In a new report out today from the Kauffman Firm Survey, the largest and longest survey of new businesses in the world, young firms in the U.S. report a rising problem in their operations - customers paying late or not making payments. While slow or lost sales have been at the top of young companies' list of challenges for the past few years, its impact is declining: fewer respondents cited sales as their primary business challenge in 2010 (44 percent) than in 2008 (53 percent). On the other hand, entrepreneurs who said their biggest challenge was customers paying late or not making payments jumped from 2 percent in 2008 to 14 percent in 2010.
In other research, I’ve shown that formation of new employer businesses was starting to be impacted by the coming recession as early as 2006. Additionally, a piece we released last week showed a continued decline into 2010, the most recent year for which data is available. In the Kauffman Firm Survey, we are able to glimpse firm-level impacts throughout this whole period. The KFS studies 4,928 new businesses founded in 2004 and tracks them over their early years of existence. The seventh follow-up report includes data through calendar year 2010.
So what do we see?
- Young firms were hampered less by hard-to-get credit or stagnant real estate values than by slow or lost sales, unreliable business conditions and customer payments. According to the survey, only about 5 percent of firms named credit access and the terms or cost of credit as their main business challenge.
- Yet, when asked whether they applied for and obtained loans or lines of credit, access to credit still seemed to be an issue for many young companies. Eleven percent of the firms in the KFS submitted new external credit applications for debt financing in 2010, a decrease from 13 percent in 2008. Nineteen percent indicated they had avoided applying for funding at some point when they needed credit because they feared their application would be denied.
- Of the firms that sought financing, 60 percent always received approval. A little more than 16 percent had mixed results, and 23 percent of the firms said their loan applications always were denied. For the latter group, 91 percent said they were denied because of banks' tighter lending restrictions. Forty percent reported denial because of insufficient collateral to guarantee the loan. Personal and business credit histories also were commonly cited (37 percent and 29 percent, respectively) as reasons for being denied.
- A lot of firms (45 percent) are making investment in future year operations (as measured by things like investing in workers, their brand, or IT infrastructure) but a much smaller percentage of firms (12 percent) are making more traditional research and development investments (also meant to have payoff in inventions, discoveries, or other future year improvements).
- About 33 percent of firms had revenues greater than $100,000 by 2008, compared with just 21 percent in 2004. Eleven percent had revenues of more than a million dollars. Growth does occur amongst the panel, but as other studies have also shown, many businesses remain small years after being created.
- About 52 percent of surviving firms had employees. Surviving firms with employees increased average employment to 7.5 employees in 2010.
These are very high-level findings meant, not to poach opportunities for research, but rather to describe what we are seeing in what is very rich microdata. Currently, hundreds of scholars around the world are using these data in their own research. The bibliography of this research is updated frequently and a listing of future research presentations (with links to papers when available) is also available online for those interested in looking at other academic studies using these data.