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SBA: Nearly 1 in 4 Entrepreneurs Start a Business with Less Than $5,000

  • Analysis by the Small Business Administration Office of Advocacy finds that half of entrepreneurs launch a business with less than $25,000, with about one in four starting with less than $5,000
  • Most startups rely on personal assets for capital, with existing business owners drawing on retained savings
  • A majority of business owners did not rely on a bank for financing, and most of those who got a loan received less than what they sought

Summary by Dirk Langeveld

About one in four entrepreneurs launch their operation with less than $5,000 in capital, according to a recent analysis by the Small Business Administration’s Office of Advocacy.

Looking at trends in small business financing, the office found that more than half of employer startups (50.9 percent) got started with less than $25,000 in funding. This included 24.1 percent who started with less than $5,000.

Modest startup funding was even more common for certain demographic groups. Fifty-eight percent of Hispanics, 57 percent of Blacks, and 55 percent of veterans began their business with less than $25,000. Forty-one percent of women established their business for less than $10,000.

Entrepreneurs have often been advised that it is possible to create a business for a modest sum of money. For example, a feature in Entrepreneur highlights businesses that can be started for less than $10,000 including operations such as consulting, creative product manufacturing, and a variety of personal services.

A total of 12.8 percent of business owners used between $50,000 and $99,999 to start their business. The same share used between $100,000 and $249,999.

Most entrepreneurs relied on personal assets rather than financing to fund their venture. Three-quarters of startups used personal savings, with 10 percent relying on a personal credit card and another 10 percent using other personal assets. In 2019, 77 percent of existing businesses relied on retained savings for purposes such as expanding a business, shoring up their financial health, or purchasing inventory.

Sixty-three percent of small business owners didn’t use bank financing. Among those who did, about 46 percent received $50,000 or more.

While three-quarters of those who sought bank financing received it, most didn’t receive the full amount they requested. Just 37 percent of employer firms received full funding, along with 29 percent of larger non-employer firms and 17 percent of smaller non-employer firms.

Women were less likely than men to use a bank for business capital. The SBA cautioned that this approach has the drawback of failing to establish a banking relationship, which could inhibit future capital needs.

The report says the total business funding market in 2020 totaled about $1.4 trillion. However, an outsized portion ($895 billion in loans of $1 million or less) came through the Paycheck Protection Program, which was established to assist businesses struggling with COVID-19 pandemic conditions.

The default rate among small businesses with outstanding loans was low, falling from 3.3 percent in October 2020 to 2.1 percent in October 2021.

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