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Cover of the Report on Startup Firms based on the 2016 Small Business Credit Survey

Startups, or small businesses that were 5-years-old or younger in 2016, reported stronger growth and more optimism than mature firms, but have greater credit risk and experience more financial challenges.

2016 Small Business Credit Survey: Report on Startup Firms

This report is the second in a series of reports based on the 2016 Small Business Credit Survey (SBCS), a national collabora­tion of the Community Development Offices of the 12 Federal Reserve Banks. As a follow-up to the Report on Employer Firms issued in April 2017, the Report on Startup Firms provides an in-depth look at the financ­ing and credit experiences of startups with employees—which we define as small busi­nesses that were five years old or younger in 2016 and had full- or part-time employees.

Startups1 are of particular interest since they account for 34% of all small employer firms and play an outsized role in U.S. innovation and productivity.2 Young firms are the drivers of job growth in the United States, account­ing for nearly all net new job creation and almost 20% of gross job creation.3 Yet, even as their importance has become more widely recognized, the rate of startup creation has been decreasing for years.4 And, of those ventures that launch, failure rates are high. Approximately one-third of new establish­ments fail within their first two years, and half fail within five years.5

Given the importance of startups for the economy, the question of startup capital needs is of central importance. Access to capital is important for both firm formation and growth. While funding is the lifeblood of every company, capital is especially critical for startups. To reach scale, startups need to be able to secure expansion capital. The Report on Startup Firms offers detailed intelligence on startups' financing needs and challenges, asking questions about capital requests, borrowing qualifications, applica­tions and success levels.

The SBCS offers a unique dataset to examine the financing realities of firms that launched after the Great Recession, amid a challenging and changing financial landscape.6 Even though most small firms seek small amounts of financing (55% of 2016 SBCS respondents sought $100,000 or less), small dollar credit is difficult to obtain. The small-dollar loan share of lending has fallen from 33% in 2008 to 22% in 2016, and continues to decline.7 Instead, firms may be turning to other financing sources. Product-wise, credit card lending has been rising since the recession, with implications for borrowing costs. In ad­dition, a variety of online alternative lenders have introduced new lending products and services. The SBCS enables us to examine the interplay between these broader market trends and small business borrowers' experi­ences.

This report addresses several important borrower-centric questions:

  • How strong is demand for financing among startups?
  • Are startup firms seeking financing and credit from traditional lenders, or are younger firms attracted to new capital sources?
  • How successful are new firms in obtain­ing financing, and how do they rate their experiences with lenders?

Overall, the survey finds:

Startup firms have stronger growth and optimism than mature small employer firms (called "mature firms" throughout), but also have greater credit risk

  • Startup firms are twice as likely as mature firms to be growing firms (adding jobs and growing revenues): 43% compared to 22%.
  • 70% of startup applicants sought funding for expansion, compared to 60% of mature applicants.
  • Most startup firms are optimistic about their future growth, with net majorities (the share of firms expecting an increase minus the share expecting a decrease) anticipating revenue and/or employment growth in the next 12 months.
  • Startup expectations are notably stronger than those of mature firms. For example, a net 61% of 0-2 year old and net 54% of 3-5 year old firms expect to add jobs, compared to 29% of mature firms.
  • Despite these positives, only 32% of 0-2 year old firms and 49% of 3-5 year old firms report being profitable, compared to 60% of mature firms.
  • 44% of startup firms self-identify as medium and high credit risk, compared to 30% of mature firms. Roughly half of the firms who reported credit risk scores used personal – instead of business – scores.

Startups have strong demand for financing yet smaller financing needs than mature firms

  • Half of startup firms are seeking external financing; 52% of startup firms applied for financing in 2016, compared to 42% of mature firms.
  • 63% of startup applicants sought $100,000 or less in financing, compared to 49% of mature applicants.

Financing challenges for startup firms are more common than for mature firms, even at comparable credit risk scores

  • 58% of 0-2 year old firms and 53% of 3-5 year old firms reported difficulty with credit availability or accessing funds for expansion, compared to 39% of mature firms.
  • 69% of startup applicants experienced a financing shortfall, meaning they obtained less than the amount they sought, com­pared to 54% of mature applicants.
  • About half (53%) of low credit risk startup applicants experienced a financing shortfall, compared to 41% of mature, low credit risk applicants.
  • Startup applicants most frequently cited insufficient credit history as the reason for not receiving the full amount of financing requested (50% of low credit risk and 47% of medium and high credit risk startup applicants reported this reason).

