Student Debt & Small Business Growth

About

Rising student debt[1] may be limiting the ability for young entrepreneurs to access capital markets, and consequently stifling small business growth[2].Researchers at the University of Pennsylvania have discovered that start-ups and small businesses account for approximately 60% of net employment activity in the United States. According to a Gallup poll conducted in Feburary 2015, one of the biggest hurdles these companies and new entrepreneurs face, is identifying and accessing the capital to finance their ventures. After the financial crisis of 2008, many entrepreneurs self-fund their businesses to circumvent the convoluted, and arduous process of acquiring a bank loan[3]. Personal debt therefore, becomes an integral component of the financing equation in starting a small business. Recent trends in small business growth have highlighted an underlying problem in the ability for entrepreneurs to utilize their personal debt capacity to start a business.

Recent Trends

An increasing debt burden may be preventing would-be entrepreneurs from exploring their business pursuits. A gallup poll conducted in October of 2015[4], found that as many as two million students cited loan debt as the principle reason they’d forgone or delayed plans to start a business. After the 2008 financial crisis, firm deaths had significantly exceeded firm births as calculated by the US census bureau. This phenomenon had gradually reversed itself in 2011, but has continued to miss the net average of 120,000 firm births experienced during the late 90's and early 2000's. Researchers speculate that fulfillment of a quarter of the entrepreneurial plans of the two million students’ pursuits would have been enough to return the 120,000 firm birth surplus.

Future Outlook

The deleterious effects of student debt on small business growth are apparent. Entrepreneurs are experiencing complications utilizing their personal debt capacity, and in some cases, persuaded to forgo business pursuits entirely. Student debt continues to rise at alarming rates, and the economic impacts are pervasive. An initiative targeting debt relief could have significant effects on the prosperity of small business in the United States.