SustainableFundingforEarlyStageSmall

BusinessesintheStateofIngenuity:

AnAnalysisofBusinessReadinessfor

Capitalization

AReporttothe

UnitedStatesEconomicDevelopmentAgency

BrianRichardJoeyLataJenniferGroceNormanWalzerBrianHargerAndyBlanke

March2014

        

  i 

 

ThisreportwaspreparedbytheNorthernIllinoisUniversityCenterforGovernmental

Studiesunderaward06‐79‐05547fromtheEconomicDevelopmentAdministration,U.S.

DepartmentofCommerce.Thestatements,findings,conclusionsandrecommendationsare

thoseoftheauthorsanddonotnecessarilyreflecttheviewsoftheEconomicDevelopment

AdministrationortheU.S.DepartmentofCommerce.Directanyquestionsandinquiries

regardingthecontentsofthereporttoBrianRichard,Ph.D.,SeniorResearchAssociatein

theNIUCenterforGovernmentalStudiesatbrichard@niu.edu.

Acknowledgements

TheNorthernIllinoisUniversityprojectteamincludedthefollowingCenterfor

GovernmentalStudiesstaff:BrianRichard,JoeyLata,JenniferGroce,NormanWalzer,Brian

Harger,andAndyBlanke.BryanCataldi,Ph.D.candidateatSouthernIllinoisUniversity,was

acontractorontheproject.

SpecialthanksgototheIllinoisBankersAssociation,theIllinoisDepartmentof

CommerceandEconomicOpportunity,theWisconsinEconomicDevelopmentCorporation,

theWisconsinBusinessDevelopmentFinanceCorporation,theUSSmallBusiness

Administration,theUSDepartmentofAgriculture,andtheNationalBankersForumfor

datacontributionsandsupport.

DonMackeandDebMarkley,RuralPolicyResearchInstitute(RUPRI)CenterforRural

Entrepreneurship,andStewJobes,StateofNebraskaEconomicDevelopmentManagerin

CommunityDevelopmentandHousing,providedinsightsintofinancialneedsofearlystart

businesses.Asalways,anyerrorsoffactorinterpretationbelongsolelytotheauthors.

ThisreportwaspreparedbyNorthernIllinoisUniversity’sCenterforGovernmentalStudiesunderaward06‐79‐05547fromtheEconomicDevelopmentAdministration,U.S.DepartmentofCommerce.Thestatements,findings,conclusionsandrecommendationsarethoseoftheauthor(s)anddonotnecessarilyreflecttheviews,opinions,orpoliciesoftheEconomicDevelopmentAdministrationortheU.S.DepartmentofCommerceortheofficersand/ortrusteesofNorthernIllinoisUniversity.

        

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ContentsExecutiveSummary ..................................................................................................................... v 

Introduction ................................................................................................................................. 1 

BusinessDevelopment ................................................................................................................ 5 

LifeCycleStagesinBusinessDevelopment .................................................................................... 7 SourcesofStartupFinancing ........................................................................................................... 8 

DebtFinancing ............................................................................................................................ 9 

ChallengesinDebtFinancing ......................................................................................................... 13 EconomicConditions ...................................................................................................................... 16 OpportunitiesinDebtFinance ....................................................................................................... 18 

EquityFinancing ........................................................................................................................ 18 

StrategiesforEstablishingandSustainingAdequateCapital ................................................ 19 

FederalEntrepreneurshipFundingPrograms ............................................................................. 20 StateEntrepreneurshipFundingPrograms .................................................................................. 23 Local‐RegionalCapitalProgramsintheSOIRegion .................................................................... 26 Local‐RegionalTechnicalAssistanceProgramsintheSOIRegion ............................................. 30 

PromisingPracticesFromOutsidetheSOIRegion ................................................................. 32 

ConclusionsandRecommendations ......................................................................................... 46 

Research .......................................................................................................................................... 47 TrainingandTechnicalAssistance ................................................................................................ 51 SmallLoanSources ......................................................................................................................... 56 RegionalPartnershipsandCoordination ...................................................................................... 57 

PathForward ............................................................................................................................. 60 

OrganizationsReferenced ........................................................................................................ 61 

REFERENCES .............................................................................................................................. 62 

AppendixA:EntrepreneurialDemographics ........................................................................... 71 

SOIRegionDemographics .............................................................................................................. 73 BusinessTrendsinSOIRegion ...................................................................................................... 77 BusinessActivityandStructureintheSOIRegion ....................................................................... 78 

AppendixB:DefinitionsofFinancingOptions ......................................................................... 87 

AppendixC:SmallBusinessCapitalUsage ............................................................................... 92 

AppendixD:SmallBusinessDebtOptions ............................................................................... 99 

PersonalSavings ............................................................................................................................. 99 Friends&Family ........................................................................................................................... 100 BankFinance ................................................................................................................................. 101 CommunityBanks ..................................................................................................................... 103 

SmallBusinessAdministration .................................................................................................... 106 SupportedDebtFinance ............................................................................................................... 108 TradeCredit .................................................................................................................................. 109 Microfinance .................................................................................................................................. 110 

AppendixE:SmallBusinessEquityOptions ........................................................................... 112 

        

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Crowdfunding ................................................................................................................................ 112 AngelInvestors ............................................................................................................................. 113 PrioritiesforAngelInvestors................................................................................................... 114 AngelInvestmentTrends ......................................................................................................... 115 FindingAngelInvestors ........................................................................................................... 118 

VentureCapital.............................................................................................................................. 120 PrioritiesforVentureCapitalInvestment .............................................................................. 120 VentureCapitalInvestmentTrends ........................................................................................ 122 

Revenue‐basedFinancing ............................................................................................................ 125 CommunitySupportedEnterprises ............................................................................................. 127 

AppendixF:LocalLoanFundsintheSOIRegion ................................................................... 129 

CityofEvansvilleRevolvingLoanFund ...................................................................................... 129 JanesvilleGapFundingTIFLoanProgram .................................................................................. 130 CityofBeloitCommercialandIndustrialRevolvingLoanProgram ......................................... 131 WalworthCountySmallBusinessRevolvingLoanFund ........................................................... 132 CityofWhitewaterEconomicDevelopmentRevolvingLoanFund .......................................... 134 CityofElkhornEconomicDevelopmentRevolvingLoanFund ................................................. 137 VillageofEastTroyEconomicDevelopmentRevolvingLoanFund ......................................... 139 GenevaLakeDevelopmentCorporation‐MasterFund(RevolvingLoanFund) ...................... 141 CountyofRacineCommunityDevelopmentBlockGrantRevolvingLoanFund ..................... 141 CountyofRacineEconomicDevelopmentAdministrationRevolvingLoanFund ................... 142 RacineDevelopmentGroupRevolvingLoanFund ..................................................................... 143 CityofRacineIndustrial/CommercialBuildingRevolvingLoanFund ..................................... 144 CityofRacineBrownfieldCleanupRevolvingLoanFund ......................................................... 144 CityofBurlingtonCommunityDevelopmentBlockGrantRevolvingLoanFund .................... 145 CityofBurlingtonTaxIncrementalDistrict#3RevolvingLoanFund ..................................... 146 VillageofUnionGroveCommunityDevelopmentBlockGrantRevolvingLoanFund ............ 147 WinnebagoCountySmallBusinessLoanProgram .................................................................... 147 RockfordLocalDevelopmentCorporationMicroloanProgram ............................................... 149 

AppendixG:SOIBankSurveyResults ..................................................................................... 150 

        

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ListofFiguresFigure1:StagesofBusinessDevelopment...........................................................................................................8Figure2:AvailabilityofLoans:................................................................................................................................17FigureA1:EntrepreneurialActivityByAge......................................................................................................72FigureA2:PopulationChangeByAge,2000‐2010.........................................................................................74FigureA3:PopulationChange2000‐2010..........................................................................................................75FigureA4:ProjectedPopulationChange2010‐2020....................................................................................76FigureA5:PercentageofTotalJobCreationAttributedtoSmallBusiness,2004‐2007.................78FigureA6:BusinessStartRateComparisons.....................................................................................................79FigureA7:County‐LevelAverageBusinessClosureRates2004‐2007..................................................81FigureA8:BusinessClosureRates2004‐2007................................................................................................83FigureA9:ChangeinBusinessEstablishments,2007‐2009.......................................................................84FigureA10:BusinessStructurein2009..............................................................................................................85FigureC1:SourcesofStartupCapitalinIllinoisandWisconsin,2007..................................................92FigureC2:SourcesofCapitalforBusinessExpansionsinIllinois&Wisconsin,2007.....................93FigureC3:CapitalNeedsforIllinoisandWisconsinStartups,2007........................................................98FigureD1:BankSizeinSOIRegion.....................................................................................................................104FigureD2:SmallBusinessLoansasaPercentageofTotalLoansinSOIRegion..............................105FigureD3:SBA7a&504‐NewJobsvs.TotalLoansinSOIRegion......................................................107FigureE1:Startupvs.PostSeedInvestingTrends,2007‐2011..............................................................117FigureE2:AngelExitTrends,2007‐2011........................................................................................................117FigureE3:VentureCapitalInvestmentbyStage,2011..............................................................................121FigureE4:TotalVentureCapitalDealsinIllinois&Wisconsin,2009–20123Q............................123FigureE5:AverageAmountofVentureCapitalperDeal,2009‐20123Q...........................................124ListofTablesTable1:SourcesofBusinessFinancing..................................................................................................................9TableC1:SourceofCapitalInjectionsforKauffmanSurveyFirms.........................................................95TableC2:BorrowingExperiencesofKFSFirmsin2008..............................................................................96TableC3:StartupIndustrySectorsbyCapitalNeed.......................................................................................98TableD1:DebtFinancingAlternativesforBusiness.......................................................................................99TableD2:SourcesforCapitalBasedonAmount...........................................................................................100TableD3:JobsCreated&RetainedbySBA7aLoanSizeinSOI..............................................................108TableE1:AngelInvestmentsforNewEnterprises2002‐2011...............................................................116

        

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ExecutiveSummary

Thisreportisintendedtohelplocaldevelopmentpractitionersandpublicofficialsgain

insightintonewandinnovativeapproachestohelpingentrepreneursfinancebusiness

starts.FocusedgeographicallyonsixcountiesinnorthernIllinoisandsouthernWisconsin

thatwerehardhitbyfloodingandtheGreatRecession,aregiondesignatedastheStateof

Ingenuity,thereportfindingsarerelevanttootherregionsintheU.S.thatwishto

strengthentheconnectionbetweenentrepreneursandstartupcapitalorearlygrowth

funding.Keyfindingsaresummarizedbelow.

WhiletheSOIregionismostlyrural,ithasshownpromiseintermsofbusinessstartups.EachofthesixcountiesintheregionhadbusinessstartuprateshigherthantheWisconsin/Illinoisaverageinthefour‐yearperiodimmediatelypriortotherecession.However,thisisoffsetbyhigherbusinessclosureratesinthesameperiod.

Amajorityofbusinessstartupfinancingcomesfrompersonalsavings,personalcredit(homeequity,creditcards),and/orfriendsandfamily.Debtfinancingisthenextmostcommonsourceforstartupcapital.Accordingtonationalstudies,bankloansarethemostcommontypeofdebtfinancing.

Technicalassistanceregardingfinancialplanningisimportanttothesuccessofsomesmallbusinesses.Manyentrepreneurshaveexpertiseintheirbusinesssectorbutmaynotunderstandhowtocompile,analyze,and/orprojectfinancialstatementsandarerefusedtraditionalbankfinancingdespitethepotentialforsuccessfulexpansion.

Successfulsmallbusinessfinancingprogramscombinecapitalsourceswithfinancialcounselingtocoachtheentrepreneurthroughtheprocess.Somesmallbanksprovidethisthroughrelationshiplending.Forthemostpart,nationalbanksaremorefocusedonloanvolumeanddon’tspendenoughtimewithsmallbusinessownerstoeducatepotentialborrowersaboutwhatisimportantforaloan.

FinancialresourcesforsmallbusinessintheSOIregionareavailableattheregional,state,andfederallevels.Regionalresourcesincluderevolvingloanfundsandanangelinvestorsgroup.BothIllinoisandWisconsinhavefinanceprogramsforsmallbusiness,primarilyaimedathistoricallyunderservedpopulationsortypesofbusinesses.FederalprogramsincludetheUSDepartmentofAgriculture’sBusinessandIndustryGuaranteedLoanProgramandtheSmallBusinessAdministration7aand504programs.

        

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EffectivepracticesfromotherregionsmaybeadaptedandimplementedintheSOIregion.Examplesinclude:

o NetworkKansasprovidesaresourceclearinghousetohelpbusinessmanagersfindappropriateresources.

o CapitalthroughCounselingusesacapitalcoachtohelpsmall‐andmedium‐sizedenterprisesfindfinancing.

o ThePlatoInitiativeformssmallgroups(about10‐20members)ofmainlysmallbusinessmanagerswhomeettolearnmanagementskillsfromtheirpeersandgainbusinessandpersonalconnectionsthatleadtocommercialopportunities.

o EconomicGardeningthatfosterseconomicdevelopmentprovidingentrepreneurswithtechnicalassistanceintheformofresearchontheirmarkets,competitors,andindustrytrends.

o TheKentuckyHighlandsInvestmentCorporation(KHIC)offersfinancing,entrepreneurialtrainingandmanagerialassistanceandcoordinatesactivitiesofserviceprovidersacrosstheregion.

Thesefindingssuggestrecommendationsinfourareas:research,training,capital

sources,andregionalcoordination.

Research:SmallBusinessFinancingExperience:

Need:Themajorityofresearchonsmallbusinesslendingfocusesonthesourceand

amountoffinancingforwhichsmallbusinessesapplyanddonotdeepenunderstandingof

thefinancingexperiences,decisions,anddetailedneedsofspecificentrepreneurs.

Recommendation:Initiatearesearcheffortfocusedonthefinancingexperiencesofsmall

businessesthatcouldbehelpfulindesigningbetterproductsandservicestohelp

entrepreneursgroworexpandtheirbusinesses.

Research:AngelInvestorIdentification

Need:Angelinvestorsare“wealthyindividuals,typicallyfellowentrepreneurs,willing

toinvestintheveryearlystagesofaventuredevelopment”(Morrissette,2007,p.52).

Angelstypicallyinvestinindustriestheyknowandmanyarehands‐oninvestorswhomeet

frequentlywiththeentrepreneurstheyfinance.Consequently,over75%ofangelinvestors

        

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investincompanieswithin50milesoftheirresidence.Thereareseveralangelinvestment

networksintheregion.Localbusinessdevelopmentexpertsbelievethattherearemany

otherpotentialangelinvestorsintheregion.

Recommendation:LaunchasystematicefforttoidentifyangelinvestorsintheSOIregion.

Asnowballsamplingtechniquewouldbroadenthereachbeyondtheoriginalsetof

interviewees.1Thesurveyfindingscouldbesharedonawebsiteorothermediawithpotential

entrepreneurs.Inaddition,discussionswiththeangelinvestorsregardinginterestsinspecific

businessventurescouldhelpdevelopmentpractitionersidentifypotentialentrepreneurs.

Angelinvestorscouldalsohelpbyindicatingthetypesofinformationtheyfindmostuseful

andtheformatstheyprefer.Allofthisinformationcouldbesharedthroughinformational

andtrainingeffortsforentrepreneursasdiscussedinthenextrecommendation.

TrainingandTechnicalAssistance

Need:Manyearlystageentrepreneurslackthefinancialskillsandknowledgetoobtain

financing.Manydonotevenapproachbanks,assumingtheywillbedeniedfunding.As

such,potentiallysuccessfulbusinessesareunderfunded.

Recommendation:Providesmallbusinesseswithaccesstomoresophisticatedmarket

analyses,assistancewithfinancialcalculationsandprojections,andinformationabout

federal,stateandlocalfinancingprograms.Offerinformationtofinancialserviceproviders

aboutopportunitiestoprovidefinancingtoentrepreneursandaboutstrengthening

coordinationoffinancialservicesrangingfromface‐to‐facecounselingtointernetorphone‐

basedservices.

                                                            1Snowballsamplingemploysaquestionattheendofeachinterviewaskingtheparticipanttoidentify

otherswhomighthaveinformationrelatedtothestudy.

        

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SmallLoanSources

Need:Smallbusinesseshaveaspecialneedforloansoflessthan$50,000.Banksare

hesitanttomakesmallloansbecauseofthehighadministrativecostsrelativetothe

revenuegenerated.

Therearefewsourcesofsmallloans.AccionChicagomakesloans(upto$20,000for

startupsand$50,000forexpansions)andtheyrecentlyexpandedtheirterritorytoinclude

theRockfordregionbutdonotmakeloansinWisconsin.LocalRLFsareoftenwillingto

loansmalleramountsbutmaybemoredifficulttofind.

Recommendation:Improveaccesstocapitalbymorefullyutilizingexistingresourcesand

attractingnewresourcestotheregion.Revolvingloanfundsareunderutilized,especiallyin

themoreruralpartsoftheregion.Improvedcommunicationsamonglendingagenciescould

leadtocollaborativeprojectsand/orcouldreducethetransactioncostsforsmallborrowers.

Likewise,coordinatedeffortsintheregiontobringinnewlendingagenciessuchasAccion

couldleadtoadditionalfinancingopportunitiesforstartupsand/orexpansions.

RegionalPartnershipsandCoordination

Need:Despitethelackofaregionalumbrellaorganization,informalregional

collaborationishappening.EntrepreneurialsupportprogramssuchastheGrowthWheel,

startedatEIGERLab,arespreadingtoorganizationsacrosstheSOIregion.GrowthWheel

bringstheserviceproviderstogethertoidentifysolutionstohelptheentrepreneurachieve

successwithshort‐termgoals.EIGERLabalsopioneeredtheFastPitchentrepreneurial

competitionintheregion,hostingthefirstcompetitionin2007.In2012,bothUW‐

ParksideinKenoshaandtheUW‐WhitewaterInnovationCenterstartedcompetitions.

        

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Recommendation:Buildontheearlysuccessesofsuchregionalprogramssuchas

FastPitchandGrowthWheel.Theseprogramsspreadthroughtheregionthroughinformal

interaction.Aregionalpolicynetworkwouldfacilitatethistypeofregionallearning.Apolicy

networkbringstogetherentrepreneurs,governmentofficials,policymakersandotherswho

areinterestedindevelopingeffectiveentrepreneurshippolicy.Aneffectivepolicynetwork

includesanorganizationthatisresponsibleforcollectinganddisseminatingregional

activitiesandeventsaswellaskeepingupwiththelatestsuccessfulpracticesfromother

regions..

Especiallyimportantisthattheregionworkasaunit.Thisiscriticalforthesmall

agenciesinlessdenselypopulatedareas.Tosucceed,theywillhavetobuildontheeffortsof

thelargercitiesandregionalcenters.Linkingthefinancialcenterswithdevelopmentagencies

thatworkwithsmallbusinesseswillbekeytoaprosperousfuture.Thiscoordinationwillbe

muchmoresuccessfulifthereisaleadumbrellaorganizationtoprovideleadershipand

assumeresponsibilityforoutcomes.

PathForward

Thesefourareas(research,training,capitalsources,andregionalcoordination)are

interrelated.TrainingRevolvingLoanFundmanagerswillhelpbusinessesaccessavailable

funds.Byexpandingontheinformalregionalcoordinationcurrentlyunderway,

experiencedRLFmanagerscanmentornewer,lessexperiencedmanagers.Theresearch

outlinedcanhelpbetterdesigntrainingprogramsthathelpcurrententrepreneursmore

effectivelytapintoexistingtraditionalfinancesourcesaswellasguidepolicymakers

towardeffectiveprogramsunderwayinotherareas.

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Introduction

TheStateofIngenuityregionincludingsixcountiesinIllinoisandWisconsinhas

sufferedfrombothnationaldisasterssuchasfloodingandfromseriouseconomicsetbacks

intheGreatRecessionthatclosedoneautomobilefactoryandcausedseriouscutbacksin

another.Whilesomeemploymenthasreturned,itisimportantthateffortscontinueto

revitalizeandtransformtheeconomicbaseforlong‐termprosperity.Localeconomic

developmentpractitionersrecognizetheimportanceofbusinessstartsandexpansionsto

regionalprosperity.

Obtainingadequatefinancingforbusinessstartsandexpansionsisattheheartoflocal

economicdevelopment.TheSOIregionisnodifferentfrommostotherareasin

encounteringdifficultiesinfinancingbusinessstarts.Banksandfinancialinstitutions,

becauseoftighterregulationsandthelackofcollateralavailabletoborrowerswith

declinesinhousingvalues,havebeenlesswillingtofinancenewbusinesses.

Thecurrentprojectexaminesaccesstotraditionalfinancingopportunities—bothdebt

andequity.Informationaboutbanklendingisprovidedalongwithareviewofequity

optionsintheregion.Attentionthenturnstoinnovativepracticesinotherstatesthathave

triedtoincreaseaccesstocapitalusingavarietyofinitiatives,someofwhichhavepotential

fortheSOIregion,althoughIllinoisandWisconsindifferinlegislationandrequirements

regardinglendingpractices.

Theintentofthisreportistohelplocaldevelopmentpractitionersandpublicofficials

gaininsightintonewandinnovativeapproachesthatcouldbetriedintheSOIcounties,as

wellasinotherregionsacrosstheUnitedStates,tohelpentrepreneursfinancebusiness

starts.Whiletheexperienceswithbusinessstartsintheregionhavebeencomparableor

        

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betterthanothersemi‐ruralareas,additionaleffortandnewoptionswillbeneededtohelp

start‐upbusinessessurviveandgrowduringtherecovery.Severalprogramsthatmaybe

triedintheSOIregionaredescribedindetailinthisreport.

Background

Thepastdecadehasbroughteconomicsetbackstomanyregionsmetroandruralalike.

Theshiftfromarelativelyprosperous2000stotheGreatRecessionstartingin2008

wreakedeconomichavoccausingdouble‐digitunemploymentandbusinessclosureswith

rippleeffectsthroughouttheregionaleconomy.Inthisenvironment,localeconomic

developmentagenciesstruggleddailytofindwaystoretain,attract,andstartbusinessesto

replacethosethatclosedduetoretirementsoreconomicshifts.Markets,technological

advancementsinproductionprocesses,andtheavailabilityoflabororotherinputsareall

importantconsiderationsaffectingbusinessstartsorexpansions.Underlyingallofthe

factorsisaccesstocapital,withoutwhichbusinessescannotstartorexpand.

Numerousregionaldevelopmentstrategiesareemployedbylocaldevelopment

agenciesdependingonsize,geography,demographics,industrialcomposition,andother

considerations.Businesscreationandexpansionsleadingtoadditionaljobcreationare

keycomponentsinmost,ifnotall,regionalstrategies.Sincethe1960s,ithasbeenwell‐

understoodthatmoreemploymentisgeneratedbysmallbusinesses,variouslydefined,

thanbylargecompaniesmanyofwhomhavedownsizedduringproductivityimprovement

approaches(Birch,1987;Bailyetal.,1994).Thus,currentjobcreationandeconomic

developmentinitiativesemphasizesmallbusinessdevelopmentandthelaunchofstartup

companies(CreatingtheNextRegionalFrontier,2009).

        

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Alargeliteratureexistsonfactorsassociatedwithentrepreneursandtheireffortsto

launchbusinesses.Especiallyimportantare:anentrepreneur’scommitmentand

willingnesstotakerisk,ingenuity,industryaffiliation,marketdemand,businessmodel,

operatingenvironment,accesstonecessaryresources,andappropriatesupport

mechanisms.Therealsoisclearevidencethatpopulationcharacteristicsareassociated

withbusinessstartsincludingseveralcohortssuchasyoungfemales,Hispanics,pre‐

retirees,farmerswithsmallacreages,andunemployed(WalzerandBlanke,2013).

Accordingtotheseattributes,thereisclearevidenceofanactiveentrepreneurshipclimate

acrosstheregion.

TheStateofIngenuity(SOI)project,withfundingfromtheUnitedStatesDepartmentof

Commerce,EconomicDevelopmentAdministration,organizedeconomicdevelopment

stakeholdersinasix‐countyregionincludingnorthernIllinois(BooneandWinnebago

counties)andsouthernWisconsin(Kenosha,Racine,Rock,andWalworthcounties)intoan

efforttoprovideservicesinamorecoordinatedfashion.AllexceptWalworthCountyare

inMetropolitanStatisticalAreas2andWalworthisamicropolitancounty.(USCensus,

2009).

Theprojectinvolvescollaborationamong12entitiestosupportentrepreneurial

approaches.TheSOIpartnershipisanetworkofuniversitiesandcolleges,economic

developmentagencies,andbusinessincubatorswithagoaltodeliverservicesinwaysthat

promotenewbusinessesintheregion,growandexpandexistingbusinesses,andincrease

                                                            2Ametroareacontainsacoreurbanareaof50,000ormorepopulation,andamicroareacontainsan

urbancoreofatleast10,000(butlessthan50,000)population.Eachmetroormicroareaconsistsofoneormorecountiesandincludesthecountiescontainingthecoreurbanarea,aswellasanyadjacentcountiesthathaveahighdegreeofsocialandeconomicintegration(asmeasuredbycommutingtowork)withtheurbancore.

        

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privateinvestment.Theultimateoutcomeoftheseeffortsistocreatejobsandwealthinthe

region.

Keytoentrepreneurialeffortsandsustainabilityisaccesstofinancing,anissuecritical

totheeffortsofallSOIpartners.Consequently,asoneofseveralkeyactivitiesintheoverall

SOIeffort,theCenterforGovernmentalStudiesatNorthernIllinoisUniversityconducted

researchonaccesstofinanceintheregionaswellasinnovativepracticesthathaveworked

inotherregionsacrosstheUnitedStates.

ThefindingsinthisreportprovideSOIparticipantsandothereconomicandbusiness

developmentprofessionalswithmoreinsightintothesmallbusinessfinancinglandscape

that,inturn,canhelpthemaccessmorecapitalintheregion.Thefocusthroughoutthis

projectisonsmallbusinesses:establishmentswithfewerthan50employees.Aswillbe

shownlater,thesebusinessesrepresentasubstantialproportionoftheventuresinSOI

countiesandarecriticaltoeconomicprosperity.

Thisreporthasseveralparts.First,thetypicalbusinessdevelopmentlifecycleis

described,alongwithcommonsourcesoffundingusedateachstageofgrowth.Thesecond

mainsectiondescribesfinancingsourcescurrentlyavailableforbusinessesintheSOI

region.Thethirdsectionfocusesonpromisingpracticesinotherregionsthatcouldyield

resultsintheSOIregion.ThefinalsectiondiscussespossibleoptionsfortheSOIregion

basedonsuccessfulpractices.

BackgroundProfile

Therehasbeenconsiderableresearchoncharacteristicsofentrepreneurs.

Entrepreneurialintentionandactionareprevalentinalldemographicgroups.AppendixA

        

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providesaprofileofentrepreneursandcomparesthatprofiletothedemographicsofthe

SOIregion.

Smallcompanies,especiallythoseinearlystagesofdevelopment,havetraditionally

encounteredobstaclestoobtainingcapital(Markley,2007).Banksandothertraditional

financingentitieshavedifficultiesmakingaprofitonsmallloansbecauseofhigh

informationcosts(i.e.,checkingoncreditworthiness,etc.)relativetotheexpectedreturn.

Entrepreneurshavedifficultycommunicatingtheappropriateinformationthatloan

officersareseeking(e.g.,businessplans,historicalandproformafinancialstatements,

etc.).Thisisespeciallytrueinruralareaswithfewerlendinginstitutionsandfewer

entrepreneurs.Morerecently,withrestrictiveregulations,riskavoidancefollowingthe

majorhousinglossesduringthehousingfinancecrisis,andconsolidationofbanking

activitieswithdevelopmentloandecisionsnowmadeatmoredistantlocations,

entrepreneurshaveevenmoredifficultyobtainingcapital(FederalReserveBankofNew

York,2012).

BusinessDevelopment

Variousmodelsdepictinglifecyclestagesofabusinessexist,withsomefocusedon

specifictypesofbusinesses,suchasthetechnologyorserviceindustries.Thedifferences

amongthemodelssometimesarerelativelyminorandbasedongrowthpatterns.Growthis

anincreaseinscalewithoutchangingbusinessstructure.Lifecyclemodelsoften

concentrateonaspecificdimensionofthebusiness,suchasmanagementormarketing.

Stagesinmanymodelsareoftenreallybusinessstrategiessuchasstability,harvesting,or

diversification.

        

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Moreusefulinthecurrentprojectarethelifecyclestagesinabusinessthatfocuson

developmentpatterns.Businessdevelopmentisaprocessthatoccursovertimewith

differentrequirementsandoperationsineachstage.Effectivelyworkingwithbusinesses

requiresthatthestageofbusinessisaccuratelyassessedsothattheneedsandissues

facingthebusinesscanbetargetedbasedonchangestrategiesthatwillmoveittothenext

higherstageofdevelopment.

Typesofassistanceneededdifferateachdevelopmentstageofthebusiness.An

importantcomponentsometimesmissedwhenassistinginbusinessdevelopmentisthe

skilllevelandexperienceoftheentrepreneur.Thesuccessofbusinessdevelopment

supportrequiresawarenessofboththeseaspects(Lichtenstein&Lyons,2010).Abusiness

ideaconceivedbyanentrepreneurwithnopreviousexperiencerequiresextensive

education,services,andsupport.Anexperiencedentrepreneurwhohasalreadyachieved

successindevelopingabusinessmayrequirelesseducationandsupport.

Entrepreneursengagedinnewbusinessdevelopmentattheearlieststagesofthelife

cyclehaveaccesstoavarietyofprogramssuchasaccelerators,incubators,government‐

sponsoredbusinessdevelopmentcenters,anduniversityresearch/entrepreneurprograms.

Assistancewithaccesstocapitalisamongthetopservicesprovidedbybusiness

developmentprograms.InastudyfortheUSDepartmentofCommerce,Economic

DevelopmentAdministration,startupsreportedaccesstocapitalastheunderlyingcause

fortheirfailures(Baily,Dynan,andDouglas,2010).

        

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LifeCycleStagesinBusinessDevelopment

Learninghowlifecyclestagesinfluenceentrepreneurs,whattheirfirm’sspecificneeds

are,andthehelpofferedbycoaches,consultants,andadvisorsareimportantindesigning

anactionable,universalmodelforstagesinthebusinesslifecycle.LichtensteinandLyons

(2010)studied26differentlifecyclemodels.Theirapproach,thebasisfordescribing

businessdevelopmentactivityinthisreport,includes:

Stage0:Pre‐Venture:Desiretostartorownabusinessonthepartofanentrepreneur,makingacommitment,determiningfeasibility,developingtheoffering,assemblingtheteam.Thekeyfocusforthisstageisformallydevelopingthebusinessconcept.Preparingabusinessplanisessential.Earlyformalplanningbytheentrepreneurresultsinasteadypaceofstart‐upactivities,leadingtoincreasedsuccessatgettingintobusiness(Liao&Gartner,2009)

Stage1:Existenceorinfancy:Productorserviceisreadyforsaleandasmallsetofcustomersshowinterest.Thisstageendsbybreakingevenfromsales.

Stage2:Earlygrowth:Acriticalmassofcustomersissatisfiedandsufficientcashflowisavailableforassetreplacementorrepair.Aslongasmarketconditionsremain,thestageendswithanestablished,sustainablebusiness.

Stage3:Expansionorsustainedgrowth:Healthyprofitsandgrowthpotentialallowborrowingorequitytofinancegrowth.Thecompanyhasprovencapabilitytoservecustomers,deliversavarietyofproducts/services,capturesmarketshare,andwithstandscompetitors.Thebusinessisofsufficientsizeandearnsasubstantialreturnonlaborandassets.

Stage4:Maturity:Establishedinsizeandstable,thebusinesshasastrongmarketposition,isprofitable,haspositivecashflow,andastrongmanagementteamwithaneffectivesystemofcontrols.Marketsaturationandcompetitionareinevitable.Protectionofexistingassetswhilesearchingfornewmarketopportunitieswillrequirecarefulbalance.

Stage5:Decline:Marketsharebeginstodeclineduetocomplacencyorrisk‐aversion.

        

  8 

 

Figure1:StagesofBusinessDevelopment

Source:LichtensteinandLyons,2010,p.70

TheStateofIngenuityinitiativefocusesonincreasingthesuccessandcapitalneedsof

smallbusinessstartsinpre‐venturebusinessesabouttolaunch(Stage0),thoseininfancy

thathavestartedandarestrivingtoachieveprofits(Stage1),andearlygrowthand

expandingbusinesses(Stage2).Variousfinancingoptionsareavailableforbusiness

development,oftenbasedonthebusinesslifecyclestage(Table1.AlsoseeAppendixBfor

definitions).

SourcesofStartupFinancing

Debtandequitycapitalsourcesofferdifferentlevelsofsupportinallstagesofbusiness

development.Findingwaystoencouragebusinessestogrowandexpandwithcapital

beyondtheentrepreneur’spersonalresourcesiscentraltodevelopmentinitiatives.

Descriptionsofcapitalfundingchoicesavailabletosmallbusinessesvarybasedonthedata

source,butitisclearthattwosourcesstandoutinimportanceforfinancingsmallbusiness:

theowner’spersonalfundsandbankloans.AppendixCcontainsadetaileddiscussionof

smallbusinessfinancingoptions.

        

  9 

 

Asdescribedpreviously,businessesfinancegrowththroughacombinationofequity

anddebt.Thissectiondescribesthesesourcesinmoredetail.Challengesinusingthese

sourcesarealsoexplored.

Table1:SourcesofBusinessFinancing

BusinessLifeCycleStage

FinanceType Source

Zero DebtorEquity FriendsandFamilyZero‐One Debt MicrofinancingOne Debt CustomerFinancingOne Debt CommunitySupportedEnterprisesOneorTwo Debt VendorFinancingOneorTwo Debt ConvertibleDebtOneorTwo Debt CapitalEquipmentLoansandLeasesOneorTwo Debt WorkingCapitalFinancingTwoorThree Debt VentureDebtTwoorThree Debt BridgeLoans Zero‐One Equity CrowdfundingOne Equity AcceleratorPrograms/Contests/PrizesTwo Equity CommunitySupportedEnterprisesOneorTwo Equity PreferredStockOneorTwo Equity MergersandAcquisitionsOne&beyond Equity StrategicPartneringThree&beyond Equity InitialPublicOffering One Neither GovernmentGrantsOneorTwo Revenueshare Revenue‐basedFinancing

DebtFinancing

Debtfinancingisanimportantsourceofcapitalforadevelopingandearlystage

business(Walker,1989;Bates,1997;BergerandUdell,2002;Cassar,2002;Chuaetal.,

2009).Thistypeoffinancingreferstomoneyborrowedthatrequiresrepayment,usually

withinterestratesthatvarywidelybysource.Ratesareinfluencedbyfactorssuchasthe

owner’spersonalcredit,assetsassociatedwiththebusiness,andamountofcapitalsought.

        

  10 

 

Debtfinancingisespeciallyappealingbecauseitallowsabusinessownertomaintain

fullcontrolatalowercost(Walker,1989;Walter,2004).Smallfirmsrelyonavarietyof

debtsourcesincludingbankloans,loansfromfriendsandfamily,personalhomeequity

loans,personalcreditcards,tradecredit,andotherinformalsourcesoffinancing(Ang,

1992;PetersonandRajan,1994;Ang,Lin,andTyler,1995;BergerandUdell,1995;Binks

andEnnew,1996;ColeandWolken,1996;BergerandUdell,1998).

TheKauffmanFirmSurveyannuallytracksagroupofbusinessesfoundedin2004.

Amongthefindingsoftheseanalyseswasthatexternaldebtwasthelargestsourceof

fundinginthefirstyearofoperation(Robb,etal.,2010).Onaverage,newfirmsborrowed

$80,000,ofwhich$32,000wasdebtfrombankloans,creditcards,andsimilarsources.

