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Equity Financing Alternatives for Small Business: A Review of Best Practices in the United States

1. Introduction

The availability of equity finance for small businesses in Canada has been a topic of interest for policy makers for many years. It is commonly acknowledged that small businesses in the United States have better access to equity financing than their Canadian counterparts. At end of 1998 there were more than 23 million small businesses in the United States accounting for more than half of both the nation's private workforce and its gross domestic product. Small businesses were identified by the US Small Business Administration (SBA) as the primary creator of new jobs in the economy.^{Footnote 3}

The United States has been extremely proactive in regards to developing public policy with the objective of facilitating the growth of small and medium enterprises (SMEs). In addition, the entrepreneurial culture that permeates most sectors of the economy has also caused numerous programs and processes to be developed that also favour the growth of small business.

The SBA has established size standards for business to qualify as SMEs in most industries. Although there are different standards set for some specific programs and approximately one quarter of all industry associations vary slightly from these numbers, the SBA's most often used standards are as follows^{Footnote 4}:

A small business (SME) has less than or equal to:

• 500 employees for most manufacturing and mining industries
• 100 employees for all wholesale trade industries
• Sales of $5 million for most retail and service industries
• Sales of $17 million for most general & heavy construction industries
• Sales of $7 million for all special trade contractors
• Sales of $0.5 million for most agricultural industries

One of the most important factors in determining the success of any small business is its ability to access financing. Equity financing, also known as risk capital, is much different from debt financing. Debt has to be repaid over a period of time with accumulated interest, while equity financing is the exchange of growth capital for an ownership share of the business. Equity financing does not constrain short-term cash flows and often the investors provide much needed advice and networking opportunities. Although, the major disadvantage is the dilution of ownership for the founding entrepreneur, equity financing is considered one of the best methods for fueling the growth and potential of small business.

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