Tim Barry came to the bankers’ table with the self-confidence of a born marketer and with entrepreneurial skills honed during his years in hard-driven Silicon Valley. He knew how to make money and how to pitch for funds.
Yet the Camas resident hit four brick walls earlier this year when he went shopping for dollars. Barry needed a $60,000 loan and a $50,000 line of credit to build up his string of online stores, which sell such niche products as airplane seat belt expanders for overweight people and monogrammed back scratchers. After his request was rejected by national and regional banks, he turned to private financing and cost-cutting for the money he needed.
Skeptics could write Barry off as a dreamer lacking the skill to turn an idea into a profitable business venture. But Barry rolled out financial particulars, and explained how he’d received professional help on a business plan, as an invited speaker at a recent business breakfast attended by dozens of Clark County business owners and bank loan officers. He’s convinced that, despite constant proclamations from lenders that they are rolling in cash for loans, start-ups such as his online Intelligent Technologies Inc. that don’t fit into a comfortable box aren’t likely to pass muster with risk-wary lenders.
“The bank is not your friend,” says Barry, whose company’s three full-time and three part-time employees operate out of a Vancouver warehouse. “You’re on your own.”
A single small business like Barry’s is a mere blip in Clark County’s push for renewed prosperity, yet those small blips add up: 42 percent of the county’s jobs are in companies with fewer than 50 employees, five percentage points higher than the state average. Barry’s experience, then, is a peephole into the taut world of business finance that is slowing Clark County’s halting efforts to build a more balanced economy.
“Everybody puts down the mom-and-pops, but if you get enough of them you have quite a few jobs,” says Jan Harte, a business adviser at the Small Business Development Center in Vancouver.
Community leaders dream of recruiting to Clark County top-tier businesses weary of California congestion or Oregon taxes, or Asian behemoths searching for low energy costs or easy air and rail access to markets. Witness the local enthusiasm about the job-creating potential of PeaceHealth and Fisher Investments. These are the kind of companies that typically finance their own growth or have easy access to capital markets.
But startups and small businesses usually need outside loans or investment money to grow. With the economy still a mess and consumers keeping a tight lid on spending, however, these small borrowers pose the greatest risk to lenders and investors.
Banks are looking for the safest bets, which these days are medical-related industries and professionals, high-income homeowners and retirees. Investors of all stripes are looking more skeptically at business plans, management skills and earnings estimates before putting money on the table.
In Clark County, where large employers are scarce, a new economic development report endorses a stronger push to promote small-business expansion. The Clark County Economic Development Plan, now in draft form, also suggests establishing a formal network of “angel” investors willing to finance startups. It poses the idea of creating a revolving loan fund through the Columbia River Economic Development Council to provide operating capital to small businesses.
By all accounts, plenty of money is potentially available from bankers and the wide array of short-term and long-term investors who fuel business growth. But the people with the big bucks seem to be taking a “tough love” approach when it comes to financing small businesses, says Brad Gevurtz, head of investment banking for D.A. Davidson & Co. in Lake Oswego, Ore.
“Even though the markets are choppy, there’s plenty of capital for large companies,” he says. “It is much harder to get capital for a small company. Everybody wants to lend to the Fortune 500 company, but if you’re a small startup it is much, much harder.”
A big drop
Small-business lending tanked during the Great Recession, for obvious reasons. The financial sector’s turmoil hit big lenders like Washington Mutual and small-timers like the former Bank of Clark County, and the falling economy wiped out jobs and home equity that owners of many startups and small businesses tapped for expansion.
In Clark County, small-business loans dropped from 17,611 in 2007 to just 6,491 in 2009, the last year for which Community Redevelopment Act data is available. The dollar amount of loans dropped by one-third. Indicators in more recent times have been mixed, showing signs of increased loan volume last year and an up-and-down pattern in small-business loans so far this year.
Some businesses looking for a route to growth see undue caution by lenders. Matt Houghton, general manager of Paul Schurman Machine Inc. in Ridgefield, is among them.
The industrial machine shop, with 25 employees, weathered the recession, even purchasing a planer and finding new customers by making inroads into the wind and pump industries. This year, when Houghton found a company wanting to “re-shore” its manufacturing from China to the U.S., he made a successful pitch for the work on the expectation that he would be able to buy a machine called a horizontal boring mill.
Houghton then set out to get financing of up to $300,000 for the machine. Two national banks that he would not identify turned him down, he says. The work went elsewhere.
Banks just didn’t understand his niche business and didn’t bother to learn, Houghton says, his voice tinged with frustration. “They want something simple,” he says. “They’re missing out.”
It’s not as if banks aren’t eager to loan. Ron Wysaske, president of Vancouver-based Riverview Community Bank, worries that the current disconnect between cash-rich banks and cash-thirsty businesses is bad for both.
“We’ve got to find business for what we do,” Wysaske said of his industry. “If everybody goes after the same thing, you might look around and say ‘We have too many banks.’”
Banks are caught between intense political pressures to do more lending and regulatory cautions designed to prevent bank failures, argues Spencer Brown, a Camas investor who also is on the board of Commerce Bank of Oregon.