Severaltypesofdebtfinancingareavailabletostartups.Smallbusinessventurescan

accessfourmainsourcesofdebtfinanceduringtheirdevelopingandearlystages:personal

financing,includingfriendsandfamily;bankfinancing,includingcreditcards,linesofcredit

andloans;tradecredit;andgovernment/non‐institutionalfinancing.Thenuancesineach

typeofdebtcaninfluencethewaybusinessesstartandgrow.Someofthesedifferencesare

describednextwithmoredetailsaboutvariousformsofdebtfinancinginAppendixD.

Personalinvestmentisthemostusedsourceofcapitalintheinitialdevelopmentphase.

TheSmallBusinessAdministration(SBA)reportedthatpersonalsavingswasthenumber

onesourceofstart‐upcapitalforsmallbusinessesinStage0and,onaverage,60%ofsmall

businessfirmsseekingstart‐upcapitaluseacombinationofpersonalandfamilysavings

(SBA,2011).Personalsavingsandresourcessuchascreditlinesthatborrowagainst

personalassetsallowanownertomaintainthemostcontrolofthebusiness(Lopez‐Garcia

andAybar‐Arias,2000;BlumberandWilko,2008).Evenwhenfinancingfrompersonal

        

  11 

 

fundsisstructuredasaloan,financialinstitutionsfrequentlyviewitasequitybecausethe

ownerloansaresubordinatetoothertypesoffinancing.

Investmentfromfriendsandfamilywithanestablishedrepaymentplanisconsidered

debt,ascomparedtoanequitypositionwiththecompany,sharingprofitsfromthefirm.

Friendsandfamilymayprovidearelativelyeasywaytoaccessloansandusuallyisin

additiontopersonalinvestment(Walter,2004).Firmswithalackoftangibleassets(i.e.,

noassetstructure)tendtorelyoncapitalfromlessformalmeanssuchasfriendsand

family(Cassar,2002).

Astheirbusinessesgrow,entrepreneursoftenhavefinancingneedsbeyondwhat

friendsandfamilyorcreditcardscanprovide.Atthispoint,theytypicallyseekbankloans

tofinancegrowth.Businessownersshouldprovidecrediblecommitmentsandsignalsto

thebanktoincreaseconfidencethatthebusinessislikelytosucceedandbeabletorepay

theloanevenifitfails(Avery,etal.,1998;BlumbergandWilko,2008).Banksevaluatethis

throughthe‘threeCs’:character,credit,andcollateral.Smallerlocalbanksareoftenina

betterpositiontoevaluatecharacterwhilelargernationalbanksplacegreateremphasison

creditscoring.

Communitybanksareinstitutionswithlessthan$1billionintotalassets.“Small

businessesconsistentlyappearmorewillingtoaskforcreditwhentheirbankisaregional

orcommunitybank(andtheyappeartobemoresuccessfulintheirrequests)”(Dennis,

2012).Communityorsmallbanks’greaterrelianceonrelationshiplendingcanhelp

addresssomeissuesassociatedwithlackofclearinformation,whichmayleadtohigher

ratesoflending.AccordingtoBergerandUdell(2002),“asmallbankmaybeabletoresolve

somecontractingproblemsassociatedwiththerelationshiplendingbyeliminatinglayers

        

  12 

 

ofmanagementandreducingtheagencyproblemsbetweentheloanofficerandsenior

management”.

TheSmallBusinessAdministration(SBA)providesaccesstoloanenhancement

programstobanks,creditunions,communitydevelopmentfinancialinstitutions(CDFI’s),

andcommunitydevelopmentcorporations(CDCs).TheSBA7aand504loanenhancement

programsareavailabletobankstohelpreducetherisksthatmayotherwiseprohibitthem

fromlendingtosmallfirmsintheirearlystages.

Additionalsourcesofdebtfinancingareavailablefromseveralgovernmentassisted

and/ornot‐for‐profitfinancialentitiesthatprovidediverselowinterestloanprogramsto

meetadiversityofsmallbusinessstart‐upneeds.National,state,andevenlocalprogram

focusonencouragingsmallbusinessgrowth.Theseprogramsofteninvolvelowinterest

loansbackedbyfederalprogramsorgrants.CommunityDevelopmentFinancial

Institutions(CDFI)andrevolvingloanfunds(RLF)aretwocommontoolsusedatthe

municipalorcountyleveltosupportbusinessdevelopmentdirectly.Bothgovernmentand

non‐governmentalorganizationsprovideminoritygroupsortargetindustriessuchas

technologyinnovationwithdesignatedfundinginresponsetoidentifiedneedsinthe

region.

Microfinanceagenciesprovidefinancialservicestopopulations,suchasthosein

poverty,withoutaccesstotypicalbankingservices(Hojeetal.,2009).Startedasa

movementtowardssocialresponsibilitytoeliminatepovertyindevelopingcountries,

microloanprogramshavebeenadaptedintheUnitedStatesandenableindividualstostart

businesseswithoutaccesstotraditionalbankcapital.Microloansinsmallamountsare

madeathighinterestratesforashortterm(Hojeetal.,2009).Mostoftheentrepreneurs

        

  13 

 

receivingmicroloanswillnotbecomelargeemployersintheregionbut,nevertheless,can

employseveralworkerswhichisimportantinsmallruraleconomies.

ChallengesinDebtFinancing

Manychallengesfacedebt‐basedcapitalizationofnewandearlystagefirms.These

challengesincludealackofinformation,limitedaccesstolong‐termcredit,andrisks

associatedwithliabilitiesassociatedwithnewnessofthebusiness(Stichcombe,1965;Chau

etal.,2009).Theimbalancescausedbynewnessandriskhavesignificantimpacts.Small

firmshaveaccessonlytosegmentsofthetraditionaldebtfinancemarketsthatarelimited

byentrybarriersandthesizeandcapitalneedsofasmallfirm(Walker,1989).Debt

financingforearlystageandnewsmallbusinessesisdifficultfromthestartduetothe

limitedavailabilityoffinancialinformation(opaqueness).Opaquenessismoreprevalentin

theinitialstageofasmallbusinessstartandisabarrierfortraditionalfinance(Bergerand

Udell,1998;Cassar,2002).Thelimitedinformationfornewventurescanleadtoless

capitalavailableathigherratesandconsequentlycandiscourageuseofbankfinance(Chua

etal.,2009;Cassar,2002).

Inadditiontothelimitedinformationandrisksassociatedwithinexperience,small

businessesinthedevelopmentstagemustcontendwithchallengestypicallyunseenby

creditseekers.Fromabanker’sperspective,thelackofdetailedknowledgeabout

industriesand/orothersmallbusinessoperationsrepresentan‘agencyproblem’.The

agencyproblemariseswhentheborrowertakescontrolofthelender’sassetthrougha

loan.Borrowersmayusetheassetintheirownbestinterest,whichmaynotalwaysbein

thebestinterestofthebank.Theseissues,plusthehighadministrationcostsrelativeto

        

  14 

 

loansize,aresignificantchallengesinherentwithdebtfinancingbybanksthatsuccessful

borrowersmustovercome.

Agencyproblemsaredirectlyassociatedwithlimitedaccesstobankcapital.

“Consequently,aspredictedbyagencytheoryandobservedinpractice,lendersmanage

riskbycreditrationingthroughtheaccept/rejectdecisionandtheamountofloan

approved”(Chuaetal.,473).Smallbanksandtheirgreaterrelianceonrelationshiplending

canhelptoovercometheagencyprobleminsmallbusinesslending.“Relationshiplending

representstheinformationalprivilegethatabankaccumulatesovertimebyestablishing

closetieswithitsborrower”(OngenaandSmith,Giannetti,2012,763).

Smallbankshavefewermanageriallayersandamoredirectrelationshipbetweenthe

managerandloanofficer.Thisresultsinabetterunderstandingandappreciationof“soft”

information(BergerandUdell,2002).Studieshavefoundthatentrepreneurshavegreater

successovercomingtheseproblemsbyworkingwithsmallcommunitybanksand

increasingtheirsocialcapital,whichincludesincorporatingthesocialcapitaloffriendsand

family(Chuaetal.,2009).However,researchbasedonresponsestotheSOIbanksurvey

(Richard,Walzer,andBlanke,2013)indicatesthatthismaynotbethecaseinrecentyears

sincetheauthorsfoundanegativerelationshipbetweenbanksizeandsmallbusinessloan

growth.

Discussionsaboutthecostofcreditwithborrowersmostoftencoversinterestrate

termsfordebtfinancing,butthecostofcreditfromalenderperspectiverequires

additionalconsiderations.Thesmallertheamountborrowed,thelessprofitablean

institutionisintermsofinterest/revenuegenerated.Costsassociatedwithgathering

informationaboutthesmallbusinessarehighrelativetothegainsfromsmalltransactions

        

  15 

 

(BlumbergandLetterie,2008),sothebenefitsoftendonotoutweighthecostsforsmall

loanamounts.CommunityDevelopmentFinancialInstitutions(CDFIs)andCommunity

DevelopmentCorporations(CDCs)canfacesimilarconditions.

Lackofassetsisalsoacauseofconcernforfinancinginstitutionsandrepresentsa

roadblocktorecoupinginvestmentifentrepreneursdefaultonpayments.Bankfinancing

forsmallfirmsdependsmainlyontheabilitytosecuredebtwithtangibleassetsbecauseof

limitedinformationaboutthefirm,lackofalternativeriskreducingfactors,andprevalent

useofrelationshipfinancing(Storey,1994;BergerandUdell,1998;Cassar,2003).Firms

lackingtangibleassetstendtoobtaincapitalfromlessformalmeanssuchasfriendsand

family(Cassar,2002).

Theproblemsassociatedwithalackofassetscanbemitigatedbyafirm’sexpressed

intent,ability,andprogresstowardsgrowth.Firmsthatplantogrowaremorelikelytouse

bankcredit.Establishingacreditrelationshipwithfinancersearlyonpositivelyinfluences

accesstocreditandcost(Cassar,2002).

Whileaccesstobankdebtislimitedintheearlystagesofabusiness,accumulatingtoo

muchpersonalornon‐traditionaldebtcanalsonegativelyaffecttheabilitytoaccesslong‐

terminstitutionaldebtfinancing.Entrepreneursusehigher‐costcreditcardsasan

alternativetoaddressingissuesfacedinobtainingsmallloans.Creditcardswithhigher

interestratesofferquickcashinjectionsthatmayseemlessexpensivethanequity

injectionsbutmayhindercontinuedoperationsorgrowthinthelongrun.

        

  16 

 

EconomicConditions

Creditsupplyandconsumerdemandareadditionalchallengestofinancingnewand

earlystagebusinesses.AccordingtotheFederalReserve’sflowoffundsaccount,

householdnetworthpeakedin2007,butfellapproximately28%duringthenexttwoyears

(BoardofGovernorsoftheFederalReserveSystem,2013).Thelossofincomeandlower

valueofpersonalpropertybroughtcautionaryspendingpatternsresultinginadecreasein

consumerdemand.Thisdecreaseindemandledtolowerbusinessprofitsandgrowth,as

wellasfeweropportunitiesforexpansion.AccordingtotheNationalFederationof

IndependentBusiness(NFIB):

Thesmallbusinessproblemhasbeenandremainsweaksales;thesecondarysmallbusinessproblemisandremainshousinginspecificandrealestateingeneral.Theincapacityand/orreluctanceofsmallbusinessownerstoaccessthecreditsystemaretheresultofboth.”(Dennis,2011).

AnFDICpanel(January2011)concurredwiththeNFIB’sfindings.Duringhistestimony

tothispanel,FederalReserveBoardChairmanBenBernankediscussedtheconceptofa

“virtuouscircle”regardingtherelationshipsbetweenimpactsoftherecessiononsales,

consumerdemand,creditworthiness,andeventuallydemandforcapitalbysmall

businesses.

Ifthesalescome,thatwillmakethesebusinessesstronger,makethemmorecreditworthyanditwillbeavirtuouscircle…Morecashflowandalsohighercollateralvaluesmakesbusinessesmorecreditworthy,givesthemmorecreditdemand,allowsthemtoexpand,allowsthemtohire.

        

  17 

 

AccordingtoBernanke,astherecoverygrowsinstrength,smallbusinesseswillbecome

strongerandbebetterabletoobtainfinancingforexpansionsinthefuture.Aweak

recoveryislikelytocontinuethecurrentdifficultiesinobtainingfinance.

SinceBernanke’sspeechattheFDICevent,accesstoloanshasinfactimproved.

NationalsurveydatafromNFIBshowsthatloanavailabilityforsmallbusinesshassteadily

recovered(Figure2).InMarch2013,theindexreacheditshighestpointsince2006.

Figure2:AvailabilityofLoans:NetPercent(“Easier”Minus“Harder”)ComparedtoThreeMonthsAgo(RegularBorrowers).

Source:DunkelbergandWade(2013)

Whilelimitedinformationandrisksassociatedwithnewventuresareespecially

importantinearlystagedebtfinancing,entrepreneurscansometimesovercomethese

        

  18 

 

challenges.Nevertheless,debtremainsoneofthemostaffordable,easiest,andaccessible

sourcesofcapitalfornewandearlystagebusinesses.

OpportunitiesinDebtFinance

Financingnewandearlystagebusinesseswithdebtcapitaloffersentrepreneurs

greatercontrolofthebusinessthanrelyingonequitycapitalandtherearewaysto

minimizethechallengesassociatedwithfinancingbusinessstartsandexpansionusing

debt.Seriousplanning,includingconsciousmanagementofdebt,socialcapital,andassets,

canbringmoresuccessinseekinglonger‐termdebtespeciallyfromsmallbanks.Useof

personalfundsandfinancingfromrelatedsourcesisessentialinestablishingcommitment.

Useofpublicfinancingresourcesandotherinstitutionalfinancingopportunities,suchas

localrevolvingloanfunds,stategrants,andspecializedfundsfromCDFIsandCDCs,are

oftenoverlooked,butpublicfinancingsourcesoftenofferadditionalopportunitiestoraise

capital.Again,theissuemaybemorethatsmallbusinessownersarenotawareofthe

programsorthinkthattheywouldberefusedforaloan.

EquityFinancing

Financingastartupusingequityinvolvesinvestingmoneyforownershipinthe

business.Thisapproachdoesnotrequireloanrepaymentandprovideshighercredibility

forthebusiness,especiallywhentheinvestmentcomesfromhighprofileinvestorswho

intendtorecovertheirinvestmentthroughfutureprofits.Foundersofnewbusinesses,but

notnecessarilysmallbusinesses,seekequityfinancingbecauseitinvolvesfewer

regulationsandthetransactioncostsofsubmittingtheirbusinessplantoinvestorsis

relativelysmall.Expertsrecommendequitysourcesofcapitalforsomesmallbusinesses

duetolimitationsontheamountofcapitalavailablethroughdebtfinancingalone(Wuet

al.,2006).

        

  19 

 

Adisadvantagecomesfromdilutionofownership,costingthefounderlossofautonomy

andcontrol.Investorsarepartnersandexpecttohaveasayinbusinessdecisions.Small

businessesseldomuseequityfinanceforfearoflosingcontrolovertheircompanies

(Mishra&McConaughy,1999)andbecauseofunwillingnesstocomplywithincreased

transparencyrequirementsconcerningbusinesstransactions(Wuetal.,2006).Small

businesses,especiallyfamily‐ownedestablishments,maysacrificeexpansionopportunities

toretainpersonalcontroloftheircompanies.

Highgrowthfirmsarethemostlikelytoreceiveexternalequityfinancing.Traditional

externalinvestorsexpectsalesofatleast$10millionwithinsixyearsofstartingbefore

consideringfinancingabusiness.Only4%ofbusinessesexpecttoachievethatlevelof

salesinthefirstsixyears(Shane,2009).

Foundersmustunderstandthefitbetweentheirbusinessandaninvestorbefore

pursuingequityfinance(Shane,2009).Oneissuewithentrepreneursinvolveshavingthe

timeandexpertisetocreateabusinessplansufficienttojustifyalargeinvestment.

Traditionalsourcesforequityfinancingincludeindividualinvestors(angels)and

institutionalinvestors(venturecapitalists).Fordetailsaboutvariousformsofequity

financing,seeAppendixE.

StrategiesforEstablishingandSustainingAdequateCapital

Theprevioussectiondescribedfundingsourcesavailabletoentrepreneurs.This

sectiondescribesmechanismsbywhichthesetypesoffundingarefacilitatedor

implemented.Itbeginswithnational,state,andlocalprogramscurrentlyavailableinthe

SOIregion.Promisingpracticesthatprovidebenefitsaredescribednext.Whilemanyof

theseprogramsarelocatedinotherpartsofthecountry,somehavealsobeenimplemented

        

  20 

 

intheSOIregion.Whilealloftheseprogramshaveatleastsomecomponentrelatedto

capitalaccess,thepracticescoverregionalcollaborationandtechnicalassistancein

additiontoinnovativefinancingprograms.

FederalEntrepreneurshipFundingPrograms

USDepartmentofAgriculture(USDA)‐BusinessandIndustryGuaranteedLoanProgram

TheUSDAoffersloanguaranteestoprivatebanksmakingloanstostartingor

expandingbusinessesinruralcommunities.TheUSDAmayguaranteeloanstorural

businessesforanybusinesspurposeincludingrealestateprojects,equipmentand

machinerypurchases,andworkingcapital.

ThepercentageofloansguaranteedbytheUSDAisnegotiatedwithlendersalthough

themaximumpercentageofloansguaranteeddecreaseswiththesizeoftheloan.Forloans

oflessthan$5million,amaximumof80percentoftheloanmaybebackedbyUSDA.For

loansexceeding$10million,theUSDAmayguaranteeamaximumof60percent.Interest

ratesarenegotiatedbetweentheborrowerandlenderandloantermsdependonthe

project.Forrealestatepurchases,loanshaveamaximumtermof30years.Forequipment

purchases,theloantermisthelesserof15yearsortheusefullifeoftheequipment.For

workingcapital,themaximumtermissevenyears.

AccordingtoUSDAdataprovidedviaaFreedomofInformationActrequest,between

2008and2011,sevenbusinessesintheSOIregionreceivedloanguaranteeswithatotalof

$42millionthroughtheBusinessandIndustryGuaranteedLoanProgram.Theseloansall

wenttowardprojectsfordebtrestructuringofexistingbusinesseswithintheregion.

        

  21 

 

SmallBusinessAdministration7aLoanGuarantees

TheSBA7aGuaranteedLoanProgramallowsbankstomakefederallyguaranteedloans

tosmallbusinesses.Theguaranteeencourageslenderstomakeloanstobusinessesthat

mightnotquitemeettheirunderwritingterms.The7aprogramguarantees85percentof

loansupto$150,000and75percentofloansover$150,000,withamaximumloanamount

of$5million(OfficeoftheComptrollerofCurrency,2013).Loanproceedscanbeusedfor

workingcapitalorfixedassetsandrealestate.

Craig,JacksonandThomson(2007,2008a,2008b,2010)havereportedextensive

researchintotheeconomicdevelopmenteffectsofSBAloanguarantees.TheyfoundSBA

loanguaranteeswerepositivelyrelatedtoemploymentlevelsandpercapitaincome

growth.Theserelationshipsarestrongerinareaswithhighersharesofminority

populationsandruralareaswithlessdevelopedfinancialsystems.

SmallBusinessAdministration504Loans

UnliketheSBA7aprogram,whichguaranteesaportionofaprivatebankloan,the504

isaloanprogram.TheSBAloansfundstobusinessesthroughCertifiedDevelopment

Companies.Inatypicaldealusingthisprogram,abankprovides50percentoftheproject

funding(firstmortgage),theSBA504loanfunds40percent(secondmortgage),andthe

entrepreneursupplies10percentasequity(Mihajlov,2012).Loansfromthisprogramcan

beusedtofundtangibleassets‐realestateandequipment.Thesecondpositiontakenby

theSBAloanandthesmallerportionfundedbythebankreducethebank’srisk,makingit

morelikelythatitwilllendtoanentrepreneur.

        

  22 

 

USSmallBusinessAdministration(SBA)‐MicroloanProgram

TheSBAprovidesfundstononprofit,community‐basedorganizationsenablingthemto

offermicroloansforsmallbusinesses.Nationally,theaveragemicroloanis$13,000withan

interestratebetween8and13percent(SmallBusinessAdministration,2012).The

maximumamountforSBAmicroloansis$50,000andthemaximumtermoftheloanissix

years.ToqualifyforSBAfundingformicroloans,communityorganizationsmust

demonstrateexperienceinlendingtosmallbusinessesandinofferingtechnicalassistance,

includingbusinesstraining.

AccordingtotheSBA’s2012listingofsupportedmicrofinanceinstitutions,sixmicro‐

lendersoperateinWisconsinbutonlyoneexistsinIllinoisandservestheChicago

metropolitanareaexclusively.Thus,theRockfordmetropolitanareaisservedbytheSBA’s

microloanprogramfromtheChicagoOffice.

TwoinstitutionsinWisconsinoffermicroloanstoatleastonecountyintheSOIregion.

TheWisconsinWomen’sBusinessInitiativeCorporationoffersmicroloansstatewide,

primarilytofemalebusinessowners.ImpactSevenInc.isacommunitydevelopment

corporationofferingmicroloansinRockCountyandcountiesoutsidetheSOIregion.

Informationonoutputsspecifictotheregionorvariousloanprogramswasnotavailable.

USDepartmentoftheTreasury‐SmallBusinessLendingFund(SBLF)

TheSBLFlendsmoneytocommunitybanksthatprovideloanstosmallbusinesses.

Eligiblecommunitybankshavelessthan$10billioninassetsandmakeloansoflessthan

$10milliontobusinesseswithlessthan$50millioninrevenue(USDepartmentofthe

Treasury,2013a).BanksinitiallyrepaySBLFloansatamaximuminterestrateoffive

        

  23 

 

percentandtheinterestratedecreasestoonepercentforbanksthatincreasetheirsmall

businesslendingactivitybyone‐tenthormore.

InWisconsin,13financialinstitutionswith55locationsreceiveSBLFfunds.InIllinois,

22financialinstitutionswith251locationsreceiveSBLFfunds.Accordingtoamonthly

transactionsreport,atotalof$395millioninSBLFfundswereloanedto32financial

institutionsinIllinoisandWisconsinasofDecember31,2012(USDepartmentofthe

Treasury,2013b).

StateEntrepreneurshipFundingPrograms

WisconsinWomen’sBusinessInitiativeCorporation

TheWisconsinWomen’sBusinessInitiativeCorporation(WWBIC)makesbusiness

loansbetween$1,000and$100,000foruptosixyears.In2012,WWBICassisted397

businesseswithstartup,expansionorsustainability.Intheorganization’sloanportfolio,

45percentofbusinessesprovideserviceseithertobusinessesorconsumers,excluding

restaurants,healthcare,andchildcare.NineteenpercentofbusinessesinWWBIC’sloan

portfolioareinmanufacturingorconstructionfirms.ToqualifyforaloanfromWWBIC,

applicantsmustdemonstrateknowledgeinmanagingabusinessintheirindustry.

Workshopsonsubjectssuchasbusinessplanningandmoneymanagementareavailable

forapplicantslackingbusinessexperience.

WWBICacceptsmaleclientsalthoughtheorganization’sprimaryclientelearewomen.

WWBICreceivesfundingfromtheSBAforitsmicroloanprogrambutinformationonthe

amountanduseoffundswasnotavailable.WWBIChaseightclientbusinessesintheSOI

region,mostofwhom,intheSOIregion,arelocatedinRacine.Theseincludeda

        

  24 

 

transportationbusiness,abusinessservicesconsultant,andaweb‐basedretailerofhome

décorproducts(WWBIC,2012).

WisconsinAngelNetwork

TheWisconsinAngelNetworkmatchesentrepreneurswithangelinvestorsstatewide.

Throughthenetwork’sDealFlowPipeline,registeredentrepreneurssubmitone‐page

summariesoftheirbusinessesincludingthecustomerproblemaddressed,annualnet

revenues,amountofcapitaltheentrepreneurseeks,alistofcurrentinvestors,the

business’targetmarket,andmarketingstrategy.UsingtheGustsoftwareplatform,angel

investorsbrowsebusinessprofilesandselectbusinessesappropriatefortheirareaof

expertiseandinvestmentneeds.In2011alone,membersoftheWisconsinAngelNetwork

mademorethan80investmentdeals(WisconsinAngelNetwork,2012).

WisconsinHousingandEconomicDevelopmentAuthority

TheWisconsinHousingandEconomicDevelopmentAuthority(WHEDA)offersseveral

loanguaranteeprogramsforsmallbusinesses.WHEDAdefineseligiblesmallbusinessesas

businesseslocatedinWisconsinwithfewerthan250employeesthatwillcreateorretain

jobsbutcannotobtainconventionalfinancingatreasonableterms.TheWHEDASmall

BusinessGuaranteeprograminsuresuptohalfofloanswithaprincipaloflessthan$1.5

millionforeligiblebusinesses.

AsimilarAgribusinessGuaranteeprogramexistsforbusinessesusingrawagricultural

commoditiestodevelopnewproducts(e.g.,acheesemanufacturercreatinganewflavorof

cheese)orpurchasenewequipmentthataddsvaluetotheproduct.Athirdprogram,the

ContractorsLoanGuarantee,providesworkingcapitalforbusinesseswithfewerthan250

        

  25 

 

employeeswithacontractbyafederal,state,orlocalgovernmentagencyforworkwithin

thestate.

In2012,KtownTransportationinKenoshareceivedaloanfromtheParticipationLoan

Program(WHEDA,2013).In2011,businessesintheSOIregiondidnotreceiveany

WHEDAfunding(WHEDA,2012).However,in2010avinylproductsmanufacturing

companyinRacinereceivedcapitalfromtheSmallBusinessGuaranteeProgram(WHEDA,

2011).

IllinoisDepartmentofCommerceandEconomicOpportunity‐AdvantageIllinois

AdvantageIllinoisisa(introduced2011)setofprogramsthatimprovesaccessto

capitalforbusinessesacrossIllinois.ACapitalAssistanceProgramcollectsfundsfromthe

stategovernmentandprivatebankstoprovideapooledreserveforinsuringloansfor

smallbusinesses.Thisreserveprotectsbanksagainstlossesfromloansofamountsless

than$1milliontobusinesseswithfewerthan500employees,fortermsoflessthanfive

years.

UndertheParticipationLoanProgram,banksidentifyviablesmallbusinessesownedby

women,minorities,anddisabledveterans,andthestategovernmentprovidesloansin

partnershipwithbanks.AdvantageIllinoisalsoincludesanInvestIllinoisVentureFund

thatprovidesadditionalcapitaltostartingorexpandingIllinois‐basedbusinessesthat

demonstratepotentialforhighgrowthinexpandingmarkets.TheInvestIllinoisVenture

Fundoffersawardsoflessthan$1millionor25percentequity.

IllinoisFinanceAuthority‐RuralDevelopmentLoanProgram

TheIllinoisFinanceAuthority(IFA)partnerswithprivatelenderstoofferloansto

businessescreatingorretainingjobsinruralcommunitieswithpopulationslessthan

        

  26 

 

25,000.IFAfinancesamaximumof75percentofprojectcostswiththeremainder

providedbyabank.Theloanshaveafixedinterestratebetweentwoandsixpercentanda

maximumtermof10yearsforpurchasesoffixedassets.Theloantermisthelesserof10

yearsortheusefullifeforequipmentpurchases.AccordingtoalistofprojectsonIFA’s

website,therearenocurrentprojectsusingRuralDevelopmentLoansinBooneand

WinnebagoCounty.

Local‐RegionalCapitalProgramsintheSOIRegion

StatelineAngels‐RockCounty,WisconsinandWinnebagoCounty,Illinois

StatelineAngelsisagroupofangelinvestorslocatedalongtheIllinois‐Wisconsinstate

line.Theorganizationprefersmakinginvestmentsofatleast$250,000toemerging

businessesinindustriessuchasbusinessservices,software,andbiotechnology.Stateline

Angelsonlyinvestinbusinessesperceivedashavinghighgrowthpotentialandtheyexpect

applicantstoidentifybusinessopportunitiesworthatleast$50millioninrevenues

(StatelineAngels,2011).

BusinessLendingPartners‐RacineCountyEconomicDevelopmentCorporation

BusinessLendingPartners(BLP),RacineCountyEconomicDevelopmentCorporation’s

BusinessFinanceDivision,offersseveralrevolvingloanfunds(RLF)forbusinessesthatwill

createorretainlocaljobswithinRacineCounty.AdealthatinvolvesaRLFtypicallyis

funded50%byabank,40%bytheRLF,andrequiresa10%equitystakefromthe

borrower.

TermsandinterestonloansusingBLP’srevolvingloanfundsvarywiththeunitof

governmentparticipatingandthefundused,butmostfundshaveaminimuminterestrate

oftwotofourpercentoveramaximumtermoffiveyears.Oftheeightrevolvingloanfunds

        

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offeredbyBLP,fourarefederally‐fundedthroughtheEconomicDevelopment

AdministrationorCommunityDevelopmentBlockGrants.Threearefundedthroughlocal

governmentresources,suchasaTaxIncrementFinancingdistrict.Privatesources,

primarilybylocalbanks,capitalizethefinalRLF.In2011,BLPapprovedsevenloansfora

totalofmorethan$4.5million.Theresultingbusinessprojectshadtotalinvestmentof

$34.2million(RacineCountyEconomicDevelopmentCorporation,2012).BLPalso

providesSBA504loans,fundedthroughthefederalgovernment.

BLPlooksforcommunitybenefitwhendeterminingprojectstofund(CarolynEngel,

personalcommunication).Benefitscancomeintheformofadditionaljobsorinthe

redevelopmentofblightedareas.About90percentofRLFloanreferralsarefromlocal

banks.BLPmakesanefforttoeducatelendersontheRLFproductsavailable.Businesses

arereferredtootherorganizationssuchasalocalSBDCorSCOREchapterfortechnical

assistance.

KenoshaAreaBusinessAlliance

TheKenoshaAreaBusinessAlliance(KABA)istheleadeconomicdevelopmentagency

forKenoshaCounty.KABAhasadivisionthatmakesloanstobusinessescreatingor

retainingjobsinKenoshaCountythroughseveralrevolvingloanfundsinpartnershipwith

privatelenders.Asoftheendof2012,KABAhadatotalofabout$28.8millionavailablein

eightfunds(KenoshaAreaBusinessAlliance,2012).

Theshareoftherevolvingloanfundinfinancingbusinessloansvarieswithtotalproject

cost.Forexample,KABAfinanced75percentofa$110,000microbreweryproject.Four

manufacturingcompaniesthatborrowedfromtherevolvingloanfundin2011hadprojects

        

  28 

 

ofbetween$1millionand$3millionincostsandreceivedbetween40and50percent

financingfromKABA(KenoshaAreaBusinessAlliance,2012).

TherearethreemainsourcesofdealflowforKABAfunds:localbankslookingto

strengthenmarginaldeals,businesseswantingtorelocatetothearea,andprevious

borrowers(RichardRodenbeck,personalcommunication).Businessesarereferredto

otherorganizationsfortechnicalassistance.KABAisprohibitedfrommanagement

participation.

RockfordLocalDevelopmentCorporation

TheRockfordLocalDevelopmentCorporation(RLDC)isacertifieddevelopment

companyfocusedonprovidingdebtfinancingtosmallbusinesses,primarilyinthe

Rockfordarea.UnlikeBLPinRacineorKABAinKenosha,RLDC’ssolefocusisonsmall

businessfinancing.RLDCmanagesthreeRLFsandisaSBA504loanprovider.Thethree

RLFshaveatotalcapitalizationofapproximately$3.5million,withabout95%ofthose

fundscurrentlyloaned(JohnPhelps,personalcommunication).RLDCwilldoasmall

amountoftechnicalassistancewithsomepotentialborrowersbutrefersmanyclientsto

thelocalSBDC.

AccionChicago

AccionisamicrolenderbasedinChicago.Theyofferloansupto$20,000tostart‐ups

andupto$50,000forestablishedbusinesses.Theyalsooffersmall‘creditbuilder’loans

between$500and$2,500.Creditbuilderloansareforthosewhoneedtobuildacredit

historyorrecoverfromapoorcredithistory(www.accionchicago.org).

        

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AccionrecentlyexpandeditsgeographicreachtotheentirestateofIllinois.Inthe

Rockfordregion,theyengagetheRockValleySBDClocatedatEIGERLabasaremote

lendingoffice.TheydonotofferloanstobusinessesinWisconsin.

SummaryofLocallyAvailableCapitalSources

TheseexamplesrepresentasampleofloanfundscurrentlyavailableintheSOIregion.

Revolvingloanfundsareavailableinallsixcounties.AppendixFprovidesdetailsaboutthe

loanfundscurrentlyinoperation.Table2summarizestheloanproductsofferedby

variousresourcesintheSOIregion.Asageneralrule,financingismoreavailableinthe

boxesmarkedX.

Table2.AvailableFinancingAmountsbyCapitalSource3

                                                            3 Brian McIntyre (Rock Valley College SBDC) and Dan Cataldi (EIGERLab) developed this matrix.

CapitalSource/CapitalRequired

Lessthan$20k

$20k‐$200k

Morethan$200k

Lessthan$20k

$20k‐$200k

Morethan$200k

Lessthan$50k

Morethan$50k

Banks‐CommercialLoan XBanks‐LineofCredit X X X XAngelInvestors X XAccion X X X

* RLDCRLF X X X* CountyRLFs X X X X* CityRLFs X X X* StateofIL X XVentureCapital X X XCrowdfunding X X X

* MostRLFsandmostStateprogramsrequireanidenticalmatchfromanotherlenderforthe$theyprovide.Inaddition,manyhavejobcreationrequirements.

StartupsMatureBusinesses

(>5years)EarlyStageBusiness

        

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Local‐RegionalTechnicalAssistanceProgramsintheSOIRegion

LaunchBox

LaunchBoxisapartnershipofnineagenciesinRacineCounty,WI.Theorganization

providesassistancetosmallbusinessesandpotentialentrepreneurs.Accordingtoits

website(launchboxracine.com),“LaunchBoxisabusinessdevelopmentresourcethat

helpsentrepreneursandsmallbusinessesreachthenextstageoftheirprofessional

journey….OurpromisetosmallbusinessesandtheCityofRacinecommunityincludes:

Anultra‐specific,laserfocusontheeconomicsuccessofRacineanditsentrepreneurs.

Connectsentrepreneurswithninespecificpartnerswhoprovideacomprehensiverangeofsupportandresources.

ReducestheentrepreneuriallearningcurvebyactingasanombudsmanwithRacine'scityagencies.

Helpsentrepreneursmaintaincriticalfocusduringtheentireentrepreneurialprocess.

LaunchBoxconnectsentrepreneurswithpartnersthatprovidethefollowingservices:

Businessplanning

Capitalproviders

Productdevelopment

Humanresources

Salesandmarketing

EIGERlab

EIGERlabisabusinessandinnovationincubatorinRockford,ILwithseveralonsite

technicalassistancepartnersthatprovideservicestotenantsandothersmallbusiness

clientsinthearea.ThesepartnersincludeRockValleyCollege,SCORE,USDepartmentof

CommerceExportCenter,NorthernIllinoisUniversity,theIllinoisSmallBusiness

        

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DevelopmentCenter(SBDC),theInternationalTradeCenter(ITC)andtheProcurement

andTechnicalAssistanceCenter(PTAC).

EIGERlabhascapabilitiesthatmostincubatorscannotprovide.Itoffersproductdesign

anddevelopment,productanalysisandrapidprototypingthroughvarious3Dscanningand

printingtechnologies.Theseservicesallowentrepreneurstoproduceprototypesof

productsinavarietyofmaterialsorevenusemultiplematerialsinasingleproduct.

EIGERlabisdevelopingintoamorefullserviceentrepreneurialsupportorganization.It

hasadoptedtheGrowthWheelapproachtoentrepreneurialsupport.Thisapproachwas

implementedfollowingarealizationthatmostoftheserviceprovidershousedwithin

EIGERlabdidnoteffectivelycommunicatewitheachother.FundersofSBDCs,SCORE,

PTAC,etc.,requirethelocalofficestoreportonvariousmetrics.GrowthWheelprovidesa

commonlanguageandassessmentthatassistsclientsandprovidersinbetterdefining

growthparameters.Thesevariousindependentserviceentitiesnowareabletowork

collaborativelytoachieveshort‐termbusinessgrowthandresults.

