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External Debt Markets Critical in Entrepreneurial Firms' Early Years

(KANSAS CITY, Mo.) April 8, 2009 — Now in its fourth year of data collection, the world's largest longitudinal survey of new businesses shows that external debt markets become increasingly important during startup companies' early growth years. In 2007, the 2,915 entrepreneurial firms surveyed injected an average of $53,000 into their businesses, with 62 percent of that capital coming from outside debt markets. By comparison, external debt markets provided 40 percent of financing in these companies' first year of operation.

These and other data were released today in the latest Kauffman Firm Survey (KFS), a Ewing Marion Kauffman Foundation-funded study of new businesses founded in 2004 and tracked over their early years of existence. The KFS fills a void in valuable data collection on young U.S. businesses, providing an understanding of how businesses are organized and operate in their early years, and shedding light on survival and growth indicators.

"This report highlights the importance of external financing for young business and sheds new light on our understanding of the credit constraints they feel," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. "In addition to studying actual debt and equity financing, the 2007 survey asked about credit applications. It will be interesting to compare these data with research on their financing in 2008, which clearly was a more challenging credit market."

The KFS started its baseline study with a cohort of 4,928 firms that began operations in 2004. This group of companies is tracked annually and asked detailed questions that cover a range of topics, including the founders' backgrounds, the sources and amounts of financing, firm strategies and innovations, and outcomes such as sales, profits and survival. The project has an additional four years of study planned. At the end of the project, the KFS will contain data from 2004 to 2011.

Twelve percent of the firms in the KFS study submitted new external credit applications for debt financing in 2007. Of those firms that sought financing in 2007, 70 percent always received approval. Nearly 18 percent had mixed results, and slightly more than 12 percent of the firms said their loan applications always were denied.

For those whose loan applications were denied, almost half said insufficient collateral to guarantee the loan was a primary reason given for the denial. The second-most common reason was flaws in the owner's personal credit history.

Less than 10 percent of black-owned firms applied for new credit in 2007, compared with nearly 13 percent of firms owned by non-Hispanic whites. Seventeen percent of firms said they did not apply for credit at some point when they needed it because they feared their loan applications would be denied. Women and African-Americans were more likely than men and whites to have avoided applying for credit for this reason. Nearly 40 percent of African-Americans said they feared being denied, compared with 14.5 percent of whites.

Interestingly, however, among the group that feared denial, a higher proportion of firms—20.7 percent—applied for credit than those in the overall sample who applied (12 percent).

Other key findings from the latest report include:

  • About 90 percent of firms that began operations in 2004 survived through 2005, while about 80 percent survived through 2006 and 73.4 percent through 2007. Most of the remainder of firms closed either permanently or temporarily over the period, while a small number, 3.5 percent, either merged with or were sold to another business.
  • Surviving employer firms increased average employment from 4.6 employees in 2004 to 6.7 employees in 2007.
  • About 40 percent of firms had revenues greater than $100,000 by 2007, compared with just 17 percent in 2004.
  • About 17 percent of firms have a national market area, and more than 13 percent of firms had some international sales.
  • More than 25 percent of firms sold at least some of their goods or services on the Internet. Nearly one-fourth of those firms had Internet sales that were more than half of their total sales.

    The KFS dataset is accessible to scholars worldwide, and all reports in the KFS series are available for download. The public-use microdata file and reports are available at http://www.kauffman.org/research-and-policy/kauffman-firm-survey.aspx.

 

 

 

 



 

 


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