Banks need to set aside greater reserves for loans that aren’t AAA rated, leaving them with less money to loan to other borrowers. That’s a problem for many smaller banks, he says.
“They’re becoming far more conservative because they have to be,” he says.
Those companies that work to make the bank their friend are most likely to succeed in borrowing money.
Portland-based building materials importer Nova Wood Products learned the value of a strong relationship with a lender when it when went looking for a $7.3 million line of credit earlier this year. Its challenge, not unusual for importers, is that it needs to pay to obtain products up front but it isn’t paid by customers until the products are delivered. Financing the products in the period between purchase and delivery poses a risk to lenders.
The company was unable to get acceptable terms on a credit line from private investors or two banks, says Chief Executive Officer Steve Getsiv, a Vancouver native. He turned to a bank “relationship officer” he’d worked with in the past, who had switched to Vancouver-based First Independent Bank, and there Getsiv secured the loan.
Getsiv echoes the advice of business finance experts: A solid relationship with a bank is all-important in today’s lending environment.
“If we would have had to accept (other lenders’) terms, we would have gotten a lower credit line and had to reduce our operations further, for no good reason,” Getsiv says.
But banks represent only a piece of the business finance puzzle — the safest and often least-expensive source of funds, but not the right fit for many companies’ growth trajectory.
Innovative companies with strong leadership still can secure healthy amounts of private financing. For example, nLight, a Vancouver manufacturer of high-powered semiconductor lasers for commercial use, this month announced a new $17.5 million round of private equity investment, bringing total equity funding for the 11-year-old firm to $110 million. To obtain this kind of outside funding, companies must give an ownership share to investors. NLight, with 230 Clark County employees, is tapping foreign markets and expects its sales to increase 50 percent to around $70 million this year.
But such deals are rare in Clark County.
Private investors looking for new places to find profit are creating or building on a wide array of financial tools for equity loans and debt financing. An informal network of “angel” investors — individuals willing to take a risk on startups in exchange for an ownership stake — is filling some of the financing gap for promising new companies. But venture capital has been a tough nut to crack in the Portland region, where well-heeled investors are scarce. Such cash is abundant in Silicon Valley and to a lesser extent the Puget Sound region, but even in this high-tech era it’s challenging to work deals at a distance rather than face to face.
Tapping into the loosely structured network is far more difficult than checking out the operating hours of the local bank. In Clark County, bimonthly PubTalk events are one attempt to link would-be investors with potential entrepreneurial borrowers. But, as inventor Dale Luger of Centralia is discovering, “it’s not what you know. It’s more who you know.”
Luger, 67, retired to Centralia from California a decade ago and has worked since then on a mobile app that simplifies address searches on global positioning devices. His vision for QuickFind is so expansive that it requires dividing the world into 1.278 trillion squares and cross-referencing each of the world’s addresses to one of those squares.
Luger expects those QuickFind numbers will be as commonplace as phone numbers — just type them in and an address pops up on an iPhone or GPS device. And he predicts his company, which he hopes to establish in Clark County or elsewhere in the Portland area, will employ hundreds.
He’s spent $200,000 but needs another $500,000 to $4 million in investment. He’s hired Benjamin Peek, a Beaverton, Ore., business consultant with deep roots in high-technology management and investment, to connect him with potential financiers.
Peek steers his clients through a challenging gauntlet. “Good ideas are not a dime a dozen. They’re a dime a thousand,” he says. Businesses need a solid financial plan and a good management team, a Catch-22 in the early development phase when there’s little money to attract top talent.
The critical factors in whether an entrepreneur will attract money from hard-nosed investors are a passion for their product and a drive to finish the task.
“A killer instinct is extremely important,” he says. “If you don’t have it, there’s nothing you can do. It’s no fun growing a business.”
Rick Turoczy, head of a new corporate-backed startup investment and support program called the Portland Incubator Experiment, says the region simply lacks wealthy business people who have sold companies and then used their proceeds to fuel the startup scene with venture capital.
“That’s one of the things we’re all waiting for,” he says. In the meantime, he’s optimistic that a growing number of wealthy venture investors in the Puget Sound and Bay Area regions are looking to this region for investment opportunities.
Even if money is tighter than in the past, Brown, the Camas investor and bank officer, doesn’t take complaints about a lack of small-business financing at face value.
“Whenever I hear from somebody who couldn’t get money for their business plan, it could be that the capital is there but they’re not interested in the business model you have to present,” he says. “Maybe they don’t have a growth plan desirable for somebody to invest in the company.”
Brown’s sentiment reflects the reality going forward for Clark County businesses struggling to move beyond mere survival to prosperity. While local business finance challenges are inescapably tied to national and worldwide economic forces, this region’s business owners don’t have the option of waiting for a return of the quick cash culture that now appears to be gone for good.
They can take the route of Tim Barry, going it alone and likely scaling back their growth ambitions. They can follow Dale Luger’s path and go for broke, hiring experts to help them reach the new funding bar. Government can play a crucial role by offering training and funding opportunities.
In the end, financial experts believe the powerful law of supply and demand will find a way to play out: Lenders have plenty of money, and businesses are eager to borrow.
“There are,” Brown says, “thirty-one flavors of ways to get your company financed.”