Posted: 02/21/2012 10:11 am
Lenders are concerned that President Barack Obama’s proposed 2013 budget and the political scuffling in Congress may leave the U.S. Small Business Administration and U.S. Department of Agriculture with inadequate loan-guarantee authority to satisfy the needs of small-businesses owners. If that happens, and “guarantee coffers are low, the borrower needs to worry if their loan will be approved before the program runs out of money,” says Mike Rozman, co-president and chief strategy officer of BoeFly.com. The New York City-based company matches borrowers with lenders online. Of further concern, he notes that “there is still limited conventional financing for start-ups.”
Before the financial meltdown and the Great Recession, start-ups were able to get financing when the applicant had related experience, invested approximately 20-percent equity into the venture and pledged collateral. That has changed drastically and fledgling entrepreneurs are left with few, if any alternatives. For more mature companies, however, “we’ve seen an increase in conventional lending over the past six months for existing profitable businesses seeking to expand or refinance debt,” Rozman says.
Kraig Kramers, a management consultant and consummate entrepreneur who turned around such Fortune 500 Companies as Snapper-brand lawn mowers, has advice for surviving economic turmoil and a possible tightening of credit. “Stay close to lenders and prospective investors long before you need them,” Moreover he says, “You must have prior happy relationships with those who will provide the cash timely when you really need it.”
He also coaches business owners to drill down “into cash management with tools you can introduce into your business to accelerate incoming cash.” Additionally, “Delegate these tools to those managers and employees who can do the best with them.”
Borrowing an idea from “a Fortune 500 company,” he says, “Look at a detailed balance sheet, yes, to the penny.” As a result, “we found a half-million-dollar stock certificate that had been forgotten.” But the technique is not just for large corporations. Kramers also found “recapturable deposits in several smaller businesses this way.”
Equally as important, cleaning up your financial statements, footnoting the most important line items and highlighting key financial ratios, prepares you for making a loan application. Furthermore, include an extensive discussion telling the loan officer and her committee how you arrived at the forecast for the next 12-month’s proforma.
Rozman adds that if customers get the cold shoulder from their exiting bank, the borrowers will need to be “aggressively seeking alternatives.” BoeFly’s 1,500 participating lenders pay subscription fees in order to view applications from entrepreneurs seeking financing. In addition to conventional loans, some of the lenders make loans that are partially guaranteed by SBA and USDA and may consider start-ups — especially for franchises.
SBA’s 7(a) loans are suitable to finance real estate, equipment, machinery, working capital, and to purchase an existing business. The agency’s 504 program is for fixed assets and most suitable to build, expand or purchase real estate. More recently, SBA initiated a temporary 504 program to “rescue” borrowers who have existing loans with balloon balances coming due and find that take-out lenders are scarce.
The basic 504 program requires job creation or retention and does not include working capital. But the temporary refinancing program waives the job-creating requirement. And it also allows some working capital for projected operating expenses.
USDA’s Business and Industry Loan Program is similar to SBA’s 7(a) but the businesses must be in rural locations. Sometimes, sparsely populated locations on the fringe of urban areas are approved. Unlike SBA’s loan limits of $5 million for 7(a) and approximately $10 million for 504, USDA’s B&I program tops out at $25 million under certain circumstances. And the loans may go up to $40 million for rural cooperative organizations that “process value-added agricultural commodities,” according to USDA’s web site.
Small-business owners are holding their collective breaths as the Obama Administration’s proposed budget wends its way through the politically-charged Congress. It is as much the chief executive’s opening salvo, as it is his wish list. But if the budget that survives includes large reductions of SBA and USDA guaranteed loans, you need to be prepared.
To test the water, talk to your bank’s loan officer about your chances of getting financing. It is better to see if your loan officer tap dances and stutters now than before crunch time. And if you don’t get a positive reply, start looking for other funding alternatives.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at http://www.Twitter.com/JerryChautin
Copyright © 2012 Jerry Chautin — All rights reserved
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For many of us, the idea of starting a small business is a lifetime goal. In fact, the chance to be your own boss by providing a product or service ranks right up there with homeownership as one of the true American dreams. Despite tough economic times, the environment for starting a small business in many parts of the country is better than you might think, particularly in view of the various assistance programs made available for small business owners.
