The Federal Reserve is not an organization that advocates careless spending, but its own frugality may threaten a key piece of small-business research. Every five years, the Fed pays about $4 million to survey companies with fewer than 500 employees about where they get financing. Now the Fed says it might stop the study it has been doing since 1987, saying its cost isn't justified.
But the survey results are crucial in understanding how small companies pay for their operations, says Allison Gilmore at the National Women's Business Council, which wrote the Fed a letter protesting the decision. Unlike major corporations, which have wider options for finding capital, small companies are more likely to use savings accounts, credit cards, and loans from friends to get up and running. Tracking how small-business owners finance their operations will help policymakers as well as banks better design programs to open up credit to these companies, she says. The Fed has yet to figure out whether the research is actually valuable for its own use.
Earlier this month, the University of Chicago's national research organization known as NORC, which conducts the study, released its latest round of findings from 2003. The group talked to 4,240 firms about how they found the cash to start and fuel their companies. It found that more-relaxed banking regulations boosted the number of ways small-business owners got cash. While commercial banks still led the way for small-business loans, more than half of the companies surveyed said they used loans from nondepositary institutions, compared with 40 percent that did so in 1998. Roughly the same number of companies as five years ago used personal credit cards. Meanwhile, the number using business cards, which have become more widely available, has jumped significantly.
Gilmore says that it's unlikely that another organization can step in and collect this type of data. Many nonprofits don't have the budget themselves for such studies. And having the government seal of approval gives the study clout. Small-business owners probably wouldn't divulge so much information to a private company or bank, she points out.