Challenges with Customer Payments Growing Concern for Young Firms, Kauffman Foundation Study Shows

Contact:
Rossana Weitekamp, 516-792-1462, rossana@weitekamp.com
Barbara Pruitt, 816-932-1288, bpruitt@kauffman.org, Kauffman Foundation

Despite economic challenges, nearly two-thirds introduced products and services in 2010

(KANSAS CITY, Mo.), May 9, 2012 – 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 to a Kauffman survey of young firms 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, according to the Kauffman Foundation's seventh follow-up report of the Kauffman Firm Survey (KFS), released today. Those challenges in the midst of the Great Recession, however, did not prevent the majority of the young businesses in the study – nearly two-thirds – from introducing a product or service that was new to one of their markets.

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.

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.

"Young firms are facing challenging financial conditions due to difficulty in receiving payments and limited access to credit to grow and thrive," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. "The cost to our economy of highly restricted credit from banks and other debt providers is that young businesses are prevented from adequately investing in their companies to fund growth and create jobs."

Other key findings from the most recently compiled data include:

  • More than 45 percent of firms made investments in intangible assets meant to show future-year gain, compared with just 12 percent of firms investing in research and development.
  • 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.
  • About 52 percent of surviving firms had employees. Surviving firms with employees increased average employment to 7.5 employees in 2010.

The KFS is the largest and longest survey of young businesses in the world. It provides insights into new U.S. businesses, providing an understanding of how businesses are organized and operate in their early years, and shedding light on survival and growth indicators. Its baseline study started with a cohort of 4,928 firms that began operations in 2004. This group of companies is tracked annually and principals are asked an extensive set of detailed questions that cover a range of topics, including the founders' backgrounds, their sources and amounts of financing, firm strategies and innovations, and outcomes such as sales, profits and survival. The project has one more year of collection planned and is currently being used in research by hundreds of scholars around the world. A full bibliography of KFS research is available at http://www.kauffman.org/kfs/KFSWiki/Related-Research.aspx.

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