Access to Capital in Rural America
Supporting Business Startup, Growth and Job Creation
in the Wake of the Great Recession
Interim Briefing for USDA
April 2012
Project Team: Deborah Markley (RUPRI Center for Rural Entrepreneurship), Erik R. Pages
(EntreWorks Consulting), Patricia Scruggs (Scruggs & Associates),
Kathleen Miller (RUPRI/University of Missouri)
INTRODUCTION
Over the past 20 years, the capital market environment in the U.S. has evolved significantly. In the
past, a business startup seeking capital had two primary options – to bootstrap using personal
resources, including those of family and friends, or to approach a local commercial bank. Now, the
ecosystem for business capital contains a wide range of new players – community development
financial institutions providing both debt and equity, microlending programs for the smallest
businesses, venture capital funds particularly for firms in targeted sectors, public financing
programs such as USDA’s intermediary relending program and the New Markets Tax Credit
program, formal and informal angel investor groups, and new innovations including crowd
financing. While this range of players, operating in both urban and rural markets, means more
options for business startup and growth, understanding the supply side of the capital market
becomes a more challenging task.
In the wake of the Great Recession, getting a handle on capital access for business startup and
growth is even more challenging. There is a widely held perception that businesses – particularly
small businesses – face unprecedented capital access challenges. For example, a recent study of
small business capital access in northern Michigan found that lack of capital was a problem for
small businesses, particularly young firms, and that inadequate capital was keeping firms from
growing and adding employees.1
This project seeks to dig deeper into these issues of small business capital access, particularly as
they affect firms operating in rural regions. If national economic recovery is dependent, in large
part, on strong and growing small businesses that are hiring new workers and making capital
investments, then understanding the precise nature of the capital access challenges they face is
critical to effective policy development.
The first phase of this project assesses what current economic research and statistics suggest about
the capital market ecosystem for businesses in the U.S. with particular attention to rural businesses
J.D. Snyder, et al. Understanding Small Business Needs and Capital Access Barriers in Northern Lower
Michigan, Center for Community and Economic Development, University Outreach and Engagement, Michigan
State University, March 31, 2011.
1
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and entrepreneurs. The review focuses on two distinct parts of the capital market system – the
supply side including both debt and equity capital, and the demand side including the quality of
both the entrepreneurs and the ventures they create. While an extensive research literature exists,
few of these analyses provide specific assessments of rural capital markets. In fact, data are often
reported in ways that make a focus on rural geographies problematic. National level data are not
often analyzed to identify or explain any fundamental differences that may exist in rural vs. urban
landscapes.
In addition to our data analysis and research reviews, the next phase of work related to the
cooperative agreement between RUPRI and USDA will focus more deeply on targeted issues and
exemplary programs and policies to better understand both challenges and innovations in rural
capital access. This research will provide case studies, innovative practices, and other reports from
the field as a means to paint a more complete picture of how rural businesses raise funds to start,
expand, and prosper.
SUMMARY OBSERVATIONS FROM CURRENT RESEARCH2
This summary focuses on three important questions:
What do we know about the rural entrepreneurs who make up the demand side of the
capital market in rural America?
What do we know about the supply of and access to debt capital in rural America?
What do we know about the supply of and access to equity capital in rural America?
THE DEMAND SIDE – RURAL ENTREPRENEURS
Rural entrepreneurs present several unique characteristics that should affect public policies toward
rural capital access, economic development, and entrepreneurial support.
Rural startups are prevalent and do not look much different from startups located in other
parts of the U.S.
Most firms – both urban and rural – start small and stay small. But, more rural firms remain
locked in this stage as self-employment ventures or microenterprises.
Rural firms are more persistent. They tend to have better survival rates than other firms.
But, survival does not equal prosperity. These persistent firms tend to grow slower, create
fewer jobs, and generate less spin-off benefits than their urban counterparts.
Slower growth rates seem to result from a mix of natural competitive disadvantages, such
as smaller home markets, and more restricted access to business growth services, including
equity capital and sophisticated coaching/mentoring/consulting.
Rural firms that do achieve fast growth tend to lose any distinctive characteristics. While
they are based in a rural region, their operations and growth patterns are similar to other
fast-growing ventures.
While it is tempting to suggest that any capital access challenges post-Great Recession are related to
supply side constraints alone, research suggests that is not the case. In the October 2011 Federal
A more detailed review of current literature has been developed by this research team and is available at
http://www.energizingentrepreneurs.org/site/index.php?option=com_content&view=article&id=105&Itemi
d=34. This page also includes a link to electronically available background research cited in the literature
review and will contain more detailed maps as they become available.
2
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Reserve Senior Loan Officer Survey, reports of weaker demand for commercial and industrial loans
outnumbered reports of stronger demand, a reversal of recent quarters.3 Chow and Dunkelberg
consider the performance of the small business sector in the current vs. past recoveries and
conclude that small business optimism is at levels below those associated with other recoveries and
business owner expectations about future business conditions are less optimistic.4 Together these
trends suggest a lower demand for capital as small businesses climb out of the Great Recession.
From the perspective of this study of rural capital access, rural-urban differences in firm startup,
growth and persistence, and innovation characteristics are important for their implications related
to the demand for capital. We explore two key questions. Do rural businesses use capital differently
than their urban counterparts? How do business advisory services factor into the rural demand for
capital?
Rural Businesses and the Use of Capital
Data from the 2010 survey of small businesses conducted by the National Federation of
Independent Businesses (NFIB) suggest that rural businesses had a more positive experience
accessing credit than urban businesses (Table 1).5
Table 1. Business Experience Gaining Access to Credit in the Last 12 Months
Urban Respondents Rural Respondents
Total
Number (percent)
Number (percent)
Respondents
Number (percent)
All of the credit wanted
168 (44.2)
63 (54.8)
231 (46.7)
Most of the credit wanted
62 (16.3)
26 (22.6)
88 (17.8)
Some of the credit wanted
78 (20.5)
14 (12.2)
92 (18.6)
None of the credit wanted
54 (14.2)
10 (8.7)
64 (12.9)
No answer
18 (4.7)
2 (1.7)
20 (4.0)
Total
380
115
495
Source: RUPRI Analysis of NFIB 2010 Small Business Capital Access Survey
For those businesses, both rural and urban, who were successful in gaining access to credit, there
are strong similarities in the way that rural and urban firms utilize the capital (Table 2). Rural
businesses were more likely to apply credit to the purchase of real estate/structures and the
replacement of aging plant, equipment and vehicles than their urban counterparts, perhaps due in
part to the sectors represented by these rural businesses.
