Todd Mikkelson is the owner of RM Group, maker of the Rain Maker spray rack which is used for water infiltration testing.
Jim Gehrz, Star Tribune
Clark Dircz, owner of Axonom Inc., talked about his decision to relocate his software company to California during an interview on 1/16/13. Lack of financing is a big problem for Minnesota small businesses, and it's become a self-fulfilling prophecy. Capital follows smart people, and smart people follow capital. From a few small business owners' perspectives, both are leaving Minnesota and the rest of the middle of the country. The rising cost of health insurance is also a problem.
Bruce Bisping, Star Tribune
VENTURE CAPITAL DRIES UP
Capital investment funding in Minnesota for the fourth quarter of 2012 hit a 17-year low at $19,714,700. And most of the capital invested went to medical device and equipment makers. Here's a breakdown of the 2012 fourth-quarter investment spending by industry:
Medical devices and equipment
Information technology services
Big hurdles for small businesses
- Article by: ADAM BELZ
- Star Tribune
- January 26, 2013 - 4:45 PM
Todd Mikkelson designs and sells a metal rack that sprays homes to make sure they're watertight.
He invented the contraption a decade ago, calls it the Rain Maker and sells it in 18 countries. Now he wants to expand. He could hire up to seven employees if things go well, he said. All he needs is a loan, and until now he hasn't been able to get one.
"It was really odd to us to be sort of penalized for being small," said Mikkelson, 49, owner of the RM Group, based in Mound. "We survived, but I'm sure not everybody did."
The life of a small entrepreneur is never easy, and lately the pressures have increased. Small businesses face headwinds from rising health care costs, politics-driven economic uncertainty and the prospect of a higher minimum wage. And still -- five years from the beginning of the recession -- they struggle to get loans.
"The hurdle is higher, and that makes companies think about how they can get by without more money," said Bill Blazar, of the Minnesota Chamber of Commerce. "That probably means they employ fewer people."
The cost of health insurance is another hurdle. Premiums per person doubled in the state between 2000 and 2010, to roughly $4,700 per year, according to the Minnesota Department of Health. Companies end up covering the lion's share of the premiums.
"It's huge. It's one of the top issues," said Kelly Guncheon, president of Small Business Minnesota.
Companies with more than 50 employees have the most to worry about: The Affordable Care Act will require them to provide health insurance to all their employees or face fines.
Companies with fewer than the equivalent of 50 full-time employees are exempt from that requirement, and Guncheon and at least some business owners are optimistic that the health care overhaul will ease the burden on them.
For those small businesses, the health insurance exchange that is supposed to go live in October will help drive down the cost of health insurance, Guncheon said. The state of Minnesota estimates that insurance costs will drop 7.5 percent thanks to the exchange.
Others believe the exchange will raise the cost of health insurance, by introducing a glut of demand into the market without increasing the supply of medical care.
"I don't think the cost is going down; I think it's going up," said Bill Lehnertz, CEO of TLC Financial, an accounting firm in Bloomington. "Small businesses don't know what's going to happen, and they're nervous."
Owners of small businesses, especially restaurants, also are paying attention to debates about the minimum wage. Minnesota is now one of only four states to offer a minimum wage lower than the federal standard of $7.25 an hour, but the new DFL majorities in the Legislature want to change that.
Currently, the minimum wage here is $6.15 per hour or $5.25 per hour if the business is small enough and certain exemptions apply. A DFL proposal would raise it to $7.50, with future increases indexed to inflation.
Very few businesses pay the minimum -- according to the Department of Labor only 6 percent of Minnesota workers were paid minimum wage -- so it's not the crucial issue for small business that financing and health care can be.
But it's been enough to get the attention of the National Federation of Independent Businesses, which wants the Minnesota minimum wage to track the federal level, and the Minnesota Restaurant Association, which is pushing legislators to recognize tips as part of a restaurant workers' wages so a change in the minimum wage doesn't have too much effect on pay for servers.
But the biggest obstacle for small businesses continues to be financing.
Credit has been slow to grease the wheels of the economy because borrowers aren't confident enough to seek out a loan and lenders are picky about how much they'll lend and what they'll need for collateral. Firms can't get large loans from banks unless they have valuable equipment or piles of cash to offer as collateral, said Clark Dircz, founder of Axonom, a firm that makes sales software in Edina.
Angel investment and venture capital has all but dried up in Minnesota for anyone not trying to make a new medical device, he said. Some entrepreneurs use home equity or a credit card to finance their business, he said, and others scrape by without using credit at all.
Minnesota venture capital funding (which accounts for a small slice of business lending but for which data is available) fell in the fourth quarter to its lowest level since 1995. Only $19.7 million in venture capital was invested in the state over the three-month period, according to the MoneyTree Report.
"The amount of start-up investment capital has been steadily declining in the state for a long, long time," said Dircz, who employees 30 people, half of them in Edina and the rest in California.
The state of Minnesota offers seed loans to encourage more private investment, but the programs flow through a select group of lenders, and many entrepreneurs don't have the workforce or wherewithal to go through the paperwork, Dircz said.
Seeing an opportunity with small firms like Mikkelson's, Affinity Credit Union rolled out its first business lending service in December, a credit card with a 9.96 percent interest rate. Banks and credit unions offer such cards to business at various rates to help them pay for gas or vehicle maintenance, or meals with clients. Affinity, which has 26 branches, has plans to offer operating loans to businesses, but companies are waiting it out for now.
Some firms, like Mikkelson's, can't get loans because they ask for too little. After his lender went out of business in 2008, he only needed a few thousand dollars each quarter, and he always paid it off quickly. The banks didn't want to service such a small loan, and he couldn't get approved.
"Everybody was trying to talk us into more ... even $150,000," he said. "We kept saying no and they kept saying, 'Well, we're not going to give you anything.'"
He and his wife, Heidi Marty, persisted and kept the company going, Mikkelson said. Now that he wants to expand, hire people and roll out new products, he's more optimistic that he can get financing.
"We haven't looked now for a few months," Mikkelson said. "But we're thinking of trying again, so we'll have to see what happens in the next year here."
Adam Belz • 612-673-4405 Twitter: @adambelz
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