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Kelley Silvey Access to CapitalKelley Silvey is still looking for capital to fund a bioenergy plant in Potosi. Despite interest from investors to build a plant in Indonesia, Silvey will wait for a loan so he can build in Missouri.
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Smokin Guns Access to CapitalAfter being featured on the Food Network, business expanded for Smokin’ Guns BBQ. Owner Linda Hopkins remembers one Utah family stopped at the restaurant twice on a family road trip.
Two Missouri Businesses Share Financing Challenges
By Marty Steffens
In 2010, despite the stubborn economy, Phil and Linda Hopkins thought they’d won the lottery. Seven years before, they cashed in Phil’s 401K and refinanced their Kansas City home to launch their dream—a barbecue restaurant. They found a building in an industrial area with no nearby competition. It was perfect for a lunch joint, where local workers could sit down for burnt-end brisket, pulled pork, or a plate of ribs. They built a bustling business with a loyal clientele and began catering. Soon, a website sold their sauce and rubs.
But then Guy Fieri rolled up in his red Camaro in the summer of 2010 to feature Smokin’ Guns BBQ on his Diners, Drive-Ins and Dives show on the Food Network. Business doubled overnight, and lines of diners snaked around the corner. Tourists from as far away as Alaska, Hawaii, and Canada detoured two miles off Interstate 70 to stop by Smokin’ Guns. The restaurant reached capacity, and despite adding a delivery service, the Hopkins family could only watch as potential customers would drive up, eye the long lines, and keep on going.
“We had to do something,” Linda says. Luckily, the property next door on Swift Street was available. Despite a tough lending environment, Linda received encouragement from a loan officer at a local bank. She hired an architect to create a blueprint with more than three times the seating, a full bar, an events room, and a larger kitchen.
Then, the bank had a management change. The loan was delayed at first, then declined. In October, federal authorities closed the weakened bank. Linda took their impressive history of sales to other lenders, but she was turned down by one bank, then another. Seven more banks didn’t believe that Smokin’ Guns’ overnight fame would last. The Hopkins had run into a roadblock—access to capital.
As the recession increased its grip on the United States, lenders tightened credit standards, requiring additional collateral and personal guarantees. Real estate values continued to crumble and made loans even tougher. By 2010, new lending to small businesses was down 30 percent from 2008, according to Community Reinvestment Act reports.
So, despite the Hopkins’ business cash flow statements that showed 40 to 60 percent year-over-year gains, the banks turned thumbs down to their $1.5 million construction loan.
“One guy told us we were crazy for trying to build in a warehouse district,” Linda says.
It was now 2011, and Phil and Linda were out of options. One day in late summer, Jeff Samborski, head of economic development for North Kansas City, stopped in for his usual combo platter. He asked Linda how things were going, and she bent his ear.
Samborski offered to help, and he put the Hopkins in touch with Advantage Capital Partners, a St. Louis-based firm that tapped funds from the state-run and federally backed New Market Development Program. It allowed investors to receive a tax credit based on dollars they put into a pool of funds that target low-income areas often ignored by lenders.
Samborski, who’s been running economic development for the city for 24 years, says capital is the toughest challenge for businesses today. Businesses such as Smokin’ Guns can be a hard sell to bankers due to stagnant real estate conditions. “Lenders were concerned that the actual brick and mortar, if it went vacant, could not be sold for the loan amount based upon the value that neighboring buildings of that size were bringing,” he says.
Tracy Reckert, vice president of Advantage, encouraged the couple to apply to the loan program, which targets businesses in underserved Missouri areas. The criteria? The business must be located in Census tracts with incomes significantly lower than surrounding areas or with 20 percent at the poverty rate. North Kansas City, with a population of 4,200, had an estimated median household income of $45,500 in 2011, far below the metropolitan Kansas City median income of $53,376.
Reckert drove to Kansas City last spring to look at the restaurant. Over pulled pork sandwiches, the deal was struck. In January 2013, the new Smokin’ Guns opened with longer hours.
