New research from Professor David Robinson and the Kauffman Foundation reveals that 75 percent of most firms’ startup capital is made up in equal parts of owner equity and bank loans and/or credit card debt, underscoring the importance of liquid credit markets to the formation and success of new firms.
Other key findings include:
- Outside debt (financing through credit cards, credit lines, bank loans, etc.) was the most important type of financing for new firms, followed closely by owner equity. These two sources accounted for about 75 percent of startup capital.
- Insider debt (from friends, family, and spouses) and outsider equity were much less important sources of startup capital.
- Owner debt and insider equity were the least important sources for startup capital.
- Firms with high credit scores (low risk) started businesses with much higher levels of startup capital than firms with low credit scores. The average amount of startup capital was $136,000 and $50,000 respectively. These compare with about $78,000 for firms overall.
- High-tech firms with high Dun & Bradstreet Credit Scores (low risk) started with nearly $275,000 in financial capital. More than $100,000 of this financing was from outside equity investors such as venture capitalists and other informal investors.
- Outside equity financing was the most important source of startup capital for high-tech firms with high credit scores.
“These findings reveal how important smoothly functioning credit markets are to the success of startups,” said Robinson. “I think many people understand the importance of bank credit for firms that are already up and running—our results show bank credit is critical at the very earliest stages of a firm’s life.”
The full report, “The Capital Structure Decisions of New Firms,” is available here.
