A year ago, Ed Brown said Nevada’s business financing picture in 2010 was the worst he’d seen in his 35 years of administering small business loans for the U.S. Small Business Administration (SBA), describing it as “a bad time” and “depressing.” Minimal loans of any kind were being made. Funds were being pieced together from various sources. Some groups had no money to lend.
In 2011, the situation had improved but was not stellar. Between Oct. 1, 2010 and Sept. 11, 2011, the SBA, together with partnering banks, made 429 SBA loans totaling $166,943. This compares to the previous year, when they lent $103,026 through 328 loans.
“It was such a huge surprise for us to beat out 2010,” said Brown, the chief of finance for the SBA’s Nevada district office. “I would’ve bet my life that we wouldn’t have done more than break even.”
Money for loans is available, more loans are being made and new funding sources are slated to become available in 2012. All of this is good news for existing businesses, small and large, that need money and qualify for loans.
“The problem is that most people who want to borrow have balance sheets that have been weakened by the economy. If you’re the prefect borrower, you can get the money. It’s hard these days to be the perfect borrower,” said Dave Archer, president and CEO of Nevada’s Center for Entrepreneurship and Technology, a nonprofit organization that helps the state’s entrepreneurs start and grow their businesses. Archer also is co-founder and treasurer of the Reno Angels, a Northern Nevada group that invests in early and mid-stage companies needing funding.
The outlook for start-up companies in the Silver State isn’t as favorable, as banks generally don’t lend to these entities due to the high risk involved.
“One of our major problems is that we do not have a local lender that masters or specializes in small loans,” Brown said. “I would love to get a credit union or midsize community bank lender here that would loan $25,000 and below.”
Small businesses that are struggling due to the weak economy but hanging on are another underserved group without many options.
“Those are the people who really need the help,” Brown said. “A lot of times their credit score is up, business has gone down, they’ve cut employees to the bare bones if they have any left, but they’re still surviving, still have a heartbeat and could use that $25,000 or $50,000. Unfortunately, that’s the customer that we’re not helping at this time.”
Banks can’t make loans, however, to people who, for example, can’t put down any money or have defaulted on a previous loan and therefore don’t meet the required criteria, said Bill Uffelman, president and CEO of the Nevada Bankers Association, which represents nearly all the banks doing business in Nevada (about 35 in all). Banks must be able to show the Federal Deposit Insurance Corp. the people to whom they loan money have the means to repay the debt.
At the same time, customers who would qualify are taking a conservative stance and not asking for money, which is further depressing the number of loans being made.
“They’re sitting tight, not expanding and making do with what they have. They’re not adding equipment or personnel and are working overtime with the people they have. Bankers have good customers who say, ‘Just not right now. I want to see where we’re going with taxes, the health plan, the whole nine yards.’”
Nevada also lacks any major venture capital (VC) firms, which typically invest in companies in amounts of about $1.5 million and higher, Archer said. “I think it’s specifically related to Nevada’s small population as opposed to any other reason,” he added. “If you look at other states our size, they don’t have a significant number of VCs either.”
What the state does have in the way of funding sources is a hodgepodge.
“Some of them are here, some are looking to come here, some are dealing with rural areas only,” Brown said. “You kind of have a combination of that. Probably by midyear, we should have some different options.”
Here’s a look at what’s available:
Traditional Bank Loans
These typically start at $150,000 and are for expansions, new equipment and the like.
“Every business lender tells me they’re all chasing loans because that’s how they make money,” Uffelman said. “They’re out there, wanting to provide service. For those who meet the criteria [for a loan], which are really fairly normal criteria, it will work out.”
The SBA has an array of government-backed small business loans that ultimately are made by lenders, not the SBA itself. Its 7(a) loans, the most common, generally are for start-up and existing small businesses that aren’t eligible for funding through usual channels. They typically range from $50,000 to $250,000. With 7(a) loans, financing can be guaranteed for working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction) and leasehold improvements.
Community Development Financial Institution Loans
Two new players on the Nevada scene providing community development loans in the range of $15,000 to $500,000 to small businesses are Idaho Nevada Community Development Financial Institution (CDFI) and California-based Clearinghouse CDFI. CDFIs are financial institutions that provide financial services to underserved markets and populations. The Idaho-Nevada CDFI, for instance, provided a $1 million permanent loan for Pacific Pines, a senior affordable housing unit in Henderson.
A third option is Arizona-based Préstamos CDFI. Through its parent corporation, Chicanos Por La Causa Inc., it provides loans to small and emerging businesses—microloans ranging from $2,000 to $50,000 and small business loans from $50,000 to $250,000.
The Rural Nevada Development Corp., headquartered in Ely, lends to small businesses in need of start-up or expansion financing, which are located in rural Nevada, the rural parts of Washoe and Clark counties and the state’s 27 Native American tribes.