3 The October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices, The Federal Reserve
Board, November 2011.
4 Michael J. Chow and William C. Dunkelberg, “The Small Business Sector in Recent Recoveries,” Presentation
to the Small Business and Entrepreneurship during an Economic Recovery Conference, Federal Reserve
Board, November 2011.
5 Survey conducted with a stratified random sample of businesses with between one and 250 employees
drawn from Dun & Bradstreet files.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
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Table 2. Business Use of Credit Received in the Last 12 Months
Urban Respondents Rural Respondents
Number (percent)
Number (percent)
Cash flow and/or daily
214 (59.1)
53 (46.9)
operations
Real estate and/or structures 78 (21.6)
35 (31.0)
Replacement of old plant,
121 (33.4)
45 (39.8)
equipment, and/or vehicles
Investment in additional
139 (38.4)
43 (38.1)
plant, equipment, and/or
vehicles
Repayment of debt
84 (23.2)
24 (21.2)
Reserve or cushion
123 (34.0)
34 (30.1)
Inventory
123 (34.0)
33 (29.2)
Source: RUPRI Analysis of NFIB 2010 Small Business Capital Access Survey
Total
Respondents
Number (percent)
267 (56.2)
113 (23.8)
166 (35.0)
182 (38.3)
108 (22.7)
157 (33.1)
156 (32.8)
When it comes to the ability to raise equity capital, some important rural-urban differences do
emerge. Rural small businesses are more likely to utilize bank loans than their urban counterparts,
and are also less likely to attract outside equity investments. As noted later in this update, these
patterns may not be the result of differences in the quality of demand for capital. Instead, they may
result from rural equity capital gaps and a correspondingly more robust rural marketplace in debt
capital availability from banks, farm lending institutions, and various government-backed finance
programs.
Rural Businesses and Advisory Services
Access to advisory services – business support services – along with capital may play an important
role in determining how well rural entrepreneurs can start, grow and maintain their businesses.
Leading programs across the country are pairing advisory services with debt and equity funding.6
Some of these are provided by traditionally-structured equity funds, while an increasing number
are provided by regional or state organizations – often referred to as Venture Development
Organizations – that serve as intermediaries connecting entrepreneurs and businesses with
essential expertise and resources.
There is growing evidence that the provision of advisory services prior to capital infusion helps
entrepreneurs both launch and grow their companies. A recent Ford Foundation survey of rural
firms that received advisory services prior to obtaining capital found that over 95% of companies
reported operational changes that led to a direct impact on their business within six months. These
impacts included expansion into new markets that resulted in increased revenues and product
placement, changes in business operation models that resulted in increased revenues, and
increased financial controls leading to cost containment and productivity improvements. Other
impacts of these services included an enhanced network of advisors and peer businesses, and
6 Jumpstart, Tech Columbus, i2E, Oregon Entrepreneurs Network, Innovation Works, Pacific Community
Ventures, and Tech 2020 are examples of award winning programs that combine advisory services with
promotion or management of equity capital. To see a preliminary map and guide to these organizations, visit
the U.S. Economic Development Administration-backed Regional Innovation Acceleration Network website at
www.regionalinnovation.org.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
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enhanced awareness of other business providers that leads to a more robust regional network of
assistance.7
THE SUPPLY SIDE – DEBT CAPITAL
Rural businesses tap investment capital from a diverse and growing set of players. New financial
tools seem to arise on a daily basis, with new resources such as crowdfunding or business
accelerators gaining much media attention. Nonetheless, most businesses still use traditional
sources of capital. Debt capital remains the primary source of funding for businesses in the U.S.,
particularly those operating in non-high tech sectors and in more rural areas. Key findings suggest
that:
While the landscape has changed in terms of suppliers of debt capital, commercial banks
remain the key institutional players in most markets, particularly in rural America.
The need for business loans and the opportunity to tap banking markets varies over the life
of a firm, with evidence that startup firms rely primarily on their own savings with some
able to access bank capital.
Aggregate small business lending by banking institutions declined by 6.2% from 2009 to
2010, marking a continuation of a downward trend since 2008.
The cause of this decline in lending is complicated, a combination of supply restrictions
resulting from caution on the part of banks, increased regulatory scrutiny, and reduced
demand as business owners remain concerned about economic and business growth.
For many rural and urban businesses, the most pressing concerns relate to economic
recovery and identifying new business opportunities. Capital access challenges are not cited
as top-priority challenges, according to a NFIB survey.
Non-bank sources of funding (e.g., Community Development Financial Institutions, public
sector programs, crowdfunding) are filling gaps in capital markets across the country, but
research on the impacts on rural markets is lacking.
Regardless of the exact causes, the steady decline in small business lending is worrisome. What is
driving the decline in lending to smaller businesses? A 2011 U.S. Small Business Administration
report pointed to a mix of factors at work: “Small business owners are reluctant to acquire more
debt, lenders are cautious about extending more debt, and regulators are carefully watching the
performance of all outstanding debt.”8 Similarly, a recent Federal Reserve Bank assessment finds
that the decline cannot be explained by any single element but rather by the interaction of five
factors:9
Tightened credit standards on the part of banks
Weak demand on the part of businesses
Poor health on the part of banks (e.g., 829 of 7800 institutions on the FDIC’s list of problem
banking institutions)
Limitations associated with SBA lending related to both the temporary nature of stimulus
expansion and the lack of resources to support technical assistance and business support
Credit gap for some businesses that are not bank or SBA qualified
7 Scruggs, Patricia and Wayne Embree, The Role of Equity Capital in Rural Economies, A report prepared for
the Ford Foundation, April 2010.