Startup firm application rates vary by credit risk

  • Startup firms continue to seek loans/line of credit at higher rates from banks than from other types of lenders.
  • However, medium and high credit risk startup applicants are much more likely to apply to online lenders than are low credit risk startup applicants. 39% of medium/ high credit risk startup applicants went to online lenders compared to only 11% of low credit risk startup applicants.
  • In fact, medium/high credit risk applicants reported applying to online lenders at comparable rates to small banks, regard­less of their age. 39% of medium/high credit risk startup applicants and 35% of medium/high risk mature applicants went to online lenders, compared to 41% and 43% that applied to small banks, respectively.

Startup firm success rates vary considerably across lender types

  • Low credit risk startup applicants have relatively high success in receiving at least some financing across lenders but are more successful at small banks (78%) and online lenders (76%) than at large banks (63%).
  • Medium/high credit risk startup applicants are notably more successful at online lenders (45% receive at least some financ­ing) than at large banks (26%) or small banks (35%).
  • Startup applicant satisfaction overall was highest with small banks, with 48% of startup applicants reporting positive experiences and lowest with online lend­ers, where only 23% reported positive experiences.
  • Overall, mature applicants reported higher satisfaction levels across all lenders: 64% were satisfied with small banks, 40% were satisfied with large banks, and 37% were satisfied with online lenders.
  • Credit cards are important financial products for startup firms
  • 41% of startup applicants applied for credit cards, their second most commonly sought product. Startup applicants more often seek credit cards compared to ma­ture applicants, but apply at a similar rate for loans/lines of credit.
  • Credit cards are the financing product most nonapplicant startups (half of start­ups overall) use on a regular basis, more than loans/lines of credit, leasing, or other financing types.

More than half of startup nonapplicants are either avoiding debt or are discouraged from applying

  • 27% are debt averse; they tend to be lower credit risks and are less likely than applicants to have experienced financial challenges.
  • 27% are discouraged—they did not apply because they believed they would be turned down—twice the share of mature nonapplicants. These firms tend to be higher credit risks and have reported prior financial challenges.
  • 36% of startup nonapplicants indicated they had sufficient financing, compared to 51% of mature nonapplicants. This group is more likely to report lower credit risk and less likely to have faced financial challenges.

A note on terminology and data compari­sons: In this report, we refer to startup firms as firms that are 0-5 years of age and have more than one and fewer than 500 full- or part-time employees. Where we can, we break out early stage (0-2 year old) and sec­ond stage (3-5 year old) firms because there are notable differences between early stage and second stage firms in securing external financing; firms with less than two years of financials and tax documents are less likely to meet traditional underwriting require­ments. We also compare startups to mature small employer firms, which we call "mature firms" for brevity: businesses that are more than 5 years old and have more than one and fewer than 500 full- or part-time employees. In cases where comparisons with mature firms are not included in the charts and tables, we footnote the relevant statistics.



1Defined in our analysis as firms five years old or younger.

2Small innovative firms have historically produced fifteen times as many patents per employee as large innovative firms. See: Anthony Breitzman. "Patent Trends among Small and Large Innovative Firms during the 2007-2009 Recession." SBA Office of Advocacy. May 2013.

3"The Importance of Young Firms for Economic Growth," Jason Wiens and Chris Jackson. Kauffman Foundation Entrepreneurship Policy Digest, September 2015; "Who Creates Jobs? Small Versus Large Versus Young," John Haltiwanger, Ron S. Jarmin, and Javier Miranda. The Review of Economics and Statistics, May 2013, 95(2): 347-361.

4"Declining Business Dynamism: It's For Real," Ian Hathaway and Robert E. Litan, Brookings Institution, May 2014.

5Bureau of Labor Statistics, Business Employment Dynamics.

6The most mature startups (5 years old) in this report were launched in 2011.

7"Loans to Small Businesses and Small Farms." In Federal Deposit Insurance Corporation, Quarterly Banking Profile. Available at: https://www.fdic.gov/bank/analyti­cal/qbp/. Accessed 7/31/2017.







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