More business owners choosing to finance their own businesses

Many small business owners are not choosing to even try applying for bank loans. Image: Flickr / Ewan-M / CC-BY-SA

A new survey by European firm Bibby Financial Services has found that more small businesses are relying on personal savings for business financing. For the most part, these business owners are not even applying for loans.

Early stage entrepreneurship

Most entrepreneurs, in the beginning stages of their business, put up money of their own in order to start the business. In 2011, early-stage entrepreneurship jumped in 75 percent of developed countries. Most of this entrepreneurship came in non-high tech ventures, such as service industry, restaurants, dry cleaners, grocery stores and information-economy jobs such as writing and photography. Many people are coming in to entrepreneurship as a last resort, when they are laid off from their jobs and essentially must start businesses in order to work.

A drop in available funding

Generally, small businesses have been financed through a combination of venture capital financing, loans from banks and financial institutions, personal savings, private financing and investors. For the most part, the availability of venture capital financing has been dropping in the United States; a PricewaterhouseCoopers report in 2011 showed that VC financing dropped more than 17 percent during the year. Many small business owners are also choosing to not even apply for bank loans, instead relying on other sources of funding for their businesses. It is not so much a matter that businesses are getting turned down for loans, but that many businesses are not even attempting to apply for those loans.

European businesses relying on savings

As with the United States, many entrepreneurs in Europe have reported that they are relying on personal savings to keep their businesses going. The Federation of Small Businesses asked 11,000 members about their funding sources. Approximately 3,600 members reported that they were relying on their personal savings accounts and the savings accounts of family members in order to keep their businesses operating. Financial analysts, however, warn that relying on private savings is not a sustainable way to maintain businesses over the long term, because savings eventually run out.

Why financing is drying up

The reasons that financing for new businesses is drying up are widely varied. Individuals with significant savings and capital are tending to hold their cash close to the chest, saving rather than spending. Investment is also more likely to go to infrastructure and disaster prevention than to high-tech start ups. The amount of cash available for investment has also gone down, as commodity prices and cash reserve requirements are going up.

[Many business owners choose to use personal loans to get their business going.]

Where to find financing

For small businesses, the lack of available financing does not have to be the death knell for a business idea. Instead, many small businesses are turning to alternative financing, such as crowd sourcing, person-to-person lending, or private financing from family and friends in order to start up their businesses.

Sources

UK Telegraph
Management Today
Science 20

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