8 U.S. Small Business Administration, Small Business Lending in the U.S. 2009-2010, p. 3.
9 Julie Stackhouse, “Understanding the Small Business “Credit Crunch”: Perspective from a Federal Regulator,”
Bridges, Federal Reserve Bank of St. Louis, Fall 2010.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
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In effect, these factors have created something of “perfect storm” in small business capital markets.
Banks are weaker, firms are weaker, and the economy is weaker. These factors lead to both reduced
supplies of available capital and weaker demand for these funds. The issue of declining demand can
also be observed in recent data from the NFIB survey of small businesses.10 For both rural and
urban businesses, access to credit is not the most important challenge. When asked to identify their
most important finance challenge, the responses show it to be less about the money than it is about
the economy (Table 3). Almost 54% of respondents, both rural and urban, indicated that their most
important finance challenges were slow/poor sales and unpredictability of business conditions.
Only 11% of businesses, 5% in rural and 13% in urban, indicated that the inability to obtain credit
was the most important challenge.
Table 3. Most Important Finance Problem Facing Business Today (2010)
Most important
Urban Respondents
Rural Respondents
Total Respondents
finance problem
Number (percent)
Number (percent)
Number (percent)
Inability to obtain
82 (12.8)
11 (5.1)
93 (10.9)
credit
Slow/poor sales
166 (26.0)
59 (27.6)
225 (26.4)
Real estate values
16 (2.5)
12 (5.6)
28 (3.3)
Cost and/or terms of
23 (3.6)
4 (1.9)
27 (3.2)
credit
Unpredictability of
178 (27.9)
55 (25.7)
233 (27.3)
business conditions
No finance problems
87 (13.6)
37 (17.3)
124 (14.5)
Cash flow
9 (1.4)
4 (1.9)
13 (1.5)
Receivables
13 (2.0)
7 (3.3)
20 (2.3)
Something else
41 (6.4)
9 (4.2)
50 (5.9)
No answer
5 (0.8)
2 (0.9)
7 (0.8)
Total
639 (100)
214 (100)
853 (100)
Source: RUPRI Analysis of NFIB 2010 Small Business Capital Access Survey
Importance of Bank Capital for Small Businesses
While demand for small business loans has been weaker, it has not disappeared. Thus, it is
important to understand how those businesses actively seeking bank loans are faring. The NFIB
2010 survey (see Table 1) found that nearly 65% of firms were able to access all or most of the
capital they needed. However, the results suggest some important differences for rural and urban
businesses. About 24% of respondents sought a new line of credit in the 12 months before the
survey (Table 4). The percent of businesses obtaining a new line with both satisfactory limits and
terms was 59% for rural businesses, compared to 40% for urban businesses. For the one-third of
respondents who sought to renew an existing line of credit, nearly 72% of rural businesses
extended their line with satisfactory limits and terms, compared to only 57% of urban businesses
who were similarly successful. While 70% of rural businesses who attempted to obtain a business
loan were successful in obtaining the amount and terms sought, only 43% of urban businesses were
successful.
William J. Dennis, Jr. Financing Small Business: Small Business and Credit Access, NFIB Research Foundation,
January 2011.
10
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What explains these differing patterns for rural firms? It is not clear from the survey data whether
the quality of the business application was significantly different across rural and urban businesses.
However, the data do suggest that the presence of local capital pools in rural regions may be
important. In the NFIB survey, 71% of rural businesses identified their primary financial institution
as a local bank, compared to only 49% of urban respondents. It is possible that relationship banking
continues to play a positive role in helping rural businesses access capital. However, further
research is needed to explore the tradeoffs involved in relying more heavily on local financial
institutions vs. a broader range of capital providers.
Table 4. Outcome of Most Recent Attempts to Obtain a New Line of Credit
Urban Respondents Rural Respondents
Number (percent)
Number (percent)
Obtained the new line with a
61 (39.6)
27 (58.7)
satisfactory limit AND terms
Obtained the new line, but
20 (13.0)
6 (13.0)
with an unsatisfactory limit
OR terms
Didn’t take the new line
22 (14.3)
3 (6.5)
because the limit or terms
were UNACCEPTABLE
Were not able to obtain the
43 (27.9)
8 (17.4)
new line
No answer
8 (5.2)
2 (4.4)
Total
154
46
Source: RUPRI Analysis of NFIB 2010 Small Business Capital Access Survey
Total
Respondents
Number (percent)
88 (44.0)
26 (13.0)
25 (12.5)
51 (25.5)
10 (5.0)
200
Analysis of Bank Lending Data
To get a better understanding of bank lending across the country, we looked at data from the
Federal Financial Institutions Examination Council (FFIEC). These data are obtained from banking
institutions as part of their compliance with the Community Reinvestment Act. Table 5 presents
summary data on bank lending for 2005 and 2010. Not surprisingly, these data show a decline in
lending, both in terms of dollar volume and number of loans made, pre- to post-recession. The
numbers also depict a fairly consistent rural-urban breakdown between 2005 and 2010. Lending in
non-core counties did shift over this time frame. Overall lending volume in noncore areas (as
percent of total lending) actually grew slightly, but the number of loans declined rapidly. The data
suggest a trend of fewer loans to larger firms and may indicate future capital access challenges for
new firms or microbusinesses in these areas.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
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Table 5. Summary Data for FFIEC Lending, 2005 and 2010
Total FFIEC Loan $ (M)
Total FFIEC Loan $ (M)/% to Metropolitan Counties
Total FFIEC Loan $ (M)/% to Micropolitan Counties
Total FFIEC Loan $ (M)/% to Noncore Counties
Total FFIEC Loans (#)
Total FFIEC Loan (#)/% to Metropolitan Counties
Total FFIEC Loan (#)/% to Micropolitan Counties
Total FFIEC Loan (#)/% to Noncore Counties
FFIEC $/Loan in Metropolitan Counties
FFIEC $/Loan in Micropolitan Counties
FFIEC $/Loan in Noncore Counties
2005
$266,027
$233,168/87.6%
$21,996/8.3%
$10,865/4.1%
7,881,500
6,757,081/85.7%
706,797/10.5%
714,622/10.6%
$34,507
$31,121
$15,204
2010
$83,598
$72,102/86.2%
$7,450/8.9%
$4,043/4.8%
4,197,610
3,677,513/87.6%
330,149/9.0%
189,948/5.2%
$19,606
$22,566
$21,285
Figure 1 provides an initial view of the distribution of bank lending across the country, using data
from FFIEC. What the data show is an uneven distribution of capital across the country. We
calculated each county’s four-year average loan per establishment value for 2005-2008 and
compared that average to national values. Counties were then coded as:
5 = counties with 250% or more of the four-year national average loan per
establishment amount and at least two years of funding
4 = counties with 150-249% of the four-year national average loan per establishment
amount and at least two years of funding
3 = counties with 75-149% of the four-year national average loan per establishment
amount and at least two years of funding
2 = counties with large one-time funding of at least 200% of the four-year national
average loan per establishment amount and no other years of funding (one hit wonders)
1 = counties with 10-74% of the four-year national average loan per establishment
amount and at least two years of funding
0 = counties with no funding or less than 10% of the four-year national average loan per
establishment amount
These data suggest that several regions may have less robust opportunities to access bank loans.
