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2001 business financing: VCs out, rich uncles
in
By Jenny
C. McCune Bankrate.com
One
thing's for sure: Raising capital won't come easy to small businesses
in 2001.
"Overall, the capital markets
are going to be much more difficult to access next year than previously
for several reasons," says Robert Hisrich, a professor of entrepreneurial
studies at Case Western Reserve University's Weatherhead School
of Management in Cleveland. "To name two: the high failure rate
of dot-coms and a lack of confidence in the business sector."
Couple that with rising interest
rates and the fact that small businesses are generally seen as higher-risk
to lenders than larger concerns, and capital will be harder to get
and will cost more next year.
While it's probably not at
the point of "2001: A Financial Odyssey," financiers of all types
-- private investors, venture capitalists, bankers and lessors --
will scrutinize investments much more carefully than in the recent
past. "We're back to the fundamentals," Hisrich says.
Banking
on loans
Despite the Fed's rate cut on Jan. 3, interest rates are still above
what they were a year ago, making money more expensive. But it's
not just higher interest rates that are affecting the availability
of loans. As more businesses default on loans, federal regulators
are telling banks to be more cautious about the loans they approve.
So that means more small
businesses will end up applying for Small Business Administration-guaranteed
loans to get money. As small businesses get shut out of regular
bank loans because they are deemed "high risk," they "will be more
willing to go through the rigorous SBA process as things get tighter
credit wise," says Jim Fox, CEO and chairman of EqualFooting.com,
a Web site that offers equipment leasing, SBA loans, lines of credits
and regular term loans.
The Federal Reserve cut in
interest rates will have the biggest impact on short-term, rather
than long-term loans. "It will influence the short-term loans,"
says Mike Riser, president of the Wisconsin Business Bank.
Riser advises small businesses
to look for more-patient lenders -- not just the SBA, but also from
local state economic development agencies or government-funded nonprofits.
In addition to credit being
tighter for small businesses, it may be more difficult to get smaller
loans. That's because they are generally less profitable to banks
and are among the first thing to go during an economic downturn,
Riser says.
One example of a more patient
lender who is willing to loan smaller amounts is the Women Business
Initiative Corporation in Riser's state of Wisconsin. "They will
loan up to $25,000," Riser says. "Their focus is women, but that's
not their exclusive focus."
Lessor
of two evils
If an economic slowdown does happen, a small company's best bet
for capital may well be an equipment lease, says Jim Fox of EqualFooting.com.
"In times when there's a high loan default rate, financial institutions
love an asset-backed loan and a lease is nothing more than an asset-backed
loan."
Because the lessor can seize
the equipment if your company defaults on a loan, leasing equipment
may be easier next year than getting a regular loan or other traditional
forms of financing, Fox says.
Where
has all the VC gone?
The amount of venture capital invested in businesses dropped for
the second and third quarters of 2000, but that doesn't mean it's
dried up entirely, Professor Hisrich says.
"They have to invest the
money that they've raised," he explains.
But while venture capital
money is available, that doesn't mean that VCs are just handing
it out to every dot-com or high-tech firm. Because the dot-com bubble
burst in 2000, taking so much money with them, venture capitalists
are becoming a lot more cautious about who they invest in.
"During the height of the
craze, a drop-out MBA and a dog could raise money for a dot-com,"
Hisrich says. "Now people have returned to the fundamentals."
In other words: They'll put
money into your firm, but only if your management is sound and your
business idea a moneymaker, Hisrich says.
Looking
for an angel
The private investor picture looks much like the VC scene. People
are still investing, but they're being much more selective.
In addition, if the economic
downturn continues, private investors may have less discretionary
income. That means less capital to invest.
"But the private investor
community is still available," Hisrich says. He sits on the board
of a fledgling venture, which just raised close to $3.5 million
from private investors. So this well hasn't run dry yet.
Keeping
things private
Most experts agree that it's an ugly time for a company to go public.
With the current stock market taking more dips than rises, it's
just not a wise route to capital. Indeed, any entrepreneur that's
looked at the performance of the stock market lately has probably
learned that lesson by himself.
While 2001 won't be the easiest
year to raise capital, there is money out there. It's just a matter
of working harder to find it and convincing lenders that your company
is worthy of an investment. "Of course, if you have a rich uncle,
it can't hurt to ask him for money," Hisrich says with a chuckle.
Jenny C. McCune is a contributing
editor based in Montana
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