Just when one sector of the economy seems to be moving forward, it is yanked back into the abyss by the others. Dennis Lockhart, president of Atlanta Federal Reserve Bank, commented on the situation last week.
He reported that job creation is proving difficult due to the decline in new business formation, which is partially due to declining real estate values that are constraining credit availability.
Mr. Lockhart pointed to the importance of the start-up sector, which is currently “sputtering.” With real estate values dropping, prospective entrepreneurs are having difficulty collateralizing loans to finance their new businesses.
Holding banks responsible for correcting this is not the right approach, said the bank president.
According to Mr. Lockhart, new businesses have the most impact on job creation. Start-up businesses grew 12 percent annually between 1992 and 2005. In recent years, this rate has stagnated, leading the U.S. to its current employment crisis.
Mr. Lockhart noted the sharp increase in the business failure rate during the recent recession. More troubling than even this, he said, is that the new business formation rate, which also fell during that time, is proving slow to recover.
When budding entrepreneurs cannot obtain conventional financing, they often look to other sources. Some use short-term financing tools like payday loans and cash advances. If their business does not quickly generate profits, they can find themselves immersed in debt. Not only could they lose their business, they could lose their home.
With personal savings taking a hit during recent years, less equity in their homes, and many alternative funding options proving unwise, would-be entrepreneurs are left with few alternatives.
However, there are some avenues, including angel financing and venture capital firms. Social media is playing an increasing larger role in helping people get the startup investment they need for a new business.
