When it comes to starting a small business, one key consideration is always cash – you need it to scale, produce products, find sales outlets and discover new customers. A variety of fundraising techniques exist, from venture capital to bootstrapping – and if you’re wondering how other entrepreneurs are funding their firms, a new report has some answers.
SCORE recently surveyed about 1,000 small businesses to determine exactly which challenges these entrepreneurs are facing, and published the results in its Megaphone of Main Street report. Escalon scoured through the report to find out some of the most essential funding facts relevant to our readers. Read on for the scoop.
1. Nearly 80 Percent of Entrepreneurs Are Bootstrapping
We all know the pros and cons of bootstrapping a business, and most startups seem to agree that the pros outweigh the cons because even entrepreneurs with very little cash in the bank appear to be leaning into bootstrapping.
According to the SCORE report, about 78 percent of businesses did not seek or obtain outside financing, and about 42 percent of entrepreneurs are starting their ventures with under $5,000 in cash reserves. Almost a quarter of the surveyed businesses started their ventures with over $50,000 available, while the majority of firms had over $10,000 in the bank.
2. Here’s How Bootstrappers Are Funding Their Businesses
With nearly 80 percent of firms noting that they didn’t seek outside financing, the question arises about how these companies were able to fund their businesses. According to the survey, the cash came from two main sources, as follows:
- Personal Funds: 66.3 percent
- Income From Another Job: 27.6 percent
Of course, depending on how much money you have in the bank, bootstrapping can be untenable, especially if you’re in an industry where a higher outlay of cash is required in the early stage of your firm.
“Some businesses, such as restaurants or manufacturing, can have large startup costs for real estate and equipment purchases that necessitate larger savings accounts, while other types of businesses, such as personal services, can be operated out of an entrepreneur’s home, and require little startup funds beyond what the owner needs to pay personal bills,” the report said.
3. Less Than Four Percent of Startups Have Outside Investors
Of the companies that went beyond bootstrapping to fund their businesses, the following represents the source of their funding:
- Borrowing From Friends/Family: 11.3 percent
- Bank Loan: 11.2 percent
- Credit Card Cash Advances: 9.0 percent
- Donations From Friends/Family: 6.4 percent
- Investors: 3.4 percent
- Grants: 2.1 percent
- Crowdfunding: 1.7 percent
Raising money can help those with lower personal savings prepare for the early days of launching, since it’s important to have some reserves if the business is slower to pick up, or to pay for unexpected costs. “Typically, mentors recommend that entrepreneurs have at least three to six months of cash reserves when starting any business.”
4. Highest Rate of Funding Success Seen Via Loans From Friends/Family
Although most startup entrepreneurs bootstrapped their businesses with their own cash reserves, the companies that did seek outside funding had varying degrees of success rates in raising cash that way.
“Of those who did pursue outside financing sources, the highest percentage of success was seen among loans from friends and family, followed by bank loans,” the report notes. About 77.3 percent of businesses that sought financing from friends and family were successful in bringing in cash, while about 58 percent who sought bank loans were able to obtain them, SCORE notes.
5. Here’s Where the Cash Goes
Among the businesses that scored outside financing, they used the funds for the following purposes, according to SCORE (respondents were asked to check all that apply):
- Purchasing equipment: 63.2 percent
- Buying inventory: 48.1 percent
- Marketing: 48.1 percent
- Leasing/preparing business location: 40.6 percent
- Product development: 27.4 percent
- Hiring staff: 25.5 percent
- Paying the entrepreneur’s own salary: 23.6 percent
- Other (licenses, operating expenses, etc.): 11 percent
Entrepreneurs can use the SCORE report to get a handle on how other startups are finding funding. Click here to read the entire report.