access to capital 101: funding options to start and grow...

Access to Capital 101: Funding Options to Start and

Grow Your Small Business

May 28, 2015

Rhea AguinaldoManager of Entrepreneurship

Small Business Majority

About Small Business Majority

• Small business education and advocacy organization –founded and run by small business owners. Been in business nine years.

• National – 14 offices in Washington, D.C., California, Colorado, Illinois, Maryland, Michigan, Missouri, New Jersey,New York, Ohio, Oregon, Virginia and Washington state

• Focus on issues of top importance to small businesses (<100 employees) and the self-employed, including access to capital, workforce, healthcare, retirement, taxes, technology and energy savings.

• Work supported by extensive research

Entrepreneurship Program

• Core program areas: Access to capital, technology, workforce benefits, business skills, retirement security.

• Online and in-person seminars in partnership with local and nat’lbusiness groups and other for-profit, nonprofit and public entities

• Special focus on underserved entrepreneurs, women- and minority-owned businesses

Our Entrepreneurship Program brings resources and education to small business owners and entrepreneurs in key areas of running and growing a small business.

Visit our Entrepreneurship resource portal:

• Background and research

• Key questions to ask when seeking funding

• Debt vs. equity financing

• The funding landscape:

o Microloans

o SBA-backed loans

o Community banks & credit unions

o Alternative online lenders: Merchant cash advance, marketplace lenders, cash flow lenders, crowdfunding

• Resources and tools

• Q&A

Topics of discussion

The dilemma

• Inadequate access to capital continues to be a top issue facing small business

Our scientific opinion polling: 90% of small businesses say the availability of credit is a problem

Women and minority owned businesses

• Women and minority owned firms face significant barriers:

o Typically smaller in size, start with less capital, less likely to have access to venture capital

o Lower approval rates for bank loans and at smaller dollar amounts

o More vulnerable to predatory lending

Women and minority owned businesses (cont.)

• Women-owned firms account for 16% of bank loans and 4.4% of dollar total – just $1 out of every $23

• Minority firms pay higher interest rates on average

o Low levels of wealth and liquidity constraints

What happened to small business bank lending?

• Small business bank lending is down 20% since before the Great Recession

• Banks are more risk averse – stricter underwriting standards

• Small business loans are riskier than large business loans; Costly to write smaller $ loans

• Consolidation of communitybanks

Small business recovery

• Small businesses were hit hard by the Great Recession

o Many suffer from devalued collateral, damaged credit scores and reduced cash flow making them less credit worthy by today’s lending standards

Small businesses accounted for 40% of job losses after the financial crisis40%

Access to capital – the lifeblood of small business

• The availability of capital is crucial for small businessstartup, survival, and growth

Small business uses of capital

Renovation and remodeling Expansion and acquisition

Purchase equipment Purchase real estate

Purchase inventory Short and long term working capital

Hire employees Manage cash flow

• Access to capital for small business means job creation in local communities and economic stability.

• There are more funding options available than ever before to help you start and grow your business

The good news

Important questions to consider

• What do you need the money for?

• How much money do you need?

• How long will it take you to pay it back?

• What is the current financial shapeof your business?

• How long have you been in business?

• How much collateral, if any, do you have to put up for the loan?

• How quickly do you need the money?

Debt vs. Equity financing

• Debt financing is money you pay back, usually with interest, over a set time period with specific terms

o Examples: Bank loans, Credit cards

• Equity financing involves giving up a portion of the ownership of business in exchange for money from equity investors; equity investors become part owner of company.

o Examples: Angel investors, Venture capitalists

Debt vs. equity financing (cont.)

Debt financing Equity financing

+ Pros

• Wide range of options

• Easier to obtain than equity financing

• Retain control and ownership of business

• Interest paid is tax-deductible

– Cons

• Collateral, personal guarantee often required

• Repayment required regardless of how business is doing

• Funds spent paying down debt

+ Pros

• Intellectual capital – Investors can provide expertise, experience and key contacts

• No obligation to repay if business loses money or fails

• Flexible use of funds without burden of paying down debt

– Cons

• Forfeit sole ownership and control of business and profits

• Time consuming; Difficult to find

• Actions must reflect interests of investors

Sources of funding

Family & friends Personal savings Microloans

Personal & Business credit cards Home equity

Community banks & Credit unions

Venture capital Equipment financing Merchant cash advance

Angel investorsReceivables & Purchase

order financing Online cash flow lenders

Economic dev’tagencies

Bank loans Online marketplace lenders

Start up programs,bus. plan

competitionsSBA loans (guarantee)

Crowdfunding:Reward & Equity

GrantsCommunity dev’t loan

funds (CDFI) Incubators & accelerators

SBA-backed loans (guarantee)

The U.S. Small Business Administration (SBA) guarantees a portion of loans to provide incentive for institutions to approve loans to small businesses who are riskier borrowers and not poised to obtain traditional bank loans.

