WHAT FUNDING SOURCES WORK FOR YOU?

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1 Access to Capital: WHAT FUNDING SOURCES WORK FOR YOU? Executive Summary May 2005 A survey conducted by the U.S. Chamber of Commerces Statistics and Research Center and its diversity initiative, Access America. This report was underwritten by Business Loan Express LLC.

2 About the Study Acquiring capital is a driving concern for small business owners. To gain a better understanding of the options used in financing businesses whether for growth or survival the U.S. Chamber of Commerce Statistics and Research Center and its diversity initiative, Access America, conducted the survey Access to Capital: What Funding Sources Work for You? This report, underwritten by Business Loan Express LLC, details the financing hurdles faced by small business owners, including women- and minority-owned businesses, and will help the Chamber elevate awareness of these challenges. The 1,080 participating business owners who responded to this study represent a diverse business community of women (48%) and minorities (18%). The minority business owners represented by African Americans, Asians, Hispanics, Native Americans, and others are combined when reporting for all minorities and separated when appropriate. The respondents represent predominately small businesses, with 95% having less than 100 employees. The survey was conducted in March and April The comprehensive tables that make up this report can be found at Copyright (c) 2005 by the U.S. Chamber of Commerce This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. (From a declaration of principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.) All rights reserved. This publication, or parts thereof, may not be reproduced in any form without the written permission of the United States Chamber of Commerce. Forward requests for permission to reprint to: Reprint Permission, Business Information & Development, U.S. Chamber of Commerce, 1615 H Street, N.W., Washington, D.C Requests must specify the exact material to be reprinted, where, and how the reprinted material will appear. Rights are granted for one edition only. Please allow a minimum of two weeks for consideration of requests. U.S. Chamber of Commerce Statistics and Research Center 1615 H Street, N.W. Washington, D.C Business Loan Express Channels Division 645 Madison Avenue, 19th Floor New York, N.Y LOAN

3 Executive Summary This study of 1,080 business owners provides comprehensive funding information for small businesses as a whole and identifies unique financing differences and challenges faced by business owners based on ethnicity and gender. The following are some of the key survey findings. Women and African American Business Owners Require Less Funding for Their Businesses. Women owners surveyed are much more apt to be in the services industries than men by nearly 2 to 1 and, consequently, had lower start-up and ongoing financing needs. Men, on the contrary, tend to own businesses needing more capital, such as manufacturing, construction, and distribution/transportation. Likewise, African American respondents operate small companies, with more than three-quarters having revenue less than $100,000. Subsequently, they showed the lowest start-up funding needs, with half starting their businesses with less than $5,000. Minority Business Owners Rely Heavily on Credit Cards. While both minorities and Caucasians drew on their personal savings to fund their businesses, Caucasians used bank loans more than minorities for initial and ongoing financing. Minority business owners made greater use of credit cards for funding cards were used by 35% of minorities overall. Similarly, men having larger businesses in A CCESS TO C APITAL: WHAT F UNDING S OURCES W ORK FOR Y OU? revenue terms took on bank loans with greater frequency than women (more than twice the rate). Women and Minorities Request Personal Lines of Credit. Men and Caucasian respondents who needed a loan were much more likely to request business rather than personal lines of credit. Women and minorities obtained personal lines of credit with equal, if not greater, frequency than business lines of credit. Minorities Often Need Credit but Feel They Will Be Denied. Of the owners who didn t request credit in the past two years, minorities were more than twice as likely as Caucasians to say that they actually needed the credit but felt they would be denied. Hispanics, in particular, felt they d be denied the credit they needed, as reported by more than 4 in 10 business owners. Women and Minorities Use Credit for Debt Consolidation at Nearly the Same Rate as for Business Expansion. While all groups need credit primarily for working capital, women and minority business owners were only slightly more likely to seek credit for domestic business expansion than for debt consolidation. Men were nearly three times more likely to use credit to grow their businesses. Value of Business Plan Underappreciated. There is near consensus that business owners credit is a factor in obtaining credit; however, just over a third believe that a business plan plays a role. Additionally, those with higher educational levels give a plan greater importance. Availability of Credit Top Problem for Minorities, Much Less for Women. About half of the minority business owners especially African Americans and Hispanics listed availability of credit among their top three business problems. Only a quarter of the women business owners reported availability of credit as a top problem. U NITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER P AGE 1

