Startups Relying on Loans and Savings
Entrepreneurs prefer risking their own money to start new ventures and are more likely to take out a bank loan than turn to family or investors, according to the Kauffman Foundation.
In an analysis of over 4,000 small businesses launched in 2004, researchers at the Kansas City, Mo.-based entrepreneurship advocacy group found that the bulk of funding came from personal savings, bank loans or credit cards.
The average amount of owner equity in these businesses was $34,500, out of an average $78,000 required to launch, researchers found. Among the 25 percent of businesses that were funded by personal credit cards, the average amount of credit-card debt was only $10,000. At the same time, personal bank loans averaged over $65,000.
About a fourth of the businesses in the study were not profitable or a reported a loss after the first year, while 17 percent made more than $100,000. Nearly 60 percent had no employees.
Tim Kane, a Kauffman Foundation researcher, said the results suggested start-up rates would decline as a result of the current financial crisis.
"This research confirms how important external financing is to firm formation," Kane said. "Entrepreneurs will have to nurse their firms along in survival mode. Many will make it through this dry spell, but a few probably will miss their market opportunity," he said.