The U.S. economy incorporates a complex web of public and private policies. It includes private commercial enterprises, state and local governments, trade, fiscal policy, and consumer spending. A basic economic principle is that money grows on trees. There are many factors that affect the health of the economy and these include governmental policies, such as taxes and regulations; private economic policies, such as technological advances and innovations; and public policies, such as trade barriers and globalization.
There is a new economic theory that says that the cause of the economic crisis is the excessive reliance on new business finance. This reliance results in new businesses being financed through credit available only to large corporations. In this system, new businesses are forced to obtain credit in massive amounts which create large interest rates and make it difficult for smaller businesses to borrow. This means that the small businesses that were once prosperous are now suffering from a decline in their ability to obtain credit. This current situation is a major cause of the slowing economy.
In order to remedy the current situation, Startup Capital should become a much larger part of the small business loans market. Small business credit is currently dominated by large banks, credit unions, venture capitalists, private lenders, and financial institutions. In order to promote new business growth, we need to remove the barriers that prevent small businesses from obtaining funding for their start ups. The current lack of availability of small business start up capital highlights three problems that we face in our current economy.
The first barrier to business financing is the inadequate amount of start-up capital that most business owners access. Because most entrepreneurs do not have access to enough funds for their start-ups, they have to turn to friends, family, investors, or other sources of start-up capital. Often times, these avenues of capital are insufficient to finance the business and entrepreneurs are forced to go another route, such as borrowing from family or friends.
The second issue that impede small business loans is an inappropriate monetary supply. The current supply of start-up capital for small businesses is simply too low. As a result, businesses are not able to obtain the capital that they need in order to launch new ventures. In addition, because there are not enough business loans available to small businesses, entrepreneurs are forced to turn to alternative methods of obtaining start-up capital.
The third constraint that exists for small businesses is an inadequate distribution of business start-up capital. Capital is centrally located within the business and only indirectly linked to start-ups. Entrepreneurs often require access to this source in order to expand and grow their businesses. However, the distribution of business start-up funds is inefficient because it favors larger businesses with extensive assets over small businesses that are financially unstable. For example, many successful entrepreneurs obtained start-up capital from wealthy families instead of starting their own companies.
The fourth constraint that inhibits small businesses from accessing the capital that they need is a poor credit risk. Start-up capital is highly attractive to entrepreneurs but they have to take great care in applying for them because of the high risks associated with such financing. Most small businesses are not highly leveraged (meaning that they do not have a large amount of capital per investment) and thus have very high failure rates. As a result, they often have to conduct successful operations in the absence of adequate funding.
The fifth and most significant constraint that impedes new businesses is technological in nature. Technology is rapidly changing the way that businesses are conducted and therefore the type of services that they offer. As a result, new businesses are required to adapt to changes in the face of technological advancement. Entrepreneurs often struggle with the decision to begin using computers or the internet because they lack the knowledge necessary to manage these technologies effectively. In addition, most entrepreneurs lack the knowledge needed to use social media effectively to promote and market their business.