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Friday, October 28, 2011

Creative Funding Opportunities for Small Business

Getting funds to start up or expand a business remains a daunting task, especially in this economy.

For example, in the Wells Fargo/Gallup Small Business Index poll released on October 24th, 10 percent small business owners said lack of available credit was the most important problem facing small business owners today, which came in fourth behind complying with government regulations/taxes, consumer confidence and lack of consumer demand.

Along with the challenges regarding availability of credit is the demand for credit. A PNC survey of small and middle-market business owners released in October reported: "Despite keeping spending plans on track, eight out of 10 (82 percent) say they will probably or definitely not take out a new loan or line of credit in the next six months. This represents the lowest demand for credit in the history of the survey."

Meanwhile, the most recent survey of bank senior loan officers by the Federal Reserve (July 2011) reported far less easing of standards in loans to small firms. It was reported: "The net fraction of domestic banks that indicated that they had eased standards on C&I loans to large and middle-market firms rose slightly to around 20 percent. On net, fewer domestic banks--about 10 percent--indicated an easing of standards on loans to smaller firms. On balance, domestic banks eased all of the surveyed terms on C&I loans to large and middle-market firms, with the most sizable net fractions of respondents reporting easing of price terms, including the spread of loan rates over banks' cost of funds, the use of interest rate floors, and the cost of credit lines. Domestic survey respondents also indicated some easing of loan terms for smaller firms, though the reported easing was less widespread than for loans to larger firms."

So, what other potential options for gaining access to funding are out there? Let's consider two that have received attention recently.

One is called crowd-fund investing.

As explained in a recent Washington Times oped, Sherwood Neiss, an entrepreneur, founder of Startup Exemption and a member of the Small Business and Entrepreneurship Council, explained: "While not allowable under existing U.S. securities laws, crowd-fund investing can provide a way for micro-angel investors, both accredited and unaccredited, to pool their individual small investments to support entrepreneurs and enterprises that have merit. If changes are made in U.S. laws, the funding rounds can occur via SEC-regulated websites. These websites will provide transparency, open communication, accountability and reporting among the investors, entrepreneurs and the SEC. This is an expanded version of ‘friends and family' fundraising, which uses an individual's or business owner's social networks to create jobs and grow the economy."

This is a common-sense way of expanding the universe of potential investors. A large population winds up evaluating each investment opportunity. As Neiss noted that in places like the United Kingdom and France, such crowd-fund investing is legal and it works quite well. Why? "The crowd is vetting the ideas of entrepreneurs and backing only those they deem worthy. Fraud - a key issue of concern for regulators and legislators alike - hasn't reared its wicked head, thanks to hundreds if not thousands of prospective investors picking apart the idea, the business model or the execution plan of the entrepreneur for bringing his goods or services to market. These discussions and vetting occur in open dialogues on Internet platforms."

It's another tremendous example of how technology is opening up new opportunities for both investors and entrepreneurs seeking capital.

What's needed is action by Congress. As The Wall Street Journal reported on September 15, 2011, U.S. Rep. Patrick T. McHenry (R-NC) "introduced legislation [Entrepreneur Access to Capital Act, HR 2930] this week to allow privately traded companies to use crowd-funding techniques to sell their shares. The measure would allow an unlimited number of people to contribute a total of $5 million to a crowd-funded start-up, with individual contributions capped at $10,000, or 10% of their annual incomes." The measures has already advanced in a subcommittee of the House Finance Committee as part of a package of other legislation to help small firms access capital.

In addition, President Obama called for this kind of crowd-funding in his proposed jobs package. Here's a case where bipartisanship can truly aid small businesses. Let's hope the bill to make crowdfund investing a reality keeps moving forward.

Second is, of all tools, Twitter.

On August 22, 2011, The Wall Street Journal ran an interesting article by Emily Glazer titled "Finding New Investors, in 140 Characters or Less." It offered examples of how entrepreneurs used Twitter to gain the attention of potential investors.

Naked Pizza, an all-natural restaurant chain headquartered in New Orleans, started posting humorous tweets on a daily basis. The report went on:

"The New Orleans Company says it has gotten about 8,000 investment inquiries in the past year and a half thanks to its online presence. Investors see the tweets-either on Twitter itself or another site that mentions the notes-and then get in touch. About a quarter of the leads ‘have resulted in some form of investment,' says Mr. Vitrano. The private-equity firm Kraft Group, for instance, first got wind of Naked Pizza through its tweets and ended up making two investments. Kraft usually invests on ‘word of mouth, phone call, someone on a road show who makes a connection,' says Robert Kraft, president international of the Boston-based firm. ‘This is purely reacting to social media.'"

As a result, Naked Pizza has grown from one location to 20 worldwide, and 450 more under contract.

Interestingly, the Journal's report noted: "Still, Naked Pizza's owners say they don't target their messages directly to potential backers. ‘The intent is more about starting a conversation in which like minds will engage,' says Mr. Vitrano. ‘Some of those like minds, it turns out, are investors.'"

Entrepreneurs often need to get very creative to get funding these days, and tweeting in this manner requires one to ramp up that creativity.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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