Despite Interest Rate Rise, Loans Among Top Sources Expected for Funding Business Startups
June 22, 2022 — Most aspiring franchise buyers plan to take advantage of Small Business Administration loans and bank loans, at 48.9% and 45% respectively, despite the rapid rise in interest rates seen in the last few months. Another 14.3% are hoping to take advantage of in-house financing by the franchise they are purchasing.
These results are according to surveys conducted by FranchiseInsights.com in May, where “personal savings” was second most often cited, at 39.7% of respondents. “Friends and family” was indicated by 14.3%, and the second most popular non-loan source.
The total percentages add up to more than 100% since respondents were instructed to choose their top three sources.
The “other” option was chosen by over 20% of respondents. The top “other” sources cited were as varied as “business grant”, “sale of home” and “sale of business” among many more.
By aggregating sources into two buckets, we see that entrepreneurs are assuming that over one third (36.5%) of startup capital sources will be from their own personal resources. The remaining 66.2% of sources will come from outside their balance sheets. “Other” sources were excluded from this view.
Personal Sources – for this analysis include personal savings, retirement funds (401K or IRA), credit cards, cash value insurance policies, and liquidation of securities. Though home equity lines of credit are technically a loan secured by the home, it was included for this analysis since it represents buyer equity.
Outside Sources – include Small Business Association (SBA) loans, banks or other loan providers, franchisor financing, venture capital, angel investors, and friends and family.
The “personal sources” share at 36.5% was only slightly higher than the 33.8% seen in our analysis of startup funding sources back in March.
Leverage to make a larger purchase and the tax deductibility of business interest go a long way to explain the popularity of debt as a key source of startup capital. Undoubtedly the reliance on debt sources for startup capital is aided by historically low interest rates in the United States, and the existence of lending programs facilitated by the Small Business Administration.
It will be interesting to see how this changes in future surveys as the Federal Reserve begins tightening through interest rates this week and reduction in its balance sheet holdings of government debt over time.