Crowdfunding Rules Up in the Air

When the bank turns down a loan request from a small or medium sized business or start-up, where can they turn for financing? Many alternative funding options are available, but one that is gaining attention and notoriety lately is equity crowdfunding.

Crowdfunding refers to “unsophisticated” investors buying shares of a company online, and was only recently made legal under Congress’s JOBS Act. Under the JOBS Act businesses would be able to raise up to $1 million each year online, without having to register with the SEC.

While this source of financing looks promising for start-ups, the rules have not been officially set by the SEC or Finra. Businesses seeking crowdfunding are frustrated by the delays, but securities trade groups warn that crowdfunding without proper rules and oversight could result in amateur investors getting duped out of money.

The SEC is supposed to make a decision in January, but due to the Agency Chairman stepping down last Friday, the process will likely be delayed even more.

For the full article, see Stalled Crowdfunding Rules Leave Business Plans on Ice

Small Business Confidence Takes a Plunge

Unlike most others, small business owners aren’t looking forward to what the New Year will bring. According to a recent survey from the National Federation of Independent Businesses (NFIB), the Small Business Optimism Index dropped severely in November.

Hurricane Sandy and the re-election of President Obama were the two big factors that went in to the drop, and the results show that the election had a far greater impact than Sandy even with the widespread damage hurting the economy. Small business owners expect worse conditions in the coming year than they have now because, according to NFIB chief economist Bill Dunkelberg, “Washington does not have the needs of small businesses in mind.” This refers to rising health care costs, new regulations, and the looming fiscal cliff worrying business owners.

Small businesses often get the brunt of problems in a down economy- and unfortunately business owners are not confident about the ways in which the government is trying to revive it.

For the full article, see  Small Business Optimism Collapses After ‘Something Bad Happened In November’

Bank Lending Down for Small Businesses in the UK

The trend of small businesses turning away from bank lending is not limited to the US- it’s worldwide. According to a recent survey, UK small-to-medium enterprises (SMEs) are at a record low for bank funding, just like their American counterparts. These results most likely come from a combination of the poor European business climate and the assumption that banks will not approve loan requests anyway. Success rates for small businesses trying to secure loans stand at about 42%. Banks in the UK were also rated low in communicating other sources of funding to denied applicants.

This survey helped show that banks are a tough source of financing for SMEs all over the world. Applications are time intensive, credit checks are necessary, and the approval process takes weeks. After approval, which is not likely in the first place, disbursement of funds can take anywhere from 30-90 days. For some small businesses in certain industries, waiting that long for cash is not feasible. Alternative financing, including factoring, is becoming more mainstream and popular as banks continue to turn away SMEs.

For the full article, see Small businesses turn their backs on banks

Local Economies Matter to Small Business

Small businesses depend on small economies. A new 2012 Bank of America survey highlights the importance of local economies to small businesses; for the majority of respondents (63%), their customers come primarily from the local community.  This is one reason that small businesses remain optimistic about the future even though national economy is struggling. This makes sense, as 75% of respondents said the local economy plays a significant role in their business as opposed to 59% citing the national economy.  Here are some other highlights from the study:

  • 54% of respondents anticipate their revenue will increase over the next 12 months
  • 31% said they planned on hiring more employees, whole 56% anticipate their staffing needs will remain consistent
  • 40% say that customer loyalty comes “because they are local.”
  • 70% of SBOs believe they have enough capital to run their business
  • 78% do not intend to apply for a business loan
  • Only 29% described themselves as “very savvy” when it comes to financial matters

For the full article, see Why a Local Economy’s Strength is Critical to Small Business Success

Small Businesses Unsure How Affordable Care Act Impacts Them

According to eHealth’s Fall 2012 Small Employer Benefits Survey, small businesses are confused when it comes to the impact of health care reform. In her article Health Care Reform: Myths and Realities, author Maria Valdez Haubrich lays out the facts for small business owners unsure about where they stand when it comes to providing insurance to employees.

  • Employers with 50 or fewer full-time employees are not required to buy health insurance for them.
  • Employers with 50 or fewer full-time employees don’t face any tax penalties for not providing health insurance.
  • Those with 51-199 face $2,000 for every employee that gets insurance through an exchange, except for the first 20 who do so.
  • Health insurance exchanges are to be created in every state by 2014, which will allow employees to buy subsidized insurance even with a pre-existing condition.

So what does this mean for small businesses? It means that for the smallest firms, health care reform really won’t have an impact at all on their bottom line. Medium-sized companies, however, will be subject to the mandate and might face higher costs of doing business, which could lead to them looking for sources of financing and cash flow such as factoring.

