Guide

More start-ups turning to the bank of mom and dad

Millennial entrepreneur
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Billionaire and GOP front-runner Donald Trump got his business start off the ground thanks to what he called a "small" loan from his father of $1 million. Turns out a fair number of millennials who are self-employed and launching start-ups are doing the same thing. Well, not the $1 million part.

While a financial gift from mom and dad is not a fresh trend, recent research finds millennials are leaning more on family for start-up activity than prior generations — suggesting the long tail of rising student debt among young entrepreneurs.

About 22 percent of self-employed millennials used a financial gift or loan from their family to fund their start-up, according to a TD Ameritrade report in December, led by researcher Head Solutions Group. Plus, more than one in 10 millennials say they're using a financial gift or loan from their family to run their business after the launch phase.

The reliance on family loans differs among generations of entrepreneurs. Compared to millennials, only 4 percent of baby boomers (ages 51 to 69) and 6 percent of Generation X respondents (ages 35 to 50) said they turned to a family member for start-up help, according to the report, which studied 1,505 self-employed American adults ages 18 and older.

"Millennials don't want to see themselves go into debt," said Dara Luber, senior manager of retirement at TD Ameritrade, in a December interview. "They want to make sure they can support themselves in the future by getting started now, and this is their way to do it."

But while some young entrepreneurs are reaching out to family for financial help, the overall ranks of millennial entrepreneurs in America has declined in recent years.

The composition of business owners ages 20-34 has fallen over the past decade, now 15.7 percent in 2014, versus 21.1 percent in 1996, according to a recent report from the Kauffman Foundation that tracks entrepreneurship.

Nevertheless, millennials value independent career paths — even if that means a family loan.

Millennials say they're working for themselves because they may well be "the most independent generation to date" with half of those surveyed saying they would rather run their own business than be in a job they're either overqualified for or do not enjoy, according to the TD Ameritrade report.

Just ask brother-sister team Daniel and Rebecca Dengrove, now 33 and 35, respectively.

The duo turned to family and friends for funding in 2012, when they were scaling up their Brooklyn-based small business, Brewla Bars. Their all-natural ice pops are sold in Wegman's, Whole Foods and natural food stores. Daniel Dengrove says they received around $60,000 from five friends and family members, including their parents. They also raised $12,000 through a Kickstarter campaign.

Siblings Rebecca and Daniel Dengrove of Brewla Bars turned to family and friends to help start their business.
Source: Brewla Bars
Siblings Rebecca and Daniel Dengrove of Brewla Bars turned to family and friends to help start their business.

"We couldn't go the bank route, we just didn't have any collateral that a bank would be interested in," Daniel said in a December interview. "Friends and family are people who know you well and will believe in you."

The pair eventually won a $10,000 grant from brewer Samuel Adams in a pitch competition, Brewing the American Dream. But Daniel says borrowing from those he knew was key to pushing the business forward.

"These are people you know and care about, who you see at Thanksgiving. It's a scary thing because I would just feel terrible losing their money," Daniel said. "But it's also motivating."