Global commerce is now dominated by technology. Of all the cohorts out there, nobody understands the new landscape better than younger generations.
Take Matt Mullenweg, for example – as a college freshman in 2003, he started WordPress. Fast forward 16 years, and his content management software powers a third of all websites. What began as a few lines of code changed the internet for the better and made him a millionaire many times over.
However, success stories like this often gloss over the many challenges faced by young entrepreneurs. Obtaining financing is one of the most formidable obstacles, as most students have little to no credit history.
In this article, we’ll explore this problem in greater detail so you’ll be able to tackle it when the time comes.
Welcome to generation startup
As the world’s first generation that has grown up entirely in the internet age, Generation Z has an uncanny grasp of technology. As such, they are adept at starting businesses. However, many don’t have a choice – according to a Pew Research study, only about a third of teens were employed in 2017, compared with half in 2000.
Historically low unemployment rates have obscured the fact most developed economies are now service-based. Older adults that worked in secondary industries now compete with the young for positions in retail and food service.
Generation Z’ers, already struggling with record education costs, have been forced to take matters into their own hands. The enterprises they run the gamut from freelance design/coding/writing practices to full-on companies selling hard goods.
Brennan Agranoff embraced the latter business model. At the age of 13, he started HoopSwagg, a custom athletic sock company. After noticing how boring standard athletic socks were, he got the idea to create ones with custom designs.
After researching the cost of logistics, he got 3,000 USD in angel funding from his parents. Brennan’s bet that athletes were looking for funkier looking socks proved correct. Four years after founding HoopSwagg, this robust business passed 1 million USD in annual revenue.
Brennan and fellow young entrepreneurs don’t worry about things like zero-hour contracts and temp work. By using readily available resources, they have created an abundant future that increasingly eludes those in the workforce.
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Even those that fail (this happens to 90% of all enterprises) build skills that increase odds of future success. By failing, they learn what doesn’t work, allowing them to proceed more intelligently in future ventures. Meanwhile, everything they did the first time (e.g. market research, hiring, etc.) stays with them, allowing them to fail forward faster.
The financial deck is stacked against young entrepreneurs
Let’s not sugarcoat reality, though – young entrepreneurs have it tough. Not only do they lack life experience, they constantly have to fight for respect from elder colleagues.
And then there is the subject of financing. With minimal/no income and no assets, it is obnoxiously hard to secure badly-needed venture capital. With apologies to under-25 CEOs, this issue is an entirely rational one.
Why do banks refuse to extend business loans to youth-run businesses?
The goal of a bank, like all publicly-traded institutions, is to maximize profit. Anything that jeopardizes their fiduciary responsibility to shareholders is minimized or eliminated. As such, bad debt is a risk that bankers try to contain at all costs.
Think about it: how many mortgage loans went south last year? Not very many – according to BankRate.com, only 0.48% of all mortgages went into foreclosure in 2018. Most mortgage loans are in the six figures – an enormous sum, to be sure. To ensure a default rate of no more than one half of one percent, they must manage risk well.
Now, think about the average young person. In 2016, the median wealth of those 18-24 was only 4,400 USD – a figure that includes illiquid assets like real estate. When you include student debt loads (average of 22,000 USD for Generation Z), many have a negative net worth.
Given all this, how eager would you expect a loan officer to be when considering an application from a student entrepreneur? Exactly.
Non-bank lenders are equally skeptical
Young entrepreneurs aren’t the only ones that have experienced funding issues with the banks. After the Global Financial Crisis of 2008, older entrepreneurs and owners of everyday businesses suddenly had trouble securing financing.
Banks had failed, and those that hadn’t were holding onto assets to survive bank runs and writedowns from bad debt. As a result, startups couldn’t get venture funding, and struggling businesses couldn’t get loans to cover payroll.
However, out of this crisis came opportunity. In the years following the credit crunch of 2007, a new crop of well-financed non-bank lenders rose to prominence. Lacking the ultraconservative risk tolerance protocols of the banks, newcomers like Lendio offered loans to those typically denied funds.
In the 2010s, dozens and dozens of online lenders emerged to fill the demand left behind by the banks. Even so, few of these institutions will lend to those with minimal assets. Don’t lose heart – some non-bank lenders offer loans to those with poor credit. However, be aware that you likely won’t qualify for much, and the terms will be oppressive (e.g. high-interest rate).
What other funding options do young entrepreneurs have?
If the banks and (most) non-bank lenders are out, how can you raise money to fund your business idea? Fortunately, there are several ways to get around this formidable obstacle.
The first way, as we mentioned earlier, is angel funding. Start by working your ‘warm network’ – that is, friends and family. However, unless you come from an upper/middle-class background, this strategy might not be feasible.
Crowdfunding should be the next weapon in your arsenal. Kickstarter and IndieGoGo were created to help breathe financial life into ideas like yours. Put together a compelling pitch, and then spread the word on social media. If you hit your target within the allotted time, you’ll get funded. If you come up even a dime short, you won’t, so read up on internet marketing and work your butt off!
Failing that, you could take on extra hours at work or get a second job. It’s not as easy as hitting up your rich uncle, but it works. People have done this to save for weddings, travel, and holidays for generations – you can do the same.
Never, ever give up
Rejection hurts. It erodes the soul to hear the word ‘no’ countless times. But persevere. Nothing worthwhile in life is ever easy.
A lot of work goes into building a successful business, but it pays you back in freedom. The freedom to set your schedule. The freedom to earn as much as you want. The freedom to determine the conditions of your labor.
You won’t find this luxury in the workforce. So stick with your business-building efforts – you’ll get there eventually.