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TOUGH TIMES FOR STARTUPS

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By MICHAEL SASSO The Tampa Tribune

Published: May 21, 2008

T AMPA - Launching a small business is never easy, but a combination of a weak economy, a depressed housing market and a drop in home equity may be preventing many small businesses from even opening.

In Hillsborough County, the number of newly opened businesses paying county business taxes - previously known as occupational license fees - is down by nearly 18 percent from a year ago and down 25 percent when compared with two years ago, according to Hillsborough County business tax receipts.

The fallout is that even promising young businesses may be struggling to get off the ground. Recently, Tim and Leisha Rider of Seffner sought startup capital from two banks for their new defense contracting business, Vykin Corp. They were optimistic because they had a contract worth nearly eight figures to provide IT services to a major military contractor in Iraq.

They were shocked when two banks offered them a total of $30,000, which is less than a third of the $100,000 they were seeking. They eventually got funding from a specialty finance company called AmeriFactors.

"How do you get into business if you need money to get started?" Leisha Rider said.

According to Hillsborough County Tax Collector records, 11,143 new businesses paid annual business taxes between Aug. 1 (when the tax forms are mailed out) and May 6. That's down 17.8 percent from Aug. 1 to May 6 of the previous year, when 13,549 new businesses paid the tax. It's down 25 percent when compared with two years ago.

Comparable statistics were not available from the Pinellas and Pasco county tax collectors.

Entrepreneurship also seems to have fallen statewide. According to the Florida Division of Corporations, 135,240 domestic for-profit corporations formed last year, which is down 14 percent from 2006, when 157,310 corporations formed. The number of limited liability companies - the other big business entity in Florida - forming in Florida rose slightly to 135,851 last year from 130,251 in 2006. However, the rise was not enough to offset the drop in corporations.

There are myriad reasons small businesses aren't forming, but a few factors seem to be putting an end to some entrepreneurs' dreams. Among them are:

•Less home equity. When the Riders went to their personal bank to get a home equity line of credit, they got a rude awakening. They had hoped to use the money to finance some of the costs of their new business, such as paying their staff of 21 computer professionals until their client started paying them.

Leisha Rider said she expected to receive at least a $50,000 line of credit, but instead the bank offered them just $12,000.

"They told us our house was worth a lot less than we thought it was," her husband, Tim, said.

In fact, home equity has dried up substantially with the real estate downturn, perhaps causing headaches for many would-be business owners.

The economists at Moody's Economy.com track the importance of home equity to people's personal incomes, using data provided by the Equifax credit agency. Before the mid-2000s housing boom, home equity extractions added 3 percent to 7 percent to Floridians' incomes. However, those extractions added 14.5 percent to their incomes by the fourth quarter of 2006.

The downturn in home equity extractions has been just as swift. By the first quarter of this year, home equity extractions in Florida added just 5.3 percent to people's incomes, according to Economy.com data.

•Real estate woes. Industries tied to real estate saw some of the biggest drops in new business creation in Hillsborough County.

Between Aug. 1 and May 6 of this year, the Tax Collector's Office recorded just 28 new mortgage broker businesses paying their business taxes. During the same period of the 2005-2006 fiscal year, it recorded 112 such businesses.

Real estate brokers and general contractors also saw big drops in new businesses, Tax Collector records show.

David Feaster, area president of Whitney Bank, said banks are more cautious about lending money in general, and anything tied to real estate may have a tough time getting financing right now. Recently, a housing subcontractor with good earnings for 30 years approached Whitney Bank for a loan. The bank had to turn him down because the housing market had caused his earnings to fall, Feaster said.

With even established business struggling to get loans, small startups will find it that much harder.

"We aren't venture capitalists," Feaster said of banks. "We have to have a very specific source of payment and a specific timing on that payment."

Frustrated at their lack of financing, the Riders looked to the Small Business Development Center at the University of South Florida for help. One of the center's financial consultants, Jim Parrish, turned them onto a niche type of financing called "factoring."

In factoring, a finance company essentially buys a company's future cash flows, and provides them with immediate money. In the Riders' case, a company called AmeriFactors is buying their future accounts receivable and paying them a lesser sum up front. The Riders' big customer is a defense contractor called Global Linguist Solutions, which provides language translators to the U.S. Army in Iraq.

"There was no other way to do this business other than to factor," Leisha Rider said.

Reporter Michael Sasso can be reached at msasso@tampatrib.com or (813) 259-7865.

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