Financing Small Business in America: Debt Capital in a Global Economy

By Roger E. Hamlin; Thomas S. Lyons | Go to book overview

Chapter 3
CURRENT APPROACHES TO
DEBT-CAPITAL FORMATION:
MICRO- AND DIRECT
LENDING PROGRAMS

The first chapter of this book described the importance of small business development and success to society. Chapter 2 discussed the difficulty of channeling debt capital to existing and start-up small businesses, and the threat that problem poses for national economic development. Chapters 3 and 4 discuss in practical terms how government can and has increased the flow of small business debt capital.

Governments are involved in a wide variety of vehicles for lending to small businesses. In this chapter, two of these mechanisms are identified and discussed. These include micro-lending/microenterprise programs, and direct lending programs. These programs typically involve government or related agencies making loans directly to businesses. These are relatively higher risk situations, such as small start-up businesses. These businesses need small loans but would have little luck with conventional lenders. If government feels these situations are important, then plugging the debt capital gap directly is one public sector alternative.

Following this chapter, Chapter 4 discusses four mechanisms government can use to leverage private capital by indirectly inducing conventional lenders and other investors to participate in midrisk lending. Four programs discussed include loan guarantees, loan insurance pooling, loans with kicker features, and subordinated lending. These programs generally serve relatively less risky, more established companies and entrepreneurs and less risky situations. These entrepreneurs and situations are sometimes

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