WASHINGTON: Small start-up firms, which are key to US job growth, are struggling to find sufficient financing to expand, according to a survey released Tuesday.
Start-ups were much more likely to face financial shortfalls even though their need for funds is smaller than that of more mature companies, the New York Federal Reserve Bank said in its latest survey.
These firms, defined as less than five years old, also are “more likely to be higher credit risk,” in an economy where banks are gradually starting to loosen the tight reins on lending following the global financial crisis.
“These findings are particularly salient for the US macroeconomy because start-ups account for 34 per cent of all US employer firms, for nearly all net new job creation and for almost 20 per cent of gross job creation,” the New York Fed said, citing outside research.
They also “play an outsize role in US innovation and productivity.”
As more than two-thirds face financing shortfalls, these firms see their applications for credit rejected at a higher rate and many more receive only some of the funds they request — 41 per cent compared to 33 per cent.
Access to credit is key to these firms and could determine their survival, said Claire Kramer Mills, the New York Fed’s assistant vice president and community affairs officer.
The success of start-ups “is essential to a healthy economy,” she said, and access to financing is “especially critical to these young firms who need funds to weather initial costs and grow.”
Start-ups were twice as likely as mature firms to add jobs and grow revenues (43 per cent compared to 22 per cent), and were also much more optimistic than mature firms about future revenue and employment growth, the report found.
The survey conducted in 2016 of over 10,000 small business — including 2,100 start-ups, all of which were formed after the global financial crisis — showed young firms “were more likely than mature applicants to face financial shortfalls (69 per cent versus 54 per cent).
“This disparity remained even when start-ups had comparable credit risk levels to mature applicants,” the report said.
The findings again show the importance of personal credit, which many of these young companies depend on, even though they tend to have weak credit scores.
As with their more mature counterparts, the role of traditional bank loans has diminished and start-ups increasingly use credit cards — a high-cost and limited resource.
They also were much more likely to apply to online lenders — 39 per cent compared to just 11 per cent.
