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Most Small Businesses Use Savings, Not Financing, to Grow

May 19th, 2011 ::

By Maria Valdez Haubrich

Many small business experts urge startup firm founders to use their personal savings to finance business startup, rather than trying to get financing from outside sources. This was good advice even before the Great Recession hit, and following this advice has become even smarter since then.

Most startup entrepreneurs are heeding that advice, a new study shows. Preliminary data from the 2010 Survey of Consumer Finances, a report by the Federal Reserve that’s scheduled to be released in full in 2012, show that more than 70 percent of U.S. small businesses use personal savings or assets as a main source of business funding, The Wall Street Journal reports.

But this doesn’t apply only to startups. As the businesses grow and become more established, one-third of their owners say they still use their personal savings to run, grow and expand the business. In comparison, a mere 5 percent said they use credit cards or business loans.

Perhaps it shouldn’t be surprising that small business owners are using their own money to run and grow companies, instead of trying to get loans or outside investment. During the depths of the recession, many entrepreneurs had their loans called in by banks—in some cases, even if they’d never missed a payment. And still others were turned down for expansion loans despite having orders in hand and proof of demand for their products or services.

Such behavior by banks seems to have convinced many small business owners they’re better off relying on no one but themselves financially. In fact, out of all the small businesses surveyed (for survey purposes, defined as companies with fewer than 500 employees), a whopping 80 percent say they have not even applied for a business loan in the last five years.

Surprisingly, however, the survey also shows that small business owners’ fears of being turned down by banks may be unfounded. Of those small businesses that applied for loans, only about 12 percent were denied. And almost every small business owner whose loan was approved got the full amount of financing he or she was seeking.

If you’ve let “fear of failure” hold you back from seeking a bank loan, maybe now is the time to make your move.

Image by Flickr user Jamie Welsh (Creative Commons)

The views expressed here are the author's alone and not those of Network Solutions or its partners.

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