A Silver Lining for Small-Business Financing?
Small-business owners continue to ask the same question: When will the finance capital return to the market? Many entrepreneurs have seen their lines of credit reduced, while others have seen the credit dry up completely.
There do seem to be signs of hope yet; particularly for capital efficient startups that serve consumers–directly or through larger partners–says John Chait, partner at Dace Ventures, an early-stage investment firm.
He warns that the days of investing $12 million into building a startup brick-by-brick are over. Using infrastructure already created by larger companies, startups can get products and services to market quicker with considerably lower costs than before, Chait says.
This trend is being mirrored with bank loans as well. Glenn Gray, president of Sunwest Bank in Tustin, Calif. says that while the investment and underwriting environment may be improving, he hopes we never return to the loose lending standards that preceded the financial crisis.
“[Small businesses] should expect an environment similar to that of 10 years ago,” Gray says adding that ultimately tighter risk management on the part of investors is good for business.
We can also expect bank loans from larger institutions to continue to be tight for a couple more years. “Bigger banks need to improve capital ratios,” Gray says adding that shrinking assets is the least expensive way for them to do this. “Perhaps the pendulum swung too far, and we’re a little too tight today.”
So Who’s Getting Funding Now?
Gray says that startups might have better luck getting a loan from a community bank rather than a big bank.
“There’s no way community banks can pick up the slack,” Gray warns, noting that community banks are able to provide more personalized service for entrepreneurs. “A business person might be able to sit down with someone more senior, possibly with credit authority or they might not have to go through the many people in the chain of command to get to someone with credit authority.”
Gray sees the investment trend leaning toward green technology, infrastructure and construction. However, Chait says with consumers spending more time online and on mobile devices, investment dollars will go toward businesses that enable two-way communication between consumers and larger companies and pair entertainment with utility.
This open communication, Chait says, improves brand value among consumers. “Marketing is no longer just about putting a static advertisement in front of someone and hoping they engage,” he says. “It’s about opening yourself up to communication building and conversation.”
A Startup’s Best Bet
While both Chait and Gray agree that capital is starting to become available, many experts still say getting a bank loan or VC funding is still highly unlikely for the average startup.
In this environment, startups should be prepared to come up with a good chunk of their own equity to put into their business. Even then, Gray says many banks tend to want to deal largely with small- to mid-sized businesses with proven revenue.
“The general rule of thumb in the past is that [startups] need about 20 percent of the capital required,” Gray says. “In today’s environment, that might be a little closer to 30 or even 40 percent.”
In his presentation at Entrepreneur’s third annual Growth 2.0 Conference, Entrepreneur columnist and founder of peer-to-peer lending group CircleLending, Asheesh Advani suggested startups start by tapping their network of friends and family for financing first.
Chait says Dace is looking to expand their portfolio this year, but they are focusing their investments on companies in the technology and software industries.
He adds that investors don’t want to just put money into a company or idea, they want to invest in people and build relationships.
“People are the value creators,” he says. “We invest in teams of people.”