An enterprising business owner can be very successful, but it takes a lot of work. (And usually a lot more time and money than the business plan calls for.) Christy is an individual who knows the score. A Registered Yoga Teacher, she has been helping people achieve healthier lifestyles through massage therapy, group exercise, yoga, and Pilates for over 17 years. However, success had rendered a problem for her: the small storefront she used for years in a downtown Midwest city is just too small for her growing clientele. She faced a daunting task: Find a new location that would be a lot larger — yet also fit into her operating and personal budgets.
Driving to work one day through town, she noticed that ‘for sale’ signs had just been posted in front of a small one-story home nearby. All along Christy had been thinking about finding a larger storefront or office. Suddenly, the idea of conducting her instruction classes in a small home made sense. The next several weeks were consumed with meetings and communications with the local town officials, realtors and the chamber of commerce, to be sure that the zoning was correct and that she could have access to some small business assistance programs.
That was three months ago, and the bottom line today is: Christy has much more room in brand new surroundings, her customer base is growing by the week and it all fits into her budget very nicely. Things are looking up now for her.
All told, there are an estimated 15 to 17 million small businesses operating in America today. Small businesses are still the backbone of our communities – our Main Streets! — and are seen by many as the embodiment of the spirit of entrepreneurship.
Entrepreneurs are credited with creating the vast majority of new jobs and employing the majority of the nation’s workers. Granted, big businesses have emerged in fields where new technologies permitted economies of scale in the production and/or distribution of goods. Still, small businesses have remained vital to the nation’s economic development, and even more important as a component of American culture.
Even as our new 21st Century embraced what many Americans could view as superior efficiency and productivity (for both small and big businesses), Americans continued to revere small business owners like Christy for their self-reliance and independence and can-do spirit.
Small businesses have also been the primary way immigrant families coming to America have climbed the economic ladder and achieved the American dream. Many minority populations today — in urban, rural and suburban communities — have seized the small business pathway as a road to economic independence and building personal wealth.
CIN editors have always recognized the vital role played by small businesses, and we devote a large section of the CIN to them. This resource tool provides basic information – including the pros and the cons of small business ownership – basic start up information – government assistance programs on the Federal and State levels – grassroots programs provided by NCRC members – private sector assistance programs – franchising basics – banking connections assistance – available small business resources and the latest small business news and information. Here are some recent excerpts:
Small Business Owners Think Controlling Employee Expenses Will Lead To Cost Savings
(Source: Gaebler) A recent Citizens Financial Group/Mastercard study found 55 percent of small business owners believe better management of employee expenses would reduce costs and benefit their business, while 40 percent said more control over employee spending would give them a better peace of mind.
Wells Fargo Lends More Dollars to America’s Small Businesses Than Any Other Lender
(Source: Market Watch) 2011 US Small Business Administration data shows Wells Fargo & Company is the top lender in dollar volume, approving $1.2 billion in SBA loans to America’s small businesses for the 2011 federal fiscal year.
How Small Business Owners Were Hurt by the Fall in Home Prices
(Source: Forbes) Personal borrowing plays a key role in how many small business people finance their companies. When the housing crisis hit, small business owners that relied on home equity to finance their companies’ operations faced a credit squeeze. Thus, small businesses have access to about $25 billion less in credit than they would have had if the trend in home equity loans had continued in the direction it had been going in the first half of the 2000s.
Coffee Fix: Starbucks Pushes Small Business Loans
(Source: Business Week) New York Times columnist Joe Nocera lauds Starbucks for supporting community development financial institutions, the nonprofit lenders serving small businesses and affordable housing in low-income communities. The coffee chain is donating $5 million and encouraging customers to pitch in at the checkout line as well.
Geithner Defends Performance of Small Business Lending Fund
(Source: Business Week) Treasury Secretary Timothy F. Geithner says that the Small Business Lending Fund had been successful even if it was smaller than envisioned. The program closed Sept. 27, having distributed $4 billion of its $30 billion to 332 community banks nationwide.
- PR Tips for Small Business (wordsforhirellc.com)
- Small Business Concepts That Work in Today’s Economy (cash-bandit.com)
Venture capitalists may invest in innovation. But within the venture-capital industry itself, innovation is rare.
There are signs, however, that the old boys network is changing. AngelList, a social network that connects startups with investors, is attempting to lead the way.
The site helps solve a problem that Naval Ravikant, AngelList’s co-founder, saw emerging two years ago. The cost of starting a new Web company had plummeted, and for early funds, scores of young Internet startups were flocking to so-called “angels” — people who invest relatively small amounts of their own money in newborn businesses. But finding an angel was no easy task. At the time, few promoted themselves online and, until recently, there was no one go-to directory of angels.