Considering bank lending, most of the counties with more limited access to capital appear to be in
the central and upper Great Plains, Central Appalachia, and parts of the Southwest.
“Capital Deserts”?
We coined the term “capital deserts” as a way to describe the more limited access to capital in
certain regions of the country. The concept is parallel to that of a food desert, defined as a
Census tract where a substantial number of low income people have limited access to a
grocery store or supermarket. However, just as the Food Environmental Atlas developed by
USDA’s Economic Research Service seeks a more nuanced understanding of a community’s
ability to access healthy food and its success in doing so, we need a deeper understanding of
these apparent “capital deserts.” Having a better grasp of the characteristics of the demand
side will provide greater insight into capital access challenges – quality of deal flow, presence
of alternative lending institutions, etc. This work should be viewed as an initial attempt to
provide a spatial overview of rural capital access; more research to clarify the “capital desert”
concept is needed.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
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Figure 1. Distribution of Bank Lending, 2005-2008
Access to Public Sources of Business Capital
A number of Federal programs provide support for business lending including:
SBA’s 7a loan guarantees, including the Small and Rural Lender Advantage program, and
504 loan program
USDA’s business lending programs including intermediary relending program, rural
business enterprise grants, business & industry loan guarantees
Revolving loan funds (RLFs) established with USDA, Economic Development
Administration, SBA, and/or HUD Community Development Block Grant funds
While there is reasonable data on SBA and USDA programs to get a sense of where the loan and
grant capital is flowing, understanding public business loan funds is more challenging since (1) the
money often flows through local units of government, regional development organizations and/or
non-profit entities and (2) the money, by definition, revolves and at some point becomes
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
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disconnected from its initial public funding source. A 2011 report on public sector business loan
funds offered some sense of the scale of support provided by these funds:11
Funding from HUD-backed third-party loans amounted to $2.2 billion in the 1990s,
according to a 2002 study
578 EDA-backed RLFs managed a capital base of more than $852 million as of March 2009
137 of the 260 SBA 504 Certified Development Companies invested $30 billion in more than
66,000 small businesses (2009 national survey by National Association of Development
Companies)
400 USDA intermediary re-lenders made over $700 million in loans to rural businesses
(according to July 2010 Congressional testimony)
What these data do not tell us is how this lending is distributed across rural America. To provide
this insight, we examined how public sources of capital were distributed across metropolitan,
micropolitan, and noncore counties using four measures:
Distribution of activity – The percent of counties reporting financing activity in any given
year.
Relative share of activity – The distribution of dollars by metropolitan, micropolitan and
noncore counties, and the overall proportion of those dollars as compared to the percent of
firms in each type of region. For example, if metropolitan regions are home to 84% of all
small firms, then their share of public sources of financing would be described as
disproportionately large if it was greater than 84%.
Coverage of activity – The percentage of firms that reside within counties reporting
financing activity. This measure provides insight into accessibility. For example, if 50% of
counties report financing activity and those counties represent 85% of all firms, then the
coverage is better than if they represented only 40% of firms.
Concentration of activity – The proportion of dollars going to the top 2% of counties and
the percent of total firms represented by these counties. For example, if the top 2% of
counties account for 20% of dollars, then one would expect those counties to represent
20% of small businesses if the distribution was proportionate.
Distribution of SBA 504 Financing Programs. On average, about 40% of all U.S. counties report
SBA 504 financing in any given year. Metropolitan areas are much more likely to have 504
financing activity – approximately 65% of metropolitan counties – as compared to less than 20% of
noncore counties. In terms of proportionality, metropolitan regions account for almost 90% of
dollars but 84.1% of total firms; noncore regions received just over 3% of 504 dollars, yet
accounted for 6% of all small businesses in the U.S. The coverage achieved by 504 financing also
shows metropolitan – noncore differences. In 2008, the 67% of metropolitan counties with 504
activity represented 93% of all small businesses (establishments with less than 500 employees) in
metropolitan counties; the 19.7% of noncore counties with 504 activity covered only 40% of all
small businesses in rural regions. These data suggest that more than half of all small businesses in
noncore counties operate in areas with limited access to SBA 504 lending.
SBA 504 funding is also concentrated in relatively few counties. In any given year, over 45% of 504
funds are distributed in only 2% of counties. In 2008, these counties were home to only 30% of the
Public Sector Business Loan Funds: Views and Recommendations from Practitioners, Forum Findings and
Recommendations prepared by National Association of Development Organizations Research Foundation and
Development District Association of Appalachia, 2011.
11
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
10
country’s small businesses, indicating that 504 lending activity is highly concentrated. Data on SBA
504 lending patterns are summarized in Table 6. One caveat related to the 504 data is that lending
is not broken out by firm size. Using the SBA definition of small business (one with less than 500
employees) does not provide the detailed breakdown by firm size that might allow consideration of
the interaction between lending and firm size.
Table 6. Summary Data for SBA 504 Lending, 2008 – 2011
2008
2009
Total ($ M)
$5,206.00
$3,812.00
Distribution of $ to
Metropolitan
Counties (note:
84.1% of U.S. firms
are metro based)
87.38%
89.92%
Distribution of $ to
Micropolitan
Counties (note: 9.8%
of U.S. firms are
micro based)
8.47%
6.79%
Distribution of $ to
Noncore Counties
(note: 6.1% of U.S.
firms are noncore
based)
4.04%
3.29%
% of funding going to
top 2% of counties
45.9%
45.03%
Total # of Counties
with 504 financing
1,365
1,148
% of all U.S.
