August 8, 2017 / 5:10 PM / 2 years ago

Financing poses frustration for U.S. startups: NY Fed survey

NEW YORK (Reuters) - The “startups” that drive U.S. job growth and productivity struggle to finance their businesses relative to more established peers with the same credit risk, according to a Federal Reserve survey published on Tuesday.

People wait in line to attend TechFair LA, a technology job fair, in Los Angeles, California, U.S., January 26, 2017. REUTERS/Lucy Nicholson

The first-of-its-kind report by the New York Fed also found that 43 percent of these small businesses, which are up to five years old and have employees, were adding jobs and growing revenues compared to only 22 percent of mature firms.

With the overall U.S. labor market hot and unemployment having fallen to a 16-year low, the survey’s findings paint a picture of entrepreneurs optimistic about their businesses but frustrated about funding them.

“Despite startups’ strong demand for financing, their problems are more acute than other firms, with most facing shortfalls and many discouraged from even applying,” Claire Kramer Mills, the New York Fed’s community affairs officer, said in the report.

Around 55 percent of startups reported difficulty with credit availability or accessing funds for expansion, compared to 39 percent of firms that were more than five years old, the survey found. Some 69 percent of startup applicants had funding shortfalls, compared to 54 percent of mature firms.

Half of startups fail within five years of launching. And while startups generally pose a higher credit risk for lenders, the disparity remained even for those deemed low risk: 53 percent had financing shortfalls versus 41 percent of their mature peers with the same risk level.

Academic research shows that such young firms account for nearly all net new, and nearly 20 percent of gross, job creation in the United States. Startups themselves account for about a third of all small employer firms, though the rate with which they are launched has fallen in recent years.

That poses a conundrum for the central bank, which is slowly raising interest rates with the hope that the depressed growth of productivity and wages will soon accelerate.

The New York Fed report, part of an annual survey of firms with 500 or fewer employees, reflects nearly 16,000 responses. It said that 27 percent of startups were avoiding debt, while another 27 percent were discouraged from applying.

While 60 percent of mature firms reported profitability, that compares to only 32 percent of startups between 0-2 years old, and 49 percent of startups between 3-5 years old.

Reporting by Jonathan Spicer; Editing by Chizu Nomiyama

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