When it comes to financing their startups, most entrepreneurs prefer to bootstrap it their first year.
According to a SCORE survey of roughly 1,000 small business startups from across the country, a whopping 78% of respondents said they relied on personal funds and income from another job to get their startup off the ground.
The survey served as the foundation for SCORE’s fall 2019 “Megaphone of Mainstreet: Startups” data report. Part 1 of that report, “Finding Your Way, Finding Customers,” revealed that one of the top concerns that startup owners have is securing enough cash flow to maintain their business and support their personal needs.
“The Megaphone of Main Street: Startups Infographic #2 - Finding Financing” highlights the findings of part two of our latest data report.
This section focuses on how startups prepare for this financial uncertainty in that all-important first year.
Startup Owners Turn to Personal Financing to Launch Their Businesses
One of the most surprising statistics to emerge from Part 2 of the report was just how little debt entrepreneurs are willing to take on when it comes to launching their startups. The vast majority of new small business owners don’t seek financing from bank loans, cash advances on credit cards, or even loans from family and friends. They also didn’t look for alternative methods of financing such as investors, crowdfunding, or grants.
When asked where their initial startup capital came from, entrepreneurs overwhelmingly relied on their own resources:
- Personal funds: 66.3%
- Income from another job: 27.6%
- Borrow from friends/family: 11.3%
- Bank loan: 11.2%
- Cash advance from credit cards: 9.0%
- Donations from friends/family: 6.4%
- Investors: 3.4%
- Grants: 2.1%
- Crowdfunding: 1.7%
Despite the prevalence of bootstrapping, however, the report makes clear to point out that startups did not begin their businesses without financial resources.
- 42% of entrepreneurs started with less than $5,000 in cash reserves.
- 49% started with more than $10,000.
- 24% started with more than $50,000.
78% did not seek outside financing.
The percentage of all startups successful in obtaining financing:
- Bank or other financial institution: 8.2%
- Friends / family loan: 4.8%
- SBA loan: 3.1%
- Online lenders: 2.3%
- Angel investors: 1.4%
- Crowdfunding: 0.8%
Only 10% of all entrepreneurs received startup funds of more than $25,000.
Outside Funding Pays for Equipment, Not Salaries
Despite their cash flow concerns and their worry about being able to support their own personal needs, less than a quarter (24%) of the entrepreneurs surveyed reported using outside financing to pay their own salaries and only a slightly higher percentage (26%) reported using the funds to hire staff. Equipment purchases topped the list, with inventory purchasing running a distant second.
Asked how they used outside financing in their first year, startup owners primarily added assets:
- Purchasing equipment: 63%
- Purchasing inventory: 48%
- Marketing: 48%
- Leasing and preparing business location: 41%
- Product development: 27%
- Hiring staff: 26%
- Paying my salary/support during startup: 24%
- Other (licenses, operating expenses, etc.): 11%
What should YOU do?
When it comes to financing their startups, the data show that entrepreneurs are largely self-reliant. However, choosing the right source of financing for your small business is a lot more complicated than it used to be, and not everyone can pursue their dreams by bootstrapping.
If you’re ready to launch a business and are looking into ways to finance operations, a SCORE mentor can help you find the solution that’s right for you. Reach out to a SCORE mentor today, and let’s get started!
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.