BUSINESS FINANCEBUSINESS FINANCE

INDIANA ECONOMIC DEVELOPMENT COURSE

Muncie Indiana

January 2015

George Robertson

PURPOSES

To define the language of finance and lending

To explore the successful approaches and programs used to accomplish successful ED results

To understand the significant recent economic changes that have created different needs and programs for economic developers

Finance programs are a critical part of business retention and expansion efforts and new business development70% of all new jobs in America are

created where they are sited

15-20% of all new jobs are created by individuals in the community who start new businesses

Financing programs vary with types of businesses served

Microenterprises

Small Business Owners

Entrepreneurs

• Elephants

• Mice

• Gazelles

post recessionary results

SolopreneurSelf-Employed

2001 9.3 million

2010 10.6 million

2014 17.9 million

Why ED groups are adopting gazelle strategies?

Economic vitality…“The degree to which an economy is composed of new and rapidly growing firms….it is the relatively small number of fast growing firms of all sizes that account for the majority of new jobs created… 95% of job growth is created by only 4% of US companies.”

Dr. David Birch

Was Birch right?

1 percent of firms generate roughly 40 percent of new job creation.

Fast-growing young firms, comprising less than 1 percent of all companies, generate roughly 10 percent of new jobs in any given year.

Ewing Kauffman Foundation, High Growth Firms and the Future of the American Economy 2010

Basic Concept :two sources of funding

Equity

Debt

CONVENTIONAL LENDERS…WHERE THE MONEY IS…

And why it was hard

Then got harder

And now improving

Bank Lending to small business

Factors increasing bank lending to small businessBelt-tightening created better

bottom-linesRate competition increasedBusiness optimism measures

improved

The three C’s of lending and what it means to our clients

CHARACTER

CREDIT

COLLATERAL

Credit CheckHarry and Mary own a small retail business (sole

proprietorship).

With business dropping during the recession, they couldn’t afford to keep their health insurance in place. Their son became seriously ill and they had over $20,000 in medical bills.

Unable to meet that debt load, they filed bankruptcy last year. However, they reaffirmed their mortgages on home and business, their car loan and their credit card debt.

Business is picking up and they now need to purchase new equipment for the business. Loanable?

CREDIT SCORES

Designed to give lenders a fast accurate prediction of loan risk.

Five Determinants:

1. past delinquencies

2. use of credit-debt to max

3. age of credit-older better

4. number credit asks

5. mix of credit-unsecured – secured

300 to 850 660 was acceptable now 700+

Collateral CheckBobbie managed a bowling alley for 12 years

and purchased it when the owner retired.

He paid the owner $100,000 he had saved and assumed the last ten years of the building mortgage and the last 6 years of the pin-setting/scorekeeping equipment note. The business has been slightly profitable but would be comfortable profitable if he could re-finance the 75K AMC note (17% interest) with a bank. Total net worth building and equipment is about 150K. Loan-able?

