Entrepreneurs usually look for funding from friends and family before they step outside their circle to "angel" investors, banks or other lenders, or venture capitalists.
The nonprofit Oregon Entrepreneurs Network held a PubTalk on Jan. 15, called "Alternative Debt and Finance" at Lucky Lab Northwest, to help aspiring entrepreneurs understand their options for early-stage financing.
The topic was timely because newly proposed Oregon legislation seeks to make it easier for entrepreneurs to get startup supporta — especially if they don't have access to wealthy friends and family or the vast resources of investors that California and Washington enjoy.
Just assigned its bill number, House Bill 4033 has three parts:
$5M loan loss reserve
The first is a one-time capitalization by the state of a $5 million "loan loss reserve" model. This means that if entrepreneurs who get loans from certain kinds of financial entities can't pay back their loan, then the State could pick up part of the tab. This "backstop" would give such lenders the confidence to make loans to borrowers who are perceived as "higher-risk" because they don't meet stringent bank loan requirements, but have solid new business ideas and a good track record for managing debt. Often that profile describes entrepreneurs who are underrepresented in the mainstream startup population, such as women, minorities and people from rural parts of the state.
The state already has a loan-loss reserve fund accessible by banks and credit unions. This new fund would be open to non-profit lenders, such as community development financial institutions. CDFIs are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. CDFIs make loans often at higher interest rates than banks, to people who would not otherwise be able to get bank loans.
The second component of the legislation would earmark $400,000 to execute a "participatory design process" with entrepreneurs all around the state. Listed as a "study" in the legislation, the design process would allow underrepresented entrepreneurs to both clarify the needs and barriers to getting startup capital and support for their businesses, but allow them to participate in creating the solutions to the problem. Ultimately, the goal would be to get the voices of underrepresented entrepreneurs heard in Salem, where few politicians have startup experience.
"It's to help amplify entrepreneur voices statewide, especially those of women, minorities and rural people, and help those entrepreneurs become partners in the policymaking process," OEN President and Executive Director Amanda Oborne told the Business Tribune.
The study would include qualitative interviews, convenings, and stipends to reimburse entrepreneurs for time and travel. "Startup entrepreneurs are so heads-down trying to bootstrap their businesses, they don't have lobbyists or public affairs departments, so they're essentially not participating." This is to get them involved.
It would complement the Oregon Capital Scan. This survey done biennially by the Oregon Community Foundation and the University of Oregon, is a comprehensive analysis of the funding landscape across the state, from the funders' and policymakers' perspectives.
It looks at how entrepreneurs benefit Oregon in terms of job growth and investments, and it shows how the public money is getting spent. The study proposed in HB4033 would complement the scan by providing data on the needs and potential solutions to increase capital access from the entrepreneurs' perspectives. Together the two could provide a robust picture of how to help stimulate economic development via innovation and entrepreneurship in Oregon.
Business for a Better Portland is the lead agency that helped craft the initial proposal that led to the creation of the bill. It's being led internally by the Economic Development Committee of the state legislature. BBPDX provided a lot of the impetus following on their workgroup meetings with stakeholders in September.
$3M Growth Board
The third component is that the bill asks to increase the Oregon Growth Board budget by $3 million. The growth board is how Oregon makes investments in local entrepreneurs by investing in funds that support multiple companies at once. The funds report back to Business Oregon on the demographics of the companies they are investing in, and the community has become more vocal about ensuring that funds investing public money support diverse entrepreneurs.
BBPDX to the rescue
Ashley Henry, the executive director of Business for a Better Portland (and also a Business Tribune columnist), explained the proposed legislation and its origins in member feedback in a presentation before the alternative debt financing panel conversation. BBPDX is three years old and now has 400 members.
"The reason that we're having so many companies flocking to us is because there's a great concern about how you can, as business people, leverage your political and social capital to create a better community for everyone."
She said how a white male whose business is doing well had just asked her, in the nicest possible way, "Why should I care about these issues that you're working on?"
"One of the things that defines who BBPDX is, is that our members are coming together not just to advocate for themselves, but for the community as a whole. Our members fundamentally believe that in order for them to have a successful company, they need to be doing business in a thriving community."
They need to think more beyond the bottom line. "How are their employees doing? Do they have access to affordable housing? How do they feel about people sleeping outside their building? How can they help their neighbors? Do their kids have access to safe and great schools? Are the streets safe when their kids are walking to school?"
Access to capital for women, minorities, and rural entrepreneurs has become a big BBPDX issue.
"Say, as a business owner, I am not able to get a loan from my bank or my credit union. Heck, even this community development finance institution wasn't able to give me a loan because I do not have access to intergenerational wealth that allows me to buy a home. Therefore, I do not have collateral, and so I am perceived as a higher risk, and therefore I'm not able to get a loan to grow my company to get to buy equipment for my restaurant, whatever the case might be.'"
She said legislators were genuinely surprised to hear that business owners couldn't get loans.
"They said, 'Wow, this is something that we really need to take into consideration. Because if that entrepreneur can't get access to capital, that's really hamstrung our economy. That's a job that's not going to get created."
The legislative concept was introduced on January 14 to the House Economic Development Committee and they have chosen to prioritize this as a committee bill.
In the short February session of just 35 days, they will try to advance the three concepts. (Loan loss reserve, the study, and adding to the Oregon Growth Fund.)
"We absolutely know that this is not the silver bullet or a perfect legislative concept. But (lawmakers) know that this room holds the key to a lot of economic opportunities if it can be unleashed through capital access."
