Growth Springs

In an effort to channel my spring fever into something productive I’m continuing to look at new businesses.  In order to grow  (or sprout ) businesses typically need funding, and how that happens varies by the type of business.  For purposes of this post we’ll look at ventures that plan to grow into something big, and companies that just plan to grow.

For the ‘something big’ crowd there is the option of being funded by an angel investor, another name for someone who has money to invest and typically some experience being part of a start up.  Getting angel funding  isn’t a walk in the park.  You need to have done your homework and be able to quickly articulate why your business “has legs”. This is also true if you get help from a business incubator.  This description fits a number of organizations that provide both business infrastructure support as well as funding.   Going for the "soon-to-be-a-big-business" model also puts you into the space for crowd funding.  The new JOBS Act was designed to juice this concept and stop the crash between crowd investing and existing securities legislation.  We'll see if it actually works. At this point, all that is certain about crowd funding is that it allows a group of people you aren’t familiar with to invest in your business without knowing much about it or you. 

The JOBS Act was billed as improving funding options for small businesses.  This is particularly important, because small business is considered a job growth engine.  I agree with the folks at MultiFunding that while it’s not a bad thing, the JOBS Act is unlikely to be a Main Street job creator.  That’s because these are the businesses  that will grow, but are not the next big thing.  This second category  is a company that plans to grow in an established line of business.  They have a higher success rate than the ‘something big’ crowd, and they’re more likely to quickly provide stable employment.  For those types of businesses the most likely sources of capital tend to be the Small Business Administration, bootstrapping and leveraging your personal assets (credit cards, home equity loans, etc.).   Not as exciting as Angels or crowds investing in your business, but still very valuable. 

From an accountant’s perspective I’ll tell you up front what your banker wants (and if you’re using your personal credit then that will be you) is not only a viable business, but good record keeping that shows you are keeping track of where the money comes from and where it goes.  It sounds simple, but many potentially successful new ventures fail based on not paying attention to these financial fundamentals.  Perhaps more importantly in these tough times, being on top of where the money is in your business can keep it going through trouble spots. 

Dowsing for Dollars

This past week marked more conversations with people who say their business is picking up than I can remember in a while. This got me wondering if small business access to credit is picking up as well.  From what I can tell, it’s getting better, but not in the usual way.

Financing consultant, Multifunding pulled together a fascinating post on how banks’ number of loans of less than $1 million is much lower than the number of small business loans they report.  There are small businesses that get loans of more than a million dollars, but not that many.  (It’s worth noting that the smaller number is in regulatory reports and the larger number in press releases.)  This discrepancy between bank publicity on small business lending and regulatory filings is consistent across all the big name banks. 

On the other hand, people who provide alternative financing are so busy they can’t keep up.  So the banks say their small business loan portfolio is growing and the factors are busy, and the economy is slow!?  That would be impossible.  Business Week’s piece on small business funding through receivables (a.k.a. factoring) has pages of testimonials from small business owners who are growing their business thanks to alternative financing.  Not to say that this is all good news.  Factoring loans are expensive.  In addition, Factoring is essentially unregulated.  So it’s higher cost and higher risk.  This creates a potential vicious circle for small business credit scores where they are compressing margins, adding debt and therefore look even less attractive to banks.

Despite the outrage expressed by ”Occupy…” it’s hard to make the case that banks are aligned in a conspiracy against small business lending.  Banks with a successful small business loan portfolio make more money than banks that just hold cash in the vault.  The issue is that the analytics that used to signal the loan would be good; don’t work well in the current environment.  There are alternatives out there, like On Deck Capital, but my guess is the shortest route to losing your bonus as a banker these days is to try something new.  It was new analytics that short circuited the whole system.  I’m not saying I agree with this logic, but I do think it’s a dynamic driving behavior.

Factoring is clearly a much used source of working capital by an increasing number of businesses.  This starts to create a virtuous circle around increased liquidity and increased competition.  The growth in receivables financing infrastructure companies like the Receivables Exchange  adds weight to the idea that so-called alternative financing is becoming more mainstream.  While the world of finance doesn’t move at the speed of tech gadgets, traditional bank loans could be heading down the path of phones without a touch screen.  Seen any lately?