Startups Relying More Heavily on Savings, Credit Cards; and Less on Bank Loans, Home Equity

Ruth Simon and Paul Overberg reported in yesterday’s Wall Street Journal that, “Startups are relying more heavily on savings and credit cards and less on two once common sources of funding, bank loans and home equity, according to a Wall Street Journal analysis of new government data. The data, released as part of the U.S. Census Bureau’s first Annual Survey of Entrepreneurs, provides a rare window into the financing challenges facing young firms and the lingering effects of the financial crisis. The survey, conducted in 2014, asked the owners of roughly 290,000 businesses with employees what sources of capital they used to start or initially acquire their business.

Tighter lending standards and the real-estate bust continue to haunt small businesses. For instance, bank financing was used by just 12.3% of firms that were less than two years old at the time of the 2014 survey. By contrast, 18.4% of six- to 10-year-old businesses and more than 20% of older firms used business loans from banks or other financial institutions to get started.”

The Journal writers pointed out that, “The typical amount needed to start a business, roughly $50,000, has changed little over the years, but new technology has allowed many firms to do more with less. More than 26% of the youngest businesses started with less than $10,000 in initial capital, up from 14.2% of companies 16 years or older.”

Simon and Overberg added that, “Personal and family savings have long been the most common source of startup financing, but the portion of business owners digging into their pockets has been increasing. Sixty-nine percent of firms that were less than two-years old relied on such savings as a source of initial capital, up from just 48% of firms started in 1998 or before. Many business used multiple sources of funding.”

The collapse of the housing market made it tougher for many entrepreneurs to use their homes as collateral for a business loan and put the brakes on home-equity loans. Just 5.5% of firms that were less than two years old used home-equity loans, down from a high of 10.4% for firms started between 2004 and 2008,” the Journal article said.

Yesterday’s article stated that, “As an alternative, more business owners are piling up credit-card debt. Personal credit-card balances were a source of startup capital for 13.2% of the youngest firms, versus just 5.1% of firms that were at least 16 years old.”

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