Henry circulated a sign-up sheet to start a full court press in the February session.
When asked to define alternative financing, Adam Zimmerman CEO of the CDFI called CRAFT3, said online lenders such as OnDeck were now mainstream.
He said if you go to a bank the first thing they want to know is how much money you already have, "Whether it's in a house, pocket money, in your bank account…And they're going to want to leverage that immediately. So, if your answer is 'Nothing,' their answer is 'It was really nice to meet you. Would you like to open a checking account?"
"Traditional lenders are asking for mostly two things: What's your credit score and how much money you have, and if you don't have money, what can you leverage?"
Alternative sources are more like microloans from places such as Mercy Corps; character-based lending; the Small Business Administration, and crowdfunding.
Zimmerman said a bank has about 90% leverage. "If I make a $100,000 and I lose that money, just to get the even I have to make a $10 million loan. Banks don't go out business by making low interest, loans. Banks go out of business by making bad loans."
He explained the basic concept of debt (you pay the money back) versus equity (the investor owns part of your company).
"Statistics show 65% of businesses never get outside capital." Companies that do not have revenue yet have a hard time getting loans because the bank demands payments right way.
"That's the first thing the underwriter is going to want to know. Is this operation throwing enough off enough cash frequently enough that we're going to be friends in six months? And I'm not going to be calling you saying 'Hey, you're 30 days past, you're 60 days past due?' And you say 'No, we didn't that contract.' Those are the conversations they want to have up front."
CRAFT3 is a 501 c three nonprofit. "Our regulator is the IRS because it's what bestows upon us the nonprofit status," said Zimmerman. "We have about $50 million in equity and we've got balance sheet at about $150 million. And in 2019 we made about $60 million in investments in businesses and nonprofits in Oregon and Washington. those loans range from a $25,000 up to nearly $12 million." Amortization is usually five years. Eateries working in the security bubble at airports have to spend a lot on tenant improvements (they are usually big chains) and lose the investment if they go under. CRAFT3 was able to finance Bambuza, a Vietnamese eatery at SeaTac airport, when no bank would.
High risk, high potential
Tjersland of New Seasons says their mission-based on program is designed to look at lenders from underserved or underrepresented. "The conversation about money can be very uncomfortable. It can be lack of collateral, it can be lack of credit. So, we tried design a loan program that for a lot of banks might be might be considered high-risk. The type of folks we lend to we look at as high potential."
They look for people who are trying to buy a piece of equipment that could double their business.
"We don't look at them as high risk because we see the potential growth for them in more stores and additional products. We just invest in their business without having that real awkward conversation."
He added, "Character based lending asks you to put skin in the game. We will give you $100,000 (at 10% APR) but you have to prove to us why. It's 'white of their eyes' lending. Can I trust you? Twenty or 30 years ago most of the people lending money looked like me. Not all of this has to do with numbers, a lot of it has to do with character."
Sitting on millions
Amy Jermain from XXcelerate Fund said women entrepreneurs are the biggest growth market who get the least amount of funding. According to SBA 72% of their loans went to men.
But single moms won't put up their car for collateral because if it got taken away the kids couldn't get to school. A typical borrower has $100,000 $200,000 in working capital, has financial integrity a credit score below 600.
"But you pay your Verizon bill! We serve people that can illustrate financial integrity. We ask you questions like what kind of wraparound services are you receiving? Who's your mentor? Who does your accounting? We ask you questions that reflect reasonably what you're going through as a startup?"
The message that there are lots of alternatives, if people know where to look and have their business plan complete. The state is all over it.
Tom Schnell, Business Finance Officer, Business Oregon said "We fund funders in the state of Oregon. We cannot directly invest in a company. What we do is we give money to various different investment agencies. We work on them throughout the state. This includes the Bend Venture conference."
They also offer the royalty-based fund for startups that have revenue.
"We can actually take a part of the monthly revenue, not net income, but revenue. And so, if you have a really good month, you pay us back a little better. If the revenues a little bit lower than that month you pay a little bit less."
One F&B (food and beverage) entrepreneur attending was Emily McIntyre, co-founder and general manager of Catalyst Trade.
It imports green coffee from Ethiopia to sell to roasters throughout North America and Europe. Their local customers include Nossa Familia, Dapper & Wise, Case Study Coffee, Seven Virtues, and Happy Cup Coffee.
Afterward, McIntyre said of the talk, "It was good for me, coming from a non-finance background, to hear some very concise overviews of what people are looking for."
She is already talking to traditional financiers, such as local credit unions.
Some of the comments such as the panel saying you have to tell the bank how you are going to pay them back, that she found pretty obvious.
"But it's good reinforcement."
Such OEN talks are aimed at beginners, but they are also attended by service providers who want to work with entrepreneurs and help them with, say, their marketing or their books. One such as Karen McKeon, a Certified Public Accountant.
"I work with any kind of small business that needs help, McKeon told the Business Tribune. "It can range anywhere from getting a brand-new company on to a (software) system. Or if a company's been established for a few years, but they've never had any kind of official books, I can help them figure it out. When people have a shoebox full of receipts, I can help them with that. It does happen. There's a lot of smaller companies, they're very good at what they do and accounting is not part of that. I see a lot of small, creative companies." She used to be a metalsmith and jewelry maker, so she sympathizes.
"I feel like I can talk their language and get them to understand their numbers and what it means for their long-term financial growth." Taxes are looming. "It's usually this time of year when people are like 'Oh my goodness, I didn't do anything last year, I really need to get it together.'"