GrowthWheelbringstheserviceproviderstogethertofocusontheshorttermgoalsof

thebusiness.Aninitialmeetingwithanentrepreneurproducesastandardized‘footprint’,

ordescriptionofthebusinessanditsneeds–regardlessofwhichproviderhasfirstcontact.

Thisfootprintcanthenbesharedwithotherproviderssotheycanquicklyidentify

solutionswithoutstartingoverwiththeentrepreneur.

TheGrowthWheelprocessquicklyidentifiessolutionstohelpentrepreneursachieve

successwithshort‐termgoals.Insomecases,theprocesscanprepareabusinessto

approachabankforfinancingafterjustafewhoursofdiscussion.

        

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AnotherwaythatEIGERlabprovideshighvalueassistancetoabusinessatalowcostis

the‘C‐Team’approach.C‐Teamisaholisticapproachtoquicklysolvingabusiness

problem.Theybringtogetheranumberoflocalexpertsbasedonthebusinessissue.The

expertsmightbringhumanresources,legal,financial,engineering,orotherexpertise.

Expertsagreetoparticipateintheprocessatnocharge,whichtakes2‐3hoursoftheir

time.

Theprocessbeginswiththeentrepreneurtaking15‐20minutestoexplaintheproblem.

Followingthisintroduction,theexpertsdiscusspotentialsolutionsbasedontheirskillsand

expertise.Occasionally,thebusinessandanexpertwillenterintoabusinessrelationship

followingthemeeting,butthatisnotthegoaloftheprocess.

PromisingPracticesFromOutsidetheSOIRegion

Promisingpracticeswereidentifiedthatshowpromiseforsuccessintheregion

throughareviewofacademicandprofessionalliteraturefocusedonentrepreneurial

support.Additionalpracticesbecameapparentininterviewswithstakeholders.

PromisingPractice‐CollaborationacrossGeographicBoundaries

AppalachianRegionalCommission.TheAppalachianRegionalCommission(ARC)

formedtheEntrepreneurshipInitiativein1997becauseofconcernsfortheregion’sfuture

andcutbacksindecliningsectorsintimber,textiles,andtobacco.An“earlyadopter”tothe

economicdevelopmentstrategyfocusingonentrepreneurship,theprojectgarneredinput

frompublicandprivatestakeholdersaswellascommitmenttothestrategybyeach

governorandstateprogrammanagerin13states.

Thetypesofprogramsprovidedincludeaccesstocapital,technicalassistanceand

training,incubators,andentrepreneurshipeducation.Anevaluationoftheinitiative,ledby

        

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RuralPolicyResearchInstitute’s(RUPRI)CenterforRuralEntrepreneurship(2008,3‐4),

foundtheregionalimpactsfromtheEntrepreneurshipInitiativetobe:

Amoreentrepreneurialeconomywithmorethan1,700businessescreated.

Amoreskilledandeducatedworkforcewithmorethan11,000studentsand

teacherstrained.

Jobscreatedbyexpandingbusinessesatamaximumpubliccostof$4,000perjob

created.

PromisingPractice–CollaborationwithLeadershipCommitment

NetworkKansas.TheGovernor’sofficealongwithmorethan1,500communityand

businessleadersidentifiedkeycomponentsforthestate’sneweconomicrevitalization

strategy.TheKansasEconomicGrowthActof2004launchedTheKansasCenterfor

Entrepreneurship,whichthenevolvedintoNetworkKansas.Thepurposesofthis

organizationaretoaccelerateeconomicandcommunitydevelopment.Thetasksinclude:

creation,reviewandrecommendationofpoliciestosupportentrepreneursin

traditionalcorporate,government,non‐profitsanduniversitiesinKansas;

acentralizedwebportalandcallcenterforentrepreneursseekingassistance

throughaseamlessresourceclearinghouse;

leadingstatewidecollaborativeeffortsbetweeneducationalandoutreachresources;

fundmanagementandfundingassistanceensuringdistributiontoqualified

entrepreneurs;

providingthenecessaryexpertise,educationandeconomicresourcesatthe

appropriatetimeduringbusinessdevelopmentactivities(NetworkKansas,2012).

        

  34 

 

PromisingPractice–CommunityFundDevelopment

StartupKansasE‐communities:Individualcommunityinvolvementincludestheability

tofundandsupportlocaleconomicdevelopmentthroughastatewidefunddevelopment

andmanagementprogram.In2006,StartupKansasbeganbyprovidingmatchinggrants

andunsecuredloans.EntrepreneurshipCommunityfundingprogramsorE‐communities

provideanadditionalfundingsource.E‐communitiescanbeasingletown,clusterof

towns,oranentirecountythatraisesseedmoneythroughdonationsfromindividualsor

communitybusinessesforlocalentrepreneurs.

Nowinitsfifthyear,theE‐communitiesprogramhasgrownfromsixcommunitiesto

30.Partnershipsinvestedapproximately$4.7millioninthefirstfouryearsandestimate

thatthefundswillgenerate$33millionininvestmentsforKansasbusinesses.Alltypesof

capitalsourcesfundstartups,expansions,orretentionofbusinesses.Thesourcesinclude:

thepartnerloan/grantfromStartupKansasorE‐community;

bankloansfordownpayments,privatecapitallentbyabankorfamilymember;

privatecapitalinvestedinreturnforequity;

additionalpubliccapitalloanedorgrantedfromsourcessuchasCertified

DevelopmentCompanies,RegionalFoundations,USDA,city/countymicroloansor

revolvingloans;and

ownerscarrytheamountofcapitaltobuythebusinessandbusinessinvestmentby

theowner,suchasequipmentorrealestate.

        

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PromisingPractice‐FundDevelopment

InvestNebraska:Committingresourcestowinandmanagefundingsourcesrequire

professionalismandleadershiptalent.Structuredflowofsupportandresourcestomake

loansmustbeinplacewithpracticesthatmaketheprocessachievableforallstakeholders.

Withseverecutbacksincommunityblockgrants,supportingbusinessdevelopmentin

thestateofNebraskarequiredanewfundingsource.AnapplicationinJune2011toa

USTreasuryfundingprogramofferedstatesmallbusinessdevelopmentfundsfor

commitmenttounderservedpopulationsanddistressedareas.

AwardedfundsbecamethebasisfortheNebraskaProgressLoanFund(NPLF),

providingloansforcommercialization.Thefieldstaffisresponsibleformarketingthe

program,creatingthefinancialpackage,negotiating,andstructuringthefinancingdeal.

Levelofriskisthehighestconsiderationandprioritiesareinfluencedbybankandinvestor

actions.NPLFloanawarddecisionstakeonemonthandareassessedbasedonleverage,

distressedorunderservedareas,jobcreationandjobquality.

OutputsspecifictotheNPLFwerenotavailablebutInvestNebraskahassupported15

businessesintotal(InvestNebraska,2013).Mostofthebusinessesreceivingcapitalfrom

InvestNebraskaarewithinanagriculturalindustrycluster.Supportedbusinessesinclude

sellersofagriculturalproductssuchasgoatcheeseandbalesofhay,softwaredevelopers

creatingprogramsformanagingfarmenergyandsupplyuse,andamixedanimal

veterinaryhospital.

PromisingPractice‐RevolvingLoanFundsafterLenderRefusal

IdahoInnovationCenter(IIC),IdahoFall,Idaho:Earlystagecompaniescanleveragethe

traditionallendingturndownintoafundingopportunitywithsupportfrombusiness

        

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developmentresources.Criteriaforfundingselectionincludearefusalletterfromabank

orprivatelenderandanemphasisoncreatingjobs.IICreturnstothelenderstoaskfor

partialparticipationifIICcoversapercentageoftheloanamount.Theinterestrateis

primelendingrateplus1‐5percentfrom60daysanduptofiveyears.Arevolvingloan

fundof$1millionhelpswithequipmentpurchasesorotherneeds.Theminimumloanis

$1,000andmaximumamountis$250,000.

PromisingPractice–CommunityDevelopmentFinance

BootstrapMontanaoffersone‐year,zero‐interestloansof$5,000to$20,000to

businessesthathaveoperatedforatleastoneyear.Short‐termloansprovideresources

necessaryforbusinessestogrowwithoutburdeningentrepreneurswithlong‐termdebt.

Borrowersusetheseloanstoexpandbusinesssalesandmarketingactivities.Usesof

bootstraploansincludehiringasalespersonorpresentingatatradeshow.Toqualifyfora

bootstraploan,anapplicantmustpresentaletterofrecommendationfromafinancial

institution,legalcounsel,orCPA.Businessesparticipatingintheprogrammustsubmit

quarterlyunauditedfinancialstatementsshowinghowloanproceedswerespent.

PromisingPractice–TargetedBusinessAssistance

TheStateofIowaprovideslow‐interestloanstofor‐profitbusinesseswithlessthan

$4millioninannualgrossincomeownedbyresidentwomen,racialminorities,andpeople

withdisabilities.Theloanshaveamaximumof$50,000overfiveyearsatlessthanfive

percentinterest.Freeone‐on‐onecounselingisofferedwhenapplyingforloans.In

addition,businessesmeetingthestate’sdefinitionofaTargetedSmallBusinessreceive

notificationofstateagencies’bidsforgoodsandservices48hoursbeforetheyaremade

        

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public,providinguniqueopportunitiesforloanrecipientstobecomegovernment

contractors(IowaDepartmentofInspectionsandAppeals,2012).

PromisingPractice–CounselingduringtheLoanApplicationProcess

CommunityCapitalDevelopment(CCD)inSeattlebringstogetherthreeorganizations

thatprovidefundingandtechnicalassistancetoentrepreneurs.SeattleEconomic

DevelopmentAssociation(SEDA)administersUSDAandSBAloanfunds.SEDAisa

certifiedCommunityDevelopmentFinancialInstitution(CDFI)since2009.Oneassociate

ofCCD,theSeattleEconomicDevelopmentFund,isacertifiedCDFIsince1998and

administersa$6millionloanfundthroughvariousprograms.

Anotherassociateorganization,SeattleBusinessAssistanceCenter(SBAC)provides

smallbusinessconsultingservices,trainingandnetworking.SBACoperatesthreecenters:

theWashingtonWomen'sBusinessCenter,theSouthSoundWomen'sBusinessCenter,the

NorthwestWomen’sBusinessCenterandtheWashingtonStatewideMinorityBusiness

EnterpriseCenter(MBEC).

CCDrequirespotentialborrowerstoattendsessionswheretheylearnaboutavailable

technicalassistance,trainingprograms,andtheloanapplicationprocess.‘Business

assistanceofficers’helpguideloanapplicantsthroughtheprocessbyassistingthemin

developingbusinessormarketingplans,cashflowandotherfinancialprojections,and

assemblingandcompletingtherequireddocumentation(seattleccd.com).Theloan

documentsarethenreferredtoappropriatelendingofficersforreview.

PromisingPractice–EquityInvestmentSupport

TheMinnesotaDepartmentofEmploymentandEconomicDevelopmentprovidestax

incentivesforangelinvestorsandventurecapitalistsprovidingcapitaltotargeted

        

  38 

 

businesses.Anindividualincometaxcreditofamaximum$125,000peryearisofferedto

angelinvestorsmakinginvestmentsofatleast$10,000insmall,localtechnologyfirms.

Anothertaxcreditisavailabletoventurecapitalinvestorsprovidingcapitaltoborderline

businesseswhotargetmarketsoutsideofMinnesota.Eligibleinvestorsmayreceivea

maximumofa45percenttaxcreditoninvestmentsforamaximumof$112,500peryear.

Asof2010,thelatestyearwithavailableoutputmeasures,theAngelInvestmentTax

Creditsupported258angelinvestorsand67certifiedbusinessesreceivedinvestment

(Nelson&Isaacson,2011).Ofthe67businesses,theindustrysectorsmostlikelytoreceive

investmentsweremedicaldevicesandequipment(15businesses),software(14),and

biotechnology(9)(Nelson&Isaacson,2011).Thetotalamountofangelinvestmentsmade

pursuanttothetaxcreditprogramwas$28millionasof2010(Nelson&Isaacson,2011).

PromisingPractice‐Crowdfunding

Arelativelyrecentfundingalternativethatisgrowinginpopularityforsmallbusinesses

andmicroenterprisesasanequityapproachiscrowdfunding‐theprocessofraisingmoney

fromagroupofpeople.Crowdfundingmodelsincludethoseforfinancialreturn(equityand

lending)aswellasforprojectsthatappealtothepersonalbeliefofthefunder(donation

andreward).Crowdfundingexpandsthe“friendsandfamily”stage,addinginvestment

frompeopleunknowntotheentrepreneur.

While‘donationandreward’crowdfundinghasgoneoninthepastintheUS,equityand

lendingcrowdfundingisexpanding.TheCrowdfundingAct,signedasacomponentofthe

JumpstartOurBusinessStartups(JOBS)ActsignedonApril5,2012byPresidentObama

hasopenedopportunitiesforentrepreneursandbusinessstartsbyremovingregulatory

barrierstoraisingcapitalfrominvestors.Theamendedrulesallowentrepreneursandnew

        

  39 

 

venturestosolicitfundingwithlimitedSecurityandExchangeCommission(SEC)filings,

andwithlimitedopportunitiestoadvertiseandpromotetheoffering(Anthony,2012).

PromisingPractice–VentureCapital

VentureDevelopmentOrganizations(VDO)

Acceleratingthedevelopmentofhigh‐growth,innovation‐basedfirmsisakeystrategy

for21stcenturyeconomicdevelopment.WorkingwiththeStateScienceandTechnology

Institute,theEDAsupportscreationofanationalnetworkofventuredevelopment

organizationstobuildcapacityforsupportinginnovationandentrepreneurshipin

distressedregions.Venturedevelopmentorganizations,suchasJumpStartinNortheast

OhioandBenFranklinTechnologyPartnersinPennsylvania,provideavarietyofservices

thatdirectlybenefitsmallbusinesses,includingaccesstocapital,expertbusiness

assistance,andnetworkdevelopment.

RegionalInnovationAccelerationNetwork(RIAN)assistsinthecreationofhighgrowth

companies,providesexpertbusinessassistance,facilitatesfinancialinvestmentsand

acceleratestechnologycommercialization.Throughthisinvestment,EDAsupportsthe

identificationofbestpracticesincultivatingregionalinnovationandentrepreneurship,

measuringtheeconomicimpactsofactivitiesdesignedtosupporttheseobjectives,and

providingassistancetoregionsinterestedinestablishingventuredevelopment

organizationstosupportbusinessdevelopment(NationalEconomicCouncil,2012;RIAN,

2012).

SecondMarket

SecondMarketisthelargestsecondarymarketforalternativeinvestments,including

privatecompanystock,limitedpartnershipinterests,auction‐ratesecurities,bankruptcy

        

  40 

 

claims,collateralizeddebtobligations,residentialandcommercialmortgage‐backed

securities,asset‐backedsecurities,warrants/restrictedstockandwholeloans.Foundedin

2004,NewYork‐based,SecondMarkethasover40,000participantsincludingglobal

financialinstitutions,regionalandcommunitybanks,hedgefunds,privateequityfirms,

mutualfunds,corporationsandotherinstitutionalandaccreditedinvestors.Serviceswere

launchedinitiallyforrestrictedsecuritiesinpubliccompanies.Expansiontothenextsetof

assetclassesincludedventure‐backedcompanies,communitybanks,andfundmanagers.

(SecondMarket,n.d.).

Mostrecently,SecondMarketcreatedapartnershipwithAngelList,acrowdsourcing

platformforentrepreneursandangelinvestors.Thepartnershipallowsformaking

investmentsassmallas$5,000instartupcompanies.Foramodestinvestment,early‐stage

companiescancreateamorediversifiedportfolioforventurecapitalists(Wong,2012).

AlternativeEquityFundingMethods

Lessformalmethodsforacquiringcapitaltoenhanceandgrownewbusinessstartup

plansinvolveleveragingcommittedcustomersorloyalsupporters.Individualsprovidethe

financialmeanstohelpthebusinessesgrowandinturnreceiveproductorservice

vouchersfortheproductorservice.AlternativemethodsincludeCommunitySupported

EnterprisesandRevenue‐BasedFinancing(seeAppendixE).

PromisingPractice–NetworkingResources

TheCapitalNetwork(TCN),Austin,TX:Networkingresourcestogetheroffersanarray

ofassistancetosupportentrepreneursanddevelopaccesstocapitalpotential.Including

morethan15,000firms,financingresourcesandbusinessassistanceorganizations,TCNis

oneofthenation’slargestseedandventurecapitalnetworks.Adatabaseincludesbusiness

        

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expertstohelpfirmswithstructuringdeals,marketing,andmanagement.Entrepreneurs

pay$750forasix‐monthmembershipandinvestorspay$1,250peryearformembership

inthenetwork.AngelinvestorreceptionsareorganizedbyTCN,whichshowcasesthree

high‐growthpotentialstartupcompanies.

PromisingPractice‐CommunitySupportedEnterprises

TheCommunitySupportedEnterprise(CSE)functionslikeCommunitySupported

Agriculture(CSA)model.CSAbringsacommunityofindividualstogether,pledging

supporttoafarmingoperationbysigninguptoreceiveaweeklydeliveryoffarmproducts.

Thefarmersreceivethecapitalneededtomaintainandgrowtheircropsandmembers

receivetheirshareoffoodthroughoutthegrowingseason.

Withdifficultyinfindingcapitalwithoutlosingcontrolofthecompanyoncethe

businessisupandrunning,individualscanestablisharelationshipwithagrowing

businessbypurchasingcouponsfromthecompanythatareredeemableatstoresforthe

product.Thisprovidesthebusinesswithnecessaryupfrontcapital,helpingtoensurelong‐

termviability.

Mostoften,theCSEsupportsandpreserveslocalcommunities,throughacombination

ofcharitableandinvestmentcontributions,especiallywhenthecommunitycommitsto

supportingthenewstartup.Amemorandumofunderstandingreinforcesthepartnership

betweenthenewbusinessandthecommunity,outliningthearrangement’sprinciplesand

circumventingmisunderstandings.DetailsofCSEarrangementsandexamplesof

implementationareseeninThePreservationTrustofVermont(PTV).

ThePTVpromotesmanyCSEswithinthestate.Oneexampleincludesalocalrestaurant

thatavoidedclosurebycollecting$1,000contributionsfromcustomerswhowererepaid

        

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viaquarterly$90couponsfortherestaurant.Anotherrestaurantcollected$5,000each

from32investorsandrepaidtheminsavingsof25%onallmealpurchasesatthe

restaurantforfiveyears.

Vermont’sCSEsalsoincludeageneralstorewherecustomersmaypay$15annuallyto

receivediscountsonallpurchases(PreservationTrustofVermont).Theseexamplesshow

thatCSEarrangementsarescalableforthebusiness’capitalneedsandpreferred

repaymentschedule.

PromisingPractice‐Multi‐jurisdictional,public‐privateentrepreneurshipdevelopmentprogram

OrganizationsintheRegionofSouthDenmarkhavecoordinatedeffortstoimprove

accesstocapitalforsmallbusinesses(EuropeanEntrepreneurialRegion,2011).Public

sectorentitiespartneredwiththeprivatesectortoexpandentrepreneurshipintheregion.

Aregionalcouncilcoordinatespoliticalsupportfromvariousjurisdictions.TheSouth

DanishRegionalBusinessDevelopmentCentreisresponsibleforentrepreneurial

counselingservices.Ayouthentrepreneurshipprogramfocusesonexpanding

entrepreneurshipefforts.Finally,Danfoss,alargeindustrialcorporationfoundedinthe

regioniscommittedtoprovideexpertiseandresourcestoentrepreneurshipdevelopment.

Severalinvestmentorganizationsaredesignedtohelpsmallbusinesses.Business

AngelsSouthernDenmarkisanetworkofregionalinvestorswhosystematicallyidentify

localopportunitiesforinvestmentinstart‐ups.TheFundforGrowthPromotionin

southernDenmarkwascreatedbytheGrowthForumtoprovideloanstoentrepreneursin

remoteareasoftheregionandventurecapitaltoentrepreneursworkingwithinthe

prioritizedfieldofhealthandwelfaretechnology.DanishGrowthFundhasalocaldivision

thatcreatesnewgrowthcompaniesbyprovidingventurecapitalincollaborationwith

        

  43 

 

privatepartnersandDanishfinancialinstitutions.ScienceVenturesDenmarkA/S,owned

bytheUniversityofSouthernDenmark,investsinhigh‐techbusinessdevelopment.Finally,

theInvestmentFundofSouthJutlandprovidesloanstoSMEsinSouthernJutland.

Therearealsoseveraltechnicalassistanceprogramsintheregion.Capitalthrough

CounselingisaninitiativewhereacapitalcoachhelpsanSMEinneedoffinanceandactsas

apersonaladvisor.TheRegionalBusinessDevelopmentCentreinasimilarfashionworks

toraisetheprofile,importance,andvalueofintellectualpropertyrightstoensuregrowth

andfreedomtooperate.SouthDanishTechnologicalInnovationrepresentsoneofthe

largestDanishgovernmentapprovedinnovationincubatorschemesimplementedtoease

accesstocapital.

Danfossistheprivatesectorpartner.Theyconductanannualinternalbusinessplan

competitiontoboostemployees’innovationandentrepreneurialskills.Thereareplansto

addbusinessplancompetitionsforstudentsin2013andan‘entrepreneurpark’was

startedtonurturetechnology‐drivenentrepreneurs.

PromisingPractice–EntrepreneurialSupportOrganization

TheKentuckyHighlandsInvestmentCorporation(KHIC)isanentrepreneurialsupport

organizationthatprovidesadiversesetoffinancingoptions,includingequityanddebt

financing.Inaddition,KHICoffersentrepreneurialtrainingandmanagerialassistance.In

somecases,employeesofKHICtakeanactivemanagementroleinthecompaniesinwhich

theyinvest.

KHIChasoperatedformorethan40yearsandhasdevelopedintoaneffective

organizationwithbroadcommunitysupport.Anevaluationoftheorganizationprovided

some‘lessonslearned’fromthesuccessesofKHIC(MarkleyandBarkley,2003):

        

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1. Focusontheentrepreneurandtheenterprise,ratherthanthecapitalusedtosupporttheenterprise.“…assistanceincludesrecognizingtheweaknessesinanentrepreneur’ssetofmanagementskillsandpluggingthegapsinthemanagementteam,evenwithKHICstaff”(p.14).

2. Buildacommittedandskilledstaff.“ThequalityofsupportprovidedtoentrepreneursisafunctionofthequalityofstaffassembledintheKentuckyHighlandsorganization.IndividualstaffmembersdemonstrateastrongcommitmenttoboththesoutheasternAppalachianKentuckyregionandtheorganizationitself”(p.14).

3. Focusongrantsmanship.“KHIChasbeensuccessfulintappinganumberoffederalprogramsthatprovidegreaterflexibilityinrespondingtoanentrepreneur’sneeds”(p.15).

4. Developanactiveandsupportiveboardofdirectors.TheKHICboardprovidescontinuity,averagingover17yearsofservice.Therearestrictparticipationrequirementsforservingwhichcreatesahighlevelofcommitment.Theboardchallengesstafftobeinnovativeandtakerisks,understandingthatfailureissometimesthecostofrisk‐taking.

5. Partnerwithotherdevelopmentorganizationsintheregionandacrossthenation.“PartnershipsareakeytoKHIC’ssuccess,allowingtheorganizationtosharerisk,extenditsgeographicreach,andincreasethetalentpoolavailabletohelpentrepreneurs”(p.16).

Theselessonsalsobringcaveats.First,becausetheorganizationwasformedmore

than40yearsago,KHICreceivedsubstantialfederalfundingthatisnolongeravailable.

Capitalizationofasimilarorganizationwouldprovidesignificantchallengestoday.

Second,KHICdoesnotworkwithveryearlystageentrepreneurs.“Theorganization

doesnotattempttoidentifypotentialentrepreneurswhoarticulateaninterestin

startingtheirownbusinessbutwhopresentnoconcretebusinessidea.There

continuestobeagapintheregioninprovidingthisdealflowdevelopmentactivity”

(MarkleyandBarkley,2003,p.13).

PromisingPractices–EconomicGardening

EconomicGardeningisanapproachtoeconomicdevelopmentthatfocusesongrowing

fromwithinthroughentrepreneurship.Entrepreneursreceivetechnicalassistanceinthe

        

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formofresearchaboutmarkets,competitorsandindustrytrends.Thegoalistoprovide

smallbusinessownersthetypeofinformationavailabletomuchlargercorporationsso

theycanmakebetterstrategicdecisions.

PromisingPractices–FundManagementService

EvanstonBusinessInvestmentCorporation(EBIC):EBICusesaprivateuniversityasa

fundmanagementsupportservice.Operatingaseedcapitalfundasaservicefortheclients

ofEvanstonBusiness&TechnologyCenter,NorthwesternUniversity,Evanston,IL,EBICis

co‐locatedwiththeincubatorbutoperatesindependently.Twoseedfundsweredeveloped

byEBIC,whichislocallyorganizedandfoundedasanon‐profit.Amatchinginvestment

fromanothersourceisrequiredtoparticipate.Typicalinvestmentsinincubator

companies&otherlocalbusinessesarebetween$50,000and$150,000.Theclientsofthe

incubatoralsoreceivefinancialadvice.

PromisingPractices–ExpertisePooling

ThePlatoInitiativeisaprogrambeingimplementedthroughoutEuropetoincreasethe

frequencyanddepthofnetworkingbetweenbusinessowners/managers.ThePlato

programformssmallgroups(about10‐20members)ofbusinessmanagers.Thegroup

typicallyconsistsofprimarilysmallbusinessowners/managerswithtworepresentatives

oflargercompanies.Thegroupprogressesthroughatwo‐yearprogramthatincludes

formalandinformalmeetings,seminars,andindividualcounseling.Participantslearn

managementskillsfrompeersanddevelopbusinessandpersonalconnectionsthat

frequentlyleadtocommercialopportunities.

        

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ConclusionsandRecommendations

ThedatacollectedsuggestthatentrepreneurshipisstrongintheSOIregionfromsome

perspectives.Businessstartratesineachofthecountiesaresignificantlyhigherthanthe

Illinois/Wisconsinaverages.However,businessclosureratesanddeclinesinthenumber

ofbusinessestablishmentsintheSOIregionindicatethatentrepreneursstruggleto

succeedandmoresupportforentrepreneursintheregioncouldhavesignificantpositive

impacts.

Indicatorsshowfinancialcapitalresourcesareusedintheregion.DatafromSBA

lendingindicatethatthevalueofloansmadeisslightlyabovethestatewidepercapita

averages.However,asurveyofbankerscompletedforthisreportrevealedthatthissource

couldbemorefullyutilized.Morethanone‐thirdofbanksindicatedthattheydonotuse

theSBAloanprograms.

InadditiontoSBAlendingprograms,severalbusinessfinanceprogramsexistinthe

region.StatedirectloanorloanguaranteeprogramsincludeWisconsinWomen’sBusiness

InitiativeCorporation,WisconsinHousingandEconomicDevelopmentSmallBusiness

Guaranteeprogram,AdvantageIllinoisCapitalAssistanceProgram,andIllinoisFinance

AuthorityRuralDevelopmentLoanProgram.RevolvingLoanFundsexistineverycounty

intheSOIregion.

Whileaccesstocapitalisessentialfornewandexpandingbusinesses,financing

programsareonlypartofalargerregionalentrepreneurshipsystem.AccordingtoHolley,

“aRegionalEntrepreneurshipSystemincludes:

acoordinatedsystemofeasilyaccessibletechnicalassistanceandtraining;

        

  47 

 

localcommunitiesthatvalueentrepreneursandlinkthemtoappropriateservices;

accesstoappropriatecapital;

theformationofclustersthatprovidesector‐specificassistance;and

aprocessforgatheringinformationaboutgapsinthesystemanddevelopingpolicyandnewservicestoaddressthosegaps”(2005,p.7).

Whilethisreportconcentratedonaccesstocapital,aregionalentrepreneurship

supportsystemshouldhaveabroaderfocus.Insomeareas,suchassmallbusiness

counseling,aregionalapproachisbeginningtotakehold.Moreeffortwillberequiredin

otherareas.

Thefindingsfromthisanalysisofaccesstocapitalsuggestrecommendationsonfour

issues:research,training,capitalsources,andregionalcoordination.Each

recommendationaddresseseitheraweaknessinthecurrentsystemoritbuildson

emergingstrengthintheregion.Theimplementationoftheserecommendationscanhelp

createapositiveclimatethatencouragesstartupsorexpansionsby2ndstagecompanies.

Research

SmallBusinessFinancingExperience

Thevastmajorityofacademicresearchonsmallbusinesslendingisbasedonlarge

datasetssuchastheKauffmanFirmSurvey.Thesedataarecollectedfromsurveysthatask

aboutthesourceandamountoffinancingthatsmallbusinessesapplyforand/orobtain.

Thesedataareusefulforunderstandingtrends,butdonothelpunderstandthe

experiences,decisions,anddetailedneedsofspecificentrepreneurs.

Aresearcheffortfocusedonentrepreneurs’experienceswithobtainingcapitalinthe

SOIregionwouldidentifyobstaclesfacedinfinancingeffortsandcouldhelpformulate

remedies.Itiswell‐documentedthatentrepreneursrelyheavilyonpersonalsavingsor

        

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debtandbankloans.(seeAppendixC).However,theprocessthattheygothroughwhen

decidingtoinvestpersonalfundsortakeondebtisnotwell‐understoodbutwouldhelp

considerablyintailoringfinancingpackages.Whatanalysisdoentrepreneursrelyon?

Howpreparedaretheywhenapproachingbanks?Whataretheexperiencesof

entrepreneurswhohaveattemptedbutfailedtoobtainfinancing?Theanswerstothese

questionscouldguidepolicymakersincreatingeffectivefinancingstrategiesbuthavenot

beenaddressedadequatelyinpreviousresearchespeciallyforremoteandruralregions.

Recommendation#1:

Initiatearesearcheffortfocusedonthefinancingexperiencesofsmallbusinesses.Awell‐

designedmixedmethodsstudywouldproducegeneralizableresultsusefulindesigningbetter

productsandservicestohelpentrepreneursgroworexpandtheirbusinesses.Exploratory

qualitativeresearch,e.g.interviewswithentrepreneursand/orfinancialinstitutions,followed

byaquantitativesurveywithgreaterreachcouldtestthegeneralizabilityofthequalitative

findings.Thefindingsthencanbeusedtodesignnewfundingopportunitiesintheregionor

toexpandaccesstoexistingprograms.

AngelInvestorIdentification

Angelinvestorsare“wealthyindividuals,typicallyfellowentrepreneurs,willingto

investintheveryearlystagesofaventuredevelopment”(Morrissette,2007,p.52).In

2012themedianangelinvestmentwasapproximately$600,000(AngelResourceInstitute

andSiliconValleyBank,2013).Priortotheinvestment,thecompaniesreceivingthefunds

hadamedianvaluationofabout$2.5million.IntheGreatLakesregion,internetandhealth

carecompaniesreceivedalmost60percentofangelinvestmentdealsin2012.

        

  49 

 

Angelstypicallyinvestinindustriestheyknow(Morrissette,2007,p.52)andmanyare

hands‐oninvestorswhomeetfrequentlywiththeentrepreneurstheyfinance.

Consequently,over75%ofangelinvestorsinvestincompanieswithin50milesoftheir

residence.

StatelineAngelsisaninvestmentgroupintheSOIregion.Accordingtotheirwebsite,

“membersareagroupofsuccessfulbusinessexecutivesandprofessionalsintheStateline

regionofWinnebagoCounty,IllinoisandRockCounty,Wisconsin”

(www.statelineangels.com/history).Thedescriptionoftheirphilosophymatcheswellwith

whatwasfoundintheacademicliterature:

StatelineAngelsisanangelinvestororganizationthatprovidesinvestmentcapitalto

start‐upandearlystagecompanies.Memberswhochoosetoinvestmayalsolendtheir

operationalexperiencetoenhancethechanceofsuccesstotheventures.Wearededicated

tofosteringgrowthintheStatelineareaandupperMidwestregionbyassistingindividuals

inthedevelopmentofsuccessfulbusinesses.

Localbusinessdevelopmentexpertsbelievethattherearemanyotherpotentialangel

investorsintheregion.Entrepreneurmagazinesuggestfourplacestosearchforangel

investors:

Universities:AccordingtoBobTosterud,FreemanChairforEntrepreneurialStudiesattheUniversityofSouthDakota,angelinvestorstendtohovernearuniversityprogramsbecauseofthehighlevelofnewbusinessactivitytheygenerate.Headvisesthatifyouarelookingformoney,callthenearestuniversitythathasanentrepreneurshipprogram,andmakeanappointmenttospeakwiththepersonwhorunsit.Generally,hesays,suchpeoplecanpointyouinthedirectionofangels.

Businessincubators:AccordingtotheNationalBusinessIncubationAssociation(NBIA),thereareabout1,000businessincubatorsinNorthAmerica.Atfirstglance,incubatorsappeartobethemerebricksandmortarfacilitiesthatofferentrepreneursreasonablerents,accesstosharedservices,exposuretoprofessionalassistanceandanatmosphereofentrepreneurialenergy.ButaccordingtoNBIA

        

  50 

 

presidentandCEODinahAdkins,manybusinessincubatorsofferformalorinformalaccesstoangelinvestors.

Venturecapitalclubs:Thetremendouswealthcreatedthroughthecommercializationoftechnology,aswellastherobuststockmarketofthe1990s,haveresultedinalargenumberofangelinvestorswhohavebeguntoformalizetheiractivitiesintogroupsorclubs.Theseclubsactivelylookfordealstoinvestinandtheirmemberswanttohearfromentrepreneurslookingforcapital.

Angelconfederacies:Someangels,shunningtheformalityofaventurecapitalclub,bandtogetherininformalgroupsthatshareinformationanddeals.Membersofthegroupofteninvestindependentlyorjointogethertofundacompany.So‐calledconfederaciesarenoteasytofind,butonceyoulocateonemember,yougainaccesstothemall,anumberthatcouldtop50investors.(AGuidetoAngelInvestors,n.d.)

Entrepreneurgoesontosuggestsourcesforfindingangelinvestors:

1. Manychambersofcommercehostaventurecapitalgroup.Manysuchgroupshaveachamberaffiliation.

2. SmallBusinessDevelopmentCentersoftenknowoflocalangelinvestorgroups.

3. Accountingfirmsmayprovideentrepreneurialservicesandknowoflocalangelinvestors.

4. Similarly,lawyersmayprovideservicestowealthyindividualswillingtoinvestlocally.

5. Professionalventurecapitalistmaybeawareofanangelinvestorgroup.

6. Regionalorstateeconomicdevelopmentagencymayknowofanangelinvestorgroup.

7. Localbusinesspublicationsoftenwriteaboutangelinvestmentgroupsandmaybeawareoftheiractivity.

8. "PrincipleShareholders"sectionofinitialpublicofferings(IPO)prospectusesforcompaniesintheareawillidentifylocalbusinesspersonswithsignificantcashouts.

9. Theexecutivedirectorofatradeassociationmaybeawareofinvestorswhospecializeinaspecificindustry.

10. Thepresidentofalocalbankorlendersatalargercommercialbankmayknowofangelgroupsbecausecompaniesthathavereceivedanequityinvestmentaregoodcandidatesforaloan.

        

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Recommendation#2:

Theseresourcesrepresentastartingpointinasystematicefforttoidentifyangelinvestors

intheSOIregion.Asnowballsamplingtechniquewouldbroadenthereachbeyondthe

originalsetofinterviewees.4Thesurveyfindingscouldthenbesharedonawebsiteorother

mediawithpotentialentrepreneurs.Inaddition,discussionswiththeangelinvestors

regardinginterestsinspecificbusinessventurescouldinformstrategiesbydevelopment

practitionersinidentifyingpotentialentrepreneurs.Angelinvestorscouldalsohelpby

indicatingthetypesofinformationtheyfindmostusefulandtheformatstheyprefer.Allof

thisinformationcouldthenleadtoinformationalandtrainingeffortsforentrepreneursinthe

futureasshownnext.