4 A CCESS TO C APITAL: WHAT F UNDING S OURCES W ORK FOR Y OU? Funding the Business Women and African Americans Use Less Money to Start Businesses About a third of all business owners said that they required less than $5,000 to start their businesses. However, far more women than men used such small start-up funding by a factor of 2 to 1. Conversely, nearly a fourth of men reported requiring $100,000 or more to start their businesses. Minority business owners, on average, reported similar start-up funding levels as Caucasians. Within the minority segment, African Americans required the least start-up funding and Asians required the most (49% and 16%, respectively, needed $5,000 or less). Although both women and African American business owners needed little start-up money, they are also more often in the services industries, and their businesses are smaller in terms of annual revenue than their counterparts. BUSINESS START-UP FUNDING LEVEL $20,000 $49,999 13% $10,000 $19,999 9% $50,000 $99,999 12% $5,000 $9,999 15% $100,000 $499,999 11% LESS THAN $5,000 35% $500,000 OR MORE 5% BUSINESS START-UP FUNDING LEVEL By Gender BUSINESS START-UP FUNDING LEVEL By Ethnicity $100,000 or more 10% 23% Women Men $100,000 or more 16% Minorities Caucasians $20,000 $99,999 20% 29% $20,000 $99,999 27% 24% $5,000 $19,999 24% 25% $5,000 $19,999 24% 25% Less than $5,000 47% 24% Less than $5,000 33% 35% P AGE 2 UNITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER

5 Sources of Funding Varies Widely Venture Capital Revolving Credit SBA Loan Home Equity Loan Friend/ Family Loan Credit Card Bank Loan Personal Savings SOURCES OF FUNDING 4% 2% 3% 3% 3% 12% 8% 16% 11% 15% 15% 18% 29% 32% Ongoing Funding Initial Funding 60% 81% Initial Funding Ongoing Funding Bank Credit Bank Credit Loan Card Loan Card Men 23% 16% 43% 30% Women 13% 15% 21% 29% Caucasians 20% 14% 34% 28% Minorities 13% 22% 22% 35% When starting their businesses, owners typically relied on multiple sources of financing. Other than personal savings, which was used by most owners, remaining sources of funding varied a great deal regardless of gender or ethnicity. In particular, the use of bank loans for start-up funding was higher for men than for women and to a lesser extent for Caucasians than for minorities. Given that men required more start-up funding for their businesses, they filled the funding void with greater use of bank loans. Similar to men with start-up funding needs, however, minorities leaned more toward credit cards for initial financing. As businesses matured, more owners continued using personal savings over outside funding sources for ongoing operations but less frequently than in the startup phase replacing personal sources with credit cards and bank loans. Overall, bank loans and credit card usage increased from 18% to 32% and 15% to 29%, respectively. As with initial funding of the businesses, men led women more than double in using bank loans for ongoing financing. These men-owned companies tend to be larger and in industries with higher capital needs (e.g., manufacturing and construction). Likewise, Caucasians used bank loans more than minorities for ongoing business financing, while minority business owners continued to rely on credit cards for ongoing needs (used by 35% of minorities overall; 28% of Asians and African Americans and 38% of Hispanics). U NITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER P AGE 3

6 A CCESS TO C APITAL: WHAT F UNDING S OURCES W ORK FOR Y OU? Seeking Credit Minorities Often Need Credit but Don t Apply Slightly more than half of all business owners reported that they sought credit in the past two years. The remainder that did not seek credit particularly minority business owners often needed the credit. Minorities were more likely than Caucasians to request credit 68% of Hispanics compared to 46% of African Americans. However, of those who didn t try to get credit, minorities were more than twice as likely (27% versus 11%) than Caucasians to report that they needed it but felt they would be denied. Of the minorities who didn t seek credit, Hispanics, in particular, felt they d be denied credit, although they needed it (41%). More men sought credit than women over the past two years, 59% to 46%. Of those that did not seek credit, there was little difference in their reasons (overall, 67% did not need it, 19% needed it but did not want the debt, and 13% needed it but felt they would be denied). SOUGHT CREDIT IN PAST TWO YEARS Minorities 57% Caucasians Women 51% 46% Men 59% 52% REASONS FOR NOT SEEKING CREDIT Caucasian Respondents REASONS FOR NOT SEEKING CREDIT Minority Respondents Needed it, but felt would be denied, 11% Needed it, but didn t want the debt, Needed it, but felt would be denied, 27% Did not need it, 40% Did not need it, 72% Needed it, but didn t want the debt, 33% P AGE 4 U NITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER

7 Working Capital Is Main Reason for Credit PRIMARY REASONS FOR SEEKING CREDIT Of the business owners who sought credit in the past two years, about two-thirds reported needing the credit primarily for working capital. Minority business owners, on average, were more likely to need credit for working capital, led by African Americans and Asians, at about 80%. International Growth/Expansion Debt Consolidation Domestic Growth/Expansion 6% 4% 4% 4% 4% 23% 23% 16% 18% 27% 30% Minorities Caucasians Women Men 42% 46% Although working capital was the primary reason for credit requests, 4 in 10 businesses sought credit for expanding their operations. This figure includes 46% of men compared to only 30% of women and 42% of Caucasians compared to only 27% of minorities. While women and minority business owners were less apt to seek credit for business expansion, they were more likely to request credit for debt consolidation. More women business owners sought credit for debt consolidation than men (23% versus 16%) and more minorities than Caucasians (23% versus ). Of the minority groups, Hispanics had the highest need for credit for debt consolidation (28%). 39% Working Capital 58% 70% 64% 63% 66% 66% U NITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER P AGE 5

8 A CCESS TO C APITAL: WHAT F UNDING S OURCES W ORK FOR Y OU? TYPES OF LOANS REQUESTED Percentage of Respondents Requesting a Loan Lease Working Capital Equipment Loan Mortgage 15% 11% 6% 12% 15% 18% 11% 22% 25% 18% 28% 23% 19% 30% 28% 29% 28% Line of Credit Is Often Requested Of the business owners who requested credit in the past two years, the most widely requested type of loan was a business line of credit (58%), followed by a personal line of credit (42%). Men led women in every loan category except for a personal line of credit, cited by 46% of women business owners compared to 39% of men. Similarly, Caucasians requested more loans than minority business owners in every category except personal lines of credit and leases. Of those who requested a particular loan, typically 80% to 90% of business owners reported receiving the loan. The frequency of women and minority business owners who received any of their requested loans was typically only slightly lower than for men and Caucasians. However, minorities reported receiving a business line of credit (60%) at a much lower rate than Caucasians (83%). Vehicle Loan 28% 37% 31% 40% 35% Personal Line of Credit Business Line of Credit 39% 46% 39% 42% 49% 47% 55% 60% 58% 67% Minorities Caucasians Women Men P AGE 6 UNITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER

9 What Affects Credit Approval? Business Owners Credit Is Believed to Be Top Factor When asked which factors they believe affect credit approval, nearly 9 out of 10 respondents selected the business owners credit, while approximately 6 in 10 chose the business current debt and annual revenue. A business plan was reported as a factor affecting credit approval by only 37% of business owners, whether men or women. However, African Americans and Asians assigned a greater significance to business plans (47% and 42%, respectively), while fewer Hispanics believed plans to be a factor (33%). The higher the education level of the business owner, the greater the emphasis on a business plan (e.g., 27% of business owners with some high school compared to 49% of those with a doctorate believed that a business plan affects credit approval). Approximately 10% of the business owners found that the owners gender and/or race was a factor affecting credit approval. However, there was a significant difference in the response depending on gender and ethnicity of the business owner. Of the survey respondents, nearly three times more women than men found gender to be a factor (14% of women versus 5% of men) and almost four times more minorities than Caucasians found race to be a factor (20% versus 6%). However, within the minority groups, opinions varied significantly while few Asians and even less Hispanics said that they feel race is a factor (16% and 4%, respectively), 4 in 10 of the African American business owners think that race plays a role in obtaining credit. Business Owners Race Business Owners Gender Lender Size Business Plan Other Financial Statement Issues Amount Requested Age of Business Annual Revenue Business Current Debt Business Owners Credit FACTORS BELIEVED TO AFFECT CREDIT APPROVAL 8% 10% 20% 37% 43% 54% 56% 62% 64% 88% U NITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER P AGE 7