Counties
43.37%
36.48%
% of Metropolitan
Counties with 504 $
67.09%
62.09%
% of Micropolitan
Counties with 504 $
52.33%
38.66%
% of Noncore
Counties with 504 $
19.65%
14.64%
2010
$4,388.80
2011
$4,809.90
89.90%
90.00%
7.07%
7.11%
3.00%
2.89%
46.07%
46.23%
1,250
1,177
39.72%
37.40%
65.55%
62.73%
44.48%
40.84%
16.41%
15.08%
Using data for SBA 504 loans, we looked at the geographic distribution of business capital over the
2005 to 2008 period. The map in Figure 2 is color coded to show the distribution of SBA 504
lending over the 2005-2008 period, using the same coding described for Figure 1. There are clear
regional disparities in lending, with counties in the central U.S., upper Great Plains and parts of the
Northwest, the Delta and deep south regions, and the Appalachian highlands showing more limited
access to capital than the upper Midwest (IL, MI, MN, WI), west coast, central Rockies, southwest
and northeast regions.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
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Figure 2. Distribution of SBA 504 Lending, 2005-2008
Distribution of SBA 7a Financing Programs. In any given year, approximately 75% of U.S.
counties report 7a activity – over 90% of metropolitan counties and 55% of noncore counties.
Compared to SBA 504 and USDA programs, the dollar distribution of 7a financing across regions
more accurately aligns with the distribution of small businesses. In other words, metropolitan
regions receive approximately the same percentage of 7a dollars (86%) as their share of all small
businesses (84.1%). The coverage of 7a activity is also broader than 504 lending. Active
metropolitan counties (those with 7a financing activity) account for over 99% percent of small
businesses in metropolitan settings, and noncore counties accounted for 75% of small businesses
operating in more rural areas.
While more firms tap into 7a programs, overall lending activity still remains highly concentrated in
a few regions. The top 2% of counties account for 40% of 7a dollars. In 2008, these counties were
home to 33% of all small businesses, indicating a slightly higher proportion of 7a activity in these
counties than would be expected. In the noncore areas, however, the top 2% of counties accounted
for 20% of 7a financing, yet covered only 6% of noncore small businesses. These data suggest
greater concentration of 7a lending activity in noncore regions than in metropolitan counties (Table
7).
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
12
Table 7. Summary Data for SBA 7a Loan Guarantees, 2008 – 2011
2008
2009
2010
Total ($ M)
$8,995.00
$7,212.00
$9,985.00
Distribution of $ to
Metropolitan Counties
(note: 84.1% of firms are
metro based)
88.00%
85.00%
85.05%
Distribution of $ to
Micropolitan Counties
(note: 9.8% of firms are
micro-based)
7.17%
9.28%
8.12%
Distribution of $ to
Noncore Counties (note:
6.1% of firms are
noncore based)
4.82%
5.73%
6.14%
% of funding going to top
2% of counties
42.70%
37.15%
39.08%
Total Counties w/ 7a $
2442
2299
2366
% of Counties
77.60%
73.05%
75.18%
% of Metropolitan
Counties with 7a $
91.55%
89.45%
90.55%
% of Micropolitan
Counties with 7a $
88.66%
84.16%
85.32%
% of Noncore Counties
with 7a $
62.69%
54.16%
57.62%
2011
$15,231.00
86.65%
8.09%
5.26%
41.07%
2349
74.64%
90.64%
87.21%
55.33%
There also appear to be fewer areas with very limited capital access associated with SBA 7a
financing. Figure 3 demonstrates much more universal coverage of the U.S. for the 7a program than,
for example, SBA’s 504 lending program. One interesting research question would be to consider to
what extent differences in the program management models lead to differing lending patterns. SBA
504 loans are made through a national network of 260 Certified Development Corporations while
7a loans are made through a network of qualified financial institutions that includes some of the
largest banking institutions in the country.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
13
Figure 3. Distribution of SBA 7a Loan Guarantees, 2005-2008
Distribution of USDA Business Financing. Compared to SBA 504 and 7a programs, USDA-backed
lending is much smaller in terms of dollar activity (about three times smaller than 504 funding and
about six times smaller than 7a funding). Consistent with Congressional intent, the programs are
also concentrated in micropolitan and noncore counties. Micropolitan regions account for 30% of
funding activity while representing 9.8% of all firms, and noncore areas account for 20% of funding
while representing only 6% of firms in the U.S. (Table 8). Given the size of the program, it is not
unexpected that the total number of active counties ranges between 16% and 37% in a given year,
yet the distribution across metropolitan, micropolitan and noncore counties is relatively stable.
The coverage of USDA financing also reflects the low percent of active counties. In 2008, the 24.8%
of noncore counties reporting activity covered 32.5% of all establishments in noncore areas, leaving
a large portion of rural businesses without regular access to USDA business financing programs.
USDA business financing is also very highly concentrated in only a few counties. In 2008, the top
2% of counties accounted for 43% of all USDA dollars, yet these counties were home to only 4% of
all firms.
The USDA funding is also highly concentrated by state, where each year just seven or eight states
account for more than 50% of all USDA financing to businesses in rural or noncore counties. While
the ranking of states changes slightly from year to year, they are primarily located in the Midwest
and Great Plains regions (Table 9).