TrainingandTechnicalAssistance

Technicalassistanceandtrainingareespeciallyimportantbecausemanyearlystage

entrepreneursdonothaveskillsrequiredtopreparetoobtainfinancing.Nationalsurveys

ofentrepreneursindicatethatentrepreneurslackthefinancialanalysisskillsrequiredto

applysuccessfullyforfinancing.Manydonotevenapproachbanks,assumingtheywillbe

deniedfunding.Assuch,potentiallysuccessfulbusinessesareunderfunded.

Smallbusinessescouldbenefitfromaccesstomoresophisticatedmarketanalyses,

assistancewithfinancialcalculationsandprojections,andinformationaboutfederal,state

andlocalfinancingprograms.Coordinationbetweenserviceproviderswouldalsobenefit

theregion.Theseservicesrangefromfacetofacecounselingtointernetorphone‐based

                                                            4 Snowballsamplingemploysaquestionattheendofeachinterviewaskingtheparticipanttoidentify

otherswhomighthaveinformationrelatedtothestudy.

        

  52 

 

services.ExamplesofprogramsinotherregionscouldbeimplementedintheSOIregionto

improveentrepreneurialsupport.

TheRegionofSouthDenmarkprovidesa‘capitalcoach’toentrepreneursinneedof

finance.Thecoachactsasapersonaladvisorhelpingthecompanytoattractcapital.Taking

thatconceptastepfurther,theIdahoInnovationCenterprovidesbusinessdevelopment

resourcesalongwithaninternalsourceofpotentialcapitalforentrepreneurswhohave

beenrefusedbyabank.TheKentuckyHighlandsInvestmentCorporationisan

entrepreneurialsupportorganizationthatprovidesentrepreneurialtrainingand

managerialassistancealongwithadiversesetoffinancingoptions,includingequityand

debtfinancing.

NetworkKansasprovidesaservicetoentrepreneurstohelpthemconnectwith

appropriateserviceproviders,includingatollfreephonenumberstaffedbyreferral

coordinators.Duringaninitialphonecall,thecoordinatorslearnabouttheentrepreneur’s

businessandneeds.Thecoordinatorthenresearchestheissuesandcallspotentialservice

providers.Theyconnecttheentrepreneurwiththeserviceprovidersandfollowthem

throughtheprocess,makingsuretheirneedsaremet.

CommunityCapitalDevelopment(CCD)inSeattlebringstogetherthreeorganizations

thatprovidefundingandtechnicalassistancetoentrepreneurs.CCDrequirespotential

borrowerstoattendsessionswheretheylearnaboutavailabletechnicalassistance,

trainingprograms,andtheloanapplicationprocess.‘Businessassistanceofficers’help

guideloanapplicantsthroughtheprocessbyassistingthemindevelopingtheirbusinessor

marketingplans,cashflowandotherfinancialprojections,andassemblingandcompleting

therequireddocumentation(seattleccd.com).

        

  53 

 

Therearealsosuccessfulexamplesofpeer‐to‐peermentoringprogramsthatcouldbe

successfullyimplemented.ThePlatoInitiativeisaprogramimplementedthroughout

Europetoincreasethefrequencyanddepthofnetworkingbetweenbusiness

owners/managers.Thisprogramformssmallgroups(about10‐20members)ofbusiness

managers.Thegrouptypicallyincludessmallbusinessowners/managersand

representativesoflargercompanies.Participantslearnmanagementskillsfromtheir

peersandgainbusinessandpersonalconnectionsthatfrequentlyleadtocommercial

opportunities.

WithintheSOIregion,EIGERlab’sC‐Teamisaholisticapproachtoquicklysolvinga

businessproblem.Theybringtogetheranumberoflocalexpertsbasedonthebusiness

issue.Theexpertsmightbringhumanresources,legal,financial,engineeringorother

expertisetohelpanentrepreneursolveadifficultbusinessproblem.

AcoordinatedsystemoftechnicalassistanceisbeginningtotakeshapeintheSOI

region.OtherorganizationsareadoptingtheGrowthWheelapproachthatEIGERlabhas

undertaken.RepresentativesfromGatewayTechnicalCollegeinSturtevant,WIandthe

WhitewaterInnovationCenteratUW‐Whitewaterareundergoingthetrainingandwill

beginimplementingitwithclientsbytheendof2013.AsofMay2013,therewere18

certifiedGrowthWheelbusinesscoachesintheSOIregion.

Severaltrainingopportunitieswereidentifiedinthecurrentresearcheffort.Many

revolvingloanfund(RLF)managersintheregion(especiallyinsmallercommunities)need

moresophisticatedknowledgeaboutfinancingalternativestosupportlocalbusinesses.

Mostlikely,businesscounselorsatSBDCsandotherplacescouldusebetterfinancial

        

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trainingaswell.Thesurveyofbankpersonneldisclosedthatmanyarenotawareofsome

ofthelocal,state,andfederalresourcesavailabletosmallbusinesses.

TheNationalDevelopmentCouncil(NDC)providesEconomicDevelopmentFinance

Professionalcertificationtraining.ThistrainingisdesignedforpeoplewhomanageRLFs

andworkwithbusinessesanddevelopersonfinancing.Thecertificationrequiresa

significantinvestmentoftime(fourweek‐longcourses)andmoney(NDCcharges$1,250

foreachweek‐longcourse).InsomeregionssuchasSouthDakota,banksorother

organizationsprovidefinancialsupporttobringNDCtrainingtoaregion.IN2013,theOhio

DepartmentofDevelopmenthostedEDFPcoursesatareducedrateof$685percourse.A

programsuchasthiscouldbeimplementedintheSOIregion.

Smaller,moretargetededucationeffortscouldalsohelp.Seminarsorwebinarson

specificaspectsofbusinesslendingcouldeducateRLFmanagersaboutopportunitiesto

stimulatesmallbusinessgrowthintheirregions.RepresentativesfromSBAorUSDAcould

presentseminarsabouttheirloanprogramstargetedtoeitherbankloanofficersor

entrepreneurs.

Atthesametime,itisimperativethatentrepreneursand2ndstagecompanymanagers

bepreparedwhenseekingloans.Theymustunderstandtheircashflowpotential,

understandmarkets,andhavethesupplychainundercontroliftheyexpectlending

institutionstoprovidefinancing.Sincerunningasmallbusinesscanconsumealloftheir

time,itisimportantthattheyhaveaccesstotechnicalandmanagementexpertiseona

readilyaccessibleandaffordablelevel.ReviewingthecurrentcapacityofSBDCsandother

agenciesintheregiontoprovidethislevelofsupportwouldbeuseful.Itwouldalsobe

        

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usefultodeterminewhethersmallbusinessesarefullyutilizingtheseservicesandidentify

obstaclestomorewidespreadutilization.

Recommendation#3.

Buildingonfindingsfromthesurveyofbankingpersonnel,anorganizedtrainingeffort

couldbecreatedintheSOIregionaimedatbetterinformingparticipantsaboutopportunities

toprovidefinancingbutalsotocreatebettercollaborationamongloanpersonnel.For

instance,ameetingoffinanceanddevelopmentpersonnelinRockforddemonstratedthat

manyparticipantshadnotmetandwerenotknowledgeableabouthowtheirspecific

programscouldworkwithotherpossibilities.Buildingamoreseamlesslendingenvironment

couldmakeiteasierforentrepreneurstoobtainfinancing.

Likewise,continuingandexpandingtheSOISourceLinkwebsitecouldhelpbusinessstarts.

Providingbasicinformationaboutbusinessesintheregionandthelocationsoffinancial

programswouldhelpminimizethetransactioncostsassociatedwithbusinessstarts.This

websitecouldbemaintainedinadevelopmentoffice,universityagencyorotherregional

group.

Creatingtrainingprogramsforentrepreneurstoimprovetheirfinancialmanagement,

marketing,andotherfunctionsisimportant.Aninventoryoftheseprogramscouldbetaken

andthenreviewedbyapanelofsmallbusinessand/or2ndstagecompanymanagersto

identifymissinglinks.TheSOIpartnershiphasmadegreatstridesinlinkingthesevarious

technicalservicesbutitmaybetimetostepbackandevaluatewhethertherearestillmissing

links.

        

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SmallLoanSources

Smallbusinesseshaveaspecialneedforloansoflessthan$50,000.Banksarehesitant

tomakesmallloansbecauseofthehighadministrativecostsrelativetotherevenue

generated.Basedoninterviewsandsurveyfindings,bankswillingtolendsmalleramounts

–oftenthroughlinesofcredit–treatthemaspersonalloans,relyingontheborrowers’

personalcreditscoreandcollateral.

Thereareafewothersourcesofsmallloans.AccionChicagomakesloans(upto

$20,000forstartupsand$50,000forexpansions)andtheyrecentlyexpandedtheir

territorytoincludetheRockfordregionbutdonotmakeloansinWisconsin.LocalRLFs

areoftenwillingtoloansmalleramountsbutmaybemoredifficulttofind.

TheStateofKansasprovidedseedfundingforlocalcommunitiestocreateloanfunds.

EntrepreneurshipCommunityfundingprogramsor‘E‐communities’provideanadditional

fundingsource.E‐communitiescanbeasingletown,clusteroftowns,oranentirecounty

thatraisesseedmoneythroughdonationsfromindividualsorcommunitybusinessesfor

localentrepreneurs.

InIdaho,earlystagecompaniescanleveragethetraditionallendingturndownintoa

fundingopportunitywithsupportfrombusinessdevelopmentresources.Criteriafor

fundingselectionincludearefusalletterfromabankorprivatelenderandanemphasison

creatingjobs.TheIdahoInnovationCenterreturnstothelenderstoaskforpartial

participationifIICcoversapercentageoftheloanamount.

BootstrapMontanaoffersone‐year,zero‐interestloansof$5,000to$20,000to

businessesthathaveoperatedforatleastoneyear.Short‐termloansprovideresources

necessaryforbusinessestogrowwithoutburdeningentrepreneurswithlong‐termdebt.

        

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Borrowersusetheseloanstoexpandbusinesssalesandmarketingactivities.Usesof

bootstraploansincludehiringasalespersonorpresentingatatradeshow.

Crowdfundingisanemergingsourceofsmallbusinesslending.Entrepreneurscanpost

fundingrequestsonwebsitessuchaskickstarter.comandarethenmatchedwithinvestors.

Currently,onlyloansanddonationsarepermittedbyUSregulations.Regulatorychanges

inprogresswillallowentrepreneurstotapintocrowdfundingforequityinvestments.

Recommendation#4.

Thesourcesofcapitalcanbeimprovedbytakingadvantageofexistingresourcesand

attractingnewresourcestotheregion.Revolvingloanfundsareunderutilized,especiallyin

themoreruralpartsoftheregion.Bettercommunicationsamonglendingagenciescould

leadtocollaborativeprojectsand/orcouldreducethetransactioncostsforsmallborrowers.

Likewise,coordinatedeffortsintheregiontobringinnewlendingagenciessuchasAccion

couldleadtoadditionallendingopportunitiesforstartupsand/orexpansions.Anyeffortsto

reducetherisksfacedbylendinginstitutionsand/orincreasingtheprofitabilityofmaking

thesetypesofloansshouldimprovetheeconomicclimate.

Bythesametoken,itisimportantthatborrowersarewell‐preparedwhentheymakean

applicationaswasnotedinthesectionontraining.Timespentmakinginformationavailable

aboutpotentialmarkets,populationtrends,andsimilarintelligencecouldimprovethe

financeconditions.

RegionalPartnershipsandCoordination

Holley(2005)suggestssettingupa‘policynetwork’tosupportentrepreneurshipina

region.“Apolicynetworkiscomposedofentrepreneurs,EntrepreneurSupport

Organizations,governmentofficials,policymakersandotherswhoareinterestedin

        

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developingeffectiveentrepreneurshippolicy”(p.56).Severalmodelsofsuccessful

regionalcoordinationofentrepreneurshipsupportnetworkscouldserveasmodelsinthe

SOIregion.Forexample,anorganizationinsoutheasternKentuckyhashadstrong

successesinspecificareas,includingregionalism.

TheKentuckyHighlandsInvestmentCorporation(KHIC)covers22countiesin

southeastKentucky.Inadditiontoprovidingavarietyoffinancingoptionsforsmall

businesses,theycoordinateactivitiesofserviceprovidersacrosstheregion.ForKHIC,

“partnershipsareakeytoKHIC’ssuccess,allowingtheorganizationtosharerisk,extendits

geographicreach,andincreasethetalentpoolavailabletohelpentrepreneurs”(Markley

andBarkley,2003,p.16).Theyalsohavecreatednationalpartnershipswithorganizations

suchastheNationalCommunityCapitalAssociationandtheNationalCooperativeBank.In

theirview,theselocalandnationalpartnershipsstrengthenentrepreneurialsupportinthe

regionbeyondwhatcouldbeachievedbyoneorganization.

Manysuccessfulentrepreneurialsupporteffortsarehousedinmulti‐countyregional

organizations.Thisisespeciallyimportantforlessdenselypopulatedareaswhere

economiesofscalearemoredifficulttoachieve.Theseorganizationscancreatelargerloan

fundswhichprovideinterestincometosupporttheiroperations.However,the

compositionoftheSOIregioncreatesobstaclesthatcomplicatecreatingasingleumbrella

organization.

First,theregioncrossesastatelineraisingseveralfundingchallenges.Forexample,an

angelinvestornetworkthatcrossedthestateborderwasdiscussedbySOIparticipants.

Thiseffortwasderailedbyprivateinvestorsnotinterestedinworkingacrossstatelines.

Thisissuecouldbeexploredfurtherandmightbeattractivetofundingagencies.

        

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Second,themixofurbanandruralareascanbringchallenges.Ruralparticipantsmay

feeltheyarenotapriorityinregionswithmoreurbancenters.Buildinglong‐term

coalitionsmaybemoredifficultinthesecases.However,itisnowmorecommonforbanks

inmetroareastohaveoperationsinmoreremotelocations.Thesesituationsmaymakeit

easiertobuildlinkages.

Despitethelackofaregionalumbrellaorganization,informalregionalcollaborationis

happening.ProgramssuchastheGrowthWheel,startedatEIGERLab,arespreadingto

organizationsacrosstheSOIregion.Morerecently,representativesfromGateway

TechnicalCollegeinSturtevant,WIandtheWhitewaterInnovationCenteratUW‐

Whitewaterarebeingtrainedandareimplementingtheprogramwithclients.Asof2013,

therearenow18certifiedGrowthWheelbusinesscoachesintheSOIregion.

EIGERLabalsopioneeredtheFastPitchentrepreneurialcompetitionintheregion,hosting

thefirstcompetitionInRockfordin2007.Thecompetitionfeaturesthreeminute‘pitches’

byentrepreneurswheretheypromotethemeritsoftheirbusinessideas.In2012,both

UW‐ParksideinKenoshaandtheUW‐WhitewaterInnovationCenterstartedcompetitions.

In2013,an‘AllStar’eventwasadded,bringingtogetherthetopcompetitorsfrom

Rockford,Whitewater,andKenosha.

Recommendation#5.

EarlysignsindicatethatregionalprogramssuchasFastPitchandGrowthWheelwillhave

apositiveimpactonbusinessfinancingintheregion.Expandingtheseprogramstonew

locationswillbeapositivestep.Otherareasarealsotryingnewapproachesanditis

importantthattheSOIregionkeepuptospeedwiththelatestsuccessfulpractices.

        

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Especiallyimportantisthattheregionworkasaunit.Thisiscriticalforthesmallagenciesin

lessdenselypopulatedareas.Tosucceed,theywillhavetocollaboratewithandbuildonthe

effortsofthelargercitiesandregionalcenters.Linkingthefinancialcenterswith

developmentagenciesthatworkwithsmallbusinesseswillbekeytoaprosperousfuture.

PathForward

Thesefourareas(research,training,capitalsources,andregionalcoordination)are

interrelated.TrainingRLFmanagerswillhelpbusinessprojectshaveaccesstocurrently

availablefunds.Byexpandingontheinformalregionalcoordinationcurrentlyunderway,

experiencedRLFmanagerscanmentornewer,lessexperiencedmanagers.Theresearch

outlinedcanhelpbetterdesigntrainingprogramsthathelpcurrententrepreneursmore

effectivelytapintoexistingtraditionalfinancesourcesaswellasguidepolicymakers

towardeffectiveprogramsunderwayinotherareas.

        

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OrganizationsReferenced

AngelCapitalAssociation(ACA)...............................100AppalachianRegionalCommission....................24,41CenterforVentureResearch..................................97‐99CimarronCapitalPartners................................101‐102EvanstonBusinessInvestmentCorporation(EBIC).....................................................36

Gust..............................................................................100,107IdahoInnovationCenter(IIC),.............................28,39IllinoisDepartmentofCommerceandEconomicOpportunity.............................................................21,37

InvestNebraska.............................................................ii,27Investor’sCircle.....................................................106‐107NationalCrowdfundingAssociation(NLCFA)......95NationalVentureCapitalAssociation(NVCA)...102,105

NetworkKansas..........................................................25,40

RAINSourceCapital.......................................................100RegionalInnovationAccelerationNetwork(RIAN)................................................................................30

RoyaltyCapitalNewEngland..........................109,110RuralPolicyResearchInstitute(RUPRI)CenterforRuralEntrepreneurship............................................25

SecondMarket...............................................................30‐31StartupKansas....................................................................26TheCapitalNetwork(TCN),Austin,TX............31‐32ThePreservationTrustofVermont................32,111UnitedStatesDepartmentofAgriculture............116UnitedStatesSmallBusinessAdministration(SBA)...................................................................81,88,‐90

WisconsinWomen'sBusinessInitiativeCorporation......................................................19,20,37

        

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AppendixA:EntrepreneurialDemographics

Therehasbeenconsiderableresearchoncharacteristicsofentrepreneurs.Global

EntrepreneurshipMonitor(GEM)conductsanannualentrepreneurialassessmentworld‐

wideandthe2011report(Kelleyetal.,2011)providesaprofileofentrepreneursintheUS.

AccordingtoGEM,in2011morethan55percentoftheadultpopulationbelievedtheyhad

theabilitytostartabusiness.Significantly,approximately36percentoftheUSpopulation

statedthattheyrecognizedentrepreneurialopportunities.Ofthat36percent,nearlyone‐

thirdsaidthatafearoffailuredissuadedthemfromstartingabusiness.Financial

considerationscontributedsignificantlytothisfear.

TheGEMreportdescribesentrepreneuriallyactivepersonsasthosewhohavetaken

stepstostartabusinessorarerunningabusinesslessthan42monthsold.TheUShada

‘TotalEntrepreneurialActivity’(TEA)rateof12.3percentin2011andtheratewas

somewhathigherformen(13.6%)thanwomen(10.8%).Thismightindicatethatfemale‐

focusedentrepreneurshipprogramsintheSOIcouldreachanunderservedpopulation.

Whileyoungerpeopletendtohavehigherlevelsofentrepreneurialintentand

establishedbusinessownerstendtobeolder,ratesofearlystageentrepreneurs(thoseof

primaryinterestinthisreport)donotvarysignificantlybetweenagegroups(FigureA1).

Thenascententrepreneurshipratepeaksforthepopulationbetween25and34(early

career)anddropsoffonlyslightlyformid‐careeradults.Newbusinessownershiprates

arerelativelyconsistentforagegroupsbetween25and54.Thissuggeststhat

entrepreneurshipprogramsneednotbeagespecific.Interestingly,TEAratesevenout

betweenthegendersforentrepreneursabove45yearsold.

        

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FigureA1:EntrepreneurialActivityByAge

AccordingtotheGEMreport(Kelleyetal.,2011),entrepreneursusuallycomefrom

wealthierhouseholds.TheTEArateis14.4%forthewealthiestone‐thirdofhouseholds

comparedto11.3%forthelowestone‐thirdincomecategory.Significantly,entrepreneurs

inwealthierhouseholdstendtobemuchmoreopportunitydriven(i.e.,startingabusiness

becauseofamarketopportunity)ascomparedtonecessitydriven(i.e.,startingabusiness

topayimmediatebills).Thisisimportantbecauseopportunitydrivenbusinessestendto

havegreaterpotentialthannecessitydrivenbusinesses.

Educationiscorrelatedwithentrepreneurialactivity(Kelleyetal.,2011)andcollege

graduatesaretwiceaslikelytoengageinentrepreneurialactivityasthosewithoutahigh

schooleducation.Similartoincome,thosewithhighereducationlevelsaremuchmore

35.9%

16.6%

7.0%5.7%

31.8%

18.1%

8.6%

21.7%

10.2%

6.1%

2.7%

15.4%

4.4%

1.9%1.1%

9.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

EntrepreneurialIntention

NascentEntrepreneurship

New Business Ownership Established BusinessOwnership

18‐34 Early Career 35‐54 Mid Career 55‐64 Late Career 65+ Seniors

        

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likelytobeopportunitydrivenentrepreneurswhilethosewithnohighschooldiplomaare

morelikelydrivenbynecessity.

Morerecently,WalzerandBlanke(2013)studiedbusinessstartsinmorethan800

Midwesterncounties.Theyfoundsignificantcorrelationsbetweenbusinessstartsand

females25to34yearsofage,pre‐retireesbetween55and64years,Hispanics,

unemployed,andsmallfarmoperators.Theyalsoreportapositivecorrelationwith

populationdensity.ThefindingsareespeciallyinterestingfortheSOIbecausebothIllinois

andWisconsinwereincludedinthestudy.Essentially,theresearchfoundthatpre‐retirees,

Hispanics,farmoperatorswithlessthan250acres,unemployed,andfemalesbetween25

and34yearsofagewerepositivelyassociatedwithgrowthofbusinessstartsbetween

2004and2007(pre‐recessionperiod)asapercentageofbusinessesin2004.Theanalysis

includedadjustmentsforqualityoflife,populationdensity,wealthinthecounty,and

relatedvariables.

SOIRegionDemographics

Consideringthegeographicbusinesschallengesandtheentrepreneurialprofiles

presentedabove,itisimportanttoexaminethedemographicsoftheSOIregion.Withafew

exceptions,theregionisrelativelyrural.RockandWalworthcountiesinWisconsinand

BooneCounty,ILeachhavepopulationdensitiesofbetween180and220personsper

squaremile.WinnebagoCounty,IL(dominatedbytheCityofRockford),KenoshaCounty,

WI(CityofKenosha),andRacineCounty,WI(CityofRacine)eachhavedensitiesbetween

575and625personspersquaremile.Bycomparison,CookCounty,IL(CityofChicago)

hasadensityof5,500personspersquaremile.Manystudies(e.g.,Markley,2007and

Walzer&Blanke,2013)describechallengesofpromotingentrepreneurshipinruralareas.

        

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Asdescribedabove,entrepreneurshavehighereducationlevels.Collegegraduatesare

twiceaslikelytobeentrepreneuriallyactivecomparedwiththosewithlessthanahigh

schooleducation.ThisisanotherchallengeintheSOIregionwherethepercentageof

residentswithbachelor’sdegreesorhigherislowerthanstatewideaverages,especiallyin

themoreruralcountiesintheregion.

TheagecompositionintheSOIregioncloselymatchesIllinoisandWisconsinoverall

withtheshareofthepopulationinpre‐career,earlycareer,latecareer,andretirednearly

identicalwiththetwostates(FigureA2).Onequarterofthepopulationislessthan18

years,slightlymorethanone‐thirdis18to44yearsold,one‐fourthisage45to64years,

andtheremaining13percentismorethan64yearsofage.

FigureA2:PopulationBreakdownpByAge,2010

Agecohort SOIRegion Illinois&Wisconsin19&Under 27.91% 26.99%20‐44 31.77% 33.56%45‐64 27.27% 26.56%Over64 13.04% 12.89%Source:USCensusBureau,2010.

EventhoughtheSOIregion’sagedemographicsmirrorthetwostatesoverall,trendsin

theSOIregionbetween2000and2010differfromthetwostates(FigureA3)andthese

trendsprovideinsightsinentrepreneurshipandworkforceopportunities.

TheSOIregion’sschool‐agepopulation(under18)increased1.8percentevenasthe

samecohortdecreasedinIllinoisandWisconsin.Theregionlostyoungprofessionals(age

18‐44)butdidnotlosenearlyasmany,proportionally,asIllinoisandWisconsincombined,

whichisencouragingbecausethisagegrouphasbeenshowntoincludepotential

entrepreneursinsomecases(Kelleyetal.,2011).However,theSOIregionalsohadmore

peopleretireorhasahigherpercentagenearingretirementthanthetwostates.

        

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FigureA3:PopulationChange2000‐2010

Source:USCensusBureau2000,2010.

Ofspecialinterestistherelativelylargeincreaseinproportionofresidentsbetween45

and65yearsofageduringthepastdecade.Thistrendreflectsanaturalagingofthe

populationbutalsosuggestsshortfallsinthefutureworkforceintheregionasthosepast

45yearsofageapproachretirementage.

TheprojectedpopulationchangesintheSOIregionto2020areconsistentwiththosein

IllinoisandWisconsin(FigureA4)butinbothcases,agrowingnumberofseniors(overage

64)willretireandashortageofexperiencedworkers(age45to64)isexpected.Woods

andPooleEconomics(2012)predictsincreasesinthepopulationwhowillstartcareers

andcouldpartiallyoffsetlossesfromretirements,butthegrowingnumberofpotential

retireesexceedsthegrowthofallothercohortscombined.Insomecases,thosepast65

yearswillcontinuetowork,especiallyiftheaveragewageincreasesduetoarelative

shortageofworkers.

        

  76 

 

Whilepastresearchondeterminantsofbusinessstarts(Walzer&Blanke,2013)shows

thatthe54to65agegroupispositivelyandsignificantlyrelatedtobusinessstarts,

improvementsinjobprospectsfortraditionalemploymentopportunitiesmaytendto

attractthosewho,otherwise,mightconsiderstartingbusinessesandthereforeadversely

affectthestockofpotentialentrepreneurs.Ineithercase,theagegroupsthatincluded

entrepreneursinthepastwillprobablyfindbetteremploymentprospectsintraditional

employmentsourcesintheforeseeablefuture.

FigureA4:ProjectedPopulationChange2010‐2020

Source:Woods&PooleEconomics,Inc,CompleteEconomic&DemographicDataSource2012.

WhilethedemographicsoftheSOIregionsuggestthatitmightstrugglewith

entrepreneurialactivity,businessstatisticsindicatethatitisdoingwell.Thenextsection

presentsbusinesstrendsshowingthatentrepreneurialactivityishighintheregionrelative

tothestatewideaverages.

        

  77 

 

BusinessTrendsinSOIRegion

BusinessDynamicsStatisticData(USCensus,2012),includingsmallbusinessesin

operationlessthan5yearswasusedtoconstructaprofileofbusinessactivityintheSOI

regionbetween2004and2007inIllinois,WisconsinandtheUStocomparetrendsin

numberofbusinessestablishments(AppendixBhasdatavariabledefinitions).Thedata

provideaperspectiveonthecompositionofbusinessesbothbysizeandyearsofoperation

andcanillustratetrendsinbusinessstartsofnew,smallestablishments.Theyears

selectedavoidinfluencesoftheGreatRecessionandbetterreflectlikelyexperiencesin

futurebusinessactivities.

EconomicImportance‐Smallbusinessesaccountforasignificantportionoftheeconomy

intermsofbothnumberofestablishmentsandemployees.InIllinoisandWisconsin,over

93percentofallestablishmentsaresmallbusinesseswithfewerthan50employees.More

thanone‐thirdofallbusinessestablishmentsarestartups(lessthanfiveyearsold)and

overonefifthofallbusinessesaremicroenterpriseswithfiveorfeweremployees.

Smallbusinessesarealsosignificantemployers.Two‐fifthsofemployeesinall

establishmentsworkinsmallbusinesses,mostlyinbusinessesthathaveoperatedformore

thanfiveyears.ThisgroupisalsoatargetforservicesbytheSOIpartners.

JobCreation‐Inadditiontobeingmajorsourcesofcurrentemployment,smallbusiness

startupsalsocreatemanyjobs.InIllinoisandintheUnitedStates,slightlyoverhalfofall

jobscreatedbybusinessestablishmentscamefromsmallbusinesses,definedasbusinesses

withfewerthan50employees(FigureA5).Withinthesmallbusinesscategory,

microenterprisescreatedone‐tenthandstartupsone‐thirdofalljobs.Assmallbusinesses

expand,theybecomemoreimportantforjobcreation;smallbusinesseswithfewerthan50

employeesaccountedforahigherpercentageofalljobscreatedthanmicroenterprises.

        

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However,smallbusinessesinWisconsincreatedfewerjobsonaveragethaninIllinois.

Improvingaccesstocapitalforsmallbusinessexpansionsmayimprovethejobcreation

ratesofsmallbusinessesespeciallyinWisconsin.

FigureA5:PercentageofTotalJobCreationAttributedtoSmallBusiness,2004‐2007

Source:USCensus,BusinessDynamicsStatisticsData,2012

BusinessActivityandStructureintheSOIRegion

BusinessStarts‐Duringthepre‐recessionperiod(2004‐2007),theSOIregioncompared

relativelywellinbusinessstartsasmeasuredbythepercentageofbusinessesstarting

duringthisperiodrelativetonumberofbusinessstartsin2004.Thisfindingsuggestsa

positiveenvironmentforstartingbusinesses.UsingtheBizMinerdataset,5between2004

                                                            5 The Brandow Company. (2011). Biz Miner, Industry Market Snapshot Reports.

http://www.bizminer.com/products/local/industry-market-snapshot-series.php

9.3%

2.6%

10.5%

33.3%

13.9%

36.7%

51.0%

41.8%

54.5%

0%

10%

20%

30%

40%

50%

60%

IL WI US IL WI US IL WI US

1‐4 employees / 0 ‐ 5 yrs. < 50 employees / 0 ‐ 5yrs.

< 50 employees / allestablishments

        

  79 

 

and2007theaveragecountyintheSOIregionhadbusinessstartsequalto9.5percentof

thetotalnumberofbusinessestablishmentsintheregionin2004(FigureA6).

TheaveragecountyinIllinoisandWisconsincombinedhadabusinessstartrateof5.6

percent.At‐testofdifferencesbetweengroupmeans,afteradjustingforsizeandvariance

inbothgroups,showsthatthesixcountiesintheSOIregionhadsignificantlyhigher

businessstartratesonaveragethandidIllinoisandWisconsinoverall.Infact,thesix

countiesintheSOIregionareallwithinthetop16percentofcountiesinthetwostatesfor

pre‐recessionbusinessstartrates.

FigureA6:BusinessStartRateComparisons

Location

2004‐2007TotalStartsasPct.Of2004TotalFirms

Two‐StateAverage 5.6%Wisconsinaverage 6.8%Illinoisaverage 4.7%SOIAverage 9.5%Racine,WI 11.9%Kenosha,WI 11.8%Winnebago,IL 8.5%Walworth,WI 8.4%Boone,IL 8.1%Rock,WI 8.0%

Source:TheBrandowCompany,BizMiner.

ThehigherperformanceoftheSOIcountiescomparedwithothercountiesextends

acrosstheretail,wholesale,finance/realestate,services,andconstructionsectors.Inmost

cases,SOIcountiessurpassedthetwo‐stateaveragestartrateindividuallyaswellas

collectively.

However,theSOIcountiesalsodiffermarkedlyinsomerespects.KenoshaCounty

hadmajorincreasesinagriculture‐relatedbusinesseswithastartrateinthissectordouble

        

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theSOIaverageandfourtimesthetwo‐stateaverage.RacineCountyhadastartratein

retailnearlytwiceashighastheaveragecountyinIllinoisandWisconsin.Thecountiesof

RacineandKenoshaalsohadlargeincreasesinnumbersofconstructionfirms.

WalworthCountydidnotleadtheregioninstartratesinanyindustrybutithada

businessstartratehigherthantheaveragecountyineveryindustryexceptmanufacturing

andmining.TheRockfordmetropolitanarea‐‐BooneandWinnebagocounties‐‐hada

businessstartrateintransportationandutilitiesnearlytwiceashighastheaveragecounty

inthetwostates.Bothindividuallyandthereforecollectively,countiesintheSOIregion

havebeenconducivetoentrepreneurialactivity.

BusinessClosures‐AccordingtotheBizMinerdataset,countiesintheSOIregionalsohad

highratesofbusinessclosures(FigureA7).Ineveryindustryexceptmining,theaverage

SOIcountyhadahigherclosureratethantheaveragecountyinIllinoisorWisconsin.A

comparisonoftheaveragesusingat‐testshowedthattheSOIregionhadsignificantly

higherclosureratesintheconstructionandservicesectorsthantheaveragecountyin

IllinoisandWisconsin.Thus,theSOIregionhadlostasubstantialnumberofbusinessesin

constructionandservicesevenbeforetherecession.

        

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FigureA7:County‐LevelAverageBusinessClosureRates2004‐2007

SOIRegionIllinois&Wisconsin tValue*

Agriculture 8.0% 5.9% 1.97SmallBusinesses6 7.8% 5.9% 1.96

Mining 2.3% 10.8% ‐1.10SmallBusinesses 4.0% 14.8% ‐1.27

Construction 13.8% 11.9% 3.08*SmallBusinesses 14.1% 12.0% 3.32*

Manufacturing 12.0% 10.2% 1.27SmallBusinesses 13.9% 11.0% 1.47

Transportation&Utilities 15.5% 13.1% 1.64SmallBusinesses 15.9% 13.6% 1.36

WholesaleTrade 11.9% 10.2% 1.87SmallBusinesses 12.8% 10.3% 2.59*

RetailTrade 15.9% 14.7% 1.55SmallBusinesses 16.4% 15.0% 2.03

Finance&RealEstate 13.0% 10.9% 0.89SmallBusinesses 13.0% 11.5% 0.59

Services 14.9% 12.4% 3.23*SmallBusinesses 15.2% 12.6% 3.51*

AllIndustries 13.9% 11.3% 4.89*SmallBusinesses 14.3% 11.5% 5.13*

*Statisticallysignificantatlessthan5%Source:TheBrandowCompany,BizMiner.

Furthermore,changesatthestateleveldonotexplaintheselossesbecausetheSOI

region’sclosureratewasproportionallyhigherthaninIllinoisandWisconsin.Thesmall

businessclosurerateinSOIcountieswasthreepercentagepointshigherthanthetwo‐state

average,adifferencethatisstatisticallysignificantatlessthan1percent.Eventhoughthe

closurerateforminingcompanieswas8percentagepointslowerintheSOIthanthe

averagecountyinIllinoisorWisconsin,thisdifferencewasnotstatisticallysignificant

becausethenumberofminingbusinessesvariedwidelyamongcounties.Thehigherthan

                                                            6IntheBizMinerdataset,asmallbusinessisdefinedasabusinessestablishmentwithonlyonesiteand

lessthan25employees.

        

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averagebusinessclosureratesinSOIcountiesindicatespecialissuesthatmaythreaten

smallbusinessesandapossibleneedforremedialaction.Highbusinessclosurerates

pressurelocaldevelopmentpractitionersevenmoretofosterbusinessstartsandreplace

businesseslostthroughclosures.

ThehighclosureratesintheSOIregionarereinforcedbyvariationsamongcounties

(FigureA8).Intermsoftotalbusinessclosuresacrossallindustries,BooneCountyhadthe

lowestclosureratesintheregion(11.9percent)andRacineCountyhadthehighest(15.6

percent)from2004to2007.Inmostindustries,theindividualSOIcounties,individually,

hadahigherbusinessclosureratethanIllinoisandWisconsinoverall.Exceptionswere

foundinmanufacturing,transportationandutilities,andfinancialservices.Walworth

Countywastheonlycountyintheregionwithalowermanufacturingbusinessclosurerate

thanthetwo‐stateaverage(7.8percentcomparedto10.2percent).Inthefinancial

servicesindustry,BooneCountyhadalowerclosureratethanthetwo‐stateaverage(3.8

percentcomparedto10.9percent).