10 A CCESS TO C APITAL: WHAT F UNDING S OURCES W ORK FOR Y OU? Top Business Problems Availability of Credit Ranks Among Top Three Business Problems for Hispanic- and African American-Owned Firms More than half of all business owners said that health care costs are among the top three problems affecting their businesses, closely followed by excessive tax burdens and rising costs of materials. Only a quarter of the business owners believed that availability of credit is among their top problems. However, minority business owners especially African Americans and Hispanics felt quite differently. Both of these groups listed availability of credit among their top problems. In fact, more than half of the Hispanics listed availability of credit as a significant problem, although Hispanics believed that race is not a factor in obtaining credit. The rising cost of health care was the most frequently reported business problem for Asians and Caucasians, cited by 66% and 55%, respectively. Women business owners surveyed said that rising health care costs, rising costs of materials, and excessive tax burdens were their top three problems. PROBLEMS AFFECTING BUSINESSES Legal Reform Availability of Credit Lack of Qualified Workforce Rising Energy Costs Rising Costs of Materials Excessive Tax Burden Rising Health Care Costs 25% 31% 36% 45% 47% 54% TOP 3 BUSINESS PROBLEMS African American Respondents TOP 3 BUSINESS PROBLEMS Hispanic Respondents 60 53% % 46% % 42% 42% Rising Costs of Materials Availability of Credit Excessive Tax Burden 0 Availability of Credit Rising Health Care Costs Rising Costs of Materials P AGE 8 U NITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER

11 About the Study Sample ETHNICITY Gender and Ethnicity African American, 6% Asian, 5% Hispanic, 4% Native American, 1% Other, 2% Caucasian, 82% NUMBER OF EMPLOYEES Less than 10, 72% 10 49, 19% EDUCATIONAL LEVEL Bachelor s Degree, 23% Some College or 2-Year Degree, 31% Some Graduate Work, 7% TOP 5 INDUSTRIES 50 99, 4% , 3% , 1% 500 or More, 1% Master s Degree or Professional Degree, 16% Doctoral Degree, 5% High School or Less, 18% Services % Retail % Manufacturing % Finance/Insurance/RealEstate % Construction % This study represents 1,080 diverse business owners, with a composition similar to the makeup of U.S. small businesses in general. Caucasians represent 82% of businesses; minorities 18% and include African Americans, Hispanics, Asians, Native Americans, and other. Both women and men business owners responded at a similar rate 48% and 52%, respectively. Additionally, Caucasians and minorities are nearly evenly split between women and men (Caucasian men, 44%; Caucasian women, 39%; minority men, 8%; and minority women, 9%). More than half of the business owners have at least a bachelor s degree; 21% have a master s or doctorate. Size of Business and Industry Ninety-five percent of the businesses responding have fewer than 100 employees. Additionally, 44% of the participants report revenue under $100,000 and are predominately owned by women women are twice as likely as men to own a business with under $100,000 in revenue. African American business owners are more likely to own businesses with under $100,000 in revenue (75%) compared to 43% of Caucasians, 43% of Hispanics, and 33% of Asians. However, a larger segment of the African American business owners are women (65%) compared to Asians (26%). Services is the leading industry for both women (40%) and men (24%) in the study sample. Retail businesses are predominately run by women ( women versus 9% men) and manufacturing by men (14% versus 5%). The minorities surveyed are less than half as likely as Caucasians to operate manufacturing, construction, health care, or professional/scientific/engineering establishments and are more apt to be in food/ agribusiness or training/education/consulting. U NITED S TATES C HAMBER OF C OMMERCE S TATISTICS AND R ESEARCH C ENTER P AGE 9

12 U.S. Chamber of Commerce Business Information & Development 1615 H Street, N.W. Washington, D.C /05