2.A Appendix
3.2 Home equity financing of new firms
(2002) and Kerr and Nanda (2009, 2010), who study the effects of intrastate and interstate banking deregulations in the U.S. on firm dynamics. A separate, though not unrelated, literature looks at how house price changes affect entrepreneurial ac-tivity, firm creation and employment. The majority of this empirical literature points towards the conclusion that house prices have a significant effect on entrepreneurial activity and employment1, however some authors find little evidence for such an ef-fect2. While some of these studies use changes in house prices to estimate the effect of changes in the availability of housing-backed financing for new firms, I comple-ment their findings by using a more precise measure for the availability of home equity financing.
The remainder of this paper is organized as follows. I begin in Section 3.2 by presenting the survey results on the use of home equity among new firms. Section 3.3 describes the empirical design, and Section 3.4 presents and discusses the results.
Finally, Section 3.5 concludes.
collected source of information on selected economic and demographic characteris-tics for businesses and business owners by gender, ethnicity, race, etc. Included in the survey are all nonfarm businesses (employer and nonemployer) filing Internal Revenue Service tax forms as individual proprietorships, partnerships, or any type of corporation, and with receipts of $1,000 or more. The survey is conducted every five years, however, only the 2007 edition is available as a Public Use Micro Sample (PUMS). Although the data provide various details on the background of business owners, the main interest of my analysis is their choice for the source of startup cap-ital. Available data provide evidence on the use of a specific type of funding source (extensive margin), but it does not provide any information about the distribution of total startup capital among various types (intensive margin).
Table 3.1 shows the prevalence of different types of startup capital funding over time. Approximately 65% of all firms established in 2007 required some startup funding. With 53.5%, the most common sources of startup capital are personal savings, followed by credit cards (11%), other personal assets (5.5%), bank loans (4.3%), and home equity (4.2%). A big portion of companies (35%) required no startup capital. Over time the funding structure of startup capital has undergone significant changes: while the importance of personal savings has stayed relatively the same until the Great Recession, the use of credit cards and home equity increased significantly. In the 1980s, 6.9% and 4.4% of business owners used credit cards and home equity for funding, whereas in 2005 the same percentages stood at 14.6%
and 7.1%, respectively. The importance of bank loans declined significantly, from 13.3% in the 1980s to 7.5% in 2005. The onset of the Great Recession is marked by a significant decrease in the use of all sources of funding, e.g. the use of home equity declined from 7.3% to 4.2% between 2005 and 2007. On the other hand, the proportion of companies that required no startup capital increased from 22.7% to 35%.
When interpreting these statistics, it is important to note that such aggregate statistics do not reveal the true importance of various funding sources for labor mar-ket outcomes such as job creation. The vast majority of firms in the U.S. (78% in 2007) are non-employers and therefore have no impact on job creation. Further-more, their economic impact is limited, since non-employer firms account for a very small fraction of total receipts (3.2% in 2007). Therefore, it is essential to focus on firms with positive employment when macroeconomic importance is in the focus.
Initial firm size is a substantial source of heterogeneity in the funding structure.
As shown in Figure 3.2, firms with an initially low number of employees tend to use home equity as a source of funding in much bigger numbers than larger firms. More specifically, among companies that have around 10 - 20 employees, around 15% of firms use home equity as the source of initial capital, whereas for companies that have more than 100 employees this percentage drops to zero. Non-employer firms are also less likely to use home equity financing for startup capital, with less than 4 percent of them using home equity financing.
|3Homeequity,mortgagecreditandfirmcreation:evidencefromtheGreatRecession
Table 3.1.Use of different sources of startup capital across time
1980-1989 1990-1999 2000-2002 2003 2004 2005 2006 2007 Total
Personal savings 0.632 0.639 0.635 0.637 0.641 0.626 0.603 0.535 0.618
Other personal assets 0.075 0.080 0.079 0.079 0.080 0.078 0.073 0.055 0.075
Home equity 0.044 0.051 0.059 0.073 0.073 0.071 0.066 0.042 0.056
Credit cards 0.069 0.111 0.133 0.148 0.143 0.146 0.143 0.110 0.118
Gov’t loan 0.007 0.007 0.006 0.005 0.006 0.005 0.004 0.003 0.005
Gov’t guaranteed bank loan 0.007 0.007 0.006 0.007 0.007 0.006 0.005 0.003 0.006
Bank loan 0.133 0.108 0.090 0.089 0.084 0.075 0.067 0.043 0.091
Loan from family/friends 0.028 0.025 0.022 0.024 0.022 0.023 0.020 0.014 0.023
Venture capital 0.003 0.003 0.003 0.003 0.003 0.003 0.004 0.002 0.003
Grant 0.002 0.002 0.003 0.002 0.002 0.002 0.002 0.002 0.002
Other 0.016 0.017 0.018 0.017 0.020 0.018 0.019 0.016 0.017
Don’t know 0.034 0.026 0.020 0.019 0.018 0.017 0.016 0.017 0.022
None needed 0.185 0.196 0.212 0.211 0.206 0.227 0.252 0.350 0.228
Not reported 0.012 0.009 0.008 0.008 0.007 0.007 0.006 0.007 0.008
Notes: This table shows the fraction of all newly created firms that used a particular source of funding for startup capital in a given time period. Observations are weighted using the provided survey weights. Data from the U.S. Bureau of Census, Survey of Business Owner, 2007 Public Use Microdata Sample.
