Many Construction Firms Need Only $5,000 to Start Their Businesses

Of 638,839 construction firms surveyed by the U.S. Census Bureau in its Annual Survey of Entrepreneurs (ASE), 20.1% report they raised less than $5,000 dollars to begin commercial activity.

The ASE is a relatively new information source released by the U.S. Census Bureau this year. It collects economic and demographic information on businesses and business ownership in all major industries, including construction. One of its advantages is that it provides statistics on finances and funding, like the start-up capital.

The ASE does not provide detail within the construction industry. Home builders and remodelers are lumped together with firms that build non-residential buildings, highways, and bridges; as well as with specialty trade contractors (roofers, electricians, drywall installers). As a previous study has shown, over two thirds of construction establishments are specialty trade contractors, which may help explain why a substantial percentage of construction firms require relatively little start-up capital.

The median amount of capital construction firms need to start their businesses is $33,529, which is $43,000 less than the median amount used by all industries, $77,227.  Exhibit 1 shows how, as the ranges of start-up capital increase, the percent of construction firms reporting steadily decreases, while the percentages of all industries are more evenly distributed.

Personal and family savings of the owner(s) of a business are by far the most common source of start-up capital for American firms. Exhibit 2 displays how these savings represent nearly two thirds of all start-up capital sources at 63.9%.

The sources of start-up capital for construction businesses are similar to the sources used by businesses in other industries, except for bank loans. The lower share of construction firms that use bank loans to start their businesses represents a possible barrier to entry. However, this discrepancy may be explained by the lower amount of start-up capital needed by many businesses in the construction industry. With a fifth of these firms raising less than $5,000 in start-up capital, bank loans may not be necessary if family and personal savings can cover the initial investment costs.

The contents of this post represent only a fraction of the data available in the 2014 Annual Survey of Entrepreneurs. For more information and statistics about construction businesses from the ASE, please read NAHB’s Special Study on their website HousingEconomics.com.



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