Since launching in 2010, AngelList has become that directory for many, with 2,500 investors and 13,000 startups using the service. Now an Atlanta-based startup that sells medical iPad apps can sign up on AngelList to connect with an investor interested in bankrolling a healthcare startup in the South.
It’s simple: Startups create a profile and pick which investors can see them. As soon as they share themselves, investors see the startup in their feed. Investors see 10 to 20 new startups in their feeds each day, in addition to the startups AngelList admins send to investors based on the interests they’ve indicated.
So far, Ravikant says AngelList connections have lead to at least 750 individual investments in an estimated 400 companies. (Those numbers are probably low, he notes, since not all deals are ultimately reported to AngelList.)
Deals born on AngelList typically range from $50,000 to $1 million a pop, and go to young startups. The industry calls this type of financing “seed-funding,” and its soaring popularity since the beginning of 2010 has been a boon to AngelList, which primarily serves the seed market. Data from CB Insights, a market research firm, shows that seed investments — mostly in Internet startups — jumped from a mere one percent of all deals during the third quarter of 2009 to a whopping 11 percent of all venture investment deals in the third quarter of 2010. Since then, seed investments have hovered at around 10 percent of all venture deals, CB Insights said.
“You’re seeing the broad institutionalization of seed investments,” said Joe Kraus of Google Ventures, the venture fund of Google, which announced at last week’s TechCrunch Disrupt conference plans to do 80-100 seed investments this year.
Accordingly, AngelList is seeing a large number of institutional investors use the service to find young startups. Thirty percent of the investors on AngelList are venture-capital firms. And while VC firms account for just 10 percent of investments reported to AngelList, it’s likely they make up a much larger share of the total dollars invested, as VCs tend to make larger bets. But Ravikant doesn’t track exact amounts in each investment, so it’s hard to say, he says.
So why did Ravikant and his partner Babak Nivi name the service AngelList when nearly a third of its users aren’t even angels? “It has to do with the evolution of the seed market,” he says. “Most of the money used to come from angels and super angels and now most of the money probably comes from VCs.”
Although it’s riding the seed-funding wave washing through both realms, AngelList is yet to make any money. Part of the reason is that the site is just a social network, not an online exchange. Deals born on AngelList are executed offline. After an entrepreneur and investor connect on the network, the two hash out a deal on their own. Unlike SecondMarket and Sharespost, two online exchanges that have been cashing in on the business of connecting startups with investors by taking a small cut of the transactions they arrange, AngelList is only in the business of making connections.
Ravikant, 37, says he has no immediate plans to change that. The company supports itself with a grant from the Kauffman Foundation, an entrepreneurship-focused advocacy group, and Ravikant found early success as a serial entrepreneur: He co-founded epinions, a product review site and vast.com, a classifieds site. He was also an early investor in Twitter and Foursquare.
As you might expect, being in the business of connecting startups with investors provides Ravikant with a front-row seat to the latest trends in Silicon Valley and beyond, including who gets money these days — and why. Investment seekers, listen up.
How did AngelList come about?
I was operating a blog with my partner Nivi called Venture Hacks, which became one of the go-to guides on raising venture capital. But we started getting a common request from readers. They would say, “Don’t tell me how to negotiate a term sheet, tell me how to get a term sheet.” So we built this product to connect entrepreneurs with investors. [AngelList] began as a mailing list in 2010, which we ran for six months, and then toward the middle of last year, we started coding furiously on it.
What percentage of the startups that have received funding through AngelList are based in Silicon Valley?
The data is a bit fuzzy, since we don’t track the actual investments but rely on self-reporting. The stats are: Silicon Valley, 53 percent; New York, 18 percent; Los Angeles, 6 percent; Europe, 4 percent; Boston, 4 percent; Austin, 5 percent; Seattle, 3 percent; and the rest, 7 percent.
How have things changed from your time as an entrepreneur in the late 1990s?
Back when I was an entrepreneur, the environment was a lot more friendly toward investors. These days, because it takes a lot less money to start a company and you can raise money from many more sources, and because the information is now out there on various blogs like Brad Feld’s site, Yokum’s site and Series Seed documents, it’s gotten a lot simpler. So I think the opportunity for investors to take advantage of entrepreneurs is diminished.
