So, all these new companies that have been started- from where did they obtain their initial capital?
A generation or so ago, folks obtained bank loans or used money from the equity in their homes. Now, they are using their savings or (as American Express advertises routinely) from their credit card lines.
Some of this change reflects the much tightened credit policies of banks since the Great Recession. 20% of the firms started more than a decade ago relied on bank loans for their startup capital; 18.4% of those started some 5 years ago used bank loans. The numbers drop to 12.3% for those firms that have been operations for 2 or fewer years (which comprised 10% of the total census) surveyed. This is despite the fact that most startups require about $ 50K in capital. (26% of the youngest firms had less than $ 10K in startup capital. While this was the maximum amount I was willing to spend to get my dialysis business, Bicarbolyte, off the ground. I was in a rare position. Even two decades after I started that firm, only 14.2% of the firms would have been satisfied with that little amount of startup capital.)
And, that $ 10K maximum for Bicarbolyte’s startup was being drawn from my personal resources. That was pretty unusual back in the 80s, but it became more prevalent 15 years later (48% of the financial sources). Now that is the dominant source of capital (69% of the newest firms have relied on such funds) for startup firms.
But, if you can’t get a loan, lack sufficient savings, and you’ve got that perfect business idea… Where else can you turn?
Crowdfunding comes to mind. But, the survey of the newest businesses (those 2 years of age or less, in the new Census about which I reported yesterday) shows that only 0.3% of the newest firms got their initial capital that way. And, almost 100% never considered it at all (ok, 99.1%). (The survey does say that 0.4% of the newest business also tried crowdfunding- but failed to obtain the desired funding.)
Now, back when we started Bicarbolyte, there was no such thing as crowdfunding (we did consider SCOR), so it was pretty critical that I had money squirreled away to capitalize on this new business concept. Because credit card financing was never going to work to start my business, since very few industrial enterprises and/or chemical suppliers took credit cards as a form of payment back then (in the early 1980s). Nowadays, almost every firm accepts credit cards. (Hmm. We don’t- still.) So, it’s not surprising to see that ringing up big bills on the credit cards works for some 13.2% of the startups for financing. And, that’s 2.5X the prevalence that obtained in 2000 (5.1%).
Of course, relying on credit card debt is pretty expensive, making this mode far more expensive than bank loans.
But, if you don’t have savings, can’t get a bank loan, have no equity (or tappable equity) in your home, you really don’t leave home with it (the credit card…)