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
14
Table 8. Summary Data for USDA Business Financing Programs, 2008 – 2011
2008
2009
2010
2011
Total ($ M)
$1,580.00
$1,449.00
$3,204.50
$1,016.00
Distribution of $ to Metropolitan
Counties (note: 84.1% of firms are
metro based)
43.48%
50.03%
49.46%
48.65%
Distribution of $ to Micropolitan
Counties (note: 9.8% of firms are
micro based)
30.51%
29.95%
29.19%
31.69%
Distribution of $ to Noncore Counties
(note: 6.1% of firms are noncore
based)
26.01%
20.01%
21.34%
19.65%
Total Counties with 7a $
931
887
1165
514
% of Counties
29.58%
28.19%
37.02%
16.33%
% of Metropolitan Counties with
USDA $
30.55%
28.73%
41.36%
18.27%
% of Micropolitan Counties with
USDA $
37.50%
35.61%
46.22%
22.38%
% of Noncore Counties with USDA $
24.80%
23.99%
28.84%
11.70%
Table 9. USDA Business Financing – Top States, 2009 and 2010
State
2010 USDA Financing to State
noncore counties
Iowa
$48.99 million Iowa
Wisconsin
$55.0 million Alaska
Nebraska
$51.23 million Wisconsin
Georgia
$48.91 million Minnesota
Kansas
$39.85 million Idaho
Louisiana
$37.1 million Colorado
Missouri
$36.46 million Texas
Oklahoma
$26.3 million
Total
$343.84 million Total
Percent of total
50.1% Percent of total
2009 USDA Financing to
noncore counties
$54.63 million
$20.98 million
$20.83 million
$15.92 million
$11.42 million
$11.39 million
$11.14 million
$146.31 million
50.5%
Figure 3 shows that similar to the SBA data there are regional disparities in USDA business
financing. Almost every region of the country has sub-regions where there is limited access to USDA
financing.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
15
Figure 3. Distribution of USDA Business Lending, 2005-2009
Community Development Financial Institutions. Community development banks and other
financial institutions are those that are guided by both social and financial goals. They generally
serve low and moderate income markets and those that are not served well by more traditional
banking institutions, including rural areas. These institutions are supported in their work by the
U.S. Department of Treasury’s Community Development Financial Institutions (CDFI) fund, created
in 1995 to help support the work of CDFIs.
From 2009 to 2011, the number of CDFI banks grew by 35% – with 84 institutions operating
today.12 While the sector is growing, CDFI banks still represent a miniscule part of the market,
accounting for less than 1% of total FDIC deposits in 2011. CDFI banks are also highly concentrated
in major urban areas. At present, twenty two states have no CDFI banks and large parts of the
country have no local CDFI presence.
Figure 4 provides a snapshot of the geographic distribution of qualified low-income community
investments using data supplied by the Department of Treasury’s Community Development
Financial Institutions Fund. To get an initial view of the distribution of community investments
flowing through CDFIs, we considered two measures. One is the percent of community investments
Robin Newberger and Susan Longworth, “Recently certified CDFI banks and the CDFI banking sector,”
Profitwise News and Views, Federal Reserve Bank of Chicago, December 2011.
12
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
16
going to a state compared to the state’s eight-year average (2003-2010) contribution to Gross
Domestic Product (GDP). This measure gives us one way of considering the distribution of
community financial investments compared to each state’s relative economic contribution. The
other measure is the eight-year average percent of community financial investments (CFIs) going to
metropolitan investments as compared to the percent of metropolitan population in each state. The
color coding of states in Figure 4 shows the following:
High proportion states have a higher percentage of community financial investments than
their contribution to national GDP. These states may also exhibit an urban bias (higher
percent of funds flowing to metropolitan areas than the percent of population in
metropolitan areas), a rural bias (higher percent of funds flowing to rural areas than the
percent of population in rural areas), or no bias.
Low proportion states have a lower percentage of community financial investments than
their contribution to national GDP. These states may also exhibit an urban, rural, or no bias.
No disproportion states have community financial investments in line with their percent
contribution to national GDP. They may also show an urban, rural or no bias.
Figure 4. Distribution of Community Financial Investments, 2003-2010
This initial assessment suggests that there are many parts of the country with disproportionately
low levels of investment relative to at least one measure of economic activity. This observation is
definitely in line with the concentration of CDFI infrastructure across the country. A more detailed
assessment of community financial investments requires a more detailed look at the geographic
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
17
distribution of investments by county. The CDFI dataset is limited in its county geocoding and more
analysis is needed to present a county-level picture of CDFI investment.
THE SUPPLY SIDE – EQUITY CAPITAL
Until recently, equity capital investments, especially institutional venture capital, were almost
exclusively concentrated in major metropolitan areas. In more recent years, numerous new rural
equity sources have emerged. This is a promising trend, as much research suggests that equitybacked firms have greater economic impact than comparable non-equity backed firms.13 Key
findings from the literature include:
Businesses in rural and less intensive venture capital (VC) markets perform on par with
investments in VC-intensive markets, indicating there is no geographic bias for
performance.
The presence of angel investors along with organized structures for investors to pool
resources and expertise has been shown to accelerate the amount of equity capital invested
into a region.
Corporate or strategic investors are increasingly important players in equity capital and
may complement angel and venture funds.
The link between advisory services and capital access is strong. Businesses and funds,
especially those focused on seed and early stage investments, perform better when there
are advisory services attached.
Even though fund size has increased over time, smaller funds outperform larger funds.
However, there is evidence that small and large funds both have a place in a region’s equity
market.
Seasoned fund managers and local sources of capital are critical elements for increasing
capital to targeted regions. Resident capital is often viewed by outside investors as an
indicator that the companies within a particular state have “something worth looking at.”
There is no indication that equity investments move out of rural or less VC-intensive states
at rates faster than other regions. There are, however, business characteristics that
contribute to and can enhance the “stickiness” of an investment.
Equity capital is relatively mobile and is increasingly crossing state lines.
The relative concentration of equity investment in metropolitan regions has been fueled by a
general perception that the best investments are those in technology-heavy metropolitan areas.
Based on these trends, one might assume that the deals in these areas perform significantly better
than deals in other parts of the country. However, there is a growing body of research that
indicates that a venture-backed business in a state like Oklahoma performs just as well as one from
the Silicon Valley. Recent research tracked over 19,000 venture-backed deals and examined these
deals based on the VC intensity of the state – VC-heavy states like California or Massachusetts and
VC-lite states like Kansas, Oklahoma, or Kentucky. The analysis showed that there were slight
differences in the inputs (e.g., amount of funding), yet no statistical difference in terms of outcomes
(e.g., return on investment, jobs created, type of exit). In other words, high performing equitybacked investments are found in all parts of the country; smaller, more rural regions can have
ventures that perform on par with those in California or Massachusetts.14
13Global
Insight, “Venture Impact: the Economic Importance of Venture Capital-Backed Companies to the U.S.
