How are you going to fund your business? That's long been one of the most vexing questions facing entrepreneurs, who routinely balance the pros and cons of insanely high credit-card rates with the discomfort of having to answer for the in-laws' investment around the holiday turkey. Those and other trade-offs constantly evolve as interest rates fluctuate, new government regulations take hold, and family members' enthusiasm waxes and wanes.
Here are three trends that could affect where you're able to raise money this year.
1. Rising interest rates
The U.S. Federal Reserve has said it's committed to keeping short-term rates low, even as it winds down its bond-buying program later this year. But in the longer term, rates have nowhere to go but up. Rates on short-term business loans, according to the National Federation of Independent Business, have been stuck at about 5.8 percent for years. For many banks, that’s barely profitable.
If you've received venture or angel financing, low interest rates have helped make your life a lot easier -- even if your company doesn't have a drop of debt. That's because private equity companies, who buy more mature companies, often do borrow money. As long as debt is cheap for them, they can afford to pay relatively high prices for their acquisitions. "In the private equity world, valuations are sky-high because debt is so cheap," says Dr. Craig R. Everett, director of the private capital markets project at Pepperdine University's Graziadio School of Business and Management. Those big valuations flow downstream, encouraging angels and venture investors to be more generous when they value companies.
What happens when interest rates rise? Valuations crash. Brace yourself.
2. Climbing real estate values
Like it or not, entrepreneurs are uniquely tied to real estate. About one in six small businesses work in real estate, whether they're builders, contractors or in related fields such as interior design and landscaping. Even entrepreneurs whose businesses appear to be outside of the sector find themselves affected: Roughly one-quarter of small business owners tap the equity in their homes to support their businesses, according to Minneapolis's Barlow Research Associates.
For other business owners, property is a key form of collateral that enables them to get the business loans they need. That's one reason why, in the aftermath of the financial crisis, we so often heard entrepreneurs say that banks weren't supporting them, and banks responding that would-be borrowers just weren't creditworthy. During that time, many business owners still had stable or growing businesses -- but because the worth of real estate had dropped so precipitously, they no longer had the collateral to back the loans they sought. Without that collateral, the banks saw them as less than creditworthy.
Thankfully, housing has been on the rebound for about a year, with the S&P Case/Shiller index of housing prices up 13.6 percent in the 12-month period ending in October. Prices are predicted to continue to rise in 2014, but at levels closer to historical norms. Zillow is predicting a 4.6 percent increase between November 2013 and November 2014, while the National Association of Realtors forecasts that home prices will rise 6 percent this year. "We're going to get a lift from housing, and that's going to lift the whole small business sector," says Mark Zandi, chief economist for Moody's Analytics.
3. Crowdfunding gets real
I admit it: This was supposed to be the trend to watch in 2013, and while we watched and watched, the U.S. Securities and Exchange Commission just couldn't get its act together and issue rules for equity crowdfunding. Finally, we're getting close.
In October, the SEC proposed opening up equity crowdfunding to investors with less than $100,000 in annual income, and also moved to allow startups to advertise the sale of their shares openly. It also limited the amount a company could raise in equity crowdfunding to $1 million, and imposed stricter disclosure requirements on companies seeking to raise more than $500,000. Whether or not you like these rules, just getting any proposal out there, after months of delays, counts as progress.
Even without the ability to offer equity, Kickstarter, the largest crowdfunding site, says it has already helped companies raise some $933 million. Some big companies are crowdfunding as well, drawn by the publicity and fan-building potential of the exercise. But for entrepreneurs located outside of the major venture capital hubs, crowdfunding holds great promise as a new route to early-stage capital.