Sunday, August 12, 2001

Lenders see startup loans as risky business


Even with solid plan, finding funding isn't easy

By Joyce M. Rosenberg
The Associated Press

        NEW YORK - The outlook for the economy is still uncertain, but lending to small businesses is showing signs of getting a little easier. There is, however, a major exception - entrepreneurs and companies that can't show good, solid results are still struggling for loans or seed money.

        “The message we're hearing is, "There's no problem here,'” said William Dunkelberg, chief economist with the National Federation for Independent Business, an advocacy group representing 600,000 small and independent businesses.

        Mr. Dunkelberg said a survey of NFIB members found only 4 percent reported problems getting credit during June, and the average rate banks are charging businesses for short-term loans was 9.1 percent, down from 9.3 percent in May.

        But NFIB members generally include established businesses, not startups. And lenders remain extremely wary about a business that's an unknown quantity.

        “No new company can get a business loan from a bank,” Mr. Dunkelberg said. He noted that an entrepreneur can get personal loans or take out a second mortgages on their homes to raise cash, but lenders are likely to turn down a company that has no track record.

        It's a similar situation in venture capital, where investors “are looking for entrepreneurs who have weathered the storm and have a business plan and a history and a team and a technology as well,” said Mark Heeson, president of the National Venture Capital Association in Arlington, Va.

        Actually, Mr. Heeson said, the seasoned entrepreneur might find money is fairly easy to come by.

        “There are a number of venture capitalists I talked to who say it's an extremely good time to invest in these small companies because the people out there now are much more professional,” he said.

        Still, many established companies aren't finding lenders jumping at the chance to cut a loan deal. Sometimes the problem isn't a rejection, but an approval that seems to be taking forever to come through.

        “They haven't turned me down — they didn't get back to me,” said Brian Schindler, vice president of Pace Elevator, a New York elevator servicing firm.

        Mr. Schindler said that when the 16-year-old company — which he and a partner have owned since 1997 — sought a loan from a bank, Pace met with continual requests for more information and documents. Finally, the company gave up on bankers; it was able to obtain a loan from a big Wall Street investment firm.

        It's harder to come by money in some sectors of the economy, most notably high-tech. But Steve Davidson, financial economist with America's Community Bankers, a trade group, said service companies are having an easier time obtaining loans. The construction business has had a little more difficulty lately, he said.

        Mr. Heeson said venture capitalists are more interested lately in biotech firms and also businesses that supply energy or energy products.

        “Any type of company, which can create new conservation devices or new types of lighting that cost a lot less,” is likely to attract an investor, he said.

        The greater caution of lenders and venture capitalists means business owners and entrepreneurs might need to work a little harder — or, like Pace Elevator, look at different sources — to find money. They need to have a well put-together business plan, and to give lenders or investors the impression they are solid, serious business people.

        Mr. Heeson noted how you present yourself matters too.

        “Entrepreneurs have to really present a plan in a really professional manner — wear a suit and tie, not shorts and sandals,” he said.

        The current climate might seem harsh to some neophyte business owners, but it's really nothing new — the dot-com blip aside, it has always been hard for startups to find financing.

        The Small Business Administration's Web site,www.sba.gov, in a section called the Small Business Startup Kit, calls personal savings “the primary source of capital for most new businesses,” followed by money from friends and relatives. Banks and credit unions and venture capital follow.

        Even Mr. Dunkelberg, well-known for years as an economist and the dean of the Temple University School of Business and Management from 1987 through 1994, couldn't get bank financing for an Internet-based business he started with partners a few years ago.

        “They wouldn't talk to us — as good as we look,” he said.

       



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