“The second week, we had our best sales ever,” Linda says. Missouri’s version of the New Market’s program is up for renewal by the state legislators, and Linda showed her gratitude by testifying. “If it weren’t for (New Markets), we wouldn’t be here,” says Linda.
Missouri is in dire need of a program that particularly targets small business in the state. “Private capital can go anywhere in the world,” says Scott Zajac, senior managing director at Advantage Capital. By providing 39 percent tax credits spread over seven years, this program is an “inducement to redirect money” to underserved areas in Missouri.
So far, the loan at Smokin’ Guns has had its intended effect. The restaurant’s payroll added 39 jobs.
And the old “hole-inthe-wall” restaurant that launched their fame?
Linda smiles. “We’re tearing it down to make a parking lot.”
Capital Still Needed
Kelley Silvey thought he had a sure thing: a patent on an idea that would eventually be able to convert trash into acetylene gas. He envisioned a plant near his hometown of Potosi siphoning off trash heading for landfills and turning it into fuel. In its initial stages, it could convert wood chips into char, immediately creating 100 jobs in a distressed area of Washington County. Later, a full spectrum of biomass conversion could be replicated in plants across the nation.
Silvey had three decades in agribusiness. His partner and company CEO, Larry Gooden of St. Louis, was a veteran entrepreneur. But when it came to raising $10 million in capital to augment the $4.5 million in equipment they’d purchased, the hot-burning fuel idea got a chilly reception.
At first, things were easy. An investment bank sought to raise capital for BioMass Energy and Technology through an initial public offering on the Frankfurt Exchange, where the prospectus drew enthusiasm from European investors. But as Euro-Zone finances changed, rules tightened by the parent company, Deutsche Börse. Because the firm didn’t meet new finance rules, the stock was delisted before trading could begin.
Then Silvey turned to local bankers who would have an interest in jobs coming to Potosi. Lenders said no, suggesting he sell his farmland for additional capital, which wouldn’t work for the Silvey family. He and Gooden also looked at state-sponsored funding but worried the secrets to the patented process might leak and cause a competitor to reverse engineer the process.
“I’ve never had so much trouble borrowing money,” he says.
When he started an egg farm in the 1980s, he walked in a bank with an idea and a spreadsheet and walked out with a loan.
“Unless you have a lot of assets, it would be difficult to put together a $5- to $6-million project today,” Silvey says. “There’s so much more required. If I were to start today and duplicate what we’ve done in the past, I just couldn’t get it done.”
But lending has picked up since the recession, according to Jerry Mueller, senior vice president of Enterprise Bank and Trust, a lender based in Clayton. He says lenders were seeking new business throughout the economic downturn all along, with special emphasis on strong balance sheets. Mueller says most institutions haven’t changed lending requirements.
What has changed is which industries were hardest hit. The market continues to be strong for health care and professional services, Mueller says. But the downturn did force companies toward mergers and acquisitions as a way to access capital.
Mueller says bioenergy projects like Silvey’s might have lost their luster to investors because of changing trends in that industry. The collapse of the ethanol industry may have had a ripple effect, even though Silvey’s project is unrelated.
High-tech start-ups are doing well, says Jake Halliday, executive director of the Missouri Innovation Center. All start-ups in the Columbia-based incubator received funding.
“In some senses, the sources of capital have never been stronger,” he says.
The risky nature of start-ups pretty much eliminates bank financing. Most are funded through the Missouri Technology Company, a public-private partnership created by the state General Assembly to foster growth of new and emerging high-tech companies. The funding, which has roots in federal stimulus funds, is “seed” start-up capped at $500,000. Other funding, such as the Strategic Research Investment Reserve, offers more federally backed funds, but has limits far less than the $10 million Silvey needs.
Although private equity funding is down, the individualized investing from “angels” is up, Halliday says.
“Angels have continued to write significant checks, (doing) as many deals and writing them as strongly as before the downturn,” he says. In his view, entrepreneurship and innovation is up across Missouri, and start-up firms offer quality jobs. “It makes all the sense in the world to sustain this.”