• SBA is not a lender, but a guarantor

• Loans cover a wide range of uses incl. start-ups, working capital, inventory, real estate, equip, etc.

• Programs also available for disaster relief, export assistance and veteran and military


Primary SBA loan programs

• 7(a) loans allows funds to be used for starting, acquiring or expanding a small business; up to $5M

o Up to 7 years for working capital; Rates from prime +1 to prime +4; Fees 2% to 3.75%

• Certified Dev’t Company/504 loans are long-term, fixed rate financing for real estate equipment and other fixed assets

o Terms for 10 or 20 years

• Borrowers must apply through a participating lender institution

Tools

• Find an SBA lender near you for in-person consultation with a loan specialist: www.sba.gov

• SBA resource partners : Women’s Business Centers, SCORE, Small Business Development Centers

+ Pros• Very competitive rates

• Longer loan terms

• No balloon payments

– Cons• Lengthy application

process requiring extensive documentation

• Strict underwriting requirements

• Personal guaranteerequired


Microloans

Microloans are small loans (less than $50k) for entrepreneurs who are typically ineligible for traditional bank loans; may be used for wide range of business purposes.

• Community Development Financial Institutions (CDFIs) are dedicated to responsible affordable lending to disadvantaged entrepreneurs and low-income communities

o Revolving loan funds through private and gov’t funding

o High touch model includes mentoring and technical assistance support

o Examples: Accion and Opportunity Fund

Resources:

• Opportunity Finance Network is a national membership organization of CDFIs across the country. Find a CDFI near you: www.ofn.org

Microloans (cont.)

+ Pros• Competitive rates

• Great for entrepreneursunable to secure traditional bank loans

• Microlenders offer add’lbusiness technical assistance support

– Cons• Small value loans may

not be sufficient

• Personal collateral and guaranteed often required

Community banks and credit unions

Small community banks and credit unions have long been key allies for small business

• Community banks: small, locally owned and operated

o Primary focus on supporting small business

• Credit unions: not-for-profit financial institutions

o Clients must become members

o Not all offer small business loans

Small business loan approval rates in 2014

Big banks 20%

Community banks 50%

Credit unions 43%

Resources

• National Credit Union Association locator:www.ncua.gov

• Independent Community Bankers of America locator: www.icba.org

Community banks and Credit unions (cont.)

+ Pros• Low interest rates (6% to

10%) – current avg. 7%

• Long loan terms (multiyear)

• Commitment to local community

• Great customer service, personal touch

– Cons• Long application times

• High hurdles, i.e. in business for 2+ years, good credit, collateral requirements

• Tightly regulated – limited flexibility

• Less range of products and technology than big banks

Alternative online lenders

• A new breed of online lenders are innovating small business lending, expanding new options for entrepreneurs:

o Simple, streamlined application process

o Convenient and quick approval and delivery of funds

o Typically higher interest rates than banks

• Not all online marketplace lenders are equal and some players mask very high rates

Small businesses must proceed with caution

Merchant cash advance

A merchant cash advance (MCA) provides cash up-front in exchange for a portion of future credit card or cash sales. The provider in turn takes a percentage of credit card/debit sales every day until the loan, plus a premium, is paid back.

• Not technically lenders but credit card payment processors

• Quick and unsecured funds at a high price

• Payday loans for small businesses


+ Pros

• Fast access to cash

• Easy approval process

• No collateral, bad credit OK

• Payments tied to fixed percentage of sales

• Good for retailers, restaurants and servicebased cash/credit-intensive businesses

– Cons• Very expensive: interest

rates are high

• Short-term: Notsustainable for funding long term growth

• Daily payments reduce cash flow

• No due date, no fixed payment

• Borrowers can get locked into cycle of high risk loans


Tip

• MCAs should be a last resort

• Be cautious of deceptive and aggressive sales/advertising

o Keywords: Fast cash, no credit score, no collateral needed

• Proper cash flow planning is highly recommended

• Fundastic merchant cash advance APR calculator: www.fundastic.com

• Examples: CAN Capital, RapidAdvance, AdvanceMe, AmeriMerchant, Merchant Cash & Capital

