Small Business Challenges
4 Comments Published by Dr. Beyster November 13th, 2007 in Employee Ownership, Entrepreneurship.As I noted in an earlier post, last Thursday I gave the keynote address at the ESOP Association Conference in Las Vegas . More than 1,000 people were present. I talked about the subject Beyond the ESOP, using SAIC as an example. After my talk, I was asked a number of questions. Someone asked if I would be interested in starting another business now. I said I wouldn’t be interested myself, but I would be willing to help others who would build such an employee-owned company.
I was also asked my opinion about the legal difficulties that have been caused for small businesses in the United States as a result of Sarbanes-Oxley. I told those present that my feeling was that Sarbanes-Oxley was a result of a few companies that perpetrated fraud on a massive scale, and not by the vast majority of American companies which our normal legal system can easily handle. This brought a round of applause.
Sarbanes-Oxley seems like a small problem compared to funding gaps that some small startup business find themselves in. Dr. Beyster mentioned in his book that he “put up his house” in order to secure a bank loan and maintain the employee-owner culture of SAIC. These days, with young entrepeneurs having to invest a significant amount in real estate in order to be homeowners coupled with shrinking home values, there is not much equity left to even secure a loan. The risk seems higher than ever. Is there a resource that small employee-owned businesses can use to secure a bank loan or financing that doesn’t involve putting up the house, or transferring complete control to outside investors? Goverment contracts seem like one potential avenue. Can anyone comment?
Dr. Pfau: There was something we did at SAIC that involved borrowing money from our bank in the form of a line of credit, secured with our accounts receivables. The bank was paid first. This is a good approach for a young business. I do not think there is a shortage of money for high-potential startups. There are many investors and private equity firms looking for good companies to invest in. There are organizations — such as UCSD Connect — near many universities that put together financing packages with company owners. As long as you’ve got a good idea, there will almost always be money to support it.
– Bob
Access to capital is a significant problem for startups. There are two ways to finance businesses either through equity sharing or loans (debt service). The government may provide funding through the SBIR/SBIT process; where a governmental agency finances in phases some of the developmental costs. However it has to be a product that the agency is interested in. Not all agencies have this program so you have to look on the agency webpage. Factoring which Bob Beyster describes is another way, a bank to buy your receivables. But most banks want the entrepreneur to have “skin in the game” and they want you to have financial risk as well. Of course angel investing and VC funding want equity and some say in your business. Friends and family is another pathway. Incubators can also assist in finding funding. Good luck.
Cecelia: Your message hits the nail on the head. The methods of financing you suggested are exactly what I would also recommend to get initial funding to start a small business. I wish more entrepreneurs knew about them. They certainly worked well for me at SAIC. – Bob