Has the average age of successful entrepreneurs dropped since then?
Yes, I’m 37 and I almost feel too old to be doing this relative to all the 20-somethings running around. Berkeley is now running Founder School and Stanford is running StartX Labs, which are these on-campus incubators. And students are going into these incubators before they’ve even graduated. Traditionally, nobody thought young people had the resources. But now code is a resource. These days, code is power. And the capital required is so low that an investor can bet on 19-year-olds who have never done anything before just because they seem really smart and have managed to build something on their computer by themselves or with their buddy before they even raised any money.
So can being relatively older hinder an entrepreneur’s ability to attract investors?
It can, and here’s why: If you’re a little older, you probably have a family and a lifestyle that requires a higher burn rate. You have these young kids going into Techstars, and for $20,000, they can live for a summer or six months and build a prototype. Whereas if you have an older team that has more personal financial obligations, you say, well, we need to raise half a million to fund our team to build a prototype. And so if one team needs $20,000 and the other needs half a million, it’s just a different risk to reward ratio.
So what’s an older entrepreneur to do?
What you often find them doing is they either have the capital to play and they seed-fund themselves or they don’t compete against the college students in the early-stage market. That is, they might go into disciplines where the initial prototype costs are high anyway. For example, if you’re building a semiconductor or a pharmaceutical, that’s going to require a few million, so at that point, there’s less that a young team with $20,000 can do to displace you.
Have you seen the average age of startup investors also drop?
Yes, but not as much. You definitely have a lot more rich people who sold their company to Google or were early employees at Facebook. Maybe they joined Facebook when they were 20, and now they’re 24 and wealthy. You see a bit of that — but not a lot. The angels and investors still tend to be an older bunch than the entrepreneurs. That’s because the bulk of the capital, even in the seed market, comes from VCs who run seed funds. And a limited partner is not going to fork over $100 million to an investor who shows up fresh out of school. So there’s sort of a minimum age threshold when it comes to VCs.
Did AngelList play a role in fueling the latest tech bubble?
There’s definitely been a rise in valuations in seed-stage companies, and we try to discourage companies from posting high valuations. We do expose startups to many more investors, which brings their price up, but we also expose the investors to many more startups, which brings their price down. So it sort of cancels out.
We also try to be a neutral marketplace and not take a point of view on this. But here’s an analogy: When the NASDAQ goes up and then it crashes, is it the fault of the people who run the NASDAQ? If the seed-funding market collapses or retreats, is that going to be our fault? I don’t think so. We’re just trying to operate a platform that makes it more efficient. But efficiency can work both ways. In a very efficient market, you actually get faster volatility and faster adjustments. That’s because as soon as news comes in, it flows through all the participants instantly. You can see that happening on AngelList. Pre-AngelList, when the seed market was going to slow down or shut down, it would take a long time for that information to ripple across the market. Whereas in the age of online markets, that information travels a lot faster. So you can see, for example, a hundred companies reduce their fundraising prices the same day.
So is AngelList a stock market for startups in a sense, similar to, say, a SecondMarket?
SecondMarket is a place where you trade secondary shares. We operate when the company itself is raising $300,000 or $1 million, as opposed to SecondMarket, where there’s a company that’s worth $50 billion, and one of their shareholders is selling $500,000 of stock to a third party. We’re different, first, because we deal in primary capital — the company itself is raising money — and second, we’re much, much, much earlier stage. And the way the market behaves at the very early stages is there are no financials, there are no customers, there are no revenues. At this point, it’s about trust, and people and vision and credentials and who is associated with your company, and what school you went to and where is your prototype and how do you think it will beat YouTube. SecondMarket’s model works for companies that are further along. But for a raw startup, like a Mark Zuckerberg in his dorm room, it won’t work for that.
Do you have any plans to monetize AngelList in the near future and, if so, how?
We don’t have any immediate plans to make money. But there’s a huge amount of active investing happening on AngelList. I was an investor myself, and I may be an investor again. We can, for example, raise a fund and invest it in some of the companies ourselves, and we would have the advantage of a great brand, good data, and we would be helping the startups in a very scalable way.
Name: Naval Ravikant
Location: San Francisco
- AngelList: The Right Way To Use It To Raise Funding – with Naval Ravikant (mixergy.com)
- Putting Millions In Startups’ Pockets, AngelList Is Crushing It (businessinsider.com)