Loans from a bank or credit union help launch and sustain most small Wisconsin businesses, with potential consequences from financial sector consolidation. Credit: Andrey Popov|Dreamstime.com.
Starting a business requires access to capital—whether it’s Microsoft in 1975, Uber in 2009 or a rural downtown coffee shop today. But financing sources vary widely across sectors and regions. That’s why AAE associate professor Tessa Conroy asked PhD student Inder Majumdar and undergraduate student Charles Zumbrunnen to research small-business financing in Wisconsin.
“Of the three main sources of firm capital—retained earnings, debt and equity—we focused on loans and equity due to data availability,” says Majumdar. “Industry interest groups regularly produce equity-based reports, but a comprehensive national or state-level review of small-business financing does not exist yet, to the best of our knowledge.”
Majumdar and Zumbrunnen analyzed trends in annual capital availability from 2000 to 2024, with a focus on lending by commercial banks and credit unions. Loans under $100,000 are the most common form of institutional financing for small businesses in Wisconsin’s regional economies. Such loans are ideal for firms with predictable cash flows and the ability to pay off their debt on a monthly basis.
“The vast majority of these firms are also small in terms of employing fewer than 500 people,” says Zumbrunnen. Such firms make up at least 95% of the state’s private sector and include many sole-proprietor firms with modest growth ambitions, adds Conroy.
In contrast to traditional loans, equity financing is well-suited for the remaining 3-5% of innovative firms, such as the Madison- and Milwaukee-based technology companies EatStreet, Exact Sciences and 7Rivers. Private investors have longer profit horizons and accept early cash-flow uncertainty and limited collateral in exchange for higher future growth potential.
The analysis revealed consolidation as the dominant trend for financial institutions. The number of banking institutions in Wisconsin declined sharply—from 365 in 2000 to 193 in 2024—as did the number of branches per bank. Thus, fewer banks are operating a larger share of branches today. In 2024, the median bank had four branches and almost a fifth had only one.
Zumbrunnen, who co-majored in economics and mathematics and earned a Hilldale research fellowship to work with Conroy on several applied projects, notes that the definition of bank deserts should rely on distance-based rather than per-capita metrics.
“In urban Milwaukee, a single branch is easy to reach for many people, but the same per-capita branch number has a very different meaning up north in Iron County,” he explains. “Due to its low population density, residents may need to travel more than 10 or 20 miles for in-person banking services.”
This matters because bank officers with local connections can include qualitative “soft” information about borrowers in their loan decisions. Thus, the ability of rural Wisconsin business owners to access capital may change if their bank moves to a distant city or a different state, where a loan officer’s understanding of their financial needs may be more limited.
“Community relationships are very important for small businesses, especially those without an extensive tax history, and for the success of entrepreneurial outcomes,” says Majumdar. “Thus, consolidation carries a risk of reduced economic activity, although we do not understand the exact impact of bank deserts yet.”
Unlike banks, the number of branches per credit union has increased by more than 20% since 2010. Wisconsin’s top-ten rank in per-capita branch numbers—albeit with regional heterogeneity—has helped sustain physical access to financial services in some areas. Although credit unions have expanded their role in commercial lending from 2000 to 2024, their regulatory cap is 12.5% of total assets due to a distinct business model. Since the national average has remained below 7.5%, it is unclear to what extent credit unions can fill the bank consolidation gap, says Majumdar.
Equity financing includes venture capital for early-stage firms and private equity for mature firms. The goal of the latter is to reduce inefficiencies through financial restructuring. This is achieved with a non-trivial board voting share or majority ownership. Although this may cause layoffs or even firm closures, the analysis showed that Wisconsin and the larger Great Lakes region were well below the national median of private equity-related layoffs.
The analysis also found that venture capital activity in Wisconsin was below peer Midwestern states and substantially below California, New York and Massachusetts, known as the “big three” states. This was unsurprising since much of Wisconsin’s economy is based in sparsely populated areas without elite universities, notes Majumdar.
The success of venture capital-funded firms is strongly correlated with founder access to entrepreneurial support organizations, such as incubators, mentoring or networking hubs and legal clinics. Consistent with the state’s limited venture capital activity, Wisconsin has only a few such organizations, such as WiSys, the technology transfer office for the Universities of Wisconsin system, and the Wisconsin Entrepreneurship Hub recently launched at UW-Madison. The national nonprofit Center on Rural Innovation plays an important role in supporting new technology-based companies in rural Wisconsin and beyond.
One of the project’s take-home messages is that access to a diverse set of financing options is critical for the resilience and growth of small businesses.
“Debt and equity have unique tradeoffs, and the majority of small-business lending in Wisconsin benefits from both institutional diversity and extensive branch networks,” says Majumdar. “The Rural Wisconsin Entrepreneurship Initiative at UW-Madison will inform policy efforts to help maintain healthy economic activity in the presence of financial sector consolidation.”
Zumbrunnen, now a research analyst at the Federal Reserve Bank of New York, views the support of founders in rural Wisconsin as a unique challenge.
“Since infrastructure investments may not be feasible in towns with 4,000 residents and at most 1% of founders per year, local collaborations between stakeholders and policymakers are critical,” he says. “For example, encouraging a community’s lawyer to offer legal clinics for founders is likely more effective than recruiting non-resident external experts for this task.”