Raising Capital in an Economic Slowdown

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Jacobs says business owners should be wary of non-bank credit options that could come with brutal interest rates, like factoring receivables. You can also try to land a loan through social lending Web sites (BusinessWeek.com, 12/21/07). In some cases, you may be able to get your suppliers to extend you credit as well, especially if you have long-standing relationships with them.

What about angel investors?

Angels may hesitate to invest their personal wealth because they're most likely seeing value shrink in their other assets, such as real estate and stocks, according to Tom Kinnear, an angel investor and head of the Zell Lurie Institute for Entrepreneurial Studies at the University of Michigan. "I think the angels are going to be a little more inclined to play it closer to the vest," he says.

Is venture capital available?

Venture firms raise money for their funds years before they invest in companies, so they still have money to commit, Kinnear says. But expect a lower valuation if you do get funded. "They will have the funds, but they will be more careful about valuations of businesses they invest in," Kinnear says. During a slowdown, VCs still want to make their target rate of return, so they'll be looking for greater shares of equity in their portfolio companies.

What about raising funds for expansion?

Companies in growth stages showing solid sales are better positioned to get both debt and equity financing in the current market. "If you're in a sweet spot of looking for growth capital or mezzanine funding, there's a whole lot out there," Kinnear says. "The closer you are to commercialization or have actual sales or, Lord willing, profits, the easier that is." The uncertainty in the market penalizes startups, but established and profitable companies can benefit from investors looking for payoffs with lower risks.

What is the government doing that could affect my business?

Tax incentives for small businesses might be worked into the Senate's version of the economic stimulus package (BusinessWeek.com, 2/4/08). The plan would increase the amount companies can write off for investments from $125,000 to $250,000, giving an incentive to buy new equipment or other capital investments in the 2008 tax year.

A bill introduced on Jan. 24 by Senator John Kerry (D-Mass.) would also reduce fees on government-backed Small Business Administration loans. SBA loans, which normally increase when other types of credit are tighter, have dropped 5.7% in total volume from Oct. 1 to Jan. 25 compared with the same period in the last fiscal year, according to the National Association of Government Guaranteed Lenders. The group, which represents some 700 lenders, said members and borrowers cited high fees and other costs as top reason for the decline, according to the group's president, Tony Wilkinson. The bill would also increase money available for microloans.

Business Exchange related topics:
Global Recession
Recession Spending and Investing
Credit Crunch

Tozzi covers small business for BusinessWeek.com.