Startup Financing Trends by Race: How Access to Capital Impacts Profitability

This briefing explores startup financing trends and how access and cost of capital impact profitability. To do so, we use data from the Annual Survey of Entrepreneurs (ASE). The ASE, conducted by the U.S. Census Bureau, is the largest annual survey of American entrepreneurs ever done and exists thanks to a public-private partnership between the Census Bureau, the Kauffman Foundation, and the Minority Business Development Agency.

The ASE samples approximately 290,000 employer businesses across all U.S. geographies and demographics and tells the story of the American entrepreneur. Below are key findings for this briefing:

Sources of Startup Capital

• Entrepreneurs of all racial backgrounds rely on three primary sources of startup capital: 1) personal and family savings (63.9 percent of all employer businesses), 2) business loans from banks (17.9 percent), and 3) personal credit cards (10.3 percent).
• However, different racial groups rely on these sources in different ways. Asian entrepreneurs rely the most on personal and family savings (73.2 percent of Asian-owned businesses), white entrepreneurs rely the most on business loans from banks (18.7 percent), and black entrepreneurs rely the most on personal credit cards (17.6 percent).

Seeking Follow-on Financing

• Most businesses reported neither needing nor seeking additional financing—aside from startup capital—in the survey year.
• However, certain businesses reported not seeking additional follow-on financing beyond startup capital, despite needing it. The top two reasons
• Whites and American Indians were the demographic groups most likely to avoid additional financing in order to not accrue debt (64 percent and 63 percent, respectively). Native Hawaiians and Blacks were the most likely groups to avoid financing because they believed their businesses would be rejected by lenders (60 percent and 58 percent, respectively).

Access and Cost of Capital Impact on Profitability

• Minorities are disproportionally hurt by the cost of and lack of access to capital. While approximately 16 percent of minority-owned businesses report profits being negatively impacted by the cost and lack of access, only about 10 percent of non- minority-owned businesses report the same.
• Black entrepreneurs, in particular, are almost three times as likely as whites to have profitability hurt by lack of access to capital and more than twice as likely as whites to have profits negatively impacted by the cost of capital.