        

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FigureA8:BusinessClosureRates2004‐2007

Source:TheBrandowCompany,BizMinerdataset.

TheSOIregionlostmorebusinesses,proportionally,intherecessionthanthestates

ofIllinoisandWisconsinoverall.AccordingtoWalls&Associates,Inc.’sNational

EstablishmentTimeSeriesdatabase,thetotalnumberofbusinessestablishmentsintheSOI

regiondecreased5.6percentbetween2007and2009(latestdataavailable),compared

with5percentdeclineinIllinoisand4.5percentdeclineinWisconsin(FigureC9).

AccordingtotheNationalEstablishmentTimeSeries,inboththeSOIregionand

IllinoisandWisconsinoverall,amajorityofestablishmentclosuresduringtherecession

involvedresident‐ownedbusinesseswithlessthan10employees(FigureA9).IntheSOI

region,84percentofthe3,134establishmentslostbetween2007and2009wereresident‐

ownedbusinesseswithlessthan10employees.InIllinoisandWisconsinoverall,69

11.3%

11.9%

13.3%

14.1%

14.2%

14.4%

15.6%

2‐state average

Boone, IL

Rock, WI

Walworth, WI

Kenosha, WI

Winnebago, IL

Racine, WI

TotalClosureRate,AllIndustries

7.8%

10.2%

10.5%

10.9%

12.1%

13.2%

17.5%

Walworth, WI

2‐state average

Rock, WI

Winnebago, IL

Boone, IL

Racine, WI

Kenosha, WI

ManufacturingClosureRate

11.6%

13.1%

13.1%

13.5%

16.4%

18.4%

20.0%

Walworth, WI

Racine, WI

2‐state average

Rock, WI

Boone, IL

Winnebago, IL

Kenosha, WI

Transportation&UtilitiesClosureRate

3.8%

10.5%

10.9%

13.4%

13.4%

17.8%

18.8%

Boone, IL

Rock, WI

2‐state average

Racine, WI

Winnebago, IL

Walworth, WI

Kenosha, WI

FinancialServicesClosureRates

        

  84 

 

percentofallestablishmentslostwereresidentbusinesseswithlessthan10employees.Of

moresignificanceregardingemployment,theSOIregionlostfiveestablishmentswithmore

than500employeesduringtherecession‐‐equalto16percentoftheregion’stotalnumber

ofmajoremployerspre‐recession.

FigureA9:ChangeinBusinessEstablishments,2007‐2009

SOIRegionIllinoisandWisconsin

Change % Change %TotalEstablishments ‐3,134 ‐5.4% ‐57,543 ‐4.8%Noncommercial ‐199 ‐5.7% ‐3,267 ‐4.2%Nonresident ‐275 ‐11.5% ‐5,049 ‐10.0%Resident ‐2,660 ‐5.1% ‐49,227 ‐4.6%

Below10employees ‐2,332 ‐4.9% ‐39,847 ‐4.2%10‐99employees ‐299 ‐6.0% ‐8,772 ‐8.2%100‐499employees ‐24 ‐7.8% ‐542 ‐7.7%500+employees ‐5 ‐16.7% ‐66 ‐7.1%

Source:Walls&Associates,Inc.,NationalEstablishmentTimeSeries

Businessstructure‐ThedistributionofbusinessesintheSOIregionmatches

statewideandnationalpatternsandhighlightsthesignificanceofsmall,locally‐owned

businesses.AccordingtotheNationalEstablishmentTimeSeries,81percentofall

businessesintheSOIareresident‐ownedbusinesseswithlessthan10employees,which

matchestheBusinessDynamicsStatisticsdatamentionedpreviously(seeFigureA10).The

proportionsofnonresident‐ownedestablishments,largelocally‐ownedestablishments,

andnoncommercialestablishmentsintheSOIregionarecongruentwiththebusiness

structurestatewideandnationally.

        

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FigureA10:BusinessStructurein2009

SOIRegionIllinoisandWisconsin US

%ofTotalEstablishmentsNoncommercial 5.9% 6.5% 6.2%Nonresident 3.8% 4.0% 3.6%Resident 90.2% 89.5% 90.2%

Below10employees 81.2% 80.2% 82.6%10‐99employees 8.4% 8.6% 7.2%100‐499employees 0.5% 0.6% 0.4%500+employees 0.05% 0.1% 0.05%

Source:WallsandAssociates,Inc.,NationalEstablishmentTimeSeries.

TheSOIregionproportionallyhasanequalnumberofestablishmentsasIllinoisand

Wisconsinoverallinmostindustries.InboththeSOIregionandthetwostates,thethree

industrieswiththelargestshareofestablishmentswereconstruction,educationandhealth

servicesindustries.Intotal,theSOIcountieshaveaslightlylargerproportionof

constructionestablishmentsthanWisconsinandIllinoisandaslightlysmallershareof

establishmentsineducationandhealthservices.Theoneindustrywiththemostnotable

differencesbetweentheSOIregionandthetwostatesisInformation,wheretheSOIregion

hasahigherconcentrationofestablishmentsthanWisconsinandIllinois.Considering

establishmentsinallSOIcountiesandallindustries,theregionlargelyhasthesame

industrialmixasthetwostatesoverall.

TheindustrymixofindividualcountiesintheSOIvaries.AllSOIcountieshada

largerconcentrationofconstructionestablishmentsthanthetwostatesoverall,butRock

Countyhadthelargestshareofconstructionestablishmentsatnearly25percent.Each

countyhadanabove‐averageconcentrationofestablishmentsintheInformationindustry

butWinnebagohadthelargestshareinthisindustry(10percentcomparedto5.5percent).

Inthemanufacturingindustry,KenoshaCountyhadabelow‐averageestablishmentshare

        

  86 

 

andBooneCountyhadanabove‐averageshare(15.4percentcomparedto10.4percentin

IllinoisandWisconsincombined).Thedistributionofindustriesineachcountyis

importantbecauseitpartiallyindicatestheopportunitiesfornewbusinessdevelopment.

(Source:USCensusBureau,2010CountyBusinessPatterns)

  87 

 

AppendixB:DefinitionsofFinancingOptions

BusinessLifeCycleStage

FinanceType

Source Description

Zero DebtorEquity

FriendsandFamily

Thefirstandmostpopularsourceforcapitalcomesfrompeoplewhoknowtheentrepreneurbestandareinclinedtoagreetomaketheinvestment.Asmoststartupshaveahightendencytofail,thedownsideandrisksshouldbeclear.Onlythosewhocanaffordtoloseshouldinvest.Dependingontheamountraisedandthesizeoftheopportunity,aconvertiblenotewithadiscountandcapisthebestapproachtomitigateriskforthistypeoffinancing(Wilson,May30,2011).

Zero‐One Debt Microfinancing Microfinanceisasystemthatoffersloanstoindividualswhoareemergingentrepreneursorself‐employedbutpartofunderprivilegedorlowincomecommunities.Peopleobtainloanswhentheycannotgothroughothertraditionalfinancialsourcessuchascommercialbanksormoneylenders(Hojeetal.,2009).

One Debt CustomerFinancing

Insomecases,customerscanbeasourceoffunding.Customerfundersdonothavethefinancialrequirementsthatbanksimpose.Theycanprovemarketfitfortheproduct/serviceoffered,improvethequality,andprovidecredibilitywithothercustomers.Anearlycustomermayprovidethefundinginexchangeforatailoredproducttomeetitsneeds,resultinginaproductnotsuitedforabroadermarket.Ascalableproductisonesold“asis”ratherthanbuildingaproductforafee.Customerfinancingcancreateacultureof“feeforservices”(Wilson,June20,2011).

One DebtorEquity

CommunitySupportedEnterprises

ThismodelisbasedontheCommunitySupportedAgriculturemodel,whichbringsacommunityofindividualstogether,pledgingsupporttoafarmingoperation,bysigninguptoreceiveaweeklydeliveryoffarmproducts.Thefarmersreceivethecapitalneededtomaintainandgrowtheircropsandmembersreceivetheirshareoffoodthroughoutthegrowingseason.TheCommunitySupportedEnterprisefunctionssimilarly.Itmaybedifficulttofindcapitalwithoutlosingcontrolofthe

        

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BusinessLifeCycleStage

FinanceType

Source Description

companyoncethebusinessisupandrunning.Individuals(bothlocalandvirtual)canestablisharelationshipwithagrowingbusinessbypurchasingcouponsfromthecompanythatareredeemableatstoresfortheproduct.Thisprovidesthebusinesswithnecessaryupfrontcapital,helpingtoensurelong‐termviability.

OneorTwo Debt VendorFinancing Consideredaloan,acapital‐intensivestartupismostlikelytousethisoption.Anewcompanywillbenefitfromthisapproachwhenrepaymentplanscanbeadaptedtothebusiness’scashflow.Whenbankloansareunattainable,vendorfinancingmayprovidemoreflexibility,extendingtherepaymentperiodandreducingmonthlypayments(Wilson,June27,2011).Nocollateralorco‐signerisnecessary(Vendorfinancing.org,2011).Ifunabletoobtainrepayment,thevendorscanwritedownthelossasbaddebt(Investopedia,2012).

OneorTwo Debt ConvertibleDebt Thestartupborrowsmoneyfromaninvestororgroupofinvestorswiththeintentionofconvertingthedebttoequitylaterthatisspecifiedatthetimetheloanismade.Inreturn,compensationrequiresadiscountorwarrantandcaponvaluationfortheinvestor.Thecompanybelievesthatitwillbeworthmoreinthefuture,withlessdilution,andlowertransactioncostsinissuingdebtratherthanequity.Investorsbelievethatthecompensationinthediscountorwarranthasenoughvaluetooffsetthevalueoftakingdebtversusequity.Additionally,theinvestorismoresecuresincedebtrankshigherthanequityinliquidation.Earlyon,startupsuseconvertibledebtforcapitalneedstomovequickly,withlowtransactioncostsandthesimplicityofobtainingcapitalinthismannerratherthanseedorSeriesA(thefirstroundoffinancingforanewbusinessventureafterseedcapital).Thissourceofacapitalismostusefultocompanygrowthastheybecomemoresophisticatedintheneedforfinancingfunding(Wilson,July11,2011).

OneorTwo Debt CapitalEquipmentLoans&Leases

Theseloansmadebybanksandfinancecompaniesprovidefundstoacquirecapitalequipment.Theequipmentiscollateralusedtosecuretheloan.Repaymentsoftheseloansoccurinthreeyearswithinterestrates

        

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BusinessLifeCycleStage

FinanceType

Source Description

between6%and12%.Attheendoftheterm,thecompanyhastheoptionofreturningtothelessororpurchasingforanominalamount.Thisoptionprovidescapitalwithoutdilutingthevalue.Thecompanycankeepscarcecapitalresourceswhilecontinuingtodevelopthebusiness.Boththelenderandborroweralignintherisk(Wilson,August2,2011).

OneorTwo Debt WorkingCapitalFinancing

Thecashconsumptionfromday‐to‐dayoperationsiswhatthecustomersoweplusinventorybuiltminuswhatisowedtosuppliersandemployees,aswellasanycashinthebank.Eventhoughonpaperthebusinesslooksprofitable,theoutlayofcapitaltoproducetheproductandthetimewhentherevenuecomeincanstallproductionanddelayfurtherincome.Theseareloanstothebusinessbybanksandfinancingcompaniesfornecessaryinventorypurchaseswhilewaitingforpaymentfromcustomers.Financingreliesonthecurrentinventoryandtheordersinhandtodeterminetheloanamount.Thestructureoftheloanislinesofcreditandloansrepaidasthemoneycomesbackintothebusiness.Thetotalamountavailablestaysthesameandthecompanycanborrowitbackagainwhenitneedsmoney.

TwoorThree Debt VentureDebt Specializedbanksandfinancecompaniesprovidethisdebtoption.Termsarethreeyearsonaveragewithinterestonlypaymentseachmonth.Whenthetermexpires,aballoonpaymentforthefullamountoftheloanisrequired.Warrantsprovidearighttobuyequityatafixedpricewithinaspecifictimeframe(usually5to10years).

TwoorThree Debt BridgeLoans Money‐losingcompaniesusebridgeloansbeforetheyrunoutoffundswhenwaitingtocloseafinancingdealorsalestransaction,whichdoesnotoftenhappen.Thelossrateishighandreturnsarenotmuchbetterthanventureinvestment,makingtheseloansrisky.Asaspecializedformofconvertibledebt,thetermsofthebridgeloanarestandard,securedbyallthebusiness’sassets,carryinginterestratesof6%to12%.Bridgeloansarecommontoallbusinesses;however,theycanbeviewedasasignalofdistressforthestartupcompany(Wilson,August15,2011).

        

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BusinessLifeCycleStage

FinanceType

Source Description

Zero‐One Equity Crowdfunding Anideaisfundedwithsmallcontributionsbyalargenumberofindividualsprovidingaccesstocapitalandinvestorprotection(StartupExemption,(n.d.)).

One Equity AcceleratorPrograms/Contests/Prizes

Bestknownacceleratorprograms(e.g.,TechStarsandYCombinator),pioneeredthisapproach.Foundingmembersrelocateforapproximatelythreemonthstoaspecificlocation.Typically,thisisanequityfundingopportunity,offeringbetween$25,000and$30,000inexchangefora5‐6%equitystake.Thesefundsaresufficientforthefoundingteamintheprogramandmaylastabitlongerthanthreemonths.Thegreatestvalueintheacceleratorprogramsisfromthementoringandopportunitytopitchtoangelinvestorgroupsattheconclusionoftheprogram.Contestsandprizecompetitionshaveincreasedinrecentyears.Entrepreneursreceivesupportandpreparationinbusinessplandevelopmentfromthehostingorganizationandcompeteforasetamountofmoney(i.e.,$5,000upto$10,000).Thepreparationconsistsofbriefmeetingsoveraperiodofthreemonthsandculminateswithapresentationtoapanelofjudges,oftencomprisedofangelinvestorsorkeycommunityand/orbusinessleaders.Thefundsprovidedbythissourceareunlikelytotakeabusinesstobreakeven;rather,itprovidesthemoneyandconnectionsneededtosetupforthenextsource(Wilson,June6,2011).

OneorTwo Equity PreferredStock Investorsandventurecapitalistsrequireanycompanyinwhichtheyinvesttoissuepreferredstock,assecurityfortheirequitydollars.Thisclassofstockprovidessuperiorsecuritysincetheinvestorshavetheoptionoftakingtheircostoutorsharingproceedswithfoundersintheeventofcompanyliquidation.Amongtheimportantprivilegesandrightsisaseatontheboardofdirectors,information,protectionofownershippercentageinfuturerounds,rightoffirstrefusalforcommonstockofferings,participationalongsidecommonstocksaleandpurchasepriceadjustmentstoguardagainstdilution.Variationexistsinhowthetransactionisstructured.Understandingthetermsforboththeinvestorandthecompanyareessential(Wilson,July18.2011).

        

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BusinessLifeCycleStage

FinanceType

Source Description

OneorTwo Equity MergersandAcquisitions

Aconsolidationofcompanies.Amergercombinestwocompaniestocreateanewcompany;anacquisitionisthepurchaseofonecompanybyanotherwithoutforminganewcompany(Investopedia,2012).

One&beyond Equity StrategicPartnering

Notapermanentorlegalpartnership,butanagreementbetweentwocompaniestoachievespecificgoalsthatwillcircumventone'sweaknesswithanother'sstrength.Alsocalledastrategicpartnership(Investopeida,2012).

Three&above Equity InitialPublicOffering

Thefirstsaleofprivatecompanystocktothepublic.Anunderwritingfirmhelpsdeterminetypeofissue,priceandtimingforthesale(Investopedia,2012).

One Neither Government

GrantsThesourceofthesefundsdoesnotrequirepaybackorequitystake.Theapplicationprocessisinvolved,isextensiveandmaycomewithstipulationsforuse,includingspecificuseorhiringasetnumberofpeople.SmallBusinessInnovationResearch(SBIR)grantsaremostcommon,althoughgrantsfromaspecificdepartment(i.e.,health,energy)areavailable.Thisisnotapopularformoffundingandisunlikelytoprovideenoughforthebusinesstoprogress(Wilson,June13,2011).

OneorTwo Revenueshare

Revenue‐basedFinancing

Oftendubbed"royalty‐basedfinancing",theconceptisfrequentlyusedbythefilmandnaturalresourcesindustrieswheninvestorsarepaidbackwithapercentageofgrossreceipts.Withnodilution,nolossofcontrol,andnofixedrepaymentschedule,entrepreneurscanstayfocusedongrowingtheirbusinesses.Itworkslikearevenuesharingagreement.Thisisideallysuitedforearlystagecompaniesthataregeneratingsales,butneedadditionalcapitaltotakefullpotentialoftheiropportunitiesandgrowasfastaspossible(Jones,2012).

  92 

 

AppendixC:SmallBusinessCapitalUsage

PublicUseMicrodatafromtheUSCensus2007BusinessOwnersSurvey(USCensus,

2012)forIllinoisandWisconsinprovideanindicationofthetypesandfrequencyofaccess

totheavailablefinancingresources.Thesurveyincluded47,639respondentsfromIllinois

and21,310fromWisconsin,providingatotalsampleof68,949.Sincerespondents

reportedallsourcesfromwhichtheyobtainedcapital,percentagesdonotalwaystotal

100%.OptionstoacquirenecessarycapitaltodevelopabusinessinStage0inthebusiness

lifecyclearefewand,notsurprisingly,personalsavings(66.6%)arethegreatestsourceof

capital.Almostonequarterofstartupsobtaincapitalthroughabankloan(FigureC1).

FigureC1:SourcesofStartupCapitalinIllinoisandWisconsin,2007

Source:U.S.CensusBureau,2007BusinessOwnersSurvey,PublicUseMicrodataSample

Intheexpansionphase,businessescontinuetousesavingsastheirmainsourceofcapital

(27.4%).Inaddition,anewsourceofcapitalexistsforfinancingbusinessoperations:

profits(18.7%)(FigureC2).

66.6%

23.4%

10.3%

9.3%

8.7%

4.7%

1.5%

1.4%

0.5%

0.2%

0% 10% 20% 30% 40% 50% 60% 70%

SAVINGS

BANK LOAN

ASSETS

CREDIT

EQUITY

FAMLOAN

GOVT GUARANTEE

GOVT LOAN

VENTURE

GRANT

        

  93 

 

FigureC2:SourcesofCapitalforBusinessExpansionsinIllinois&Wisconsin,2007

Source:U.S.CensusBureau,2007BusinessOwnersSurvey,PublicUseMicrodataSample

TheKauffmanFirmSurvey(KFS)providesdetailedpaneldataaboutstartupfirms.The

KFSbegancollectingdatain2004fromnearly5,000randomlyselectedfirmsthatwere

startedinthatyear.Withannualfollow‐upsurveys,KFStracksfirmsthroughtime.

Robb,et.al.,(2010)describedtheresultsoftheKFSdatafromstartuptosurvivingfour

yearoldfirmsin2008.TableC1displaysthesourcesofcapitalinjectionsatyear1and

year4forthefirms.Almost90percentofallfirms(3,125of3,564)useownerequityforat

leastaportionoftheirstartupcapital.Theseownerinjectionsaccountedfor36percent

($28,541of$80,359)ofaveragecapitalinstartupfunding.Acloselyrelatedsource,owner

debt(primarilycreditcards)isusedbymorethanone‐thirdofstartups,butthissource

accountsforonlyabout4percentofaveragecapital.Thus,ownerequityandpersonaldebt

representapproximately40percentofstartupcapitalinthesefirms.

Outsiderdebtaccountsforanother40percentofstartupcapitalaccordingtotheKFS

data.However,asmallerpercentageoffirms(about40percent)useitasasourceof

27.4%

22.7%

18.7%

12.9%

6.8%

4.9%

1.8%

1.0%

0.7%

0.2%

0.2%

0% 5% 10% 15% 20% 25% 30%

SAVINGS

BANK LOAN

PROFITS

CREDIT

EQUITY

ASSETS

FAM LOAN

GOVT LOAN

GOVT GUARANTEE

VENTURE

GRANT

        

  94 

 

capitalatstartup.Majorsourcesinthiscategoryincludepersonalbankloans,bank

businessloans,andlinesofcredit.

Capitalfrom‘insider’(friendsandfamily)sourcesrepresentsslightlymorethan10

percentofaveragestartupcapital.Insidercapitalcomesmostlyintheformofloansrather

thanequityinthefirms.

Outsiderequityisrarelyusedbystartupfirms,accordingtotheKFSdata.However,

whenthissourceisused,ittendstobeasignificantamountoffunding.Only26ofthe

3,564firmsthatusedcapitalsourcesaccessedventurecapital.However,theaverage

investmentforthesefirmswasmorethan$350,000.

Asfirmsmatured,theirsourcesofcapitalchanged.OfthefirmsintheKFSsamplethat

survivedto2008,abouttwo‐thirdsusedoutsiderdebtfornewcapital,accountingfortwo‐

thirdsofaveragecapitalinjections.Lessthanhalfofthesefirmsusedadditionalowner

equity.Ownerfunds(debtandequity)wereapproximately20percentoftheaveragenew

capital.

Evenasthesefirmsmatured,veryfewusedoutsideequityasacapitalsource.These

capitalsourcesareusedforlargerinjections,likelyinhighgrowthfirms.Thesevenfirms

thatattractedventurecapitalaveragedover$1millioninnewcapitalfromthatsource.

        

  95 

 

TableC1:SourceofCapitalInjectionsforKauffmanSurveyFirms

AllFirms:2004 SurvivingFirms:2008StartupCapital NewCapitalInjections

AllFirms JustFirmswith Source

>0

Number ofFirms withSource>0

AllFirms JustFirmswith Source

>0

Number ofFirms withSource>0

TotalNewFinancialInjections $80,359 $89,255 3,564 $78,049 $118,314 1,673Owner Equity $28,541 $36,134 3,125 $11,118 $34,557 781InsiderEquitySpouseEquityParentEquity

$1,700

$491

$1,209

$36,367

$30,732

$35,310

177

62

126

$541

$444

$97

$30,787

$38,729

$13,106

45

31

16OutsiderEquityOtherInformalInvestorsOtherBusinessEquityGovernmentEquityVentureCapitalEquityOtherEquity

$6,901

$2,793

$1,841

$466

$1,454

$347

$153,608

$107,685

$162,369

$85,664

$352,111

$189,561

205

110

56

27

26

9

$5,549

$2,255

$1,989

*

$1,119

*

$359,302

$317,338

$369,029

*

$1,011,097

*

49

27

14

*

7

*Owner DebtPersonalCreditCard–OwnerPersonalCreditCard–OtherOwnersOtherPersonalOwnerLoan

$3,487

$3,175

$288

$25

$11,322

$10,587

$8,995

$15,853

1,194

1,159

132

*

$4,836

$3,949

$182

$704

$19,827

$16,696

$12,056

$210,428

596

574

40

14InsiderDebt

PersonalFamilyLoan

PersonalFamilyLoan–OtherOwnersBusinessLoanfromFamily

BusinessLoanfromOwner

BusinessLoanfromEmployee(s)

OtherPersonalLoan

OtherPersonalFunding

$7,633

$2,670

$286

$1,350

$1,887

$69

$559

$812

$52,048

$28,398

$34,681

$43,909

$117,804

$19,349

$29,457

$64,514

542

327

29

115

67

9

73

50

$4,105

$1,964

$29

$528

*

*

$659

$132

$51,296

$32,376

$16,825

$29,356

*

*

$115,964

$18,004

191

140

9

38

*

*

16

24OutsiderDebt

PersonalBankLoan

BusinessCreditCard

OtherBankLoan

BusinessCreditCard–OtherOwners

BusinessCreditCards

BankBusinessLoan

CreditLine

OtherNon‐BankLoan

GovernmentBusinessLoan

OtherBusinessLoan

OtherIndividual Loan

OtherBusinessDebt

$32,097

$10,476

$1,394

$1,498

$167

$859

$10,060

$3,798

$2,040

$725

$187

$259

$634

$86,374

$61,086

$9,828

$65,010

$9,694

$7,383

$154,043

$71,429

$120,950

$84,303

$63,305

$49,512

$120,971

1,439

641

543

92

62

452

243

210

72

34

19

22

22

$51,901

$12,138

$3,655

$442

$270

$2,083

$14,710

$15,334

$1,761

$558

$638

$233

*

$121,512

$117,389

$13,770

$65,058

$14,125

$13,110

$258,366

$122,120

$163,832

$162,171

$210,733

$64,910

*

1,107

247

675

21

59

406

150

335

32

10

8

9

*Source:Robb,et.al.,(2010)analysisofKauffmanFirmSurveyMicrodata.Sampleincludesonlysurvivingfirmsoverthe2004–2008period,andfirmsthathavebeenverifiedasgoingoutofbusinessoverthesameperiod.Theoriginalsamplesizein2004was4,928.Note:*indicatessamplesizeislessthan7.

        

  96 

 

MasonandStark(2004)notedthatnewentrepreneursshouldbeawarethatthe

sourcesoffundingeachemphasizedifferenttypesofinformationandeachfundingsource

usesdifferentcriteriawhenreviewingastartup’sbusinessplan.Bankers,venturecapital

fundmanagersandbusinessangelseachprobethebusinessplanforspecificcriteriawith

differentweights.Thefundingproposalrequiresadaptationaccordingly.Thestart‐up’s

viability,potentialprofit,downsiderisk,likelylifecycletime,andpotentialareasfor

improvementarecentralissuesofconcernforallfundingrequests.

AnalysisoftheKFSdataalsoshowedthatabout13percentoffirmsinthesample

appliedforaloanin2008(TableC2)andmorethantwo‐thirdsoffirmsreceivedtheloans.

Themostcommonreasonsfordenialwerecredithistory,insufficientcollateral,and

requeststhatweretoolarge(Robbetal.,2010).

TableC2:BorrowingExperiencesofKFSFirmsin2008

NewLoanApplications 13.2%LoanApplicationOutcomeAlwaysApprovedSometimesApproved/SometimesDeniedAlwaysDenied

67.6%17.5%14.9%

ReasonsforDenial InsufficientCollateralLoanRequestTooLargeInadequateDocumentationBusinessCreditHistoryPersonalCreditHistoryBusinessisTooNewOther

42.2%28.0%15.6%33.3%45.0%15.7%14.7%

Didn’t applywhenneededcreditbecause thought theywouldbeturneddown 17.6%Source:Robb,et.al.,(2010)analysisofKauffmanFirmSurveyMicrodata.Sampleincludesonlysurvivingfirms(2,606).

AccordingtoRittenberg(2011),24millionUSbusinesseswithfiveorfeweremployees

havecapitalneedsoflessthan$35,000.Capitalprovidersincuranumberofcostswhen

makingloansrelatedtocreditchecks,loanapplicationanalysis,andprocessing.Becauseof

thesecosts,manyfinancingprogramsarenotcosteffectiveforthesesmallloans.This

        

  97 

 

posesasignificantchallengeintheefforttomeetnewsmallbusinesscapitalneeds

(Rittenberg,2011).

TheresearchbyMasonandStark(2004)andtheKFSdataindicatethatmanybusiness

ownerscouldbenefitfromtechnicalassistancetohelptheminobtainingcapital.Owners

withknowledgeaboutthetechnicalaspectsoftheirindustrymaynothavethefinancial

analysisskillsrequiredtoobtainfinancingfromoutsidedebtorequitysources.Assistance

fromanoutsideexpertinpreparingloanapplicationsorpresentationstoequityproviders

mightallowthemtosucceedmoreoften.

MagnitudeofStartupFinancing

TheamountofcapitalrequiredforsmallbusinessesbetweenStages0‐2canvary

significantly.FurtheranalysisofthedatafromtheBusinessOwnersSurvey(USCensus,

2012)providesdetailsregardingthecapitalneedsamongIllinoisandWisconsinstartups.

Onequarterofstartupsrequirelessthan$5,000andabouthalfofstartupsrequireless

than$25,000(FigureC3).Approximatelyoneinsevenstartupsneedsover$250,000in

capital.

        

  98 

 

FigureC3:CapitalNeedsforIllinoisandWisconsinStartups,2007

Source:USCensus,BusinessOwnersSurvey,2012

Whenconsideringtheindustrysectorclassificationsforstartups,theProfessional,

Technical,andScientificServicessectorrequirestheleaststartupcapital.Theservice

sectorismorelaborintensive(Acs,Armington,&Zhang,2007)whichmayexplainwhy

capitalrequirementsarelessthaninothersectors(TableC3).

TableC3:StartupIndustrySectorsbyCapitalNeed 

StartupCapitalNeed PredominateIndustrySector %Under$5,000 Professional,Technical&ScientificServices 27.26%$5,000‐$9,999 Professional,Technical&ScientificServices 19.78$10,000‐$24,999 Construction 16.51$25,000‐$49,999 RetailTrade 13.44$50,000‐$99,999 RetailTrade 14.86$100,000‐$249,999 RetailTrade 16.38$250,000‐$999,999 RetailTrade 16.36$1M+ Manufacturing 15.27

Source:USCensus,BusinessOwnersSurvey(2012)

Under$5K25%

$5Kto9,99911%

$10Kto24,99914%

$25Kto49,99911%

$50Kto99,99912%

$100Kto249,99913%

$250Kto999,99910%

$1Mormore4%

        

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AppendixD:SmallBusinessDebtOptions

Smallbusinessventurescanaccessfourmainsourcesofdebtfinanceduringtheir

developingandearlystages:personal(friendsandfamily)financing;bankfinancing,

(creditcards,linesofcreditandloans);tradecredit;andgovernment/non‐institutional

financing.TableD1providesanoverviewofthetypesofdebtfinancingavailablefor

businessesbystageofdevelopment.

TableD1:DebtFinancingAlternativesforBusiness

Stage DebtFinancingSources DebtFinancingTypesandDocumentsDevelopment Founders,friends,and

familyLoans‐ promissorynotesandloanagreements

SBAloanguarantees SBAguaranteedrevolverortermnote‐notesandloanagreements

Leases Equipmentvendors Promissorynoteswithhighinterestandcollateralized

bypersonalassetsOperating Banks Debt‐ loanagreementsandpromissorynotes Institutionalinvestorsand

privateequityMezzaninedebt,convertibledebt,orsecuritizations‐notes,debentures,loanagreements,conversionagreementsandwarrants

Equipmentvendorsandleasingfirms

Source:Walter,R.W.,FinancingYourSmallBusiness,2004,LibraryofCongressCataloging‐in‐Publication‐data.

PersonalSavings

Personalinvestmentisthemostusedsourceofcapitalintheinitialdevelopmentphase

ofasmallbusiness.TheSmallBusinessAdministration(SBA)reportsthatpersonalsavings

isthenumberonesourceofstart‐upcapitalforsmallbusinessesinStage0and,onaverage,

60%ofsmallbusinessfirmsseekingstart‐upcapitaluseacombinationofpersonaland

familysavings(SBA,2011).Personalsavingsandresourcessuchascreditlinesthat

borrowagainstpersonalassetsallowanownertomaintainthemostcontrolofthe

business(Lopez‐GarciaandAybar‐Arias,2000;BlumberandWilko2008).Evenwhen

        

  100 

 

financingfrompersonalfundsisstructuredasaloan,financialinstitutionsfrequentlyview

itasequitybecausetheownerloansaresubordinatetoothertypesoffinancing.

DatafromtheUSCensusBusinessOwner’sSurvey,2007(USCensus,2012)showthat

virtuallyallstartupsusesavingsastheprimarysourceofcapital.Dependingonthe

amountofcapitalneeded,thesecondaryandtertiarysourcescouldvary(TableD2).

TableD2:SourcesforCapitalBasedonAmount 

StartupCapitalNeed PrimarySource

SecondarySource

TertiarySource

Under$5,000 Savings Credit BankLoan$5,000‐$9,999 Savings BankLoan Credit

$10,000‐$24,999 Savings BankLoan Credit$25,000‐$49,999 Savings BankLoan Credit$50,000‐$99,999 Savings BankLoan Equity$100,000‐$249,999 Savings BankLoan Equity$250,000‐$999,999 Savings BankLoan Assets$1M+ Savings BankLoan AssetsSource:USCensus,BusinessOwnersSurvey(2012)

Friends&Family

Investmentfromfriendsandfamilywithanestablishedrepaymentplanisconsidered

debt,asopposedtoanequitypositionwiththecompany,sharingprofitsfromthefirm.

Friendsandfamilymayproviderelativelyeasytoaccessloans,usuallyinadditionto

personalinvestment(Walter,2004).Firmswithalackoftangibleassets(i.e.,noasset

structure)tendtorelyoncapitalfromlessformalmeanssuchasfriendsandfamily

(Cassar,2002).

Whilefriendsandfamilycanprovideavailablefunding,LeeandPersson(2012)found

thatentrepreneurstypicallyusethissourceoffundingasalastresort.Itcanbeevenmore

unattractiveinriskyventuresandinlargeinvestmentsthatcanconstraingrowth.In

addition,imposingrisksonfamilyandfriendsisunappealingandhaspotentialrelationship

        

  101 

 

repercussions.Inarandomsampleof1,498Illinoissmallbusinessowners,only16.5

percentreportednegotiatingloansfromfriendsorfamily(Neely&VanAuken,2012).In

thenationalKauffmanFirmsurvey,in2004,15.2percentofcapitalinjectionstonewfirms

involveddebtfromindividualswithpersonalconnectionstotheentrepreneur(Robbetal.,

2010).

BankFinance

Externaldebtfinancingforsmallfirmsfollowsthestartofthebusiness.Establishedand

operatingentrepreneurstypicallyseekbankfinancingotherthanbank‐ownedcreditcards.

Entrepreneurspromotetheirnewventurebyestablishingacrediblepersonalcommitment

tothebusiness.Businessownersshouldprovidecrediblecommitmentsandsignalstothe

banktoincreaseconfidencethatthebusinessislikelytosucceedandbeabletorepaythe

loanevenifitfails(Avery,etal.,1998;BlumbergandWilko,2008).Personalcollateral

commitments,suchashomeownershiporotherinvestmentpropertyarepreferredby

banks(BlumberandWilko,2008).ThishasbecomeanissueduringtheGreatRecession

whenthemarketvalueofhomesdeclined.Inaddition,incorporationofthebusinessand

assetsecureddebtincreasesthelikelihoodtoreceivebankcapital(Cassar,2002).

Theapproachtoevaluatingbusinesslendingbytraditionalfinancialinstitutionscanbe

categorizedinfourways–“financialstatementlending,asset‐basedlending,creditscoring,

andrelationshiplending,”(BergerandUdell,2002).Often,newbusinessesdonothavea

clearandstraightforwardfundingarrangement,whichimposesadditionaldifficultiesand

costsonlendinginstitutionsandlimitsaccesstofinancialstatementlending.Financial

statementlendingiswhenabankloansfundsbasedonthestrengthofafirm’s

performanceasindicatedbytheirfinancialstatements.

        

  102 

 

Asset‐basedlendingisalsoaffectedbyinadequateorunclearfinancialinformation.

Cassardescribestheimportanceofassetstonewbusinessstartsandnotesthat,“dueto

performancecontractingmechanismofbanks,severalauthorssuggestthatfinancingwill

dependuponwhetherthelendingcanbesecuredbytangibleassets”(Storey,1994;Berger

andUdell,1998,Cassar,2002).Tohaveassets,abusinessmuststart,growandbeinthe

operationstage.Assetlendingcanbeveryexpensivetomonitorforlendersandcanbe

relativelyexpensiveforsmallbusinesspurchases(BergerandUdell,2002).

Creditscoringandrelationshiplendingarebettersuitedtoaddresstheissueofunclear

financialinformation.Creditscoringplacesheavyweightonthecreditworthinessofthe

ownertogaugetheabilitytorepayloans(BurgerandUdell,2002).Theapproachisused

moreofteninfinancingmicro‐businesseswithloantotalsof$50,000orless.

