More than half a decade after Southern Nevada’s economy hit the skids, it’s still tough for small businesses to rustle up funding.
Sure, the markets have loosened, but companies continue to get the thumbs-down when they apply for bank loans.
Consider the Biz2Credit Small Business Lending Index, which shows that loan-approval rates at big, national banks rose to 15.9 percent in February. That was up from 11.7 percent in February 2012, but it also means roughly 84 percent of applicants didn’t get financing to start up or expand. On the small-bank side, 50.3 percent of owners received loans, up from 47.6 percent a year earlier. Still, half of small businesses had to survive without additional capital.
What’s more, other traditional funding sources still lag. Take home equity, once a vital source of small-business capital. With more than half of local homeowners underwater, tapping into home value isn’t an option for most entrepreneurs.
“It’s very difficult. The restrictions are very tight,” said Luke Hoffman, an investor who’s funded small companies including a mortgage company, real estate brokerage, nightclub and show-ticket brokerage. “Fifty percent of the U.S. population is unbankable. People have had foreclosures, they’ve let credit cards go. A person with a small-business idea may have a great concept, but have an extremely difficult time raising money because of his circumstances.”
That’s where investors such as Hoffman come in. For a company closed off from funding, private investors are stepping in to fill the cash gap.
But investors aren’t just for businesses that can’t find capital any other way.
Jonathan Fine, founder and co-owner of Sting Alarm, PBR Rock Bar at Miracle Mile Shops inside Planet Hollywood Resort and Rockhouse at The Venetian, said he doesn’t like debt. Investors help him avoid it.
“We were funding through investors seven years ago, when credit was easy to get,” Fine said. “My dad (local developer Mark Fine) always taught me to be conservative, and to never take on more than you can handle. If you have a slow month and you can’t make a (loan) payment, you run the risk of everybody losing their jobs.”
If you’re looking for an investor, your best bet is to go through networks of people you already know. Start with trade groups or chambers of commerce, or talk to vendors and suppliers. Ideally, your investor understands your company’s industry, Hoffman said.
“If you’ve been in business or worked somewhere for a while, you’ve made community contacts with people who know and respect you,” he said.
Business networks brought Michael Solomon a key investor who helped his Las Vegas franchise company expand into Los Angeles. The experienced restaurant investor was looking for a business to fund, and mutual contacts directed him to Solomon’s MJS Consulting, which owns and operates Capriotti’s Sandwich Shop franchises.
“We were growing so fast that we had kind of reached our credit limit with the banks,” Solomon said. “The opportunity kind of fell in our lap, and it allowed us to open up a new market for what we were doing.”
Business networks aren’t the only investor source. Lots of business owners turn to people they know especially well: friends and family. Not everyone recommends this route. Hoffman called turning to family an “obvious” solution, but also said it could be “tricky,” with “unintended consequences.”
“You can have the fallout of hurt feelings if things don’t go well,” he said.
Solomon agreed, saying he’s mostly stayed away from close friends and family as investors: “You don’t want to worry about business issues at Thanksgiving.”
For Fine, though, friends and family have made up almost all of his investors. For one thing, they’re likeliest to support your company, by bringing in friends and associates to give you business.
“We let everyone know that anything we do is a risky venture, that we give them the opportunity to make some good money, but that they shouldn’t invest anything they can’t afford to lose in a worst-case scenario,” he said.
Whether you go with family or business associates, experts recommend a few tips for working with investors.
The most important thing is to have a comprehensive business plan in place, Hoffman said.
“Be well-organized. Don’t just rent space and throw stuff in there and hope it works out. Successful businesses today have a theme, or a plan. The days of hanging a shingle on a building and hoping people show up may be gone forever,” he said.
Your plan should specify how much money you need, and what you plan to use it for. Investors also want to know how you’ll measure progress, and how you plan to repay them.
Plus, before you bring on an investor, consider how much control you’re willing to give up. That’s especially important if the business fails to live up to expectations, Solomon said.
“What does the investor get if you don’t perform? That’s what you have to be careful of,” Solomon said. “Sometimes you’re better off with what you have. You may not want to risk what you’ve got to expand.”
If you do want to take the risk, weigh your comfort level on the investor’s share of the company. Hand over 25 percent of your business, and you’re still in charge. But let three people take 25 percent each, and you could have trouble hanging on to your business if the other partners don’t like how you run the show. Sometimes, it’s easier to limit an investor’s ownership if you promise a higher rate of return on his share.
“You definitely do give up some control with investors, but ultimately, you can still be in the driver’s seat,” Hoffman said.
And no matter how much control you want to keep, understand that investors will have ground rules. For example, they’ll want to know how much you pay yourself and how much of a raise you’ll give yourself each year. A salary cap, a seat on the board or some collateral might help investors feel more confident about supporting your company. Whatever they are, be willing to write those rules up front. Make everything clear, from paybacks to expectations to consequences if there are problems, Fine advised.
But it’s not just about what the investor wants. Make sure you’re comfortable with the person who’s looking at funding your company. If you’re not the kind of entrepreneur who likes feedback, reconsider partnerships altogether, Solomon said. A better option may be borrowing from friends, family or associates, and repaying the loan with a competitive interest rate.
“Most investors end up being partners, so you have to feel comfortable with them,” he said. “You have to have some trust that they’re going to make the right decisions, and that they’re going to be reasonable about how to grow the business. Have a meeting of the minds before you do it. It’s a marriage, essentially, with a prenuptial in case things don’t work out.”
Contact reporter Jennifer Robison at email@example.com or 702-380-4512. Follow @J_Robison1 on Twitter.