Facing Headwinds in the Loan Market, Entrepreneurs Look Elsewhere for Funding

Apr 23, 2018

Launching a new business has never been easy, but it's even tougher for startups in the post-recession economy. Credit remains tight, and banks in Northeast Ohio rarely risk loans to unproven entrepreneurs.

In this week's Exploradio, WKSU's Lucas Misera looks at how small-business owners are getting creative in startup financing.

Show Me the Money
Studies show that business loans have taken a backseat to financing methods like bonds and commercial paper since the early 1990s. The ability to issue bonds is typically cheapest and most available for proven firms, leaving small business at a disadvantage.

Yet, getting even loans is a challenge for young companies. A November 2017 study from the Federal 

The Federal Reserve Bank of Cleveland's 2017 report on microbusinesses
Credit THE FEDERAL RESERVE BANK OF CLEVELAND / THE FEDERAL RESERVE BANK OF CLEVELAND

Reserve Bank of Cleveland details the troubles that entrepreneurs and small businesses face.

Even microbusinesses (companies with fewer than five employees) with creditworthiness similar to larger firms were about 10 percent less likely to receive financing than their larger counterparts.

Cleveland Fed senior policy analyst Ann Marie Wiersch says one reason for the disparity in credit availability may be because small businesses apply for smaller amounts of funding.

"According to our survey, nearly three quarters of microbusinesses needed less than $100,000 in financing," says Wiersch. "And we've seen from banking industry analysis that small-dollar loans can be less profitable for banks."

The idea is that, whether loaning $1 million or $100,000, certain costs are  "fixed" for banks. Because those costs make up a bigger percentage of the smaller loans, there is greater profit potential with bigger lending.

Getting Creative
Regardless of what drives banks' worries about small businesses, small business are getting creative to fund themselves.

Gwen Rosenberg, the owner of the popcorn shop, Popped!, in downtown Kent, started her business with her own savings.

She says her credit card application was denied for the shop.

"I tried to get the business credit card, and I was denied," says Rosenberg. "They said they would give it to me in my husband's name, so I said, 'Well, you know what? Screw you. I'm just going to go ahead and fund it myself."

Along with digging into her savings account, Rosenberg started a campaign on crowd-sourcing site Kickstarter. Although going online was an alternative to traditional funding, she says it isn't easy.

"Even when you set it up, they tell you there aren't internet fairy godmothers that just throw money at people. I mean, let's be realistic," says Rosenberg.

Popped! customers are met with a wide array of flavors at the counter.
Credit LUCAS MISERA / WKSU

Still, Popped! isn't the only local company that had to turn to Kickstarter.

Akron-based company JASWIG, makers of adjustable standup desks, successfully used Kickstarter to get the startup funding they needed. Initially, they set a goal of around $50,000 and almost received $75,000 by the end of the campaign.

So what was JASWIG's secret?

According to co-founder Mathias Ellegiers, they relied on what he calls the "triple-F" method.

"If you need money, the first party to go to is the 'triple-F': the family, friends and fools," says Ellegiers. "Those people believe in you; those people want to support you."

Like Rosenberg, Ellegiers and the JASWIG team struggled finding traditional financing. The only bank willing to take a chance on the young company wasn't American; it was from Belgium.

Mathias Ellegiers, co-founder of JASWIG, poses for a photo.
Credit JEFF ST. CLAIR / WKSU

Ellegiers says American banks were less personal and were concerned mostly with a company's proven record, while the foreign bank was more flexible, evaluating the potential of JASWIG and its founders.

Are Banks to Blame?
For banking industry outsiders, its easy to blame the financial markets when entrepreneurs are refused funding.

But it's important to remember the heavy regulations banks face in a post-2008 Great Recession economy. With regulators breathing down the necks of financial institutions, banks are pressured into balancing profits with compliance.

Considering this, small businesses could be a headache for lenders.

WKSU
Infogram

Bureau of Labor Statistics data shows that only 33 percent of businesses started in 2007 survived until 2017. Go back even further to 1997, and only 20 percent remain.

So, perhaps until regulations loosen or startup survival rates trend upward, entrepreneurs may remain locked out of the loans market.