November 23, 2014

Sources of Start-up Funding

Default-Image-9

The latest Gallup-Wells Fargo Small Business Index, a representative telephone survey of 600 small business owners conducted at the end of March 2014, provides some interesting statistics on where current small company owners got the money they needed to start their businesses.

Some of the data confirms what most of us already know. The most common source of new company financing is the business owners themselves. For the 435 surveyed small business owners who started their own businesses, 82 percent drew on their own savings to get their companies going. (The margin of error is plus or minus five percent). Including the small business owners who took over their businesses from someone else changes the numbers relatively little; 77 percent of the whole sample used their savings to start their companies. (The margin of error is plus or minus four percent).

What may surprise more people is the second most common source of start up financing – a loan or line of credit from a financial institution. Despite the popular perception that financial institutions don’t loan money to people starting small companies, the Gallup-Wells Fargo survey indicates that 41 percent of all small business owners, and 38 percent of those business owners who started their businesses, obtained this type of start-up funding.

A more nuanced understanding of small business finance explains why credit from financial institutions is more readily available than most people think. Many small business owners personally borrow (often tapping the equity in their homes) or personally guarantee the financing of their businesses, making it possible for a fairly sizable fraction of people to obtain credit for the founding of small businesses.

The survey shows that crowd funding remains relatively uncommon, with only 3 percent of the small business owners indicating that they had obtained money to start their companies from this source. On the other hand, even this small fraction is high when compared with the frequency with which businesses get start-up financing from business angels and venture capitalists. While the Gallup-Wells Fargo survey did not ask about those sources, other surveys indicate that less than one percent of U.S. small businesses get initial capital from these sources.

Moreover, the small fraction of small business owners reporting that they obtained initial capital from crowd funding might reflect the age of the companies surveyed. By asking a cross-section of small business owners about the sources of their start-up funding, Gallup and Wells Fargo contacted the owners of many businesses initiated before this funding source was an option. (The fact that this source was not included in their 2006 survey is testimony to its newness).

Three important time trends can be seen from the Gallup-Wells Fargo data. First, the fraction of small business owners using their own savings to finance their companies is up significantly since 2006, when only 73 percent of those who started their own businesses used their own savings to finance the formation of their companies. Second, the share of small business owners tapping loans or lines of credit from financial institutions to start companies is statistically unchanged from 37 percent in 2006 to 38 percent in 2014. Third, the fractions of small company owners obtaining start-up funding from friends and family (24 percent in 2006 and 30 percent in 2014), credit cards (21 percent in 2006 and 31 percent in 2014), and business partners (14 percent in 2006 to 21 percent in 2014) are all up significantly since before the Great Recession.

While obtaining start-up financing is not a trivial matter, the survey reveals that it is far from the largest problem that small business owners face when founding their businesses. Only 10 percent of those surveyed by Gallup-Wells Fargo indicated that “credit financing/availability of funds” was their “biggest challenge,” a fraction statistically indistinguishable from the share that said “bureaucracy/licensing requirements/government regulations” was their largest issue. By comparison, 23 percent said their number one start-up problem was “securing accounts/generating revenue/customer base.”

6 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

6 Reactions

  1. That’s right. Credit is readily available but a lot of would-be business owners are reluctant to take it can bury a person under debt if the business did not go so well. While it may be an attractive source funding, I would still prefer my own savings or money borrowed from people I know.

  2. Scott, (that is, if you monitor the comment section) some clarity would be helpful. It seems to me that the survey reveals that startups are accessing consumer lines of credit as much or more than business lines. Meaning, using credit cards or home equity loans versus securing a small business loan or line of credit. Am I reading that correctly?

    Also, did the survey make a distinction between startups (something pre-revenue) and early-stage ventures (something in revenue)?

    Thanks!

  3. If any one wants to start-up a business then the biggest problem faced is funding. Yes, it is absolutely true that most lending companies do not want to lend money to anyone who want to start up a small business because they are not sure if the new business will get proper cash flow or not. But, still small business owners can go for crowd funding services.

  4. I had taken payday loans for starting a business. For starting a business,finance is the chief component.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>



Compare your business to the industry - Try our new tool


X