Raising capital for your small business start up may be one of the hardest things you’ll ever have to do as a business owner. That is why it’s extremely important to build and maintain enough personal savings. It gives you the capability to invest your own money into your business, without relying heavily on outside capital. Your personal savings is more likely to be the primary source of capital for your small business start up instead of a loan or line of credit anyway.
In fact, according to a recent study by Benjamin Ryan at the Gallup Business Journal, personal savings is a crucial source of funding for small business start ups. The study found that due to lack of financing, small business start ups have been on the decline. It’s largely because people haven’t had the personal savings to invest in their own business. Here are 2 facts about small business start ups that were discovered due to the study:
- Business Closing Held Steady, While Startups Declined – According to the study, the number of small business start ups have been declining over the last 30 years. It also pointed out that there are even less new businesses being developed than existing businesses that are closing their doors. Approximately 16.5% of businesses were small business start ups in 1977 but that number declined to 8.2% by 2011. This means the number of small business start ups have been cut in half since then. However, the percentage of existing businesses that closed down remained steady at about 9%. Based on these statistics you can conclude that fewer new businesses are being started and existing businesses are still closing down at the same rate they were almost 30 years ago.
- Personal Savings, A Key Source of Funding for Business Startups, Have Declined – The study explains that fewer small business start ups are being created because the amount of personal savings has continued to decline since the 1970’s. It also explained that in 2006, 73% of business owners reported that personal savings were their primary source of capital and 37% said a loan or line of credit was the secondary source. In 2014, 77% business owners reported that their personal savings were their primary source of capital and 41% stated a loan or line of credit was the secondary source. A decline in the primary source of funding (i.e. personal savings) makes it much more difficult to qualify for outside capital such as loans and lines of credit, which have proven to be the second most common source of small business start up financing.
The Final Predication – “Entrepreneurship Remains at Risk”…
According to the Gallup study, based on the personal savings rate from 2009 to 2012, the rate in which small business start ups are bring created should increase from 2013 to 2016. However, since the personal savings rate fell in 2013 and 2014, we could see a decline in the number of small business startups created in the 3 to 4 years after. Therefore entrepreneurship still remains at risk. The key for aspiring entrepreneurs is to save as much money as possible at least 3 to 4 years before planning to launch a small business start up. If you fail to save, you may find yourself having difficulty raising outside capital such as loans and/or lines of credit.