US startups struggle to find funding

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Charlie Yeh, of mFluiDx, demonstrates his inexpensive disease testing kit at a startup competition in San Francisco. Reuters

WASHINGTON (AFP) – Small startup firms, which are key to US job growth, are struggling to find sufficient financing to expand, according to a survey released Tuesday.

Startups were much more likely to face financial shortfalls even though their need for funds is smaller than that of more mature small 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 startups account for 34 percent of all US employer firms, for nearly all net new job creation and for almost 20 percent of gross job creation,” the New York Fed said, citing outside research.

They also “play an outsized 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 startups receive only some of the funds they request – 41 percent compared to 33 percent for older businesses.

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 startups “is essential to a healthy economy”, she said in a statement, and access to financing is “especially critical to these young firms who need funds to weather initial costs and grow”.

Startups were twice as likely as mature firms to add jobs and grow revenues (43 percent compared to 22 percent), 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 businesses – including 2,100 startups, all of which were formed after the global financial crisis – showed young firms “were more likely than mature applicants to face financial shortfalls [69 percent versus 54 percent]”.

“This disparity remained even when startups 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.

“That is going to have implications for the cost of credit and frankly second stage growth of these businesses, or, frankly, they’re ceasing to exist,” Ms Kramer Mills said.

“It is connected to failure rate absolutely.”

As with their more mature counterparts, the role of traditional bank loans has diminished and startups increasingly use credit cards – a high-cost and limited resource.

They also were much more likely to apply to online lenders – 39 percent compared to just 11 percent.

And with outside research showing the growing role of women and minority-owned startups, particularly minority-women-owned firms, the New York Fed plans to do further analysis of  these elements in separate reports later this year.

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