Working-Capital Financing of Small Business
WORKING,-CAPITAL FINANCING OF SMALL BUSINESS VICTOR L. AlDREWS, *" SEYMOUR FRIEDLANDt AND ELI SHAPIRO$ INTRODUCTION There are several important suppliers of short-term funds1 in our financial system. The means used by small concerns to secure short-term financing are associated closely enough with the institutional practice of these lenders that, in large part, the two must be considered together. Therefore, this discussion concentrates upon the financial relationships between small businesses and (I) the commercial banking system, (2) other financial intermediaries, (3) business firms in their lending activities, and (4) specialized financing institutions. THE DEMAND FOR SHiORT-TERM FUNDS There are strong incentives for business to finance short-term assets with short- term funds and permanent assets with long-term funds.2 Lack of access to external long-term debt and equity sources, however, compels small businesses to substitute short-term funds where long-term funds would be preferred. Thus, many small firms 3 are forced to finance permanent assets by continuously refunding short-term debt. * A.B. i95i, M.A. 1953, M.B.A. 1954, University of Chicago; Ph.D. 1958, Massachusetts Institute of Technology. Assistant Professor of Finance, School of Industrial Management, Massachusetts Institute of Technology. Contributor to economics publications. tB.S. I95O, M.B.A. 1951, Boston University; Ph.D. 1955, Harvard University. Assistant Professor of Finance, School of Business, Rutgers University. Contributor to economics publications. $A.B. 1936, Brooklyn College; A.M. 1937, Ph.D. 1945, Columbia University. Professor of Finance, School of Industrial Management, Massachusetts Institute of Technology. Research Staff, National Bureau of Economic Research.
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