FIVE KEY BUSINESS FINANCE TRENDS FOR 2010, STARTUP CAPITAL WILL BE TIGHT

01/29/2010

FIVE KEY BUSINESS FINANCE TRENDS FOR 2010, STARTUP CAPITAL WILL BE TIGHT

Karl Kaiser’s Orlando firm, which provides temporary automobile licenses to car dealers nationwide, is optimistic about 2010. In fact, he’s ready to grow his eight-person work force. But he fears the tight credit market might hold him back.

“I could double my staff this year if I could borrow the money I need,” said Kaiser, CEO of Instetag Inc., who isn’t optimistic about prospects for borrowing. “The banks said regulators have tied their hands about making more loans.”

Unfortunately, business finance experts say the ongoing cash crunch will continue to limit business opportunities, which is one of five key trends they believe will shape business finance in 2010:

1. Business credit will remain scarce.

Even as the nation’s banking system undergoes internal repairs in 2010, lenders will remain reluctant to approve business loans, said Scott Shane, a business professor at Case Western Reserve University who follows corporate finance trends.

The problem: Commercial real estate loans that have gone bad or are on the verge of doing so forced banks to divert money from capital accounts into loan loss reserves.

That skewed capital ratios, the balance between the book value of a bank and the money it holds in reserve. Regulators are demanding banks improve their ratios, leaving them two options: Raise more capital from investors or reduce the book value, which means dropping loans.

Suggestions: Business owners having trouble getting a loan could approach newer banks that don’t have bad loans on their books written during the real estate boom from 2004 to late 2006.

Also talk to a business consultant or small business resource such as SCORE Orlando at the Disney Entrepreneur Center (www.disneyec.com) to find a business-friendly bank, said David Felker, executive vice president at Winter Park-based BankFirst. “Look for banks’ reputations on the street.”

Another option: The Black Business Investment Fund of Central Florida (www.bbif.com) is administering the state’s new Economic Gardening Business Loan Pilot Program. It provides loans of $50,000-$250,000 to qualified small business owners with 10-50 employees.

2. It’ll be a tough year to finance a business start-up.

Start-up companies typically seek bank loans to get going. When that fails, entrepreneurs use their own savings and personal credit lines for necessary cash, or they rely on friends and relatives for help.

But Shane said going those routes is harder than ever. “People’s net worths have dropped, so they don’t have investment capital. And banks have cut home-equity and credit-card lines” to reduce their risk.

Suggestions: Peer-to-peer lending, often through Web sites such as Peer-Lend (www.peer-lend.com), is one alternative. Another option, though potentially risky, is using retirement account money to finance a business.

3. Selling businesses or taking them public won’t be easy.

Many entrepreneurs think up an exit strategy from the day they launch a business. They pitch the possibility of big returns to investors in order to raise money. Typically, the strategy is either to sell the business or sell stock through an initial public offering when conditions are right.

But opportunities will be limited this year. “Last year at this time, the IPO [initial public offering] market was as bad as it has ever been,” said Shane. “I see only a handful of companies going public in 2010.”

Shane expects the market for IPOs to improve gradually if the stock market continues to recover.

Jim Gilkeson, associate professor of finance at the University of Central Florida, predicts similar problems for those who want to sell businesses.

The mergers and acquisitions market dropped 21.6 percent last year, from 8,788 deals between January to November 2008 to 6,892 during the same period in 2009, said a Robert W. Braid & Co. report released in December.

Suggestion: Alternatives which are less-common, such as all-cash transactions, could allow some businesses to find buyers.

4. The outlook for venture capital investment remains cloudy.

Venture capital fueled business growth during most of the past decade, but investment plunged with the stock market crash of 2008 and has recovered only slightly since.

According to the latest PricewaterhouseCoopers MoneyTree report,

$4.8 billion in venture funds was invested nationwide in third-quarter 2009, up from $4.1 billion in second-quarter 2009. But that was down from $7.2 billion in third-quarter 2008. The Southeast U.S., which includes Florida, saw venture funds invested drop from $338 million in second-quarter 2009 to $213 million in third-quarter 2009.

Venture fund investments likely will be weak this year as funds remain cautious about the prospects for new businesses in a still-troubled economy, said Shane.

But Gilkeson expects a stronger venture market, extending a trend that began early in 2009. “Venture capitalists are looking ahead to conditions six or seven years in the future, and they back strong ideas.”

Suggestions: Ask your lawyer how to find venture capitalists who specialize in your industry, or, if you’re seeking a small amount of money, ask about angel investors instead. Plus, the National Venture Capital Association (www.nvca.org) has a membership directory available for purchase, and Angelsoft (www.angelsoft.net) helps start-up firms find angel investors.

5. Large companies will issue more bonds.

Though few doors are open to early-stage businesses, large firms could have an easier time. The reason: The bond market is healthy, and low, fixed interest rates make new issues more attractive than bank loans to businesses needing investment money. “I suspect you’ll see an upswing in bond issues from companies with decent credit histories,” Gilkeson said.

It could grow even more attractive if inflation increases and bond rates rise as the economy improves. Companies that issue bonds at 2010 levels would end up paying relatively little in the future for the money they raised.

Suggestion: If your firm is considering issuing bonds, seek advice from an investment banker. To find one, contact the National Investment Banking Association (www.nibanet.org) at (706) 208-9620.

Though market watchers agree businesses will have a hard time raising money, it might not be a bad thing, said Clay Singleton, a Rollins College finance professor. “It was normal for people to chase banks for money, not banks chasing people to make loans. That changed years ago, but 2010 could be the year for business growth based on businesses making money.”

Meanwhile, Kaiser of Instetag still plans to seek a loan, though the time frame will depend on when new business opportunities arise. He wants to add new products and expand into other states this year because the number of temporary license plates issued in Florida fell 60 percent from 2007 to 2009, resulting in less business for his firm. He wouldn’t divulge revenue or the volume of licenses Instetag handled last year.

“We have plenty of opportunities to follow,” said Kaiser. “To do that, we need up-front capital.”

COMMENTARY: I agree 100% with these five trends. I have been telling business startup entrepreneurs to either bootstrap or raise capital from F&R's. VC's are not looking and startups unless the risk has been completely wringed out. Junk bonds are back, and this is not a good sign. Federal Reserve Chairman Bernanke has been quite vocal about this, and some finance experts are predicting a "Bond Bubble". My advice, don't buy bonds, and don't even bother raising capital that way unless you are AAA or BAA at the minimum. Banks and Wall Street firms seem to have forgotten about September 2008, and floating these junk bonds is very dangerous.

By the way, if you are a high-technology entrepreneur, I strong recommend Scott Shane's book, "Finding Fertile Ground", the source for my Entrepreneur Series for technology entrepreneurs. Join my blog group and I will fill you in.

Courtesy of an article dated January 22, 2010 appearing in The Orlando Business Journal

Posted at 10:27 AM | Permalink

Comments

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Posted by: angela | 09/26/2011 at 09:01 AM

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Posted by: freight factoring | 02/14/2011 at 09:23 PM

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Posted by: Small Business Finance | 12/23/2010 at 01:26 AM