Relationshiplendinglargelybasesloandecisionsonproprietaryinformationaboutthe

firmanditsownergatheredthroughavarietyofcontactsovertime(OngenaandSmith,

2001;Giannetti,2012).Otherinformationaboutthefirmorownersfromsuppliers,

customers,andcommunitymembersmayalsoprovidelenderswithamoregeneralsense

ofthebusinessenvironment.“Importantly,theinformationgatheredovertimehas

significantvaluebeyondthefirm’sfinancialstatements,collateral,andcreditscore,helping

therelationshiplenderwithinformationalopacityproblemsbetterthanpotential

transactionlenders.”(BurgerandUdell,2002).

        

  103 

 

CommunityBanks

Communitybanksareinstitutionswithlessthan$1billionintotalassets.“Small

businessesconsistentlyappearmorewillingtoaskforcreditwhentheirbankisaregional

orcommunitybank(andtheyappeartobemoresuccessfulintheirrequests)”(Dennis,

2012).Communityorsmallbanks’greaterrelianceonrelationshiplendingcanhelp

addresssomeissuesassociatedwithlackofclearinformation,whichmayleadtohigher

ratesoflending.AccordingtoBergerandUdell(2002),“asmallbankmaybeabletoresolve

somecontractingproblemsassociatedwiththerelationshiplendingbyeliminatinglayers

ofmanagementandreducingtheagencyproblemsbetweentheloanofficerandsenior

management”.

FDICCallreports,basedondeposits,illustratethesignificantpresenceofcommunity

banksintheSOI(FigureD1).OfalldepositoryinstitutionsintheSOIregion,community

banksarethemostcommontypeofinstitution.Decreasesintotalassetsfrom2007to2011

didnotchangethefactthatsmallcommunitybanksrepresentedthelargestnumberof

institutionsandprincipallendingsourceforsmallbusinessloans.

        

  104 

 

FigureD1:BankSizeinSOIRegion

Source:FederalDepositInsuranceCorporation,2011CallreportdatacompiledbyNIU‐CGS.

“Whilecommunitybankswithassetsunder$1billionrepresentlessthan11%of

bankingassets,theyprovidenearly40%ofloansbythebankingindustrytosmallbusiness,

extendingcreditthatiscrucialtojobcreationtheyhaveauniqueroletoplayinour

financialsystem,”(FDIC,2007).Comparedwithlargercounterparts,communitybanksin

theSOIissuedasignificantlyhigherportionoftheirloanstosmallbusinesses(FigureD2)

(FDIC,2011).

67.3%

9.1%

18.2%

5.6%

70.7%

5.2%

20.7%

3.5%

Small Banks ( <$1.122 billion inassets)

Intermediate Small Banks (assetsbetween $1.22 billion and 2.8

billion)

Assets between $2.8 billion and 1trillion

Assets > $1 trillion

2011 2007

        

  105 

 

FigureD2:SmallBusinessLoansasaPercentageofTotalLoansinSOIRegion

Source:FederalDepositInsuranceCorporation,2011CALreportdataanalyzedbyNIU‐CGS.

TheFDICinJanuary,2011convenedaforumon“OvercomingObstaclestoSmall

BusinessLending.”CongressmanSpencerBachus,ChairmanoftheHouseFinancial

ServicesCommittee,recognizedtheimportanceofcommunitybanksinhisopening

remarks:

…whilefailurespeakedin2010,theFDIC'slossesweredownbecausesmallerinstitutionswerefailing.Thefactthatsmallercommunitybanksarefailingcanbepartiallytracedbacktogovernmentpoliciesthatgaveourtoo‐big‐to‐failinstitutions,inmyopinion,acompetitiveadvantage.Thefactthatcommunitybanksarefailingwillhavedisastrousimpactonsmallbusinessesgoingforwardbecausethesesmallbanksaremorelikelytoextendcredittosmallbusinessesthantheirbigbankcounterparts.(FDIC,2010)

FDICActingChairmanMartinGruenbergnotedtheimportanceofcommunitybanksin

hisaddresstotheAmericanBankersAssociationAnnualmeetingonOctober25,2011

whenhestated,“theFDICisgoingtoundertakeanumberofinitiativestofurtherour

understandingofthechallengesandopportunitiesforcommunitybanksandtoconveythe

importanceofcommunitybankstotheFDIC’smission.”(Gruenberg,2011).Thelarge

10.0%

3.8%

3.8%

2.3%

10.7%

4.0%

4.4%

2.1%

Small Banks ( <$1.122 billion in assets)

Intermediate Small Banks (assets between$1.22 billion and 2.8 billion)

Assets between $2.8 billion and 1 trillion

Assets > $1 trillion

2007 2011

        

  106 

 

presenceofcommunitybanksintheSOIpresentsanopportunityforeconomic

developmentpractitionersandbankrepresentativestocollaborateandbettermeetthe

needsofsmallbusinesseswithfurthergrowthintheregion.Animportantrolemayremain

foracommunitybankthathasanadvantageoverlargebanksinextendingloanstosmall

businesses.Theirlocalrootsandknowledgeofthelocalcommunityandtheentrepreneurs

whorunlocalbusinessesmaybecriticalinprovidingthetypeofrelationship‐drivenloans

thatmanysmallbusinessesneed.

SmallBusinessAdministration

CommercialbanksmayhesitatetolendtobusinessstartupseventhoughtheSmall

BusinessAdministrationprovidesloanenhancementsandgrantstoencouragecapital

accessforsmallbusinesses.TheSBA7aand504loanenhancementprogramsareavailable

tobankstohelpreducetherisksthatmayotherwiseprohibitthemfromlendingtosmall

firmsintheirearlystages.

Inadditiontobanks,theSBAprovidesaccesstoloanenhancementprogramstocredit

unions,communitydevelopmentfinancialinstitutions(CDFI’s),andcommunity

developmentcorporations(CDCs).“Surprisingly,smallfirmsdonotfinancetheir

investmentsignificantlymorefromgovernmentsourcesordevelopmentbanksdespitethe

factthatsuchprogramsareoftenpoliticallyjustifiedasincreasingfinancingforsmall

firms”(Beck,etal.,2003).

CDFI’soffermicroloans,financialservicesandbusinesstrainingtoentrepreneursand

underprivilegedpopulations.Theorganizationsprovideslendingservices,oftenbackedby

SBAloanenhancementsbasedonfinancialstatusofapplicantandofferstailoredmade

repaymentplanstomeettherequirementsofcustomers.CDFIscanhelpunderprivileged

        

  107 

 

andruralcommunitiesbyofferingsavingsaswellascreditprogramsthatteachmoney

managementskills.Apartfromconventionalloanprograms,CDFIsprovideseveral

insuranceplans,whichhelpmeetfinanciallossescausedbyfireornaturaldisasters.

AnanalysisoftraditionalcapitalactivitiesbyFDICrecognizedinstitutionsandSBA

backedloanactivityintheSOIillustratestheimpactsoftheSBAproducts.BasedonSBA

informationregarding7aand504loansintheSOIandtheFDICreportedactivity,loansin

theSOIincreasedeachyearfrom2008to2010despiteadverseeconomicconditions(SBA,

2011;FDIC,2011).TotalSBAapprovedloansincreasedandtheamountslentincreased

also.

FigureD3:SBA7a&504‐NewJobsvs.TotalLoansinSOIRegion

Higherlendingmeantmorejobscreatedandretained.(TableD3).Whiletotalloans,

loanamounts,andjobsincreasedintheSOI,theaverageloanamountwassubstantially

lowerthaninthecombinedstateaverages.AccordingtoSBAreports,SOIbanksissueda

totalof$91,895,433in7aand504backedloansin2010withanaverageof$387,744per

loan,comparedtoacombinedstateaverageof$821,661(SBA,2011)makingincreased

0 100 200 300 400 500 600 700 800 900

7A Loans

7A Jobs

504 Loans

504 Jobs

7A Loans 7A Jobs 504 Loans 504 Jobs

2010 207 820 30 279

2009 169 537 18 158

2008 187 402 28 239

        

  108 

 

accesstoSBAloansintheSOIanimportantconsiderationforbothaccesstocapitalandjob

creation.

TableD3:JobsCreated&RetainedbySBA7aLoanSizeinSOI

2008 2009 2010NewEmployeesPerLoan 1.2 2.6 2.9RetainedEmployeesPerLoan 3.2 6.3 3.5SOI7AAverageLoanAmount $86,148 $117,817 $176,334

SBAprogramsresultedinanincreaseofsmallbusinessloansandjobscreated,but

preliminaryfindingsfromIllinoisrespondentsoftheSOISmallBusinessCapitalAccess

Surveysuggestthatmoreimprovementsareneeded.Morethanone‐third(36%)reported

nouseofthe7aprogramandslightlymorethanone‐half(56%)madeonly1to10loansin

thepast12months.IllinoisbankersreportedtheneedforimprovementsintheSBA

programsincludinghigherguarantees,lesspaperworkinmakingloans,andeliminationof

fees.WhileSBAprogramsmayneedimprovementsbasedonthesurvey,theyhavebeen

effectiveinprovidingcapitaltoSOIsmallbusinesses.

SupportedDebtFinance

Additionalsourcesofdebtfinancingareavailablefromavarietyofgovernmentassisted

and/ornot‐for‐profitfinancialentitiesthatprovidediverselowinterestloanprogramsto

meetawiderangeofsmallbusinessstart‐upneeds.Atthenational,state,andevenlocal

levels,thereareprogramsfocusedonencouragingsmallbusinessgrowth.Theseprograms

areusuallylowinterestloans,oftenbackedbyfederalprogramsorgrants.Community

DevelopmentFinancialInstitutions(CDFI)andrevolvingloanfunds(RLF)aretwocommon

toolsusedatthemunicipalorcountyleveltosupportbusinessdevelopmentdirectly.Both

governmentandnon‐governmentalorganizationsprovideminoritygroupsortarget

        

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industriessuchastechnologyinnovationwithdesignatedfundinginresponsetoidentified

needsintheregion.

Basedondiscussionsinafocusgroupmeetingwithfinancialinstitutionrepresentatives

intheRockfordarea,creatingamorecompletefinancialdeliverysystemwithbetter

coordinatedprogramsisanimportantopportunityintheSOI.Theregionhasaccessto

severalprogramsmostofwhichprovidewaystoabsorbriskandincreasecapitaltogrow

smallbusinesses.Compilingandspreadingmoreinformationabouttheseprogramswithin

theSBDCs,incubators,accelerators,economicdevelopmentorganizationsandother

serviceproviders,includingbanks,wouldincreaseopportunitiesforfundingadditional

businessventures.

TradeCredit

Tradecreditis“acriticalsourceoffinanceformanysmallbusinessesbutisoften

ignoredwhenassessingcreditavailability,andonethatcanbeinterchangedwithcredit

fromfinancialinstitutions”(Dennis,2012).Tradecreditoccurswhenonebusinessdelivers

agoodorservicetoanotherbusinesswithanagreementtobepaidlater.Effectively,the

sellerloansmoneytoabuyerbynotrequiringcashatthetimeofdelivery.Tradecredit

termsremaineconomicalifnegotiatedandmonitoredcarefullytolimitthecostofcredit.

Unlikebankloans,tradecreditisexpectedtoberepaidwithindaysorweeks.“Forty‐

seven(47)percentofsmall‐businessownersacknowledgeusingtradecredit;46percent

donot,and7percentdonotknow(Q#21).The7percentnoanswersarelikelylightor

non‐users”(Dennis,2012,p.37).Resultsofrecentsurveysshowthatthoseusingthemost

tradecredithavehadtoincreaselinesofcreditandloansduetotighteningoftradecredit.

Thetighteningislikelytoreflectstrainfromlackofpayment.

        

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Tradecreditisespeciallyimportanttobusinesseslackingaccesstobankcapital.During

recessions,businessesseektradecreditwhenbankfinancingmaybeunavailable(Loveet

al.,2007).Businessesmayfindtheirproductsuppliersmorewillingtoextendcreditthan

formalfinancialinstitutionsbecausesuppliershavemorecompleteinformationabout

businessesthanbanks(Burkart&Ellingsen,2004).Tradecreditalsoprovidesameansfor

large,credit‐worthysupplyingbusinessestopasstheirfinancialaccessthroughtosmaller

purchasers(Boissay&Gropp,2007)andlargesuppliersoftenprovidediscountsforearly

paymentinordertoreducetherisksoflending(Klapperetal.,2011).

Microfinance

Microfinanceagenciesprovidefinancialservicestopopulations,suchasthosein

poverty,withoutaccesstotypicalbankingservices(Hojeetal.,2009).Startedasa

movementtowardssocialresponsibilitytoeliminatepovertyindevelopingcountries,

microloanprogramshavebeenadaptedintheUSandenableindividualstostartbusinesses

withoutaccesstotraditionalbankcapital.Microloansaremadeinsmallamountswithhigh

interestratesoverashortterm(Hojeetal.,2009).Mostoftheentrepreneursreceiving

microloanswillnotbecomelargeemployersintheregionbut,nevertheless,canemploy

severalworkerswhichisimportantinsmallruraleconomies.

MicrofinancingorganizationsrepresentasmallfractionoftheUSfinancialmarketbut

theirtotalloansincreased68percentbetween2002and2008(Klein,2010).Small

businessmicroloansaveragedapproximately$9,000,withamaximumamountof$35,000.

Whenthesupplyoftraditionalbankloansforsmallbusinessesdecreased,microfinancing

organizationsincreasedtheirlendingactivity(Klein,2010).

        

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Differentapproachestoofferingmicroloansexist,includingperson‐to‐personaswellas

asecurityornotefromamicrofinanceinstitutionthatcreatesthefund.Foranexampleof

person‐to‐personmicrolending,www.Prosper.comallowsindividualstolisttheirneeds

forloansbetween$2,000and$25,000andinvestorsprovideloansatinterestrates

contingentonameasureofinvestmentriskcalculatedbythewebsite.

Non‐profitorganizationsoftenactasintermediariesbetweenacquiringtheinvestment

andprovidingtheloan.TwolargeUS‐basedonlinemicrofinanceinstitutionsare

MicroPlace(https://www.microplace.com)andKiva(www.kiva.org)bothofwhichprovide

onlinenetworksconnectingborrowersandinvestors(Hoje,etal.,2009).

MainehasbeenespeciallyactiveinworkingwiththeSmallBusinessAdministration

usingprogramssuchasIncubatorsWithoutWalls(www.whcacap.org/index.php).These

programsaredesignedtoprovidelowcostorfreetrainingprogramsforentrepreneursand

individualsinterestedinlaunchingabusinessventure.ArelatedexampleisMaineStream

Finance(mainestreamfinance.org)whichoperatesasaCommunityDevelopmentFinancial

Institution.

        

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AppendixE:SmallBusinessEquityOptions

Crowdfunding

Arelativelyrecentfundingalternativethatisgrowinginpopularityforsmallbusinesses

andmicroenterprisesasanequityapproachiscrowdfunding‐theprocessofraisingmoney

fromagroupofpeople.Crowdfundingmodelsincludethoseforfinancialreturn(equityand

lending)aswellasforprojectsthatappealtothepersonalbeliefofthefunder(donation

andreward).Crowdfundingexpandsthe“friendsandfamily”stage,addinginvestment

frompeopleunknowntotheentrepreneur.

While‘donationandreward’crowdfundinghasgoneoninthepastintheUS,equityand

lendingcrowdfundingwillexpandin2013.TheCrowdfundingAct,signedasacomponent

oftheJumpstartOurBusinessStartups(JOBS)ActsignedonApril5,2012byPresident

Obamahasopenedopportunitiesforentrepreneursandbusinessstartsbyremoving

regulatorybarrierstoraisingcapitalfrominvestors.Theamendedrulesallow

entrepreneursandnewventurestosolicitfundingwithlimitedSecurityandExchange

Commission(SEC)filings,andwithlimitedopportunitiestoadvertiseandpromotethe

offering(Anthony,2012).

ThoseseekingfundingthroughcrowdfundingmustfilewiththeSECandinclude

informationsimilartowhatabankwouldrequireforaloan(Anthony,2012):

Namesandcontactinformationforowners,directors,andofficers;

Businessplanoftheissuer;

Financialstatementsand/orincometaxreturns

o Forofferingsof$100,000orless,acertificationbytheprincipalexecutivethatthefinancialsarecorrect

o Forofferingsbetween$100,000and$500,000,financialsmustbereviewedbyaCPA

        

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o Forofferingsabove$500,000,financialsmustbeaudited

Adescriptionofintendeduseofthefunds;

Adescriptionofthevalue(includingfuturevaluationmethods)ofcrowdfundedshares,rightsofcrowdfundedshareholders,andhowthesevaluesandrights;mightbeaffectedbyotherownership/capitalstructureofthefirm;and

Otherriskfactors.

Equityandlendingcrowdfundingplatformsallowcompaniestosellshares,upto

$1milliontoanyinvestorina12‐monthperiod.Theannualincomeofthecompanyisthe

basisfortheallowableamountofinvestments.Forthoseinvestorswithlessthan$100,000

annualincomeornetworth,theirinvestmentlimitisthegreaterof$2,000or5%oftheir

networthorannualincome.Forinvestorswithmorethan$100,000annualincomeornet

worth,theallowableamountforinvestmentisupto10%oftheinvestor’sannualincome,

nottoexceed$100,000(Rotblut,2009).

TheNationalCrowdfundingAssociation(NLCFA)(2012)wasformedpriortheJOBSAct,

withamissiontosupport,promote,andeducatethecrowdfundingmarket.Services

includeorwillincludenetworkingandcollaboration,groupgrowth,support,operations

anddealmanagement,professionaldevelopmentandindustrytrendsaswellaspublic

policyinvolvementthatsupportandpromotecrowdfunding.Whilecrowdfundingis

relativelyrecent,itopensentrepreneurstoamuchbroadrangeoffundingsupport.

AngelInvestors

Angelinvestorsusetheirwealthtoinvestinanewbusinessopportunityattheearliest

stagesinreturnforastakeinownership.Theseinvestmentscomeintheformof

convertibledebtorpreferredstock.Interestincompaniesthatwillprovidealargegain

whensoldorgoingpublicispreferredover“lifestyle”companiesthathavelimitedearnings

        

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potential,includinglocalrestaurants,retailshopsorsmallconsultingfirms(DeBaise,

2010).AngelinvestorsaccreditedbytheSecuritiesandExchangeCommissionprovide

entrepreneurswiththeassuranceofinvestinglong‐term;unaccreditedinvestorscan

withdrawinvestmentatanytimeresultinginfinancialdistressofthenewbusiness

(Gaebler.com,n.d.)

Angelinvestorsareusuallyinterestedinseedingstart‐upcompanies,ofteninindustries

wheremembershaveexperience.Asidefromfinancialsupport,angelsinvestbyproviding

timeandexpertisetohelpthemsucceed.Much,ifnotmost,oftheangelinvestment

occursinmajormetropolitanareasbut,dependingonwheretheinvestorsarelocated,can

occurinruralareasaswell.Thetasksassociatedwithfindingworthyinvestmentsrequire

dealsourcing,readingbusinessplans,conductingduediligence,engaginglegalsupport,

andmonitoringinvestmentstodeterminefollow‐onorexitstrategies,allofwhichcanbe

time‐consumingandexpensive(Mercil,2006).

PrioritiesforAngelInvestors

Whenconsideringinvestmentopportunities,25prioritiesforangelinvestorswere

studiedbySudek(2006;2007)andthefindingsshowfourtoppriorities:1)

trustworthinessandhonestyofanentrepreneur,2)themanagementteam,3)enthusiasm/

commitmentoftheentrepreneur,and4)potentialexitroutes(potentialliquidity).

Thelowestprioritiesforangelinvestorsare25)opportunityforinvolvementinthe

company,24)alignmentofinvestor’sexpertisewithgapsinthebusiness,23)abilityto

reachbreak‐evenwithoutfurtherinvesting,and22)sizeofinvestment.Businessangels’

investmentemphasisisclosertoVentureCapitalFundManagersthanbanks.Wiltbank

(2005)appliedtheVentureCapitalmodelofinvestmentvariablestoangelinvesting

        

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practicestoevaluatehowthevariablesaffectangelinvestoroutcomes.Themodelcould

notconsiderothervariablesthatareimportanttoangelinvestorssuchasmanagement

talentandexecutionprocesses.Basedonthecomparisons,angelinvestorsexperience

fewernegativeexitswheninvestingintheearlierstageofthebusinesslifecyclesincethis

stagefitstheangelinvestors’expertise.Morepost‐investmentparticipationalsorelatesto

fewernegativeexits.Themedianofnegativeexitsoccurredat3.5yearswhilethemedian

timeforsuccessfulexitsis5.8years.

However,sinceangelsareindividualfunders,emphasisisonsuitabilitywithpersonal

investmentcriteria.Thisrestrictsanangel’sinvestmentconsiderationtothoseindustries

andmarketsforwhichheorshehassomepriorknowledgesoastominimizeriskwiththe

investmentdecision.Businessangelinvestorsseekpersonalsatisfactionfromtheir

investmentsandthusentrepreneursmayhavetoappealtoangelinvestorsonanemotional

level.

AngelInvestmentTrends

TheCenterforVentureResearchconductsnationalresearchonequityfinancingby

angelinvestorsforearlystageentrepreneurialventures.Duringthepasttenyears,the

totalnumberofentrepreneursfundedbyangelinvestorsincreased54.3%;activeinvestors

increased62.7%andtotalinvestmentdollarsincreased69.7%(TableE1).Theimpactof

theGreatRecessionduringtheyears2007‐2009isshownbyadecreaseininvestment

dollarsfromthepreviousyear.Inthetwomostrecentyearsforwhichdataareavailable

(2010‐2011)totalinvestmentdollarshadreturnedto2004levels.

        

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TableE1:AngelInvestmentsforNewEnterprises2002‐2011

Year TotalEntrepreneurs

ActiveInvestors

Totalinvestment

($B)

Increase/Decreaseoverprioryear

2011 66,230 318,480 $22.5 12.10%2010 61,900 265,400 $20.1 14.00%2009 57,225 259,480 $17.6 ‐8.30%2008 55,480 260,500 $19.2 ‐26.20%2007 57,120 258,200 $26.0 1.80%2006 51,000 234,000 $25.6 10.80%2005 49,500 227,000 $23.1 2.70%

2004 48,000 225,000 $22.5 1.24%2003 42,000 220,000 $18.1 14.00%2002 36,000 200,000 $15.7 ‐47.70%

Source:CenterforVentureResearch,2003;(Sohl,2004‐2012).

AdditionaldatafromtheCenterforVentureResearch(Sohl,2004,2005,2006,2007,

2008,2009,2010,2011,2012)providestrendinformationregardingwhereangel

investorsdirecttheirinvestments,withstartupsandpostseedbusinessestrending

similarlythrough2008.New,firsttimeinvestmentrepresentedmorethanhalfofthetotal

investmentinnewbusinessesthrough2008.

Atthedepthsoftherecession,in2009and2010,angelinvestorsshiftedtheirfocus

awayfromstartupsandamajorityoftotalangelinvestmentwenttoestablished,post‐seed

businesses.In2011,thepercentageoftotalangelinvestmentgoingtopost‐seed

businessesdecreasedastheshareofinvestmentinstartupsincreased.Thissuggeststhat

angelinvestorshavebegunredirectingtheirattentiontonewbusinessesastheeconomy

improved.Althoughthemajorityoftotalangelinvestmentintherecessionwasin

establishedbusinesses,themovementawayfromsupportingstartupsappearstobea

resultofthebusinesscycleratherthananew,long‐termtrend.

        

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FigureE1:Startupvs.PostSeedInvestingTrends,2007‐2011

Source:CenterforVentureResearch,AngelMarketAnalysisReports2005‐2011.

Angelinvestorsexitmorefrequentlyviamergersandacquistionsthanthrough

bankruptcieswhichmaybebecauseofthegreaterexpertiseofinvestorsandsome

involvementinmanagementdecisions.Inthemostrecentyearforwhichdataareavailable

(2011),thefiguresshowbothexitsareattheirlowestpointsoverthepastfiveyearswhich

mightbeunexpectedduringaweakeconomicrecovery(FigureE2).

FigureE2:AngelExitTrends,2007‐2011

Source:CenterforVentureResearch,AngelMarketAnalysisReports2005‐2011.

55.0%46.0%

39.0%

45.0%

35.0% 31.0%42.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005 2006 2007 2008 2009 2010 2011

Startup Post seed/startup

0%

10%

20%

30%

40%

50%

60%

70%

80%

2007 2008 2009 2010 2011

Mergers & Acquistions Bankruptcies

        

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FindingAngelInvestors

Accesstoangelinvestorsisnotlimitedtolocalindividuals,resources,orgroups.More

recently,angelinvestorshavecreatedorganizationsthatformalizeequityfinancingfor

entrepreneurs.TheKauffmanFoundationprovidedseedfundingtosupportthecreationof

theseorganizations.ExperiencedleadersintheAngelCapitalAssociationareassembling

bestpracticesinstartingandoperatinganetworkofangelinvestors,developing

disseminationvehiclesforthisinformationaswellasquantifyingangelinvestor

organizationsandoperations(Payne,n.d.).Thisadditionalinformationshouldfacilitate

connectionsbetweenentrepreneursandpotentialangelfundingopportunities.

Gust

Gustisacomputersoftwareplatformformanagingdealflowsusedbymorethan750

angelgroups,venturefundsandotherinvestmentorganizationsworldwide.(AngelCapital

Association,2012).EntrepreneursuseGusttoolstofacilitatetheprocessesoffundingand

sponsoringnewbusinessstartups.AccordingtotheGustwebsite,(www.gust.com)more

than50,000applicationsforfundingsupportfromentrepreneursin34industrieswere

receivedduringthepast12months,indicatingthevolumeandappealofthisapproachand

morethan35,000affiliatedinvestorsusedthisplatform.Investorscanbrowsebusiness

reviewsandgaugeinterestonasecureandprivateplatform.Messageboardskeepalldeal

informationinonecentrallocationsothatfilesharingofbusinessplansandfinancialson

Gustcanoccur.Applicantsprovideaone‐pageoverviewforeasybusinesscomparisons.

Email,weborcustomizableapplicationscanmatchthedealflowprocess(Gust,2012).

        

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RAINSourceCapital

RAINSourceCapital(2011)organizesangelinvestorswhohaveinterestinsupporting

growingcompanies.RAINSourceformsindividualfunds,addsothercapital,andshares

expertisefromamongandbetweenfundsthattheymanage.Anaverageinvestmentfrom

angelsaveragesbetween$25,000and$100,000inafundanditismember‐ledwitha

specificindustryfocusforthefund.Usuallycompaniesthatalreadyhaveraisedcapital,

includingfriendsandfamilyresources,andwiththepotentialinfiveyearstobea$10

millioncompanyareconsidered.

RAINfundscanbenefitsmallercommunitiesthatarenottargetsforotherequity

resources.RAINSourceCapitalcreatessustainableinvestmentfunds,alongwithproviding

expertisetogrowbusinessesthatcreatejobsandbuildlocalwealthaswellasrecruitand

fostercompaniespayinghighwages.Asof2011,RAINcurrentlyhadeightinvestment

fundsthatmeetactivelywithentrepreneurs(RAINSourceCapital,2011).Fourofthese

fundswereinMinnesotaandtheotherswereinIdaho,Montana,andSouthDakota.

CimarronCapitalPartners

Anotherapproachtoenhancinginvestmentactivityinaregionwhilemaintaininga

competitivereturnoninvestmentispossiblethroughthe“fundoffunds”modeldeveloped

byCimarronCapitalPartners(CimarronCapitalPartners,2012).Underthe“fundoffunds”

model,aregionalinvestorsuchasastategovernmentinvestsmoneyinmultipleventure

capitalfundswiththeintentofpromotingeconomicdevelopmentwhilereceivingareturn

onpreviouslyidlecash.Withinterestinseedtoearlystagebusinessfunding,Cimarron

CapitalPartnersworkwithstatesorregionstodevelopfundinginsupportofthe

entrepreneurialecosystemandattractinginvestment.ClientsincludetheArkansas

InstitutionalFund,IowaFundofFundsandOklahomaCapitalInvestmentBoard.

        

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TheIowaFundofFundsinvestsinsevenprivateventurecapitalfundsspecializedin

industriessuchasmanufacturing,consumerservices,healthcare,andeducation(Iowa

CapitalInvestmentCorporation,2013).TheArkansasInstitutionalFundhasaportfolio

includingmainlyventurecapitalfundsthateithersupportanArkansasbusinessorare

basedinthestate(ArkansasVentureCapitalInvestmentTrust,2012).TheOklahoma

CapitalInvestmentBoardhasaportfolioof19venturecapitalfundsincluding16firms

withanofficelocatedinthestate(OklahomaCapitalInvestmentBoard,2013).

VentureCapital

Aventurecapitalistisaprofessionalinvestorwithinterestinbuildingearly,innovative

businessesandactivelyworkingwiththeentrepreneurialmanagementteam.Venture

capitalinvestorsmanageaninvestmentfundraisedfrominstitutionalinvestorssuchas

pensionfunds,insurancecompanies,endowments,andfoundations.Asmanagersofthe

fund,venturecapitalinvestorsare“generalpartners”havingresponsibilitytothe“limited

partners”thosewhoinvestthemoney.Theventurecapitalfundmanager,withthetrust

andconfidenceoflimitedpartners,managesandprotectsthelimitedpartners’money,

whenmakinginvestmentsofatleast$5millioninnewbusinesses.

In2010,theUnitedStateshad462activeventurecapitalfirms,down55%sincethe

heightofthetechnologybubblein2000(NationalVentureCapitalAssociation,2012).

Venturecapitalfundinvestorstypicallyexpectrepaymentwithin3to7yearsthrough

eitherbuy‐outbyanothercompanyorgoingpublicandsellingsharesthroughaninitial

publicoffering(FundingPost.com,n.d.).

PrioritiesforVentureCapitalInvestment

Venturecapitalistsexpectahigherrateofreturnthantraditionalinvestors,typically

25%ormore(Ward,n.d.).Earlystagebusinesseshavedifficultyattractingventurecapital

        

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withoutareasonablecashflow,whichusuallyoccursinStage2:Earlygrowth.Earlystages

makepredictingsuccessmoredifficultduetotheinstabilityofthebusiness,unknown

marketsandlackofrecordofaccomplishment(Grupt&Sapienza,1992inWiltbank,2005).

Venturecapital(VC)fundscanspecializeaccordingtothelifecyclestage;however,

avoidingseedstage7fundingistypicalofmanyventurecapitalorganizations(FigureE4).

AccordingtoinformationfromThomsonReuters,in2011,theventurecapitalfundswere

splitbyapproximatelyone‐thirdinearlystage,expansion,andlaterstage.

FigureE3:VentureCapitalInvestmentbyStage,2011

Source:ThomsonReuters,2012.

Venturecapitalfundmanagers(VCFM)placehighimportanceontheabilityofthe

managementteam,includingtheirskill,quality,characteristicsandrecordof

                                                            7 Thomson Reuters stage definitions varied slightly from the description provided within this document.

Thomas Reuters’s Seed is equivalent to Stage 0: Pre-venture; early stage is equivalent to Stages 1 & 2: Existence/infancy and Early Growth.

        

  122 

 

accomplishment.Market/industrycharacteristics,environmentalthreats,competition

levelsandproductdifferentiationarealsoconsidered.VCFMsaredrivenbyreturnson

investmentastheymanagefundsforoutsideinvestors.

McMillan,etal.,(1985)studiedcriteriausedtoevaluateinvestmentopportunitiesby

venturecapitalistsincluding27criteriaorganizedintosixmajorgroups.Toppriorities

included:1)personalityandexperienceoftheentrepreneur,especiallyevidenceofstaying

powerandabilitytohandlerisk;2)productandmarketcharacteristics,including

proprietaryprotection8fortheproductandhighgrowthrateasthemostappealingmarket

characteristic;and3)financialconsiderations,especiallyhighupsidepotentialandhigh

investmentliquidity,althougha10yearpayoutratherthanfiveyearswaslikely.

McMillanetal.,(1985)alsoreportedthat84%ofventurecapitalistswoulddisqualifya

venturefrominvestmentiftheentrepreneurlackedevidenceofstayingpoweranda

potentialfora10timesreturnoninvestmentwithin10years.Thecriterionofconcernin

everycaseofcriticallyflawedventuresistheentrepreneur’spersonalityorexperience.

Thebusinessplanhadtoindicateasclearlyaspossiblethestayingpowerofthe

entrepreneur,arecordofaccomplishment,abilitytoreactwelltoriskandtargetmarket

familiarity.Theabilitytopulltogetherateamaswellastodemonstrateleadershipofthe

teamisacriticalcapabilityoftheentrepreneurforventurecapitalists.

VentureCapitalInvestmentTrends

TheNationalVentureCapitalAssociation(NVCA)istheventurecommunity’strade

associationthataccumulatesanddisseminatesstatisticsregardingtheventurecapital

industry.Priorto2009,reportsonthenumberofdealsandtotalinvestmentswere

                                                            8 Although claiming “high tech” was not important, 70% of all ventures are in the “high tech” category.

        

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availableonlyatthebroadregionallevelbutstateleveldatahavebeenavailablesince

2009(ThomsonReuters,2012).StatedataforIllinoisandWisconsinbetween2009and

2012:3Qshowthat2012activitydecreasedfrom2011and,inWisconsin,hadnotreturned

tothe2009level(FigureE5).

FigureE4:TotalVentureCapitalDealsinIllinois&Wisconsin,2009–20123Q

Source:ThomsonReuters,2012.

TheaverageamountofventurecapitalinvestedforeachdealinIllinoisandWisconsin

waslessineachyearcomparedtotheUS,exceptin2010whenIllinoisexceededtheUS

averageby$3millionperdeal.In2010,bothIllinoisandWisconsinincreasedinventure

capitalinvestmentsby111%and177%respectively(FigureE6).

43

60

101

61

11 19 15 9

54

79

116

70

0

20

40

60

80

100

120

2009 2010 2011 2012

IL WI Total

        

  124 

 

FigureE5:AverageAmountofVentureCapitalperDeal,2009‐20123Q

Source:ThomsonReuters,2012.

Investor’sCircle

Investor’sCirclemembersincludehighnetworthindividuals,venturecapitalists,

investmentadvisors,familyofficemanagers,andfoundationofficers.Theypayanannual

fee,providingforfacilitationofcapitalflowfrominvestorstoprivate,earlystage,forprofit

companiesandsmallventurefundsplusinvitationstoparticipateinVentureFairs.

VentureFairsallowentrepreneurstopitchcompaniespositionedforregionalor

nationalgrowthandcommittedtoenvironmentalandsocialimprovements.Among

preferredindustrysectorsobtainingsupportfromInvestor’sCircleareCleantech(Energy

&EnvironmentalSolutions),Community&EconomicDevelopment,Healthcare,Biotech&

Wellness,SustainableConsumerProducts,andDigitalMedia,Software&Education.

VirtualVentureFairsareconductedmonthlyusingwebinarstoallowmorefrequent

entrepreneurpitches.SemiannualVentureFairsoccurinthefall(ontheEastCoast)and

spring(ontheWestCoast),usuallyovertwodays.Thescheduleincludesmeetings,

$4.54

$9.59

$7.62 $6.80

$2.30

$6.41$4.86

$5.64

$6.33$6.66

$7.70$7.35

$‐

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

2009 2010 2011 2012

$inmillions

IL WI US

        

  125 

 

networkingandworkingsessionsalongwiththekeyfocusoftheFair:thecompanies’

businesspresentations.Deal‐makingresultsduringthefinaldayoftheevent.

Entrepreneurssubmitanapplicationalongwithafeetobeconsideredforinvestment.

Applicationsincludingspecificcriteriaaresubmittedonarollingbasis.Toqualify,a

businessmustbefully‐formedwithoneyearexperienceandexpectedtoachieve$5million

ormoreinrevenuesinthenextfiveyears.Gustistheon‐linedealdatabaseforinvestorsto

reviewandresearchtheopportunity.InvestorCirclestaffreviewallapplicationswithin

fourweeksofsubmissiontodeterminewhethertheycanadvanceintheprocess.

Applicationscanbeforeithervirtualorsemi‐annualVentureFairs.

Next,reviewcommitteesconsistingofInvestorCirclemembersareformedtoselect

applicantstopresenttheirbusinessideastopotentialinvestors.Onemonthpriortothe

VentureFair,anentrepreneurreceivesassistanceinpreparingthepresentationandother

supportingmaterials.Thereviewcommitteeevaluatesthepresentationspriortothe

event.

