Where are Startups getting their Financing?
You might expect that most business start-ups go to banks to finance their business, but a recent survey by SCORE shows otherwise. According to their survey of 1000 startups, only 11 % obtained a bank loan. The rest found other ways to fund their businesses. Here’s how.
Most entrepreneurs bootstrapped from personal savings. About half started with a small cash reserve of less than $5,000. But many new business owners had more cash available and nearly 25% started with more than $50,000.
Many new business owners rely on income from another job. They didn’t “quit their day job” until the new business was able to support them. This is a time-honored tradition even with businesses that eventually became large and famous.
Borrowing and donations from family and friends was the third most likely source of funds. Many a successful entrepreneur had a family member who believed in them and wanted to help jump start their business.
Credit cards are still used by some. A few credit card companies are now offering significantly reduced rates to businesses that have been in business long enough, meet a minimum sales revenue threshold, and have a good credit rating.
Investors, crowdfunding and grants are other infrequent sources of funds. For a detailed listing see the chart at the top of the page. Note that the numbers add up to more than 100% because many new business owners employ multiple sources of financing.
As a reminder, there are two major categories of financing — equity and debt.
Equity financing - With equity financing (or equity capital) a business raises money by offering ownership shares. Equity investors get a stake in the business and a share in the company’s proﬁts. They will naturally expect to get a return on their investments. Some might also require that they have a hand in the company’s decision-making. Equity capital may come from a variety of sources described above—such as personal savings, family, friends, employees, customers, venture capitalists, or angel investors.
Debt financing - Debt financing involves borrowing money that must be repaid (usually with interest) over a period of time. According to the survey, debt financing was most commonly used to purchase equipment and initial inventory, for marketing, or to lease or prepare the business location.
Generally, business assets are used to secure the loans. To protect them from default on a loan, lenders commonly require borrowers to personally guarantee repayment (i.e., to have a sufficient personal interest at stake). The Small Business Administration’s SBA 7(a) program helps encourage banks to issue long-term loans to small businesses unable to get financing on reasonable terms through conventional lending sources. To access SBA supported financing, contact a financial institution that offers these loans or contact SCORE for guidance.
Other financing and cost-sharing options include partnerships, joint ventures, and alliances. If you’re seeking funding to start or grow your small business, reach out to your local SCORE chapter to explore the options at www.score.org or call 1-800-634-0245. SCORE mentors can help guide you to resources that might best fit your financing needs.
For more than 50 years, SCORE has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 11,000 volunteer business mentors in more than 300 chapters serve their communities.