The United States has witnessed a surge in new business startups over the past few years despite the global health pandemic and an economic downturn. According to U.S. Census Bureau data on the number of new business applications reported, American startups grew from 3.5 million in 2019 to 4.4 million in 2020, an impressive 24 percent increase1. As a critical part of the backbone of the American economy, startups create jobs, spur innovation, and foster the entrepreneurial spirit. The main strength of startups is flexibility and creativity because of their ability to shift gears constantly to adapt to the changing needs of markets and customers.
New businesses also offer fast growth potential and high return on invested capital for results-driven global-minded entrepreneurs. With the advancement of information technology, startups today can easily reach the 95 percent of the world’s customers who live outside of the United States. Thus, startups are well-positioned to compete and succeed in niche markets globally. Nevertheless, many talented and innovative entrepreneurs face serious challenges in launching a startup due to lack of access to capital. In addition, startups often struggle in the early stages of business development because their lack of operating history can make it difficult to obtain a business loan.
A Quick Glance
Startups in Global Markets: 8BA startup is a new business that aims to sell a unique product or service
in niche markets both at home and abroad.
Startup Capital: 10BStartup capital, also referred to as seed money, is money raised by an entrepreneur or an organization to launch and run a new business from the ground up.
Opportunities: (1) Potential for succeeding in niche markets globally; (2) Fast growth potential and high return on invested capital.
Challenges: (1) Lack of access to capital is often cited as one of the primary barriers facing entrepreneurs in launching a new business; (2) Obtaining a business loan is also challenging for early-stage startups due to lack of operating history.
Key Points
• American startups, with their flexibility and creativity combined with the utilization of modern information technology, are well-positioned to compete and succeed in niche markets both in the United States and internationally.
• Exporting enables American startups to reach the 95 percent of the world’s customers who live outside of the United States, diversify their customer bases, and protect them against periodic domestic economic downturns.
• Without access to capital, even the talented and innovative entrepreneurs face serious challenges in launching a new business and keeping it going long enough to start making a profit.
• There are four major sources of capital for American startups: (1) Personal Assets, (2) Debt Financing, (3) Equity Financing, and (4) Government Programs. The details will be discussed in the next section of this chapter.
Potential Sources of Capital for American Startups
Source 1: Personal assets must be considered as the first source of capital because most commercial lenders do not offer financing for a startup enterprise with no track record on which the business can be judged.
Pro: The entrepreneur can retain complete control over the business by leveraging personal financial resources.
Con: The entrepreneur must assume all the financial risk.
• Personal Savings: Cash, cash equivalents, and liquid investments held in non-retirement accounts.
• Home Equity: Cash from refinancing, home equity loans, and home equity lines of credit.
• Retirement Accounts: 401(k) loans as well as 401(k) and IRA distributions, which are subject to tax and possibly penalty.
Source 2: Debt financing is a method of raising capital for a business by borrowing money from an external source that must be paid back with interest over time.
Pro: The entrepreneur retains business ownership while minimizing the cost of financing, which is generally far less than the return that an equity investor will require.
Con: The entrepreneur is generally required to provide a personal guarantee and/or collateral that can be used to assure repayment of the loan, even if the business fails.
• Family and Friends: Financial support may be available from relatives and friends in exchange for signing a legal promissory note with agreed upon interest and repayment terms.
• Credit Cards and Short-Term Loans: Unsecured credit cards provide a quick revolving line of credit while unsecured short-term loans provide a fixed lump sum of money repayable in fixed payments over a set period of time.
• Asset-Backed Loans: Financing may be available based on the value of the company’s equipment, inventory, or accounts receivable, thereby using the borrower’s assets as collateral.
Source 3: Equity financing is a method of raising capital for a business by selling ownership shares (equity) to investors such as venture capital firms or angel investors.
Pro: The entrepreneur obtains capital on a permanent basis with no requirement of repayment of principal or interest while increasing the company’s net worth, hence improving its ability for other debt financing.
Con: The entrepreneur faces a higher cost of capital compared to debt financing, while diluting ownership control of the business with shared profits.
• Crowdfunding: The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. Crowdfunding can be either (1) donation-based or (2) investment-based.
• Angel Investors: Wealthy private investors who use their own net worth to provide capital for startups and early-stage businesses in exchange for convertible debt or ownership equity.
• Venture Capital: A form of financing provided by firms or funds to startups or small businesses with high growth potential, in exchange for equity or an ownership stake.
Source 4: Government Programs that may be of beneficial to American entrepreneurs aspiring to succeed in global niche markets are offered by the U.S. Small Business Administration (SBA) and potentially by state and local economic development organizations.
Pro: The entrepreneur may qualify for an SBA loan targeted to startups and seek a grant that generally requires no repayment of principal or interest.
Con: The entrepreneur may need more than the maximum SBA loan amount and government grants given to startups are rare.
• SBA Microloan: Smaller-scale loans targeted specifically to startups, as well as existing small businesses, seeking to borrow from under $500 to up to $50,000.
• SBA State Trade Expansion Program (STEP): U.S. small businesses can overcome obstacles to exporting through STEP grants that cover the costs associated with entering and expanding into international markets.
• State and Local Grants: Special grants targeted to startups may be available from state and local governments.
These links updated: 4/23/18. This website has been funded in part by the U.S. Commercial Service. Copyright (c) All Rights Reserved by the District Export Council of Georgia. Image:: Fotolia_47136361_Subscription_XL .