Five Angel Investing Trends for 2007

More recently, however, credit data for the business itself has been aggregated in data repositories. The Small Business Financial Exchange (affiliated with Equifax), for instance, collects data based on the performance of small businesses on their loans, leases, lines of credit and credit cards. And banks and other lenders are increasingly using this data on the business itself to supplement their existing underwriting criteria of the entrepreneur. In fact, almost all the top 20 banks in the country now use data from small-business data repositories to make lending decisions. This trend should continue as additional credit reporting agencies aggregate business data and the predictive ability of this data becomes clearer.

4. Getting $50,000 in funding continues to be difficult. According to the Global Entrepreneurship Monitor, the average amount of start-up capital used by small businesses in industrialized countries is currently $53,000. But the reality for most entrepreneurs is that credit card financing isn't sufficient for raising $50,000, and angel investors tend to avoid being the only investor in a company that's poorly capitalized.

So where are entrepreneurs getting the money they need? At CircleLending, we constantly see clients who are facing this issue turn to relatives and friends to help fill the gap. And while some seek government funding, those options may not be as available as they were in the past: The SBA Microloan Program was originally designed to serve this capital gap. However, funding for the program has been on the chopping block lately and hasn't been aggressively marketed by SBA lenders, so it's unclear whether the program will be revitalized in the future.

Nonprofit microlenders have traditionally struggled to get to scale and compete with banks to serve this niche. One promising trend might help level the playing field: The microlenders are banding together to convince the credit bureaus to include performance of microloans in credit scores, making these loans a more viable option for those who want to use small loans to build their credit.

5. Low credit scores are no longer a constraint on financing, but patient capital continues to be a critical barrier on success. I've often lamented how the four Cs of credit (cash, credit, collateral and character) have been reduced to just one C: your personal credit score. If you have a good business idea but a mediocre credit score (or no credit score because you're too young or too new to the country), your options in the past were limited. And unless you were willing to bet your home equity on the business, your cost of capital would be considerably higher than it would be for someone with good credit.