Revenue‐basedFinancing

Oftendubbed"royalty‐basedfinancing",revenue‐basedfinancingisusedbythefilm

andnaturalresourcesindustries—payinginvestorsapercentageofgrossreceipts.This

approachallowsentrepreneurstofocusongrowingtheirbusinesseswithflexible

repaymentschedulesandwithoutlossofcontrol.Bothequityandtraditionaldebt

financingstructuresareusedtomeetcapitalneedsofexpandingbusinesses.Alumpsum

forunrestrictedgrowthandnoobligationtorepayintheeventofinsufficientfuture

revenues,inexchangeforapercentageoffuturerevenues,isthebasisforstructuringthe

        

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deal.Apaymentamountbasedongrossrevenuesallowsforfluctuationinmonthly

paybackamounts.

Interestratesarehigherforrevenue‐basedfinancingagreementsthanfortraditional

bankloansasinvestorsexpectareturn3timesthecapitalprovidedbasedonasimpleor

time‐adjustedpercentageandmayincorporatearateofreturnvariabletoreflecthow

muchtimeittakesforrepayment.Thisapproachisbestsuitedforearly‐stagecompanies

withmoreriskthantraditionalbankingwillacceptwhilehavinglessriskandupsidethan

expectedbyriskcapitalinvestors.

Revenue‐basedfinancingworksbestforbusinessesthatgeneratesaleswithwell‐

definedcapitalrequirementsandlimitedscalingpotential.Theirneedisforadditional

capitaltotakefullpotentialofopportunitiesandgrowasfastaspossible(Morell,2012;

Jones,2012).LighterCapitalandRoyaltyCapitalNewEnglandareexamplesofinvestment

fundsthatcreaterevenue‐sharefinancedealsforentrepreneurs.

LighterCapital

LighterCapitaloffersloanstobusinessesrangingfrom$25,000to$500,000in

proportiontothebusiness’annualrevenues.Theloansarerepaidmonthlyasapercentage

ofthebusiness’totalrevenuesotheborrower’stotalpaymentdecreasesinmonthswhere

revenuesdecrease(LighterCapital2011).

LoansfromLighterCapitalareretiredwhenborrowersrepayatotalamount

determinedwhentheloanismade,withmostloanshavingatermofonetofiveyears.The

loansaredesignedprimarilyforbusinessesintechnologyorknowledge‐basedindustries

andtheyarenotofferedforstartups.LighterCapitalencouragesbusinessesinasset‐

intensiveindustriessuchasmanufacturing,construction,andfoodservicetoseekcapital

        

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fromtraditionalsourcesinsteadofLighterCapitalbecausetheycanoffercollateral(Lighter

Capital,2011).

LighterCapitalseeksbusinesseswithatleast$200,000inannualrevenuesand

interestedentrepreneursmayapplyon‐line.Asof2011,thecompanyhasinvestedin17

businessesnationwidewithmostprovidingsoftwareorweb‐basedservices.Lighter

CapitalisnotcurrentlyinvestedinanycompanieswithintheSOIregionandtheonly

Midwest‐basedcompanyreceivinginvestmentwasaMinnesotasoftwaredeveloperfor

nonprofitorganizations(LighterCapital,2011).

RoyaltyCapitalNewEngland

RoyaltyCapitalNewEnglandisaninvestmentfundofferingrevenue‐basedfinancingto

businesseswithestablishedpresencesintheirindustries,existingrevenuestreams,and

potentialforrapidgrowth.Theprincipalamountisnegotiatedbetweenbusinessowner

andinvestorandinvestorsreceiveareturnoninvestmentthatisamultipleofthe

principal.Eachmonththeborrowerpaysafixedpercentageofitstotalrevenue,repaying

theloan’sprincipalwithin48monthsandthenpayingtheinvestor’sreturnwithinfourto

sixyears.RoyaltyCapitalNewEnglandstatesthatborrowersbenefitfromreducedcapital

costsduetointerestdeductibilityandthatitrequiresnocommitmentofpersonalassets

and(RoyaltyCapitalNewEngland,2011).

CommunitySupportedEnterprises

TheCommunitySupportedEnterprise(CSE)functionssimilarlytotheCommunity

SupportedAgriculture(CSA)model.CSAbringsacommunityofindividualstogether,

pledgingsupporttoafarmingoperationbysigninguptoreceiveaweeklydeliveryoffarm

        

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products.Thefarmersreceivethecapitalneededtomaintainandgrowtheircropsand

membersreceivetheirshareoffoodthroughoutthegrowingseason.

Withdifficultyinfindingcapitalwithoutlosingcontrolofthecompanyoncethe

businessisupandrunning,individualscanestablisharelationshipwithagrowing

businessbypurchasingcouponsfromthecompanythatareredeemableatstoresforthe

product.Thisprovidesthebusinesswithnecessaryupfrontcapital,helpingtoensurelong‐

termviability.

Mostoften,theCSEsupportsandpreserveslocalcommunities,throughacombination

ofcharitableandinvestmentcontributions,particularlywhenthecommunitycommitsto

supportingthenewstartup.AMemorandumofUnderstandingreinforcesthepartnership

betweenthenewbusinessandthecommunity,outliningthearrangement’sspiritand

principlesaswellascircumventsmisunderstandings.DetailsofCSEarrangementsand

examplesofimplementationareevidentinThePreservationTrustofVermont.

ThePreservationTrustofVermontpromotesnumerousCSEswithinthestateof

Vermont.Oneexampleincludesalocalrestaurantthatavoidedclosurebycollecting

$1,000contributionsfromcustomersthatwererepaidviaquarterly$90couponsforthe

restaurant.Anotherrestaurantcollected$5,000eachfrom32investorsandrepaidthemin

savingsof25%onallmealpurchasesattherestaurantforfiveyears.Vermont’sCSEsalso

includeageneralstorewherecustomersmaypay$15annuallytoreceivediscountsonall

purchases(PreservationTrustofVermont,n.d.).Asshownbytheseexamples,CSE

arrangementsarescalableforthebusiness’capitalneedsandpreferredrepayment

schedule.

        

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AppendixF:LocalLoanFundsintheSOIRegion

CityofEvansvilleRevolvingLoanFund

Purpose

TheRLFisdesignedtofacilitatebusinessdevelopmentprojectswithintheCityofEvansvillethatcreateinvestmentandemploymentopportunities.

Eligibility

AnyCEO,oranequivalent,seekingtoestablishanewoperation,expandanexistingorstart‐upanewbusinessintheEvansvillearea,maysubmitanapplication.

Loanscannotbeusedfordebtfinancing,residentialprojects(unlessdirectlyrelatedtobusinessconversion),studiesorother“soft”costs,maintenance,orinvoluntaryrelocationpayments.Norcanfundsbeusedtofinanceanyofthefollowingbusinesses:speculativeinvestmentand/orrealestateinvestments,non‐profitbusinessororganizations,lendinginstitutions,gamblingoperations,andnon‐publicrecreationfacilities.

Thefollowingactivitiesareeligibleforprogramfunds:land,building,andfixedequipmentacquisition;sitepreparationandconstruction,includingsiteclearance,demolition,removalorrehabilitationandimprovements;thereconstructionorinstallationofbuildingsandfixedequipment;thepaymentofassessmentsforsewer,water,street,andotherpublicutilitiesiftheprovisionofthefacilitieswilldirectlycreate/retainjobs;workingcapital,includingmarketing;workforcedevelopmentand/ortraining.

Requirements

Tobeeligibleforfunding,allofthefollowingminimumconditionswillbeconsidered:

1. Aminimumof$1ofprivatefundsleveragedforevery$1ofloanfundsrequested;

2. Thecreation/retentionofatleast[1]full‐timeequivalent,permanentposition‐excludingthosefilledbyowners/partnersorfamilymembers‐forevery$10,000dollarsrequested;

3. Projectviabilityandabilitytorepaytheloan;

4. Compliancewithallapplicablelocal,state,federalcodesandlaws;and

5. Projectcompletionwithin36‐monthsofloanapproval,detailinghiring,construction,andotherrelevanttime‐boundschedules.

6. Inabilitytoobtainadequatefundingfromothersources.

Conditions

Applicationsmaybesubmittedatanytimeduringtheyear.AllcompletedapplicationsaresubjecttoreviewbyEvansvilleEconomicDevelopmentCommitteeandtheRLFReviewBoard.TheCity’sCommonCouncildeterminesallfinalloandecisions.

        

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Loanamountsaresubjecttoprogramfundavailabilityandeligibilitycriteria.Termsareasfollows(maximumtermslisted):workingcapital‐5yrs.;machinery,equipmentandfixtures–7yrs.;andrealestate‐10yrs.Ratesarebetween4%andprime.Tosecure100%oftheloan,assetstobepurchasedwithloanproceedsandany/allotherassetsownedand/orusedinthebusiness,pluspersonalguaranteesarerequired.Nofundswillbereleasedwithoutwrittencommitmentsfromotherfundingsources.

Repaymentschedulesaremonthly;interestand/orprincipalmaybedeferredforuptotwo(2)years,dependingonrecommendationsofthesaidreview.Interestshallaccrueduringthisdefermentperiod,andbeaddedtotheprincipalloanamount.Thereafter,bothinterestandprincipalshallbecollectedfortheremainingtermoftheloantomaturity.Noloanshallbesubjecttoanypenaltyforprepaymentpriortothetermoftheproject.However,latepaymentpenaltiesareapplicable.

FailuretocomplywithanyoftheprovisionsoftheRLFmayresultindefault.InadditiontothesaidrequirementsintheLoanRecipientObligationssection,thefollowingshallalsobeconsideredasadefault:

1. Recipient’sfailuretocreate/retainthespecifiednumberofjobswithinaspecifiedtimeframe;

2. Failuretomakeanypaymentofinterestorprincipalwithin30daysafterpaymentduedate;

3. Defaultingonotherloanswithprivatelenders;

4. CessationofoperationsormovementofbusinessfromtheCity;

5. Saleofthebusiness.

Intheeventofdefault,theCitywillissueaNoticeofDefault.Allrelevantandinterestedparties,includingbutnotlimitedtoothersecuredlenders,willbenotifiedofdefault.Onceissued,allsumsdueandowingtheCityshall,attheCity’soption,becomeimmediatelydueandpayable.Toavoidforeclosureandanyothercollectiveactions,thedefaultmustbecurednotlessthan60daysfromthedateofnotice.

JanesvilleGapFundingTIFLoanProgram

Thisprogramisdesignedtoprovideloanfundingtohelpcompanieshaveincreasedaccesstocapitalforexpansionpurposes.Thepurposeistoassistinthefinancingofjob‐creatingexpansionprojectswhichcannotbeadequatelyfinancedusingonlyprivatesectorandequityfunding.WithouttheTIFloanfillingtheremainingfinancinggap,theprojectwouldnotgoforward.

Gaploansaretobemadetofor‐profitbusinesseslocatedinspecifiedTIFareaswithintheCityofJanesville.Loansmaybemadeforbusinessstart‐up,expansionorforbusinessrecruitment.Businesseswillneedtocommittoretentionorexpansionofjobstoreceivefunding.

Desirablebusinesses

1. Manufacturing/Assembly

2. WarehouseDistribution

        

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3. Professionalservicesincludingcomputers,phonesandothertechnology‐relatedproductorservice‐orientedcompanies

Eligibleusesoffunds

1. Purchase,expansionorremodelingofcommercialrealestate

2. Purchaseofmachineryandequipment

3. WorkingCapital

Ineligibleusesoffunds

1. Loanswhereprimaryrepaymentsourceisfutureequityorpotentialrefinancingofdebt

2. Loanswithoutasecondarysourceofrepayment

3. Loansforpoliticalpurposes

4. Loansforspeculativepurposes

5. Loanssecuredbyrestrictedstockinclosely‐heldcorporations

AllTIFloanswillbesecuredviasubordinatedlieninterest.

Allloansrequirepersonalguaranteesoftheownerswhichhave20%orgreaterequityinthebusiness.AllTIFloanstobetermloans.Norevolvingcreditlines.

AllTIFloansrequireaminimumofannualpayments.Thesubordinated“TIF”portionsoftheloanswillmatchthelender’smarketratetermsandinterestbutatnotimewillthetermexceed10years.Subordinatedloanstobepricedatfixedmarketratestobedeterminedatthetimeoftheloanrequest.TypicalsizeofTIF“gap”loan‐$20,000to$50,000basedontheexpansionproject.

CityofBeloitCommercialandIndustrialRevolvingLoanProgram

Objectives

1. Stimulateprivatesectorinvestmentintolong‐livedphysicalplantandequipmenttoincreaseproductivityandcreatenewemploymentopportunities,includingopportunitiesforLowandModerateIncome(LMI)persons.

2. Providefinancingtofillgapsinlocalcapitalmarketsandtherebystimulateprivatesectorcapitalformation,andtoserveasa“pumpprimer”ratherthanareplacementforprivatecommerciallending.

3. Aidsmallbusiness,especiallythosethathaveahighmultipliereffectonjobsandincome.

4. StabilizeanddiversifytheCity’seconomicbase.

5. Fostertheretentionandexpansionoffinanciallyandmanageriallysoundexistingindustries.

6. AttractfinanciallyandmanageriallysoundnewindustriesandcapitaltotheCity.

7. Supportstart‐upbusinessesintheCity.

        

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EligibleArea

TheactivityfinancedanditsbenefitmustbewithinthemunicipalboundariesoftheCity.

EligibleApplicants

Eligibleapplicantsarefor‐profitcommercial,industrialorservicesectorbusinesseswhowilllocateorexpandintheCitybycreatingnewjobs,ofwhichmorethan51%mustbeLMIpeopleatthetimetheyenterthejoborenterthejobtraining.BusinessesthatwillretainjobsthatwouldhaveotherwisemovedoutoftheCityarealsoeligible,ifmorethan51%ofthejobsretainedareforLMIpeople.EligibleActivities

Programfundsshallbeusedtoassistabusinesstofinanceexteriorandinteriorbuildingimprovements(includingupperfloorunits),purchaseoflandandbuilding,newconstruction,purchaseofmachineryandequipment,landimprovements,(i.e.,sitepreparation,sewerandutilityextensions,etc.),demolition,andleaseholdimprovements.

IneligibleActivities

Programfundsshallgenerallynotbeusedforworkingcapital;debtrefinancing;speculativeactivities;residentialbuildingconstructionorrehabilitation;routinemaintenanceofplantorshopfacility;specializedequipmentthatisnotessentialtobusinessoperation;activitiescomplete,begunorcontractedfor,priortoreceivingfinalapprovalofanapplicationforfundingunderthisProgram;andcostsotherthanthosespecifiedinII,D.

Collateral

AnyavailablebusinessorpersonalassetsconsideredadequateandsatisfactorytotheCorporation.

Repayment

Baseduponborrower’screditneeds,theProgrammayprovideforflexibilityinloanrepaymenttoinclude

1. Delayfirstpayment.

2. Monthly,leveldebtinstallments.

3. Deferralsofprincipal,orinterestandprincipalrepaymentsforalimitedperiodoftime.

4. Extendedamortizationschedulewithballoonpayment.

WalworthCountySmallBusinessRevolvingLoanFund

TheHometownEntrepreneurLoanProgramisasmallrevolvingloanfundpoolmanagedbytheWalworthCountyEconomicDevelopmentAlliance,Inc.Itwasacquiredin2008fromtheUnitedStatesDepartmentofAgriculture‐RuralDevelopmentfortheuseofprovidingsmallloanstonewandemergingbusinessesinWalworthCounty.UnderHELPentrepreneurscansecurefundsforstart‐up,businessacquisition,andexpansion.

        

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Eligibility

Mustbe:

LocatedinWalworthCounty

Havefewerthan50employees

Havegrosssalesunder$1,000,000

EligibleUseofFunds

RealEstateAcquisition

EquipmentPurchases

WorkingCapital

Constructionorrenovation

IneligibleUseofFunds

Produceagriculturalproductsexceptforcommercialnurseries

TimberOperations

Limitedagriculturalproductionrelatedtotechnicalassistanceprojects

Programsoperatedbycabletelevisionsystems

Fundscanonlybeusedforplanninggivenprojectsandcannotbeusedforareawidetypeplanning

Fundsmaynotbeusedtorefinanceexistingdebt

TypesofFinancingAvailable

RealEstate

Equipment&Construction

WorkingCapital

LeveragedFunds

OnedollarofprivatesectorinvestmentshouldbeobtainedforeachdollarofRLFinvestment.Privatesectorinvestmentisdefinedasfinancingfromaprivatelendinginstitution,publicsectorbusinessloanprograms,otherthantheCommunityDevelopmentBlockGrantprogram,ornewequitythatisinjectedintothebusinessaspartoftheexpansionproject.GrantsfromtheDepartmentofVocationalRehabilitationarenotconsideredeligiblematchesforloanpurposes.

EquityRequirements

Borrowermustshowaminimumof10%equityintheprojectbeingfunded.

PersonalGuarantees

InmostcasestheBudget&FinanceCommitteewillaskthebusinessownertosignapersonalguarantee.

        

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LoanTerms

Themaximumfundingavailabletoloanapplicantsis$50,000,ofwhichmatchingfundsmayberequiredbytheloanapplicant.

Workingcapitalloans–uptoseven(7)years

Machinery,equipment&construction–uptoten(10)years

Realestate–uptotwelve(12)years,amortizedover20years

TheinterestrateforeachloanissetbyWCEDA'sboardofdirectorsandwillvarydependingupontheborrower’screditandabilitytorepayfunds.

Fees

Allfeesaretakenoffofthetopoftheloanapproval.

$100non‐refundableloanapplicationfee($100creditwillappliedtootherfeesifloanisapproved)

1%loanoriginationfee

Allapplicableattorneyfees

Alltitleandothercollateralsecurityfees

CityofWhitewaterEconomicDevelopmentRevolvingLoanFund

ThroughagrantfromtheWisconsinDepartmentofCommerce’s‐CommunityDevelopmentBlockGrantProgram(CDBG),theCityofWhitewaterhastheabilitytomakeloansofvaryingsizestobusinessesthatareconsideringlocatingwithinthecitieslimits.

LoanPrograms

IndustrialDevelopmentLoanProgram‐Thisprogramistargetedtomanufacturing,distribution,andrelatedbusinesseswhichhavegreatercapitalneedsandgenerallyprovidelargernumbersofjobs.Loansmadeunderthisprogramwillnotexceed$150,000,unlessexceptionalcircumstancesmeritagreatersum.

CommercialEnterpriseLoanProgram‐Thisprogramisdesignedtoappealtomid‐sizedtolargercommercialandretailbusinesses.Loanswillgenerallynotexceed$50,000unlessexceptionalcircumstancesmeritalongerterm.

MicroloanProgram‐Theintentofthisprogramistoencouragenewbusinessformationandexpansionofsmallbusinesses,particularlythoselocatedinthedowntownbusinessdistrict.Loansunderthisprogrammaynotexceed$15,000.

EligibilityRequirement

EligibleArea

ProjectsmustbelocatedwithinthecorporatelimitsoftheCityofWhitewaterinordertobeeligibleforloansmadethroughtheEconomicDevelopmentLoanProgram.

        

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EligibleApplicants

ApplicationsmaybesubmittedbyanybusinesswishingtoestablishanewoperationorexpandanexistingoperationlocatedwithintheCityofWhitewater.

EligibleActivities

Programloansareavailabletoapplicantsforthefollowingactivities:

Acquisitionofland,buildingsandfixedequipment

Sitepreparationandconstructionorreconstructionofbuildings(includingleaseholdimprovements),providedthattheyareinkeepingwithanycovenantsordesignguidelines(suchastheWhitewaterBusinessParkCovenants)imposedbytheCityofWhitewaterorWhitewaterCDA,andareconsistentwithplansapprovedbytheCityofWhitewaterPlan&ArchitecturalReviewCommission;

Installationoffixedequipment

Clearance,demolition,orremovalofstructuresorrehabilitationofbuildings(includingleaseholdimprovements)andothersuchimprovements,providedtheyareinkeepingwithanycovenantsordesignguidelines(suchastheWhitewaterBusinessParkCovenants)bytheCityofWhitewaterorWhitewaterCDA,andareconsistentwithplansapprovedbytheCityofWhitewaterPlan&ArchitecturalReviewCommission;

Paymentofassessmentstoabusinessforsanitarysewers,watermains,publicstreetsandotherimprovementsiftheprovisionoftheimprovementswilldirectlycreateorretainjobs.TheuseofEconomicDevelopmentLoanProgramFundsinthismannermustbeintheformofaloantoabusinesswhichisassessedforthesecosts.

Inadditiontotheabove,theMicro‐LoanProgrammayalsobeusedtoprovideworkingcapitalforinventoryanddirectlaborcostsonly.(ThisuseisavailableexclusivelytoMicroloanrecipients.)

IneligibleActivities

Refinancingorconsolidationofexistingdebt;

Reimbursementforexpendituresmadepriortoloanapproval;

Specializedequipmentthatisnotessentialtothebusinessoperation;

Residentialconstructionorreconstructionunlesssuchreconstructionisintendedtoconverttheuseoftheresidentialbuildingtoabusinessorindustrialoperation.Programfundsmaybeappliedtotheexteriororothernecessaryimprovementtomixed‐use(commercial/residential)buildingswheresuchimprovementsaredirectlyattributabletothecommercialenterpriseoperatingwithinthebuilding.

EconomicDevelopmentLoanProgramfundsmaynotbeappliedtoconversionorrehabilitationofresidentialunits.

RoutineMaintenance;

Professionalservicessuchasfeasibilityandmarketingstudies,accounting,managementservices,andsimilaractivities.ThecostoflegalservicesincurredinclosingtheEconomicDevelopmentLoanProgramareeligible;

        

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FaçadeimprovementsarenoteligibleundertheMicroloanProgram.

OtheractivitiesthattheLoanReviewBoardmayidentifyduringtheadministrationoftheprogram.

IneligibleBusinesses

Speculativeinvestmentcompanies;

Realestateinvestmentcompanies(exceptforfacilitiesfromwhichthebusinessoperates);

Lendinginstitutions;

Gamblingoperations;

Recreationalfacilitieswhichdonotallowaccesstothegeneralpublic;

OtherbusinessesnotservingtheinterestsoftheCityofWhitewater;

Anygovernmentbodyorgovernmentalentity(includingtheCityofWhitewaterorWhitewaterCDA);and

Not‐for‐profitbusinessesororganizations.

Businessesareallowedonlyoneoutstandingloanundertheprogram.

MinimumRequirements

Tobeeligibleforfunding,aprojectmustmeetallofthefollowingminimumrequirements;

PrivateFundsLeveraged‐Theapplicantmustleverageaminimumofonedollarofprivatefundsforeveryonedollarofloanfundsrequested.HigherleveragemayberequiredatthediscretionoftheLoanReviewBoard.

CostperJobCreated‐Atleastonefulltime,permanentpositionmustbecreatedforevery$20,000orprogramfundsrequested.Nopart‐timejobswillbecountedtowardmeetingthisrequirement.TheCDAmayrequirejobcreationatarategreaterthanonejobper$20,000loaned,upontakingintoconsiderationthetypeofjobs,hourlywage,benefits,etc.

FinancialFeasibilityandBusinessViability‐Theapplicantmustdemonstratethattheproposedprojectisviableandthebusinesswillhavetheeconomicabilitytorepaythefunds

LowandModerateIncome(LMI)Benefits‐Theprojectwillprovideincreasedpermanentemploymentorwillretainexistingjobswhichwouldhavebeenlostlocally.Ofthejobscreatedorretainedbytheproject,atleast51percentmustbemadeavailabletolowormoderateincomepersonsasdefinedbytheUSDepartmentofHousingandUrbanDevelopment.

CompliancewithApplicableLaws.Applicantswillcomplywithallapplicablelocal,state,andfederallawsandcodes.

ProjectCompletion‐Projectshallbecompletedwithin24monthsfromthedateoftheloanapproval.

        

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OwnerEquity‐ApplicantsfortheMicroloanProgrammusthaveaminimumtenpercentequityinthebusinesstoqualifyforloan.

Fees

IndustrialDevelopmentLoanProgram‐Atthetimeofclosing,loanrecipientswillbeassesseda1%feeforadministrativeexpenses,alongwiththeactuallegalfeesrelatedtoloanorigination.

CommercialEnterpriseLoanProgram‐Atthetimeofclosing,loanrecipientswillbeassesseda1%feeforadministrativeexpenses,alongwiththeactuallegalfeesrelatedtoloanorigination.

MicroloanProgram‐Asthetimeofclosing,loanrecipientswillbeassesseda$150fee.

CityofElkhornEconomicDevelopmentRevolvingLoanFund

ThroughagrantfromtheWisconsinDepartmentofCommerce’s‐CommunityDevelopmentBlockGrantProgram(CDBG),theCityofElkhornhastheabilitytomakeloansofvaryingsizestobusinessesthatareconsideringlocatingwithinthecitieslimits.

EligibleArea

ProjectsmustbelocatedwithinthecorporatelimitsoftheCityofElkhorninordertobeeligibleforloansmadethroughtheRevolvingLoanFund.

EligibleApplicants

ApplicationsmaybesubmittedbyanybusinesswishingtoestablishanewoperationorexpandanexistingoperationlocatedwithintheCityofElkhorn.

EligibleActivities

Programloansareavailabletoapplicantsforthefollowingactivities:

Acquisitionofland,buildingsandfixedequipment

Sitepreparationandconstructionorreconstructionofbuildingsorinstallationoffixedequipment

Clearance,demolition,orremovalofstructuresorrehabilitationofbuildingsandothersuchimprovements;

Paymentofassessmentstoabusinessforsanitarysewers,watermains,publicstreetsandotherimprovementsiftheprovisionoftheimprovementswilldirectlycreateorretainjobs;

Workingcapital(inventoryanddirectlaborcosts).

IneligibleActivities

Refinancingorconsolidationofexistingdebt;

Reimbursementforexpendituresmadepriortoloanapproval;

Specializedequipmentthatisnotessentialtothebusinessoperation;

        

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Residentialconstructionorreconstructionunlesssuchreconstructionisintendedtoconverttheuseoftheresidentialbuildingtoabusinessorindustrialoperation.

RoutineMaintenance;

Professionalservicessuchasfeasibilityandmarketingstudies,accounting,managementservices,andsimilaractivities.ThecostoflegalservicesincurredinclosingtheRLFareeligible;

OtheractivitiesthattheLoanReviewBoardmayidentifyduringtheadministrationoftheprogram.

IneligibleBusinesses

Speculativeinvestmentcompanies;

Realestateinvestmentcompanies;

Lendinginstitutions;

Gamblingoperations;

OtherbusinessesnotservingtheinterestsoftheCityofElkhorn;

Not‐for‐profitbusinessesororganizations.

MinimumRequirements

Tobeeligibleforfunding,aprojectmustmeetallofthefollowingminimumrequirements;

PrivateFundsLeveraged‐Theapplicantmustleverageaminimumofonedollarofprivatefundsforeveryonedollarofloanfundsrequested.HigherleveragemayberequiredatthediscretionoftheLoanReviewCommittee.

1. CostperJobCreated‐Atleastonefulltime,permanentpositionmustbecreatedforevery$20,000orprogramfundsrequested.Thecommitteemayrequirealowerjobcreationratewherewarranted,(takingintoconsiderationthetypeofjobs,hourlywage,benefits,etc.)

2. FinancialFeasibilityandBusinessViability‐Theapplicantmustdemonstratethattheproposedprojectisviableandthebusinesswillhavetheeconomicabilitytorepaythefunds.

3. LowandModerateIncome(LMI)Benefits‐Theprojectwillprovideincreasedpermanentemploymentorwillretainexistingjobswhichwouldhavebeenlostlocally.Ofthejobscreatedorretainedbytheproject,atleast51percentmustbemadeavailabletolowormoderateincomepersonsasdefinedbytheUSDepartmentofHousingandUrbanDevelopment.

4. CompliancewithApplicableLaws.Applicantswillcomplywithallapplicablelocal,state,andfederallawsandcodes.

ProjectCompletion‐Projectshallbecompletedwithin24monthsfromthedateoftheloanapproval.

        

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MaximumLoan‐Therecommendedmaximumamounttobeloanedtoanyoneapplicantislimitedtotwenty(20%)percentoftheentireprojectcost.

Terms&Conditions

LoanAmount

Loanamountsaresubjecttotheavailabilityofprogramfunds,butaresubjecttoarecommendedmaximumloanequaltotwenty(20%)percentoftheentireprojectcost.

InterestRate

Theinterestrateshallbeestablishedatnolessthanfourpercent.

TermsofLoans

Workingcapitalloansshallhaveamaximumtermofeightyears

Loansformachinery,equipmentandfixturesshallhaveamaximumtermofeightyears

Realestateloansshallhaveamaximumtermofeightyearswhichcanbeamortizedonatwenty‐yearbasiswiththeoptionofrefinancingforanadditionaltwelveyearsuponLoanReviewBoardapproval.

Inanycase,theloanshallnothaveatermlongerthanthetermsoftheotherprivatefinancingintheproject.

VillageofEastTroyEconomicDevelopmentRevolvingLoanFund

ThroughagrantfromtheWisconsinDepartmentofCommerce's‐CommunityDevelopmentBlockGrantProgram(CDBG),theVillageofEastTroyhastheabilitytomakeloansofvaryingsizestobusinessesthatareconsideringlocatingwithinthecitieslimits.

EligibilityRequirements

EligibleArea

ProjectsmustbelocatedwithinthecorporatelimitsoftheVillageofEastTroyinordertobeeligibleforloansmadethroughtheRevolvingLoanFund.

EligibleApplicants

ApplicationsmaybesubmittedbyanybusinesswishingtoestablishanewoperationorexpandinganexistingoperationlocatedwithintheVillageofEastTroy.

EligibleActivities

Programloansareavailabletoapplicantsforthefollowingactivities:

Acquisitionofland,buildingsandfixedequipment

Sitepreparationandconstructionorreconstructionofbuildings,includingleaseholdimprovementsandfaçaderenovationforcommercialandindustrialbuildings;and/orinstallationoffixedequipment

Clearance,demolition,orremovalofstructuresorrehabilitationofbuildingsandothersuchimprovements;

Workingcapital

        

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IneligibleActivities

Refinancingorconsolidationofexistingdebt;

Reimbursementforexpendituresmadepriortoloanapproval;

Specializedequipmentthatisnotessentialtothebusinessoperation;

Residentialconstructionorreconstructionunlesssuchreconstructionisintendedtoconvertthebuildingtoabusinessuse;

RoutineMaintenance;

Professionalservicessuchasfeasibilityandmarketingstudies,accounting,managementservices,andsimilaractivities.

OtheractivitiesthattheLoanReviewBoardmayidentifyduringtheadministrationoftheprogram.

IneligibleBusinesses

Speculativeinvestmentcompanies;

Realestateinvestmentcompanies;

Lendinginstitutions;

Gamblingoperations;

Non‐publicrecreationfacilities;

OtherbusinessesnotservingtheinterestsoftheVillageofEastTroy;

MinimumRequirements

Tobeeligibleforfunding,aprojectmustmeetallofthefollowingminimumrequirements;

PrivateFundsLeveraged‐Theapplicantmustleverageaminimumofonedollarofprivatefundsforeveryonedollarofloanfundsrequested.Privatesectorinvestmentisdefinedasfinancingfromaprivatelendinginstitutionandcashequitythatiscontributedtotheprojectbytheapplicant.

CostperJobCreated‐AtleastoneFULLTIME,permanentpositionmustbecreatedforevery$20,000orprogramfundsrequested.

FinancialFeasibilityandBusinessViability‐Theapplicantmustdemonstratethattheproposedprojectisviableandthebusinesswillhavetheeconomicabilitytorepaythefunds

LowandModerateIncome(LMI)Benefits‐Theprojectwillprovideincreasedpermanentemploymentorwillretainexistingjobswhichwouldhavebeenlostlocally.Ofthejobscreatedorretainedbytheproject,atleast51percentmustbemadeavailabletolowormoderateincomepersonsasdefinedbytheUSDepartmentofHousingandUrbanDevelopment.

CompliancewithApplicableLaws.Applicantswillcomplywithallapplicablelocal,state,andfederallawsandcodes.

        

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ProjectCompletion‐Allprojectsshallbecompleted,allfundsexpended,andalljobscreatedand/orretainedwithin24monthsfromthedateoftheRLFloanapproval.Alljobsshallbemaintainedforaminimumof12months.

MaximumLoan‐Therecommendedmaximumamounttobeloanedtoanyoneapplicantislimitedtotwenty(20%)percentoftheentireprojectcost.

Terms&Conditions

LoanAmount

Loansareavailablefrom$5,000to$100,000.Loansexceeding$100,000shallbelookedatcase‐by‐case.

InterestRate

TheinterestrateshallbesetattheratecurrentlybeingofferedbytheWisconsinDepartmentofCommercethroughitsCDBGprogram.Theinterestrateshallbefixedforthelifeoftheloan.

TermsofLoans

Machinery&equipment2‐10years;

Buildingsandland‐10to20yearsand;

Workingcapital‐1to7years

GenevaLakeDevelopmentCorporation‐MasterFund(RevolvingLoanFund)

PurposeoftheEconomicDevelopmentMasterFund

TheMasterFundhasbeenestablishedtoenhancethebusinessclimatewithintheeligibleareathroughtheretentionandexpansionofexistingbusinessesandthedevelopmentofnew,smallbusinesses.Smallbusinessesoftenlackthenecessarycapitaltodeveloporexpandtheiroperationsandthislackofcapitalhasasignificantimpactonthelocaleconomy.TheMasterFundprogramincludesfundingmechanismsandinterestratesthataredesignedtoencouragebusinessdevelopment,whileprovidingfortherecapitalizationandgrowthoftheMasterFundprogram.

EligibleApplicants

EligibleapplicantsfortheMasterFundarebusinessestablishmentsorpropertyownerslocatedwithintheeligiblearea.Theexceptionbeingbuildingdesigngrantsandconstructionfacadeloans.ThisfinancingisavailableonlywithintheCityofLakeGeneva.Applicantsmustdemonstratethattheyareunabletoaccessthefinancingnecessaryforthebusinessorrealestateprojectthroughconventionalsources.NoGLADBoardofDirectorsmembershallbeeligibletoparticipateintheprogram.

CountyofRacineCommunityDevelopmentBlockGrantRevolvingLoanFund

ThisprogramwasdesignedspecificallytoassistbusinessesinRacineCounty.Theprogramprimarilyfinancesrealestateprojects,equipmentpurchasesandlimitedworkingcapitalneeds.TheCDBG‐RLFpartnerswithyourbankprovidingaportionofyourfinancingneeds.

        

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EligibleProjectCosts

Landandbuildingpurchases

BuildingconstructionEquipment,furnitureandfixturepurchases

Limitedworkingcapitalandtrainingcosts

Demolition,renovation,andimprovementsofbuildings

Purchaseofrollingstock

FeesEstimated

$1,000legalfee

1.5%processingfee

Out‐of‐pocketclosingcosts

Rates&Terms

Aslowas2%

Upto5yearterm

Upto20yearamortization

Keymanlifeinsurancetypicallyrequired

CountyofRacineEconomicDevelopmentAdministrationRevolvingLoanFund

ThisprogramwasdesignedspecificallytoassistbusinessesinRacineCountybyofferinganEDA‐RLFloaninpartnershipwithabankloan.Theprogramprimarilyfinancesrealestateprojects,equipmentpurchasesandlimitedworkingcapitalneeds.

TheCountyEDA‐RLFoffersabelowmarketinterestrate,currentlyaslowas2.44%.Itsparticipationcannotexceedeither$200,000or33%ofthetotaleligibleprojectcosts.

EligibleProjectCosts

Landandbuildingpurchases

Buildingconstructionorrenovations

Equipment,furnitureandfixturepurchasesLimitedworkingcapital

FeesEstimated

$1,000legalfee

1.5%processingfee

Out‐of‐pocketclosingcosts

        

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Rates&Terms

Aslowas2.44%

Upto10yearterm

Upto20yearamortization

Keymanlifeinsurancetypicallyrequired.

