ECONOMIST FINDS RURAL 'FINANCING GAP' IN STATE (FIRST OF TWO PARTS)

KANSAS CITY -- If you are a small businessman or farmer in rural Missouri, economists at the Kansas City Federal Reserve Bank are worried about your opportunities to borrow adequate equity capital.

A comprehensive, first-ever study of available capital reserves in outstate Missouri and other central and western states served by the federal bank has produced what economists are calling a "financing gap." This is the conclusion of the institution's chief economist, Robert Berney, who believes a shortage of equity capital is retarding the growth of numerous rural areas throughout the bank's service area.

A newly adopted policy of the Kansas City Federal Reserve is the improvement of equity capital availability in targeted areas, with an emphasis on small, fast-growing businesses. Researchers have labeled these firms "gazelles," or rapidly expanding businesses that have doubled in size within four years, starting with a revenue base of at least $100,000.

Bank officials believe these expanding firms have a good chance of triggering further economic development in what they label "under-served non-urban regions" in Missouri and such neighboring states as Iowa, Kansas, Nebraska, Oklahoma and Colorado.

Economists contend too many of these high-potential business firms are failing or are unable to expand because of inadequate equity capital sources. "Thus, the economy could be solved," the study argues. "Another potential policy problem," the Federal Reserve study warns, "is whether the merging of banks around the country is making it more difficult for small firms and small farms to get the credit they need to be economically successful."Although the study concentrated on practical solutions to the problems raised, economists say they are also concerned with a potential economic deterioration in their service area in the event of a more immediate business downturn. "As long as credit markets continue to expand in the U.S., serious problems are unlikely to develop, but we are concerned about what will happen in the next tight credit period," the task force report says.

In addition, the latest economic bulletin issued by the Kansas City bank had this to say about current and long-range agricultural conditions: "The farm economy in the Midwest and mountain states weakened in the second quarter. While farm financial conditions remain healthy overall, the increase in loan demand and further weakness in loan repayments point to concern about conditions later this year."For the first time, bank economists have been able to compile separate economic statistics for metropolitan, suburban and rural areas. Utilizing this database, the bank reports a decline in numbers of small establishments and the employment in small firms in rural areas while just the opposite took place among large firms. "Our hypothesis explaining this is that small firms are having problems getting their capital needs met."While small firms in the bank's service region are facing localized credit shortages, the database for these firms from 1990 to 1995 points to a remarkable start-up growth, particularly in urban areas. This new database tracks employment by firm size from 1990 to 1995, and according to this data, total U.S. nonfarm, private employment grew by 6.9 million or 7.3 percent. Small firms, with less than 500 employees, grew at 10.5 percent, nearly three times the 3.7 percent of large businesses.

Using a private data source rather than the often less current Census Bureau numbers, the Kansas City analysis found that nationally there were some 360,000 fast-growing (gazelle) firms in 1997, which was 4 percent of all firms that year. We are assuming that all of them will be needing additional bank credit and a quarter of them will need equity financing to maintain a healthy debt-equity ratio so they can continue growing, the economic report declares. For the 12 states in the Kansas City service region, there were 40,308 rapidly growing firms in 1997, with one-third of them in the retail and wholesale trades, one quarter were in the service sector and 11 percent in manufacturing.

In this same 12-state area, all the gazelle companies created 1.3 million new jobs from 1992 to 1996. Almost all were created by the small gazelles. In contrast, the large gazelles, despite their rapid growth in revenue, created only 1.4 percent of the jobs."Our concern," the study's economists stated, "is with learning what limits the growth of the gazelles, and even more importantly, what prevents other entrepreneurs from becoming gazelles. The lack of available finance has been considered one of the major impediments to the growth of rapidly growing firms. Of course," the study concludes, "periods of tight credit will magnify the impacts of this financial shortage."Next: How Missouri fares in this first-ever survey of equity capital needs.