Economy,” National Venture Capital Association, 2009.
14 Analysis published in “The Role of Equity Capital in Rural Communities” a report to the Ford Foundation.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
18
Specific findings from this analysis include (Table 10):
The average investment in a VC-lite state was just over $6 million, compared to California or
Massachusetts, which averaged $12 million per deal.
There were slightly more investments from individual investors in VC-lite states than other
states (perhaps indicating the importance of angels in these regions.)
The return on investment in terms of multipliers and the type of exit (ratio of IPOs,
acquisitions or failure) showed no statistical difference across regions.
VC-lite states created the same number of jobs per deal as VC-heavy states, even though the
average amount of financing received was half the amount.
Table 10: Summary of Venture Capital Performance by State Groupings
CA/MA
TX/CO/WA
VA/MD/NY/NJ/PA/DC
Total Equity $
$187.46 B
$49.6 B
$61.7B
Average
$12.9 M
$10.2 M
$8.0 M
Investment $
IPO Exit Raise
$38.4 M
$38 M
$42.0 M
(median)
Exit Type:
2.6
2.9
2.9
Acquisition to
IPO ratio
Percent out of
37/30
37
37
business (%)
Mean # of
25
25
23
employees
Source: Analysis conducted by Dr. Rob Wiltbank, Willamette University
All others
$69B
$6.6 M
$33.9 M
2.7
35
24
Analysis of Venture Capital in More “Rural” States. To better understand equity funding in more
rural states, we examined data for the 22 states with population density and/or percent of
population living in metropolitan regions less than the U.S. average.15 Together these 22 states
(Table 11) represent 17.5% of the nation’s gross domestic product, yet only 5.7% of the 2010
venture capital invested, 8.2% of all venture-backed deals, and 3.3% of all venture capital under
management. While statistically these states are more rural than others, it is important to note that
all of these states contain metropolitan areas. It is not possible with the equity capital data available
to determine whether investments are made primarily (or even exclusively) in the metropolitan
centers or whether they are spread across metropolitan, micropolitan and noncore areas.
With the caveat above in mind, the analysis of these states clearly shows that states with lower
populations and densities can be high performing in terms of equity. Here, Colorado, Minnesota,
Oregon and Utah receive almost 80% of the venture capital funds invested in the 22 more rural
states. States like Vermont, New Mexico and Kansas perform fairly well in terms of venture capital
investment per gross state product or total number of business establishments. An important
research question is what distinguishes more rural states that are attracting venture capital from
those that are not. Understanding the capital networks in these states and their connections to
demand side services may provide valuable insights that could help lower performing states
participate more fully in venture capital markets.
Due to the geographic isolation and large percent of federal land ownership, Alaska was excluded from the
states analyzed.
15
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
19
When we compare a state’s ability to attract venture capital and fund more than just a handful of
deals, several characteristics appear:
Geography does not seem to be a primary factor in venture capital performance. Each
region of the country, except the south/southeast, had at least one top performing state; the
top three performing states (Colorado, Minnesota and Utah) were quite distant from the
two major centers of venture capital resources – California and Massachusetts/New York.
Having capital under management in the state does not necessarily result in capital
being invested in the state. In other words, some of the states with the lowest amount of
venture capital investment in local businesses were also some of the states with the largest
average amount of venture capital under management (e.g. Alabama, Kentucky, Maine, and
Missouri).
Workforce and R&D characteristics seem to be strongly correlated with venture
capital investments. States that have an educated workforce, along with management,
professional and scientific talent, attract significantly more venture capital. Patent activity,
the percent of high tech jobs, and use of technology in agriculture also strongly correlate
with investment capital.
Venture capital is mobile. These 22 states attracted capital from across the country.
However, Table 12 shows that lower performing states, on average, are more reliant on
smaller regional capital networks whereas the top performing states have a more robust
national network.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
20
Table 11. Analysis of Venture Capital in More Rural States
8 Year
Average
Venture
Capital $
under
mgt. ($M)
$3,362.63
$883.00
$2,109.63
$63.88
$37.75
$70.13
$4.75
$54.13
$934.13
$27.88
$175.50
8 Year
Average
Venture
Capital $
Invested
($M)
$567.70
$160.74
$324.06
$152.14
$17.90
$42.63
$32.68
$16.99
$57.18
$30.34
$5.05
Average
Venture
Capital
Invested
$M/Gross
State
Product
$B
2.19
1.38
1.21
0.91
0.68
0.56
0.26
0.31
0.23
0.34
0.09
8 Year
Average
Number
of
Venture
Deals
85.75
31.75
45.25
29.75
5.50
13.25
16.63
4.38
14.75
2.13
3.88
Number of
Venture Deals
per 10,000
establishments
6.76
5.46
3.81
3.35
2.94
3.65
2.79
1.17
1.24
0.51
1.15
Average
State
Ranking
on Key
Economic
Factors
8
16
12
17
17
25
22
23
31
28
30
Overall
Venture
Capital
Ranking
(based
on Avg.
VC $/GSP
$)
1
2
3
4
5
6
7
8
9
10
11
Colorado
Utah
Minnesota
Oregon
Vermont
New Mexico
Kansas
Idaho
Missouri
Nebraska
Maine
North
Dakota
$4.88
$3.88
0.12
1.38
0.77
31
Iowa
$56.13
$32.54
0.22
3.63
0.57
33
West
Virginia
$13.13
$9.68
0.15
3.38
1.12
41
Alabama
$260.50
$23.53
0.14
6.38
0.83
37
Kentucky
$145.13
$27.18
0.17
7.38
1.06
42
Montana
$0.00
$7.61
0.20
1.00
0.32
31
Oklahoma
$88.75
$19.79
0.12
5.00
0.69
37
Wyoming
$74.00
$2.86
0.07
1.13
0.64
37
South
Dakota
$95.88
$1.29
0.03
1.38
0.64
40
Mississippi
$22.00
$2.65
0.03
2.00
0.43
47
Arkansas
$9.50
$1.25
0.01
1.63
0.32
44
Source: Calculations derived from 2011 National Venture Capital Association Yearbook
Notes:
VC under management: The total amount of venture capital managed by funds resident in a given
state, including previous deals that have not exited, current year’s investments and uncommitted
cash.