In addition, the U.S. Department of Agriculture helps fund projects that create or maintain jobs as well as projects that promote a clean rural environment.
Nevada is home to three angel investment groups, which provide seed and early-stage capital in the range of about $50,000 to $1.5 million. Reno Angels, for instance, since forming in 2008, has invested $1.5 million in 10 companies (out of 110 applications). Sierra Angels, based in Incline Village, provides early-stage investments in promising local technology ventures. The Vegas Valley Angels provides equity capital to early and mid-stage entrepreneurial companies, primarily those based in Southern Nevada.
“The headline there is that the angel investment community is alive and well in Nevada,” Archer said. “There are a lot more deals than there is money to invest.”
Pursuing angel or venture capital funds isn’t always the best option for start-up and existing businesses, however, Archer said.
“You’re going to give up a fair amount of equity,” he added. “You’re going to pay a lot for that money. I encourage people to try to bootstrap themselves and find friends and family to borrow from because it’s a much more favorable type of financing.”
Future Financing Sources
Business financing in Nevada could potentially improve in 2012, as new funding sources come online.
“Literally, today, it’s not so great,” Archer said. “In six months, it’s going to be much, much better.”
These potential sources of new capital are:
State Small Business Credit Initiative funds
U.S. Department of the Treasury has approved $13.8 million of SSBCI funds to be used for lending to businesses in the state. The Nevada Commission on Economic Development will use the majority of these monies to support its Collateral Support Program, funds going to financial institutions to cover the necessary collateral that small businesses lack to qualify for a bank loan.
About $500,000 is destined for Nevada Microenterprise Initiative (NMI), a CDFI that provides microloans, ones under $35,000, to start-ups and cottage industries. While NMI has existed for a number of years, it hasn’t made any microloans for the past two. It changed management earlier this year, and hopes to begin lending again in 2012.
Nevada Capital Investment Corp. Funds
Under Senate Bill 75, passed during the recent legislative session, the Nevada Capital Investment Corp. was established. It’s a nonprofit board of directors that will oversee the investment of state funds, up to $50 million from the Permanent School Fund, along with any private equity funds obtained in the future, in private Nevada companies in specific industries. Those industries include health care and life sciences; cyber security; homeland security and defense; alternative energy; advanced materials and manufacturing; information technology; and any other industry the board deems eligible.
“SB75 is the best thing that happened to this Nevada entrepreneurial community in 10 years,” Archer said. “It has the flexibility to invest in early-stage companies. These companies might also qualify for angel financing up to perhaps $3 to $5 million investments. It’s not a little niche.”
The NCIC’s goal is to have a fund manager in place and begin investing in Nevada companies by fall of 2012.
Nevada State Development Corp. BIDCO Loans
The Nevada State Development Corp.(NSDC), a nonprofit organization providing loans to small and medium-sized businesses for commercial real estate and equipment, hopes to soon begin providing loans starting at $50,000, through a for-profit Business and Industrial Development Corporation.
Crowd Fund Investments
Crowd funding, also called crowd financing or crowd-sourced capital, is when a collective group of people, typically via the Internet, provides financing to a start-up or existing small business in need. Unlike angel investing, where a small number of people invest a large amount, with crowd funding, a large number of people invest a small amount.
“An angel investment might have 30 people investing $30,000. A crowd fund investment might have 300 people each investing $1,000 dollars,” Archer said. “The terms are kind of the same.”
In November, Senator Scott Brown (D-Mass.) introduced to the Senate a crowd funding bill called “The Democratizing Access to Capital Act,” which would alter U.S. Securities and Exchange Commission law to allow smaller investors to buy shares of a start-up company before it goes public on crowd funding websites. It would afford entrepreneurs and small business owners access to additional sources of capital. Currently, the SEC only allows qualified institutions like Goldman Sachs and individuals with net incomes of more than $200,000 ($300,000 for couples), or a net worth of more than $1 million, to invest in private companies before an initial public offering.
“If that bill passes, it will start having a good amount of momentum,” Archer said.
Business financing experts are hopeful next year will improve upon 2011 but aren’t confident that will be the case. Las Vegas perhaps will take longer to bounce back than Reno.
“In my old age, I’ve gotten very cynical. It’s hard to sit here and say doing this is going to make that happen. Doing this you would hope would make that happen,” Uffelman said. “The [financing] trend is better than it was, but it’s still really poor. It will be that way for some time to come.”
Senator Brown will be content to just attain this year’s level of loans in 2012. “If we go up, that’s just an extra bonus,” he said. “It’s going to take some time. Unfortunately, I know people are losing patience and all. It’s probably best for us to go slow this time around, for our recovery. We just don’t want to shoot back up like we’ve done in the past. Let’s take it easy, take it slow and slowly rebuild,” Brown added.