Small Business Financing

By at 22 February, 2022, 4:24 pm

by Raymond J. Keating – 

The latest “Small Business Finance FAQ” report was just published by the SBA’s Office of Advocacy, and it serves up an assortment of notable details on how and why small business owners fund their enterprises.

The startup funding information is instructive, and fits with the longtime data and trends as to sources. Figure 1 below is from the FAQ, and what we see is that personal savings is the overwhelming main source for new business funding (74.7 percent of startup entrepreneurs relying on this), with another 10 percent using personal credit cards, 10 percent tapping into other personal assets, 6.3 percent using home equity, and 6.6 percent a business credit card. Meanwhile, 7.7 percent turned to family and friends, venture capital, grants and “other sources.”

It also must be noted that 19 percent used a bank loan. As noted in this report, “established firms with a proven record have a better chance of obtaining funds from bank lenders.” Meanwhile, a mere 2.3 percent tapped into some kind of government guaranteed loan.

Source: SBA Office of Advocacy, “Small Business Finance FAQ,” February 2022

As for the small business financing market, in 2020, this amounted to approximately $1.4 trillion, and included bank loans, finance companies, fintech like online lending platforms, angel investments and venture capital. Figure 2 from the FAQ report breaks down key areas of this market over the three most recent years with data availability.

Source: SBA Office of Advocacy, “Small Business Finance FAQ,” February 2022

Finally, what about the level of financial capital needed to start a business? It turns out that 24.1 percent of small businesses were started with less than $5,000; 35.8 percent with less than $10,000; and 50.9 percent with less than $25,000.

That last bit of information about the level of financing needed should be encouraging to entrepreneurs, i.e., it is possible to start a business with a relatively modest amount of startup funding.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.



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