Personal Savings Outpace Loans and Other Sources Expected for Funding New Franchise Units
By: Michael Alston for Franchise Insights
March 22, 2023 — Amid news of bank failures and high interest rates, business startups expect personal sources to make up the vast majority of funding for their business launches. Those planning to take advantage of Small Business Administration loans and bank loans have dropped to 30.1% and 22.8% respectively, given forty-year highs in interest rates and tightening credit conditions. Another 15.4% of respondents are hoping to take advantage of in-house financing by the franchisor from whom they are purchasing.
Back in November, “personal savings” was the most often source selected, at 45.1% of respondents. In February 2023, “personal savings” rose to 48.5%. “Friends and family” dropped to 18.4%, while “credit cards” and “home equity line of credit” tied for sixth place at 13.2% of respondents.
These results are according to surveys of aspiring business owners conducted by FranchiseInsights.com in February 2023. The total percentages above add up to more than 100% since respondents were instructed to choose their top three sources.
The “other” option was chosen by 5.1% of respondents. The top “other” sources cited were as varied as “inherited IRA” and “sale of home,” among many more.
By aggregating sources into two buckets, we see that entrepreneurs are assuming that now 38.5% of startup capital sources will be from their own personal resources. The majority at 61.5% expect to use sources 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 38.5%% was also up from the 36.5% seen in May 2022 and the 33.8% seen in our analysis of startup funding sources back in March 2022..
Undoubtedly higher interest rates are a key factor in the expected reliance on personal savings and sources of capital. Leverage to make a larger purchase and the tax deductibility of business interest go a long way to explain the popularity of debt among the top three sources of startup capital.
Next week, we will compare data from March 2022 to March 2023, which was collected after the Silicon Valley Bank failure began to make headlines. This will reveal more clearly how prospects’ expectations have shifted dramatically.
FranchiseInsights.com conducts a monthly “mystery shopping survey” as well as the Small Business Startup Sentiment Index™ (SSI) of individuals who have recently inquired about businesses for sale.The most recent Startup Sentiment Index™ survey was conducted February 16-23, 2023. Responses related to financing were collected from both instruments.
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Published on Wednesday, March 22nd, 2023.