Loan officers' decision policies towards small businesses

When small business managers seek outside financing to expand their businesses it is important that they understand the logic of those supplying the funding in order to increase their chances of receiving the money they need. The previous chapter of the book provides insight into the decision making of venture capitalists. However, venture capital is only available to a select few firms. Further, the vast majority of small businesses are unwilling to give up ownership in return for funding. Most small businesses prefer to rely on retained earnings only as the source for growth capital, but when that is insufficient, bank loans are the preferred outside source of growth capital among most businesses. Berger and Udell (2003) report figures from the US that indicate the importance of debt to small and new business- -debt represents 50% of the capital structure in small firms and of those less than two year old, 52% had debt as their major source of funding- -with commercial bank loans the most common source of debt funding. Even among the most prestigious venture capital backed firms that make IPOs, bank financing is a major source of finance (Berger and Udell, 2003). Given this, we believe that it is time to devote more interest to the decision making of loan officers, who provide the majority of growth capital to businesses, but of whom little is known. This is done in the following book chapter.