Table 3.2 shows the prevalence of different sources of startup capital by employ-ment size bins. These are chosen to match the size bins available from the Business Dynamics Statistics database, which will facilitate the interpretation of the empirical results in the later section. Looking at the table, it is clear that there are substantial differences in the funding structure of non-employer (first column) and employer firms (last column). Employer firms require more startup capital: 36.2% of non-employer firms require no capital, whereas for non-employer firms the same percentage is only 7.8%. As a consequence, all funding sources are more common with employer firms: 68.5% of the owners of employer firms used personal savings compared to 52.9% for non-employer firms. Institutional sources of startup capital are substan-tially more prevalent: in the case of employer firms 18.3% of them use bank loans, 16.8% credit cards, and 13% home equity, whereas the same percentages for non-employer firms are 3.6%, 10.8% and 3.8% respectively.
For several funding sources, an inverse U-shaped relationship between employ-ment size and their prevalence can be observed. The use of personal savings, other personal assets, home equity, credit cards, and loans from family/friends initially increases with employment size up to a given level and then decreases. In contrast, formal institutional sources of outside capital, such as government loans, bank loans, and government-guaranteed loans display a positive relationship between employ-ment size and their prevalence. While only 3.6% of newly created non-employer firms use bank loans as a source of startup capital, this percentage rises to almost 40% for firms with more than 20 employees. This implies that formal sources of outside capital are substantially more frequently used by firms with higher employ-ment.
Figure 3.2. Use of home equity financing by employment size, 2007
0.05.1.15.2Use of home equity financing
0 50 100 150 200
Employment
Notes: This figure plots the fraction of newly created firms in 2007 that used home equity as a source of startup capital against the (noise-infused) establishment employment. Observations are weighted using the provided survey weights. Data from the U.S. Bureau of Census, Survey of Business Owner, 2007 Public Use Microdata Sample.
Table 3.2.Use of different sources of startup capital by employment size
0 1-4 5-9 10-19 20+ Total Employers
Personal savings 0.529 0.699 0.606 0.606 0.540 0.535 0.685 Other personal assets 0.052 0.121 0.113 0.152 0.086 0.055 0.120
Home equity 0.038 0.129 0.142 0.155 0.087 0.042 0.130
Credit cards 0.108 0.173 0.151 0.110 0.123 0.110 0.168
Gov’t loan 0.002 0.013 0.019 0.029 0.036 0.003 0.015
Gov’t guaranteed bank loan 0.002 0.020 0.024 0.023 0.037 0.003 0.021
Bank loan 0.036 0.168 0.245 0.269 0.391 0.043 0.183
Loan from family/friends 0.013 0.050 0.061 0.047 0.045 0.014 0.050
Venture capital 0.002 0.008 0.002 0.019 0.014 0.002 0.008
Grant 0.002 0.002 0.002 0.002 0.006 0.002 0.002
Other 0.014 0.043 0.055 0.045 0.054 0.016 0.044
Don’t know 0.016 0.021 0.044 0.039 0.082 0.017 0.025
None needed 0.362 0.079 0.066 0.082 0.058 0.350 0.078
Not reported 0.007 0.006 0.010 0.002 0.006 0.007 0.006
Notes: This table shows the fraction of all newly created firms in 2007 that used a particular source of funding for their startup capital. Columns represent different size groups, defined using the (noise-infused) establishment employment. Observations are weighted using the provided survey weights. Data from the U.S. Bureau of Census, Survey of Business Owner, 2007 Public Use Microdata Sample.
Lastly, Table 3.3 shows that a substantial sectoral heterogeneity in the use of home equity for startup capital can be observed. The difference between the sectors is almost tenfold, with only 1.5% of firms in the sector Educational Services and almost 13% of firms in Accommodation and Food Services using home equity.