The Wall Street Journal’s April 4-5, 2009 “Weekend Edition” included an article by Jane Kim entitled “Credit Woes Hit Home.” I have had several conversations and sent a number of documents and links during the past few weeks to Jane; indeed, the “Credit Cards and Small Business Usage Report” on this site was based on a few pages of backgrounder information that just kept “growing and growing” that I prepared for her). Of course, I have some comments.
First of all, I’d like to thank Jane for her dedication in researching this story. If you are a casual “passerby,” you have no idea how some of these data pertaining to credit card usage on the part of small businesses can make just about anyone’s head spin. There are related caveats, such as data collection problems and a paucity of existing research regarding entrepreneurial “bootstrappers.”
Bootstrapping can be described as starting a business with little or no capital, and instead use creative workarounds such as bartering, trade credit, sharing space, bootstrap marketing, and non-traditional sources of capital; as Jane quoted me to say, “Credit cards have become probably the most common small-business loan product.” As the economy depends on entrepreneurs, and it has been estimated that “75 to 85 percent” (for citation see Lahm, 2005, p. 4, quoting McCune) of all businesses are bootstrapped, the importance of “credit woes” and what is happening to small business owners merits a lot more discussion.
Why is there so little research on entrepreneurial bootstrapping on the part of academic researchers?
Okay, my take on the “food chain,” as someone who is not a life-long academic: Top tier research institutions can be described as those that are well supported and structured to engage in pursuing all kinds of research studies. Previously, these institutions were known as “Research I,” as designated by the Carnegie Foundation classification system, which was then renamed the category “Doctoral/research universities-extensive,” and has now been changed again to a more complex system; for instance, “RU/VH: Research Universities” (VH signifies “very high” research activity). I ran a search on one institution that I knew qualified as a “RU/VH” institution on the Carnegie site just now, and I then ran a search for “find similar” (you can see the results for yourself, here).
Perhaps that is way more than you want to know, so let me describe the culture and conditions: Faculty typically have more modest teaching loads, research sabbaticals, grant writing and review support, teaching assistants, research assistants, office support, and a mandate to publish or perish in “top journals.” What are “top journals,” you ask? The ones that tend to publish research that can only be realistically produced by faculty who have the time (in some cases years), and the wherewithal otherwise to engage in large scale, possibly grant-funded, intensive research projects.
My own dissertation took over a year of full-time work. I’ll probably never have the time to be involved in a study that “intensive” again in my lifetime (certainly as long as I am employed at what can be colloquially described as a “teaching and engagement” oriented institution — which I happen to like).
A newcomer who is quite possibly an established researcher’s prodigy may also “get a break” and publish in a top scholarly journal. I am not part of that “RU/VH academic researcher all-stars celebrity” world (kind of like Hollywood, for academics). I like research, but I’ve spent too much time in the real world, as a practicing entrepreneur, to be attractive to the sort of institution that is more interested in the pedigree of life-long academics who have enormously long publication lists. I can never compete with that kind of publishing track record (the other route in is to be famous, or buy a building, I suspect). I entered academia too late; I can’t catch up (and I am not apologetic for deciding to teach later in life).
So, do you think that researchers at these (name brand research) institutions are particularly interested in a landscaper with five employees, two pick-up trucks towing trailers, and a modest assortment of lawn care tools and equipment? Or would they be more inclined to study some VC funded, highly visible, Silicon Valley or Research Triangle “media darling”? By the way, the latter can afford consulting services and may even sponsor research.
Indeed, as I responded to a follow-up question after my opening statement providing Congressional testimony on the use of credit cards by small businesses (why was research on bootstrapping lacking?): these very small businesses aren’t “sexy” enough to garner the attention of researchers.
It is only when one pulls back the lens and views the scene in the aggregate that the face of entrepreneurship becomes clear. Peggy Durant (the bed and breakfast owner in Jane’s article) is an entrepreneur. It’s the contractors, hair salons, landscapers, local coffee houses, wedding photographers, strip mall retailers, and home-based business owners (“roughly half of of all U.S. businesses“; see Executive Summary of the linked SBA report) across America who comprise the real face of entrepreneurship.
I have started similar small businesses relative to the pecking order in the entrepreneurial arena. I had a marketing firm (which in turn serviced other small businesses), and my wife operated a career service. We were part of the “greater whole” at that time, which could be characterized as a colorful and vibrant tapestry of individuals with hopes and dreams for a good life, carving out an honest living, and paying our bills (and for my wife and me, raising a family, which we had not as yet started at this point in our marriage).
According to SBA data (FAQs, 2008), as of 2007 there were 27.2 million businesses in the U.S. However, of these, 20.4 million had no employees. I’d say it’s fair to describe these non-employer businesses as “very small.” So what’s the connection between bootstrapping, small firms (or “very small” firms), and credit card usage? It’s hard to know, precisely. A longitudinal Federal Reserve study (2007) indicates that as of 2003, 46.7 percent of small firms used personal credit cards (77.3 percent used either a personal or a business credit card).
Did you notice that the years from some of these various reports do not match up? You don’t have to be a trained researcher to understand that this is problematic relative to the data collection (and subsequent analysis) issues I mentioned at the top of this post. Nevertheless, I think it is safe to say that roughly half of small firms use personal credit cards.
Another issue is related to intent. Was the purchase that a small business owner made for web hosting ($60/year) using a credit card for shopping convenience (i.e., an easy way to pay online), or was it a means to leverage a credit card as a form of start-up capital? We can’t know for sure if she was “bootstrapping,” or not. What was she thinking, and what were her financial circumstances at the time?
Putting it all together, despite some gaps and weaknesses in terms of data and the lack of an extensive body of existing research, we can still draw some conclusions in broad brush strokes:
- Bootstrapping is the most often used method for starting a business. By contrast, “a would-be entrepreneur has a greater chance of winning a million dollars or more in a lottery than getting venture capital” (see GEM report, p. 14).
- The vast majority of all businesses are very small businesses (about half of them home-based).
- We already know that entrepreneurship is the lifeblood of our economy; yet, big government has tended to focus on bailing out big companies (instead of implementing some smart things early on, like addressing the housing crisis that started this mess, first).
- Personal credit cards (along with so-called business credit cards, which typically involve accepting personal liability and appear on personal credit reports), are likely to have been used by approximately 9.7 million very small businesses (see page 3 of the report I prepared, here, for the calculation method and discussion of assumptions).
- Credit card companies are inflicting “woes” and knee-capping both individual consumers and entrepreneurs, making it such that small business owners cannot sustain their operations, forcing them into laying off more individuals, and placing every American at risk as the economy at large has been hurled into a downward spiral.
- According to credit card companies, their actions of late have been taken to reduce risk.
So the question becomes, doesn’t disabling entrepreneurs radically increase the risk that we as a nation will not soon recover from an economic crisis (as compared to reducing a bank’s risk)?
As an educator, I am extremely hesitant to characterize anyone as an idiot. Rather, I like to think that every individual can learn and improve in some way (intellectually, spiritually, emotionally, physically), given the right motivation and environment. But, the persons running the banking industry who brought this current crisis to a “neighborhood and small business owner’s street-corner shop near you,” leave me little choice. This situation entails more than short-sightedness on the part of the credit card industry. Not only do credit card companies lack ethical leadership, they act like they are being run by complete morons.
Hey, bankers. Want to really “reduce risk”? Think of ways to work with entrepreneurs, and not against entrepreneurs. The “alternate option” to consider relative to trying to understand this imbecilic behavior is that banks are gearing up to ask for another bail out (hand out). This next time will be based on a credit card crisis (which banks themselves, seem to be in the process of creating).