The cost of borrowed funds is higher for small firms. Interest rates on bank loans for small businesses average 2 or 3 percentage points over the prime rate. Fixed rate loans are usually more expensive than floating rate loans. A majority of small firms used some form of financing in the past. Use of personal credit cards was more common for very small firms about 40 percent of firms with fewer than 10 employees used personal credit cards compared with 22-24 percent for larger firms with 50 or more employees.
Banks are the dominant suppliers of external financing to small firms.
Thirty-seven percent of small firms obtained some financing from commercial banks. Other major suppliers include finance companies, leasing companies, and other non-financial institutions. The dollar value of small business loans grew 5.2 percent from June 1995 to June 1996. Other sources of financing include trade credit, personal loans from financial institutions, and loans from friends and relatives. They produce twice as many product innovations per employee as large firms, including the employees of firms that do not innovate.