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New Businesses Rely More on Bank Loans and Credit Cards Than Friends and Family

Posted by: Nick Leiber on November 3, 2008

Where do most new businesses turn to for startup capital? The common assumption is friends and family. But a recent report from the Kauffman Foundation shows most actually rely on personal bank loans and credit cards.

Using data from the Kauffman Firm Survey of nearly 5,000 firms from their birth in 2004 through the first three years of life, “The Capital Structure Decisions of New Firms” reports:

“Indeed, our calculations indicate that external debt financing—primarily through owner-backed bank loans and business credit cards—is the primary source of financing at a firm’s inception. The average amount of bank financing is seven times greater than the average amount of insider-financed debt; three times as many firms rely on outside debt as do inside debt.

Reader Comments

Suresh Naryanaswamy

November 3, 2008 12:19 PM

It is impossible to reduce costs beyond a certain point without actually recycling the people that work for the company. Our companies may have to regrow on other planets...but that does not come cheap either....hmm....we may need more whiz kids on wall street to figure this one out.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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