Small businesses, ultimately, are people with goals and values that can't be calculated on a profit-and-loss statement, a nominee for a high-level post in Donald Trump's administration observed during a confirmation hearing.
If they could be, it might be considerably easier for them to get the credit they need to add workers, buy inventory or simply stay afloat in the window between product delivery and customer payment.
Instead, according to a report by the country's 12 regional Federal Reserve banks published on Tuesday, Aug. 8, more than half of the startup firms that play an outsize role in U.S. job creation and innovation struggled to get loans. As a result, some 81% dipped into their personal funds to bridge the gap.
The trends help explain why the formation of new businesses -- which generate almost all net new job growth in the U.S. -- has been declining for years. Addressing that pattern is particularly vital to the Federal Reserve as it seeks to nurture an eight-year recovery in which employment gains have yielded only lackluster wage growth and inflation.
"Given the importance of startups for the economy, the question of startup capital is of central importance," according to the 2016 Small Business Credit Survey Report on Startup Firms. "While funding is the lifeblood of every company, capital is especially critical for startups. To reach scale, startups need to be able to secure expansion capital."
It's a conundrum that the Trump nominee, Linda McMahon -- who eventually won the Senate's approval to lead the Small Business Administration -- is familiar with, having co-founded the company that eventually mushroomed into World Wrestling Entertainment Inc. (WWE)
"It is very difficult to have access to capital and get loans when you really have no collateral against that except your own cash flow," she told the Senate Committee on Small Business & Entrepreneurship in January. "I know that there are a lot of startups that face those kinds of issues in getting capital."
A particular challenge for lenders is that startups, which the new report defined as companies less than two years old and employing less than 500 workers, tend to have higher credit risk. That counters assets such as being twice as likely as mature firms to expand payrolls and increase sales.