Don’t Forget Credit Unions

2003 $9 billion business lending

2009 $35.7 billion

2013 $47.2 billion

2000 15% credit unions made business loans

2006 24%

2008 28%

2013 35%

Increasing as other loans I.e. auto shrink

Restricted law to 12.25% assets –bill 27.5% of assets

Basics 2: Uses of fundsWorking Capital

Fixed Assets

Real Estate

Determines loan term

Determines Collateral value

Determines risk evaluation

Sources and Uses must match

Role of the economic developer….creative financing

ABC COMPANY Financing Needs

Tenant improvements $30,000

Increased inventory 20,000

New computerized cash reg. 20,000

Working Capital 10,000

$100,000

SBA 7a the small business workhorse

SBA’s primary lending program

70 % Guarantee of bank loan

35% Start Ups

32% Minority Borrowers

FY13

$17.86 billion up18%

Average $385,000

Up 13%

Major industries:Services, retail,

food, construction

SBA 504 Small Business

Real Estate/Capital Equipment Program

50-40-10 Real Estate

CDC-Certified Development Corporations

FEB. 2011 Refinancing ballooning mortgages-ended FY2013

FY13

$11.7 billion down 22%

Average $678,000

Down 4.3%

WEB Resources

SBA.gov/services/financialassistance

USDA.gov/rbs/busp

Rural Areas USDA your best friend

Operate through State Offices

www.rurdev.usda.gov/scrty/

sdirs.html

SOURCES OF START UP FINANCING

0%

10%

20%

30%

40%

50%

60%

70%

80%

PersonalSavings

Loans FamilyFriends

CreditCards

source

The easiest and lowest interest rate source of borrowed capital

Historically, home equity-second mortgages fund 30% of small business start ups

Recession Effect?

Down, Down, Gone

ED’S TOOL—THE LOCAL ECONOMIC DEVELOPMENT LOAN FUND

Revolving Loan Funds

Micro Loan Funds

SOURCES OF EQUITY FINANCING

Founder, Family Friends

Strategic partners

Venture capitalists

Angel Investors

Private Stock Placements and IPO’s

State Government Programs—IN 21st Century Fund

VENTURE CAPITAL INVESTMENT IN US

Angel/VC investment up from $18.1 Billion in 2003 to $22.5 Billion in 2005 to $31.4 Billion in 2007 and down to $19.2 Billion in 2008

AND down to $17.7 million in 2009, lowest level since 1997, 2011 soared $28.4 billion, and 2012 up to $20.7 billion, 2013 24.8 billion

0

5

10

15

20

25

30

35

investment in $billion

2003

2007

2008

2009

2010

2012

2013

ANGELS…local communities most likely source

“usually sophisticated investors willing to provide seed capital in high risk companies for an expected large return on investment”

Difficult to find Difficult to match

Angel Capital Match-making Investor Roundtables

Local/ Regional Investor Funds

State/regional Investor Associations

Usual investments $100,000-$1,000,000

Venture Capital—the success stories abound

Hanover NH

Borealis Ventures

($100,000-$2.5M)

12 technology companies and 250 technology jobs in Nashua NH

Jump Start-Northeast Ohio

Early Stage Companies

Leverages Public Funds with private venture funds

Inclusion group targets minority firms

www.jumpstartinc.org

Entrepreneurial Entrepreneurial EcosystemEcosystem

Indiana’s Programs

Locavestingcrowd funding

Investing In Main Street Instead Of Wall Street

No Small Potatoes Investment Club

Maine

"We want to lend the old-fashioned way. We take into account what their peers, suppliers and customers say about them."

Locavesting—invest 50% of investment capital within 50 miles of home

Hardwick, Vermonto High Mowing Seeds--

$1.1 million from a group of (accredited) local investors, all within 50 miles

o Claire's Restaurant—meals with locally grown product--sold prepaid "food coupons" to 50 residents for $1,000 apiece, which entitled them to $25 off a meal once a month for four years.

Crowdfunding Crowdfunding explodingexploding

$100 million in seed money

crowdfunding platform Kickstarter.com

Entrepreneur Access to Capital Act (HR 2930) April 6 2012

641,800People out of Poverty

128,400New Businesses Created

Indiana

$850,000

$136,300

$220,000

$384,825

EB-5 Regional Center Targeted Employment

Area (TEA) a rural area or an area

that has experienced high unemployment of at least 150 percent of the national average

allows $500,000 USD investment rather than the regular $1 Million USD.

Regular--$1,000,000 investment =Green card for investor and immediate family including all children under 18

And a final thought

START BUILDING A FINANCE PROGRAM TOMORROW

“Opportunities do not come to those who wait. They are captured by those who attack.”

Gen. George Patton

RESOURCES

Kauffman Foundation—information/manuals www.emkf.org

Angel Capital Association(200 angel associations-US/Canada) www.angelcapitalassociation.org/

US Center for Venture Research-Univ. NH www.wsbe.unh.edu/CVR National Association Venture Capitalwww.ncav.orgNational Association SBIC’swww.nasbic.org