Credit Card Financing Risky for Start-Ups

For modern small businesses, plastic is a way of life– over 80 percent of small businesses use credit cards to finance their companies. However, there are several misconceptions about small business credit cards that a recent Inc.com article clears up, including the following:

  • Business credit cards do not shield owners from personal liability
  • An owner’s personal credit standing is key to landing a credit card
  • Interest rates on business credit cards can rise at any point
  • For start-ups, even $1,000 in debt raises the probability of shutdown by 2.2 percent

    Start-ups especially depend on credit cards, because they are easier to come by than a business loan or an investor. It is very easy to become quickly overburdened by interest and vulnerable to economic shifts.

    Small business startups might want to consider other sources of financing before turning to credit cards. Detailed descriptions of other financing options can be seen in a previous blog post, Alternative to Bank Loans. In a nutshell, they include asset-based lending, lease-backs, and cash advances.

    See the original article: The Credit Card Mistake That Can Destroy Your Company.

    Small Business Saturday is Saturday Nov. 24th

    The U.S. Small Business Administration recently announced that this Saturday, November 24th, is “Small Business Saturday.” According to the SBA website, Small Business Saturday is a day dedicated to small businesses where they encourage shoppers to celebrate and support local companies by shopping there.

    Small business owners can get involved by getting free Small Business Saturday marketing materials from the SBA website, joining the Facebook group and using their own social media to promote it, and joining the Twitter discussion with the hashtag #SmallBizSat.

    For shoppers, here is the link to find out which of your local businesses are participating: Shop Small

    Small business is the backbone of our society, so get out and show support of your local industries by shopping small this Saturday, November 24th.

    Bailouts Didn’t Help Small Business Lending

    It appears that the government bailouts to major banks in the 2008-09 financial crisis did little to help small business lending- in fact, the opposite is true. According to a Bloomberg Businessweek article entitled “TARP Verdict: Bailouts Failed to Help Small Business,” the banks that took bailout money cut lending to small businesses even more than other banks (21% drop compared to 14% elsewhere). Commercial and industrial loans were the hardest hit.

    So what’s the takeaway here? Banks still aren’t lending money to small businesses. Small companies that meet the requirements for bank loans are few and far between, and approval is unlikely. In order to stay afloat, small businesses must turn elsewhere for financing. Several financing options are discussed in the “Alternatives to Bank Loans” blog post below. For the full Bloomberg article, click here.

    Gas Rather than Electric Grid Might be the Future of America’s Power

    In the wake of Hurricane Sandy and the massive power outages that followed, many are wondering whether the current electric power grid in America is a sustainable way to supply power to the country.

    In a recent Forbes article, the author discusses how the current energy grid is increasingly fragile, and rather than fix it for trillions of dollars, we should consider converting to a natural gas power grid. He cites the 2003 blackouts and Hurricane Sandy as evidence that the so-called “smart grid” was not designed to survive strong winds, storm surges, or debris from storms and other inclement weather. The costs to fix the current system would be massive.

    Rather than fix the current system, the author suggest we use a “compelling alternative”- the U.S. natural gas pipeline network. The advantages of a natural gas grid would be that it could transport natural gas to and from any location in the 48 states with over 90% efficiency, and wouldn’t be as susceptible to natural disasters. For the full article, see here: Natural Gas: America’s Future Electric Grid?

    Alternatives to Bank Loans

    In a recent article in The New York Times entitled “When Banks Won’t Lend, There Are Alternatives, Though Often Expensive”, author Ian Mount points out that alternatives to bank loans are on the rise in today’s rocky small business economy. He gives several examples of non-traditional financing options, of which this blog will discuss three: asset-based lending (factoring), lease-back lending, and cash advances.

    Asset-Based Lending: Also known as factoring, this options refers to the process by which businesses sell their receivables to a factoring company. They then get 80-90% of the cash back immediately and the rest after customer repayment, less a percentage fee. This option is best for business-to-business companies that cannot wait for payment, and the cost is usually 4-5% monthly with an effective annual interest rate is typically between 18-30%.

    Lease-Back: This refers to when a company sells its property, plant, and/or equipment, and simultaneously leases it back for cash. It is best for companies with valuable plant or equipment that are underutilized, and the cost is monthly lease payments plus the depreciation and tax burdens of equipment.

    Cash-Advances: Cash advances take place when a company receives an advance sum from a lender and pay them back with percentages of their monthly card receipts until the loan plus a predetermined rate is repaid. This financing method is best for retailers and restaurants with limited financing options, and the cost is usually 20% and up.

    All three are viable financing options for companies rejected by banks, or looking for fast cash alternatives. See the original article “When Banks Won’t Lend, There Are Alternatives, Though Often Expensive”.

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