INTRODUCTION

Despite the increasing evidence of the importance of new business formation, and the importance of small businesses to the economies of various areas (Armington and Odle, 1982; Birch, 1979; White, 1980), there is minimal amount of information available on how people assemble the capital necessary to initiate the new business (Andrews andEiseman, 1981; Daniels and Lirtzman, 1980; Shapero, 1983). There is a general lack of information regarding the ability of new small businesses to obtain financing, and the extent of differences in financing is influenced by where the business is located (Andrews and Eiseman, 1981; SBA 1983; Dunkelberg and Scott, 1983; Shapero, 1983). If there are substantial differences, the financial institutions concerned with small businesses need to be aware of these differences, so the flow of capital is not unnecessarily impeded.

Reports are beginning to appear that purport to show that there is or is not a capital shortage for small businesses (CNEA, 1981; Daniels and Lirtzman, 1980; SBA, 1983). The conclusions seem to be sensitive to how a capital gap is defined and national economic conditions.

One of the more comprehensive surveys of capital needs of small businesses was completed by the Council for Northeast Economic Action in 1980 (CNEA, 1981). They found that a capital gap existed for 1.1–1.7% of the financially sound firms, defined as debt/equity ratio of one or less. This amounted to 46,000 to 71,000 firms in the US.