Online marketplace lenders

• Online marketplace lenders (peer-to-peer) connect small businesses with institutional and individual investors; capital obtained via term loan, similar to traditional bank loan.

o New wave of online lenders

o Focused on transparency in pricing and overall process


There are 2 main types of marketplace loans:

• Personal loans for business use (unsecured, no collateral req’d) – Don’t look into your business; focus on personal finances and credit score

o Lending Club, Prosper

• Business loans (secured, collateral req’d) – Similar to small business bank loan; look into business and personal finances

o Funding Circle, Dealstruck, Lending Club


+ Pros• Fixed monthly

payments

• Transparent pricing and process

• Quick application,approval and delivery of funds

– Cons• Higher interest rates

than banks

• Lenders may require access to bank account

Online cash flow lenders

• Loans typically secured for short-term working capital (cash flow)

• Non-traditional underwriting algorithms incl. social, online data

o Short-term (6-12 mo.)

o High-interest (20-50%)

o Similar to merchant cash advance

o Deduct a fixed amount or percent of sales on daily basis until loan is paid off

• Examples: OnDeck, Kabbage, IOU Central, PayPal, Square, Amazon

Online cash flow lenders

+ Pros• Instant decision, fast

access to cash

• Flexible underwriting as long as you have cash flow

• No collateral required (personal guarantee in most cases)

– Cons• Very high interest rates

• Opaque pricing makes true cost of loans hard to determine, often 50%+

• Not term loan

• Borrowers can get locked into cycle of high risk loans

• Lender pulls directly from merchant or bank accts

Crowdfunding

• In crowdfunding, entrepreneurs raise funds by reaching out to a large number of people (investors) through an online platform.

o Lots of smaller sums of money takes the place of one or two large investors

• Entrepreneurs create an online campaign about their venture/idea, indicate amount of money they’re seeking, what it’ll be used for, and what contributors (or investors) will get in return.

o The best campaigns inspire people to donate or invest.

Crowdfunding – Reward & Equity

There are 2 main types of crowdfunding:

• Reward crowdfunding

o Most common form, popularized by sites like IndieGogo and Kickstarter

o Entrepreneurs solicit financial contributions in exchange for rewards (T-shirt, customized trinket, thank-you note, first access to product)

o No financial return so SEC laws don’t apply

• Equity crowdfunding

o Similar concept but instead entrepreneur offers financial return

o JOBS Act and Title II rules

Resources:

• Online review site to compare and choose which crowdfunding platform is right for your business: Crowdsunite.com

Crowdfunding (cont.)

+ Pros

• Opens new pools of funding

• Eliminates the gatekeepers–no financial underwriting

• Marketing and promotion

• Vet an idea

• A successful campaign can lead to bank or VC funds

– Cons

• Time intensive before,during and after campaign

• Requires tech savvy

• Some platforms have all or nothing policy

• IP protection

• Not for all businesses and industries

Crowdfunding (cont.)

Are you a good crowdfunding candidate?

Ask yourself three questions:

• Do you have a loyal following or inspiring story?

• Do you have a good email list and social media presence?

• Are you looking to engage an audience of potential customers?

The funding landscape

Fundastic was created with small business owners in mind and provides unbiased, objective information, resources and tools to help small business owners navigate their financing options, with a special focus on the new online lending options.

Resources

Still need help navigating your options?

• Visit lender agnostic marketplaces to comparison shop among a wide range of products from a variety of lenders–community banks, online lenders, SBA loans, etc.

• Bonus: they also provide good educational tools and resources

Resources

Small Business Majoritywww.smallbusinessmajority.org

Visit our Entrepreneurship resource portalwww.sbmbizportal.com

Opportunity Fundhttp://www.opportunityfund.org

Join our network

Rhea Aguinaldo

Manager of Entrepreneurship

[email protected]

(415) 654-4846

Connect with us!

@SmlBizMajority

Small Business Majority

Ways to Get Involved:

Contact

• Receive a monthly newsletter

• Share your story for media requests

• Letters to the editor/Op-eds

• State events/Roundtables

• Fly-ins

• Webinars for business organizations

Small Business Majoritywww.smallbusinessmajority.org

Questions?

Rhea AguinaldoManager of Entrepreneurship

[email protected](415) 654-4846

access to capital 101: funding options to start and grow...

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