Less than 50 percent of small firms borrow once or more during a year. The cost of borrowed funds is higher for small firms. Interest rates on bank loans for small businesses average two or three percentage points over the prime rate. Fixed rate loans are usually more expensive than floating rate loans. The majority of small firms used some form of financing in the past.
Credit cards are also a very important financing source.
Banks are the dominant suppliers of external financing to small firms. Thirty-seven percent of small firms obtained some form of financing from commercial banks. Other major suppliers include finance companies, leasing companies, and other non-financial institutions. Other sources of financing include trade credit, personal loans from financial institutions, and loans from friends and relatives. Small firms produce twice as many product innovations per employee as large firms, including the employees of firms that do not innovate.