RacineDevelopmentGroupRevolvingLoanFund

TheRacineDevelopmentGroup(RDG)createdaloanfundtopromotebusinessdevelopmentandrealestateprojectsintheCityofRacine,withemphasisonlow‐andmoderate‐incomeneighborhoods.ContributingmembersincludeChaseBank,JohnsonBank,M&ICommunityDevelopmentCorp.,RCEDC,S.C.Johnson,TriCityNationalBank,USBankandWellsFargoBank.

Thisprogrampartnerswithbankfinancingtofundrealestateprojects,furniture,fixturesandequipmentpurchasesandlimitedworkingcapitalneeds.

TheRDGoffersabelowmarketinterestrate,currentlyaslowas4%.Itsparticipationtypicallydoesnotexceedeither$100,000or40%ofthetotaleligibleprojectcosts.

EligibleProjectCosts

Landandbuildingpurchases

Buildingconstructionorrenovations

Equipment,furnitureandfixturespurchases

Limitedworkingcapital

FeesEstimated

$1,500legalfee

1.5%processingfee

Out‐of‐pocketclosingcosts

Annualservicingfeeof0.5%collectedwithmonthlypayments

Rates&Terms

Aslowas4%

Upto5yearterm

Upto20yearamortization

Keymanlifeinsurancetypicallyrequired.

        

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CityofRacineIndustrial/CommercialBuildingRevolvingLoanFund

ThisprogramwasdesignedspecificallytoassistbusinessesintheCityofRacinebyofferinganI/CB‐RLFloaninpartnershipwithabankloan.Theprogramprimarilyfinancesrealestateprojectswherethefinancingwillresultinacurrentlyvacantfacilityinbecomingoccupiedeitherbytheborrowingbusinessoratenant.

TheCityI/CB‐RLFoffersabelowmarketinterestrate,currentlyaslowas2.44%.Itsparticipationcannotexceedeither$200,000or33%ofthetotaleligibleprojectcosts.

EligibleProjectCosts

Landandbuildingpurchases

Buildingconstructionorrenovations

Loanstodeveloperswherethebuildingwillbecometenantoccupied

Environmentalremediation

FeesEstimated

$1,000legalfee

1.5%processingfee

Out‐of‐pocketclosingcosts

Rates&Terms

Aslowas2.44%

Upto10yearterm

Upto20yearamortization

Keymanlifeinsurancetypicallyrequired.

CityofRacineBrownfieldCleanupRevolvingLoanFund

WhocanApplyforaBC‐RLFLoan/Grant/LoanGuarantee?

PublicandprivateentitieswithcontroloveroraccesstothesitelocatedintheCityofRacine.Applicantsmustpossessacceptablecredithistory,proposecrediblepropertyreuseplans,provideadequatecollateral,anddemonstratethefinancialcapacitytoundertaketheproject.

ApplicantsMUSThaveanapprovedRemedialActionPlan(RAP)withtheWisconsinDepartmentofNaturalResources(WDNR),complywiththeWIVoluntaryCleanup

        

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Program(VPLE)andclaimadefenseunderCERCLAs.107.Partiesresponsibleforthecontaminationarenoteligibletoapplyforcleanupfunding.

Prioritywillbegiventoprojectsthatreduceenvironmentalthreatstothecommunity,reducesprawl,preservegreenspace,andgeneratejobgrowthandeconomicexpansionwithintheCity.

EligibleUsesofFunds

Cleanupactionsassociatedwithremoving,mitigating,orpreventingthereleaseorthreatofareleaseofhazardousmaterialsandpetroleumcontaminationsuchas:

Erectingfences,warningsignsorothersitecontrolprecautions;

Installationofdrainagecontrols;Stabilizationofberms,dikesorimpoundmentsordrainageorclosinglagoons;

Cappingofcontaminatedsoils(ifrequiredforacleanupactivity);

Usingchemicalsandothermaterialstoretardthespreadofthecontaminationormitigateitseffects;

Excavation,consolidation,orremovalofhighlycontaminatedsoils;

Removalofdrums,barrels,tanks,etc.thatmaycontaincontaminants;

Containment,treatment,disposalorincinerationofcontaminants;

Conductingsitemonitoringactivities(includingsamplingandanalysis)thatarenecessaryduringthecleanupprocess,orthatdeterminetheeffectivenessofacleanup;

Costsassociatedwithpublicparticipation,workerhealthandsafety,andinteragencycoordinationrequirements;

Abatementofasbestosandlead‐basedpaint,and

Purchaseofenvironmentalinsurance.

TheBC‐RLFfundsmaybeusedforremovalactivities(includingdemolitionand/orsitepreparation)onlyifthedemolitionand/orsitepreparationisnecessarytoaccesstheenvironmentalcontaminationtoberemoved.

WhatActivitiesCANNOTbeFundedbytheBC‐RLF?

TheBC‐RLFmaynotbeusedforpre‐cleanupenvironmentalresponseactivities.

Fundscannotbeusedtoexpensesincurredpriortoloanclosing.

CityofBurlingtonCommunityDevelopmentBlockGrantRevolvingLoanFund

ThisprogramwasdesignedspecificallytoassistbusinessesintheCityofBurlington.Theprogramprimarilyfinancesrealestateprojects,equipmentpurchasesandlimitedworkingcapitalneeds.

TheBurlingtonCDBG‐RLFoffersabelowmarketinterestrate,currentlyaslowas2%.Itsparticipationcannotexceedeither50%ofthetotaleligibleprojectcostor$300,000.

        

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EligibleProjectCosts

Landandbuildingpurchases

BuildingconstructionEquipment,furnitureandfixturepurchases

Limitedworkingcapitalandtrainingcosts

Demolition,renovation,andimprovementsofbuildings

Purchaseofrollingstock

FeesEstimated

$1,000legalfee

1.5%processingfee

Out‐of‐pocketclosingcosts

Rates&Terms

Aslowas2.44%

Upto10yearterm

Upto20yearamortization

Keymanlifeinsurancetypicallyrequired.

CityofBurlingtonTaxIncrementalDistrict#3RevolvingLoanFund

ThisprogramwasdesignedspecificallytoassistbusinessesinTID#3intheCityofBurlington.ThisdistrictconsistsprimarilyofthedowntownareaandpartofHighway36.Theprogramprimarilyfinancesrealestateprojects,furniture,fixturesandequipmentpurchasesandlimitedworkingcapitalneeds.

TheBurlingtonCDBG‐RLFoffersabelowmarketinterestrate,currentlyaslowas50%ofPrime.ParticipationbytheTID‐RLFistypicallynomorethan40%oftheeligibleprojectcostsor$100,000,whicheverisless.

EligibleProjectCosts

Landandbuildingpurchases

FaçadeimprovementsEquipment,furnitureandfixturepurchases

Limitedworkingcapitalneeds

Tenantimprovements

FeesEstimated

$1,000legalfee

1.5%processingfee

Out‐of‐pocketclosingcosts

        

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Rates&Terms

Aslowas2.44%

Upto10yearterm

Upto20yearamortization

Keymanlifeinsurancetypicallyrequired.

VillageofUnionGroveCommunityDevelopmentBlockGrantRevolvingLoanFund

ThisprogramwasdesignedspecificallytoassistbusinessesintheVillageofUnionGroveanditsenvirons.Theprogramprimarilyfinancesrealestateprojects,equipmentpurchasesandlimitedworkingcapitalneeds.

TheVillageofUnionGroveCDBG‐RLFoffersabelowmarketinterestrate,currentlyaslowas2%.Itsparticipationcannotexceedeither50%ofthetotaleligibleprojectcostsor$300,000.

EligibleProjectCosts

Landandbuildingpurchases

Buildingconstruction

Equipment,furnitureandfixturepurchases

Limitedworkingcapitalandtrainingcosts

Demolition,renovation,andimprovementsofbuildings

Purchaseofrollingstock

FeesEstimated

$1,000legalfee

1.5%processingfee

Out‐of‐pocketclosingcosts

Rates&Terms

Aslowas2.44%

Upto10yearterm

Upto20yearamortization

Keymanlifeinsurancetypicallyrequired.

WinnebagoCountySmallBusinessLoanProgram

Purpose

Tocreatejobsforlow‐moderateincomepersonsthroughlow‐interestloanstobusinessintheCountyofWinnebago.

        

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EligibleBorrower

1. AnybusinesslegallyestablishedtodobusinessintheStateofIllinoisandtheCountyofWinnebago.

2.Applicantmustbeabletorepaytheloanandisanacceptableriskasdeterminedbytheloancommittee.

3.PropertymustconformtouseundertheCountyofWinnebagoZoningOrdinanceandanyotherLocal,State,orFederallaws.

4. ApplicantmustmakeadequateprogresstowardclosingofloanasdeterminedbyCDBGStaff.

5. Applicantmustprovethatprojectwouldnotproceedbutfortheloan.

6. Allpropertytaxes,insurance,waterbills,etc.,mustbecurrent.

EligibleProducts:

1. Propertyacquisition,machinery/equipmentacquisition,rehabilitation,expansion,andmovingexpenses.

2. Adequateprivatesectorfinancingisnotavailabletocompleteproject.

3.Jobsmustbecreatedforlow‐moderateincomepersons.

4.Loansmustbematchedwithequityorprivatesectorfinancing.

5.RehabilitationworkiseligibleonlywhendoneincompliancewiththeDavis/BaconActandotherapplicableFederalLaborLaws.

6.Aftercompletionofproject,propertymustcomplywithallapplicablecode,permit,andlicenserequirements.

IneligibleProjects

Projectswherethereisadequateprivatesectorfinancing.

Workingcapital.

Inventory.

Refinancingexistingdebt.

Non‐fixedimprovements.

Improvements/purchasesmadepriortoclosing.

Projectswhichcanbesolelyfundedbytheapplicant.

Buyouts.

Housing.

Vehicles.

Incorporationexpenses.

Financingfees.

        

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Thegeneraltermis5yearsat5%perannum.Howeverthismaybeadjustedbasedontheapplicant’sneeds.

RockfordLocalDevelopmentCorporationMicroloanProgram

EligibleUsesofFunds

Workingcapital

Realestate

Machinery/equipment

Leaseholdimprovements

Short‐termcontractormaterialsloans

EstimatedInterestRatesAsofMarch2012‐6‐8%.

        

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AppendixG:SOIBankSurveyResults

BankersweresurveyedinIllinoisandWisconsinin2011and2013.TheIllinoissurveywasconductedinOctober2011.Atthattime,theWisconsinbankerswerenotwillingtocooperatewiththesurvey.TheWisconsinbankerseventuallyagreedtoparticipateandcompletedasurveysimilar(mostofthequestionswereidentical)totheIllinoissurveyinMarch2013.

Themajorityofrespondentstobothsurveysrepresentedcommunitybanks.RespondentstotheWisconsinsurveyweresomewhatmorelikelytobefromregionalbanks.Mostoftheresponsesinthe‘other’categoryindicatedthattheywerelargenationalbanks.

Figure1.HowisthefinancialInstitutionchartered?

ILresponses:97,WIresponses:119.

Thedataonhowoftenbanksinoursurveyslenttosmallbusinessesislesscomparablebecauseeachsurveydefined‘smallbusiness’somewhatdifferently.TheIllinoissurveydefinedthemashavingfewerthan50employeesandlessthan$5millioninannualrevenues.FortheWisconsinsurvey,theyweredefinedasthosewillfewerthan500employeesandlessthan$5millioninnetprofits.

BecauseoftheWisconsinsurvey’sbroaderdefinitionofsmallbusiness,respondentsweremuchmorelikelytohaveahighpercentageofsmallbusinessloans.Smallbusinesslendingmakesupoverhalfofallloansat85percentofWisconsinbanks,withalmosttwothirdsstatingthatover75percentofallloansweretosmallbusinesses.

UnderthemorerestrictivedefinitionofsmallbusinessusedintheIllinoissurvey,about30percentofbanksmakebetween51and75percentoftheirloanstosmallbusinesses.Smallbusinessloansmakeupover75percentofallloansatanother30percentofIllinoisbanks.

        

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Figure2.Whatpercentageofallloanactivityatyourinstitutioninthelast12monthswasfor‘smallbusiness’?

ILresponses:94,WIresponses:121.

Whenworkingwithotherorganizationstoassistsmallbusinesses,Illinoisbanksaremostlikelytopartnerwithsmallbusinessdevelopmentcenters(SBDCs),chambersofcommerce,localeconomicdevelopers,andcommunitycolleges.TheyrarelyorneverworkwiththeEconomicDevelopmentAdministration,convention&visitorsbureaus,universitiesorstateeconomicdevelopers.

Figure3.Howoftendoesyourinstitutionworkwiththefollowingorganizationstoassistinbusinesssupportanddevelopment(Illinois)?

ILresponses:93.

        

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WisconsinbanksaregenerallylesslikelythanIllinoisbankstoworkwithpartnersforbusinesssupport.ThemostfrequentpartnersthatWisconsinbanksusearechambersofcommerceandlocaleconomicdevelopers.SBDCsareused,butlessfrequentlythanIllinoisbanks.

Figure3.Howoftendoesyourinstitutionworkwiththefollowingorganizationstoassistinbusinesssupportanddevelopment(Wisconsin)?

WIresponses:120.

        

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IllinoisandWisconsinbankershadsubstantiallydifferentviewsontheirlocaleconomies.Thelikelycauseofthedifferenceisthetimingofthesurveys.IllinoisbankerscompletedthesurveyinOctober2011.Wisconsinbankersweresurveyedin2013whentheoutlookforthenationaleconomyhadimprovedsubstantially.

AlmosttwothirdsofWisconsinbankersstatedthattheirlocaleconomyhadbeenimprovingforatleastayear.Thiscomparedwithjust15percentofIllinoisbankershavingthisviewinlate2011.Onthenegativeside,Illinoisbankersweremuchmorelikelytoreporthigherlevelsofbusinessclosingsanddecreasedemployment.

Figure4.Whichofthefollowingbestcharacterizesthelocaleconomicconditionsinyourregion?(checkallthatapply)

ILresponses:94,WIresponses:122.

        

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Bankerswereaskedaboutincreasesinsmallbusinessloanvolumeovertwotimeperiods:pastyearandpastfiveyears.WisconsinbankssawlargerincreasesinsmallbusinessloanscomparedwiththeircounterpartsinIllinois.Again,thisdifferenceislargelyduetothetimingofthesurveys.Itwouldbeexpectedthatbankswouldmakemoreloansastheeconomyimproves.

Overthepreviousyear,almost45percentofWisconsinbankersreportedincreasesof5percentormore.Onlyabout25percentofIllinoisbankersreportedincreasesgreaterthan5percent.About30percentofIllinoisbanksexperienceddecreasesinloanvolume,comparedwithlessthan13percentinWisconsin.

Figure5.Indicatehowyourfinancialinstitution'stotalnumberofapprovedsmallbusinessloanshaschangedinthepast12months.(selectonlyoneanswer)

ILresponses:71,WIresponses:79.

        

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Theresultsweresimilarwhenlookingbackfiveyears,althoughthedifferenceswerenotassevere.About42percentofWisconsinbanksexperiencedloangrowthofgreaterthanfivepercent,comparedwith34percentofIllinoisbanks.SignificantlymoreIllinoisbanksexperiencedagreaterthan10percentdecline(24percentvs.10percent).

Figure6.Indicatehowyourfinancialinstitution’stotalnumberofapprovedsmallbusinessloanshaschangedinthepast5years.

ILresponses:71,WIresponses:79.

        

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Illinoisbankerswereaskedthereasonforchangesinsmallbusinesslending(thisquestionwasnotincludedontheWisconsinsurvey).Thetwomostcommonanswersindicatedthatdeclineswereduetoalackofdemandforloans.Tighterfederalregulationswasthethirdmostcitedreason.

Figure7.Whatisthemainreasonforthechangeinlendingactivitiesforstart‐upbusinessesinthepast12months?(checkonlyone)

ILresponses:69.

        

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Thetoptworeasonsforloanrequestsinbothstatesweredebtconsolidationandworkingcapital.IllinoishadmoredemandforworkingcapitalloanswhileWisconsin’stopdriverwasdebtconsolidation.Wisconsinbanksweretwiceaslikelytoreceiverequestsforbusinessexpansionrelatedloans,inpartbecausetheyweresurveyedatatimewhenthenationaleconomyhasimprovedrelativetowhenIllinoisbanksweresurveyed.

Figure8.Whatarethemainreasonsforthesmallbusinessloanrequestsreceivedinthepast12months?(checkallthatapply)

ILresponses:71,WIresponses:77.

        

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Bankerswereaskedwhatpercentageofloanapplicationswerefromnewbusinesses,expansionsofexistingbusinesses,ordebtrestructuring.InIllinois,existingbusinessexpansionsanddebtrestructuringgeneratedthemajorityofapplications.Veryfewbanksreceivedmorethanaquarteroftheirapplicationsfromnewbusinessstartups.TheWisconsinresultswereverysimilartothosefromIllinoisforthisquestion.

Figure9.Illinois:Approximatelywhatpercentageoftotalnumberofsmallbusinessloanapplicationsapprovedbyyourinstitutioninthelast12monthswereforeachofthefollowing:(shouldtotal100%)

ILresponses:66.

Figure10.Wisconsin:Approximatelywhatpercentageoftotalnumberofsmallbusinessloanapplicationsapprovedbyyourinstitutioninthelast12monthswereforeachofthefollowing:(shouldtotal100%)

WIresponses:73.

        

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Mostbanksrequirebetween20and40percentequityparticipationfornewbusinessborrowers.Thisistrueinbothstates.Forexistingbusinesses,manybanksrelaxtheequityrequirementssomewhat.

Figure11.Illinois:Onaveragewhatpercentageofpersonalequityinjectiondoesyourinstitutionrequireforabusinessloanfornewandexistingbusinesses?

ILresponses:70fornewbusinesses,62forexistingbusinesses.

Figure12.Wisconsin:Onaveragewhatpercentageofpersonalequityinjectiondoesyourinstitutionrequireforabusinessloanfornewandexistingbusinesses?

WIresponses:77fornewbusinesses,76forexistingbusinesses.

        

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Commercialloansmakeabout44percentofapprovedloansatWisconsinbanks.InIllinois,about31percentofloansareforcommercialbusinesses.HomeloansmakeupaboutonethirdofapprovedloansonaverageinbothIllinoisandWisconsin.IllinoisbanksmadesomewhathigherpercentagesofloansforautosandretailbusinesseswhencomparedwithWisconsin.

Figure13.Whatpercentagedoeseachofthefollowingloancategoriesrepresentinyourinstitution'stotalnumberofapprovedloansinthelast12months?

BanksinbothIllinoisandWisconsinuseadiversesetofloanproductsforsmallbusinesslending.Foralltypesofloans,bankersinbothstatesmostfrequentlyrespondedthattheyusetheproducts‘often’.Adjustablerateloanswerethemostlikelyloantypetobeused‘rarely’or‘never’bybankers.

Figure14.Howoftenarethefollowingusedforsmallbusinessloans?(Illinois)

ILresponses:69.

Auto Home Agriculture Retail CommercialIllinois

Mean 10.3 32.7 18.0 8.1 30.9Minimum 0 0 0 0 0Maximum 50 80 80 60 90Responses 63 63 63 63 63

WisconsinMean 3.9 33.2 10.6 8.2 44.2Minimum 0 0 0 0 0Maximum 20 96 100 30 353Responses 68 68 68 68 68

        

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Figure15.Howoftenarethefollowingusedforsmallbusinessloans?(Wisconsin)

WIresponses:75.

Insufficientcashflowisthemostlikelyreasoncitedbybankersfordecliningsmallbusinessloanapplications.Cashflowwaslistedas‘always’or‘often’beingafactorby86percentofrespondentsinbothstates.Inadequatepersonalcollateralandpoorcreditscoreswerethenextmostcommonfactors.Theleastcommonreasonswereloansthatweretoolargeandinsufficientsuppliernetworks.

Figure16.Howofteniseachofthefollowingcircumstancesafactorindecliningsmallbusinessloanapplicationsoverthelast12months?(Illinois)

ILresponses:70.

        

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Figure17.Howoftenareeachofthefollowingcircumstancesafactorindecliningsmallbusinessloanapplicationsoverthelast12months?(Wisconsin)

WIresponses:73.

Wisconsinbankerswereaskedaboutdocumentationrequiredaspartofloanapplications.Forentrepreneursatthepre‐venturestage,bankersaremostlikelytorequirepro‐formafinancials.Balancesheets,assetsummaries,andmulti‐pagebusinessnarrativesarealsorequiredbyover50percentofbankers.

Fornewerbusinessesinoperationlessthantwoyears,almostall(over85percent)ofbankersrequirepro‐formafinancials,balancesheets,andassetsummaries.Balancesheetsandassetsummariescontinuetobeimportanttobankersasthebusinessmatures.However,longerbusinesssummariesornarrativesbecomelesscriticalasthebusinessmatures.Bankersaremorelikelytolookforsinglepagesummariesfrommaturebusinesses.Generally,banksrequiremoreinformationfromnewbusinessesduetouncertainty.ThisquestionwasnotincludedontheIllinoissurvey.

Figure18.Whattypesofdocumentationdoyourequirefromasmallbusinessloanapplicant?Pleasecheckallthatapply.

PRE‐VENTURECLIENTS

START‐UPENTREPRENEURS(in

business2yearsorless)

EXISTINGENTREPRENEURS(inbusinessmorethan2

years)One‐pageBusinessOverview 18.6% 32.9% 45.7%Five‐pageBusinessSummary 25.7% 42.9% 15.7%Multi‐PageCompleteNarrative 51.4% 47.1% 15.7%Pro‐FormaFinancials 64.3% 88.6% 64.3%BalanceSheet 57.1% 91.4% 94.3%AssetSummary 54.3% 85.7% 84.3%Responses:70

        

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Referraltosmallbusinessdevelopmentcenters(SBDCs)isthemostcommonassistanceprovidedbybankerstounsuccessfulloanapplicants.OverhalfofallbankersrespondingstatedtheyprovidedSBDCreferrals.ServiceCorpsofRetiredExecutives(SCORE)wasthenextmostcommonreferral.Wisconsinbankersappearsomewhatmorelikelytoprovidereferrals.ThethirdmostcommonresponseforIllinoisbankersafterSBDCandSCOREreferralswas‘noassistancetypicallyoffered’.

Figure19.Whatassistancedoesyourinstitutionroutinelyprovidetosmallbusinessloanapplicantsdeniedforaloanfromyourinstitution?(checkallthatapply)

ILresponses:70,WIresponses:71.

        

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Notsurprisinglybecauseofthetimingofthesurveys,Wisconsinbankersweremoreoptimisticaboutfuturesmallbusinesslendinggrowth.About70percentofWisconsinbankersexpectedlendingtoincreaseby5percentormore,withoveronequarterexpectingagreaterthan10percentincrease.OnlyonebankerrespondingfromWisconsinexpectedadeclineinsmallbusinesslending.Inlate2011,Illinoisbankersweresomewhatoptimistic.Sixtypercentexpectedatleastsomelendinggrowth.Fewerthan10percentofIllinoisrespondentsexpectedadeclineinlending.

Figure20.Duringthenext12months,howdoyouanticipatethatyourfinancialinstitution'slevelofsmallbusinesslendingwillchange?(checkonlyone)

ILresponses:70,WIresponses:73.

TheUSSmallBusinessAdministration(SBA)istheorganizationthatbanksworkwithmostoftenwhenclosingsmallbusinessloans.TheSBAhasloanguaranteeandotherloanprogramsthataredesignedtopartnerwithprivatesectorbanks.About32percentofIllinoisbankersandover40percentofWisconsinbankerindicatedthattheyworkedwithSBA‘often’or‘always’.TheUSDepartmentofAgriculture(USDA)wasthenextmostcommonagencyforbankerstoworkwith.LikeSBA,USDAhasloanprogramsthatworkinpartnershipwithbanks.

Illinoisbankersonlyrarelyworkwithstateagenciesorlocalrevolvingloanfunds.ThisisalsotrueofmostWisconsinagencies.However,bankersdocommonlyworkwithWisconsinBusinessDevelopment(WBD).About80percentofWisconsinrespondentsindicatedthattheyworkedwithWBD‘sometimes’,‘often’,or‘always’.

        

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Figure21.Indicatehowoftenyourinstitutionhasworkedwitheachofthefollowingagenciesduringthepasttwoyearsinordertoclosesmallbusinessloans.(Illinois)

ILresponses:65.

Figure22.Indicatehowoftenyourinstitutionhasworkedwitheachofthefollowingagenciesduringthepasttwoyearsinordertoclosesmallbusinessloans.(Wisconsin)

WIresponses:69.

        

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Anopen‐endedquestionfocusedoncollaborationwithpartnersintheregion.Thequestionyieldeddiverseresponses.Somesaidthattheyalreadywereworkingwithpartners.OnerespondentinWisconsinreportedpartneringwithcountyeconomicdevelopmentcorporationsandchambersofcommerce.Otherssimplysaidthattheydonot.Thosethatsuggestednewactivitiesfocusedoneducation,eithersuggestingthatbankerslearnmoreaboutavailableprogramsorbettereducatingsmallbusinessowners.OfthesevenrespondentsintheWisconsinsurveythatansweredtheopen‐endedquestiononcollaboration,fourofthemstressedtheimportanceofinformationsharing.TwooutoftwelverespondentsintheIllinoissurveyalsoexpressedaneedforinformationaboutgovernmentprogramsthathelpbankslendtobusinesses.Theseresponsesareconsistentwiththesurvey’sfindingsregardingawarenessofprogramsprovidebystategovernments,SBA,andUSDA.

IllinoisbankerswereaskedabouttheirfamiliaritywithAdvantageIllinois,theDepartmentofCommerceandEconomicOpportunity’sprogramtoincreaseaccesstocapitalforsmallbusinesses.Thisprogramhadbeenannouncedinthemonthsleadinguptothesurvey.Lessthan40percentofIllinoisbankersindicatedfamiliaritywithAdvantageIllinois.

Figure23.AreyoufamiliarwiththerecentlyannouncedAdvantageIllinoisprogramwithregardstohowitrelatestoinstitutionallenders?

GiventhelowlevelofawarenessaboutAdvantageIllinois,itisnotsurprisingthatfew

bankersindicatedthattheywouldbelikelytousetheprogramswithinit.Aboutonethirdofbankersresponded‘don’tknow/notsure’andanotherthirdresponded‘notlikely’.Thetotalofthesetworesponsesroughlyequalsthenumberofresponsesindicatingunfamiliarityintheabovequestion.

        

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Figure24.PleaseindicatehowlikelyyourinstitutionwouldbetousethefollowingAdvantageIllinoisprogramstoassistsmallbusinesses.

ILresponses:65.

Aseriesofquestionswereaskedaboutregulatorychanges.Thefirstsimplyaskedifthebankhadexperiencedregulatorychanges.About70percentofbankersinbothstatesindicatedthattheyhadexperiencedregulatorychangesinthepastyear.

Figure25.Hasyourinstitutionexperiencedregulatorychangestosmallbusinesslendinginthepast12months?

ILresponses:53,WIresponses:68.

        

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Bankersinbothstatesfeltthatthechangeshadresultedintighterregulations.OtheronethirdofIllinoisbankersreported‘muchtighter’practiceswithanother40percentreporting‘somewhattighter’.InWisconsin,justover20percentresponded’muchtighter’whileabout40percentresponded‘somewhattighter’.Onlyonebankerfromeachstatefeltthatregulatorypracticeswerelooser.

Figure26.Whatchangeshasyourinstitutionexperiencedregardingregulatorypracticesinthepast12monthswithregardstosmallbusinessloans?

ILresponses:55,WIresponses:69.

2023

11

1

15

30

23

1

0

5

10

15

20

25

30

35

Muchtighter Somewhattighter

Stayedthesame

Slightlylooser Muchlooser

IL WI

Num

berofBanks

        

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Thetighterregulatorypracticesresultedinfewerloansinbothstates.Overhalfofthebankersrespondingsaidthattheregulatorypracticesledtoadecreaseinloans.OnlytwoWisconsinbankersfeltthatthechangesledtoanincreaseinsmallbusinessloans.

Figure27.Whathasbeentheimpactofregulatorychangestosmallbusinesslendinginthepast12months?

ILresponses:53,WIresponses:66.

Inanopen‐endedquestion,surveyrespondentswereallowedtoelaboratetheirthoughtsonregulationinrelationtotheirsmallbusinesslending.BankersinIllinoisandWisconsinwerebothaskedtorecommendchangesingovernmentpoliciesatanylevelofgovernmentthatwouldmakebanksmorelikelytolendtoneworexpandingbusinesses.InbothWisconsinandIllinois,themostfrequentlymentionedgovernmentagencywastheSBA.CommoncomplaintsbankershadoftheSBAwerethatitsloanguaranteesweretoosmalltojustifythecostofpayingafeeandtakingtimetoapplyfortheguarantee.OnesurveyrespondentinWisconsinwaswillingtoacceptsmallerloanguaranteesfromtheSBAifasimplerapplicationprocesswereoffered.SeveralsurveyrespondentsinWisconsinalsobelievedthattheycouldincreasetheirsmallbusinesslendingiftheSBAreinstatedits504loanrefinancingprogram,whichendedinSeptember2012.

Thesecondmost‐frequentlymentionedgovernmentagencywastheFDIC.OnesurveyrespondentinIllinoisandtworespondentsinWisconsinperceivedtheFDICashavinganadversarialattitudetowardbanks.However,surveyrespondentshadnospecificrecommendationsforhowtheFDICcouldbemoreamenabletobankers.

30

23

34

30

2

0

5

10

15

20

25

30

35

40

Decreaseinloans Nochange Increaseinloans

IL WI

Num

berofBanks

        

  170 

 

Byfar,IllinoisbankersaremostfamiliarwithSBA’s7(a)loanprogram,withover83percentrespondingthattheyare‘very’or‘somewhat’familiarwiththeprogram.TheonlyotherSBAloanprogramsthathadover50percentindicatingatleasta‘somewhat’leveloffamiliaritywereCDC/504loans(63percent)andSBAExpress(51percent).Noneoftheotherprogramshadgreaterthan30percentfamiliarity.

Figure28.PleaseindicateyourfamiliarityofeachofthefollowingSBAloanprograms.(Illinois)

ILresponses:65.

        

  171 

 

Ingeneral,WisconsinbankersweremorefamiliarwithSBAloanprograms.Over80percentindicatedthattheyare‘very’or‘somewhat’familiarwiththreeSBAloanprograms:7(a),SBAExpress,andCDC/504loans.Familiaritywiththe504programwasalsoreflectedinresponsestoanopen‐endedquestiononpoliciesthatrespondentsfeltwouldmakethemmorelikelytoincreaselendingtosmallbusinesses.SeveralrespondentsintheWisconsinsurveyexpressedinterestinusingthe504programforrefinancing,whichwaspermittedonlybetween2011and2012.OveronequarterofbankersrespondingindicatedtheywereatleastsomewhatfamiliarwitheverySBAloanprogramexceptinternationaltradeloans.

Figure29.PleaseindicateyourfamiliarityofeachofthefollowingSBAloanprograms.(Wisconsin)

WIresponses:69.

        

  172 

 

WhenaskedhowmanySBAloanshadbeenapprovedbytheirinstitution,theresponsesweresimilartothefamiliarityquestion.SixtypercentofIllinoisbankshadapproved7(a)loans,50percentCDC/504loans,21percentSBAExpress,and17percentAmericanRecoveryCapital.NootherSBAloanprogramhadbeenusedbymorethan14percentofIllinoisbanks.

Figure30.HowmanysmallbusinessloanshasyourinstitutionapprovedusingthefollowingUnitedStatesSmallBusinessAdministrationprogramsinthepast12months?(Illinois)

ILresponses:64.

        

  173 

 

JustastheyhadbeenmorefamiliarwithSBAloanproducts,WisconsinbanksweremorelikelytoapproveSBAloanscomparedwithIllinoisbanks.ThreequartersofWisconsinbankshadapproved7(a)loans,70percentCDC/504loans,and53percentSBAExpress.CAPlines,RuralLenderAdvantage,CommunityExpress,andPatriotExpresswereallusedbybetween20and25percentofWisconsinbanks.

Figure31.HowmanysmallbusinessloanshasyourinstitutionapprovedusingthefollowingUnitedStatesSmallBusinessAdministrationprogramsinthepast12months?(Wisconsin)

WIresponses:64.

        

  174 

 

BankerswereaskedtheiropinionsaboutwaysSBAcouldbetterhelpthemworkwithsmallbusinesses.Theyindicatedthateliminatingfees,reducingpaperwork,andincreasingloanguaranteeswouldallbehelpful.Nosingleansweramongthesestoodoutasbeingsignificantlymoreimportant.

Figure32.WhatactionsbytheSBAwouldmosthelpyourinstitutiontoassistsmallbusinessesobtaincapital?(pickyourtop3)

ILresponses:62,WIresponses:67.

        

  175 

 

ThesurveyturnedfromtheSBAtofocusonU.S.DepartmentofAgriculture(USDA)programs.Ingeneral,bankersarelessfamiliarwithUSDAprogramsascomparedtoSBAprograms.USDA’sCommercialandIndustrialLoanprogramwastheonlyonethatIllinoisbankerswereatleastsomewhatfamiliarwith.Threeothers(BIGuarantee,RuralEconomicDevelopment,andGuaranteedCompany)registeredover10percentfamiliarity.Theremainingprogramswereallunder5percent.

Figure33.HowfamiliarareyouwitheachofthefollowingUSDAprograms?(Illinois)

ILresponses:65.

        

  176 

 

InWisconsin,overonethirdwereatleastsomewhatfamiliarwiththeCommercialandIndustrialprogram,onequarterhadfamiliaritywiththeBIGuaranteeprogram,andtheRuralEDprogramhada21percentfamiliarity.ExceptfortheGuaranteedCompanyLoanprogram(11percent)allotherprogramswerefamiliarto6percentorfewerWisconsinbankers.

Figure34.HowfamiliarareyouwitheachofthefollowingUSDAprograms?(Wisconsin)

WIresponses:68.

        

  177 

 

Aswouldbeexpectedfromthelowfamiliaritynumbers,veryfewIllinoisbankersareusingUSDAloanprograms.About11percentofbanksrespondingmade1‐10CommercialandIndustrialLoans.Between5and8percentreportedmakingloansusingtheBIGuaranteed,RuralEconomicDevelopment,andGuaranteedCompanyprograms.Theremainingprogramswerebeingusedbyoneornoneofthebanksresponding.

Figure35.HowmanysmallbusinessloanshasyourinstitutionapprovedusingthefollowingUSDAprogramsinthepast12months?(Illinois)

ILresponses:63.

        

  178 

 

AlmostonequarterofWisconsinbanksreportedusingtheCommercialandIndustrialLoanprogram.TheBIGuaranteeprogramwasusedby12percentandtheRuralEDprogramby8percent.OneortwobankreportedusingtheremainingUSDAprograms.GiventhelowawarenessofmostUSDAprogramsinbothstates,itisnotsurprisingthatrelativelyfewbanksinthesurveyreportedworkingwiththeUSDAorapprovingUSDAloans.

Figure36.HowmanysmallbusinessloanshasyourinstitutionapprovedusingthefollowingUSDAprogramsinthepast12months?(Wisconsin)

WIresponses:64.

        

  179 

 

BankersinbothstateswouldliketoseeUSDAincreaseoutreachandpubliceducation.Thismaybeareflectionofthelowfamiliaritynumbersseenabove.AswiththeSBAprograms,theywouldalsoliketoseeUSDAreducepaperworkandloanfeerequirementsandrelaxunderwritingstandards.Inopen‐endedresponses,tworespondentsinWisconsinbelievedthattheUSDA’sBIloanguaranteeprogramisunder‐fundedandonerespondentexpressedinterestineliminatingborrowertimelimitsfortheUSDA’sFarmServiceAgencyloanprograms.

Figure36.HowcantheUSDAimprovesmallbusinessaccesstocapitalthroughyourinstitution?(checkallthatapply)

ILresponses:58,WIresponses:53.