Small business finance
3 important questions on Small business finance
CQ 1: How can small businesses attract finance? (2)
- No-need firms, discouraged borrowers, denied borrowers, and approved borrowers
- Bootstrapping and pecking order: own resources, debt financing, equity financing
CQ 2: How can small businesses signal their credit worthiness? (2)
- The small business finance market for loan is opaque
- small businesses signal via: information, collateral, third party cover, entrepreneurial talent, relationship factor
- banks try to overcome information asymmetries, secure pay back, and limit failure costs
- There are advantages and disadvantages for small businesses using equity finance
- VC fund has to deal with adverse selection and moral hazard
CQ 3: Can small business use the "crowd" to attract funding? (2)
Crowdfunding is an increasingly common source of finance for entrepreneurs:
- Way around capital constraints
- obtaining funding from the crowd may help to obtain funding from traditional sources
- Securing funding ("All-or-Nothing" principle helpful), assessing interest product, marketing
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