VC investment: The amount of new venture capital invested in a specific year, including initial and
follow-on investment. Average investment/Gross State Product is used to create a relative
comparison of VC investment to a state’s economy.
VC deals: The number of investments made in business enterprises; may include multiple
investments in a single business entity. Deals/10,000 establishments is used to make relative
comparisons among states.
Key economic factors: Venture capital is attracted to areas with high levels of innovation. These
include the education level of the workforce, the management, technical and scientific talent, the
patent activity, the percent of high tech jobs, and the technology level of the agricultural sector.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
12
13
14
15
16
17
18
19
20
21
22
21
Table 12. Capital Networks of More “Rural” States vs. Top Performing States
%
Total
%
%
Capital
Sources Capital
Capital
from
of
from
from CA
Nearby
2010 VC Capital Sources
Capital In-state and MA
States
% Capital
from other
States, Foreign
or Unknown
Sources
Average for 22 Rural States
38%
5
10%
19%
33%
Average for Top Performing States
15
10%
38%
4%
47%
Source: Calculations derived from 2010 National Venture Capital Association Yearbook
Making the Most of Capital Networks: A Comparison of Two States. Examining patterns of
capital under management can provide insights into the capital networks that may be at play in a
state. Maine is a good example of a state with significant capital under management, yet little
annual investment in Maine businesses. Since 2003, the state has had an average of $175 million
under management in any given year, yet the actual amount of capital invested in Maine companies
over the same time period is only $5 million per year, or 3% of the total under management. By
comparison, Oregon has had less than $65 million under management per year since 2003, yet
attracts on average $152 million per year in new investments or 230% of the total under
management. 16
What might account for the differences in these two states? One possibility is the capital network in
each state – the infrastructure to manage and attract investment capital and to develop the deal
flow in which venture capital can be invested. Taking a deeper look at both states, Oregon has a
robust capital network that systematically works to connect supply and demand. The state has a
long-standing and award-winning entrepreneurial development organization (privately funded)
with chapters across the state that mentors new companies to make them venture ready, then
holds angel and venture capital forums to connect companies to investors inside and outside the
state. There are multiple angel groups, many more than ten years old. There is an active set of
industry associations that work collaboratively through the Oregon Innovation Council to address
capital and other growth issues. And finally, the state has invested in Oregon-based equity funds
through the Oregon Growth Account as well as outside venture funds through a fund-of-fund model
requiring funds from outside the state to have a presence in Oregon to search for deals. These
venture funds are also tied into the state network of business groups, angels, and corporate equity
funds like Intel Capital.
Maine, on the other hand, has a less developed set of resources that directly tie entrepreneurs to
capital. The state’s angel network is less mature, and the entrepreneurial assistance programs are
more educational institution-based, with hands-on mentoring from experienced CEOs only recently
added. State funding for equity investments has gone to very early stage ideas and is not as well
connected to the advisory services that help entrepreneurs be “venture-ready.” While there is an
active and well-known CDFI and venture fund using New Market Tax Credits, this fund is not well
connected to other entrepreneurial or state supported activities. While many pieces of a capital
network exist in Maine, there does not appear to be the same level of cohesion within the network
as in Oregon.
16
Calculations based on data from the National Venture Capital Association 2010 and 2011 Yearbooks.
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
22
A FRAMEWORK FOR GUIDING NEXT STEPS
Our review of the current literature and analysis of secondary data have raised a number of
research questions and identified some issues worthy of deeper exploration. These include the
following:
More research is needed to better understand the geographic disparities in the distribution
of bank and public sector financing across the U.S. We need to further test the concept of
“capital deserts” and the contribution of supply and demand factors toward creating these
deficits. How well a region is able to absorb capital is likely to depend at least in part on the
quality of the surrounding ecosystem, the quality of the entrepreneurs and other factors
that interact to determine how well communities are positioned to take advantage of and
optimize business capital in their region, and attract new sources of capital to the region.
More analysis of the relationship between firm size/age and capital access, particularly in
terms of SBA lending programs, is needed.
Additional analysis of CDFI data by geography is needed to gain a better understanding of
rural vs. urban differences in investment patterns.
More research is needed to understand why some relatively rural states seem to attract
equity capital while others do not. What accounts for these differences? Does the presence
of angel investors, both formal and informal, have anything to do with these trends?
There is evidence that rural venture capital deals offer similar returns and have similar job
creation impacts as urban deals. Are there intermediaries in the states attracting or keeping
venture capital that are better able to make the case for such rural investments? Is there
stronger institutional capacity in these places?
On the demand side, more research is needed to explore the capital access experience in
some diverse rural regions and markets – how do these experiences differ? Building on the
evidence from the NFIB study, what is the capital access experience of businesses in
micropolitan or noncore regions? Do relationships with local sources of business financing
matter in terms of capital access?
What impact does the business support infrastructure have on capital access? Where are
businesses finding the support needed to effectively access capital – what are their value
networks for gaining access to both capital and the advisory services they need to support
business startup, growth and job creation?
While these issues are worthy of further research, what is equally important from the perspective
of USDA is a framework for guiding how we move forward in gaining deeper insights into rural
capital access. Through this initial assessment, we have identified a clear need to understand the
leverage points that will make the greatest difference in access to capital in rural America and to
the economic outcomes that result from the effective deployment of that capital. In a time of scarce
resources, it becomes even more critical to identify interventions that offer the greatest return on
investment in terms of improved economic outcomes for rural places. We propose looking at
leverage points on three levels:
Policy Levers – What are the changes or enhancements to policies that would strengthen
the distribution and coverage of capital programs?
Program Levers – What are the lessons learned from high performing regions that could be
applied to help develop or enhance programs in underserved capital regions?
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
23
Infrastructure Levers – What are the most critical elements of the capital market ecosystem
or “infrastructure” of a region that can enhance the outcomes of federal capital programs, in
particular?
Access to Capital in Rural America – Interim Briefing for USDA – April 2012
24