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You’re the Boss Blog: What Business Owners Get Wrong When Looking for Capital

April 22, 2013 by Leave a Comment
Searching for Capital

A broker assesses the small-business lending market.

The life of a small-business owner or entrepreneur can be chaotic. We live from priority to priority, crisis to crisis. There are only 24 hours in a day and only so many hours to sleep. Believe it or not, I still haven’t changed the phone system in our office that I posted about months ago. I have given up on it for now, moved on to higher priorities. As owners, we concentrate on pleasing our customers and whatever urgent issues arise during the day, and we let other issues — even important ones, sometimes — take a back seat.

That’s why I’m sympathetic to business owners who are too caught up in the day-to-day crush to do a good job of looking for capital. Whether small-business owners are looking for debt or equity, and regardless of how far along they are in their business, the process can be exhausting. And while phone systems are fairly easily to replace, a mistake with a debt or equity round can be devastating,

The best advice that I think I can give anyone in the hunt for money is to get organized early, do your research, identify your targets for financing, and pursue them in a focused and methodical way. As small-business owners and entrepreneurs, we often try throwing as much as we can against the wall to see what sticks. But when it comes to looking for money, this approach can consume time and is unlikely to end happily. Still, I see it all of the time.

Imagine a biotechnology company that spends six months trying to pitch pretty much every Internet investor in the country. Or the owner of a start-up who networks only with lenders who require companies to be profitable and to have been in business for at least two years? Imagine a loan application submitted with financial statements that have fundamental mistakes in them or are months behind. Or consider a business plan to raise investment money that was too poorly written to be understood. I know it sounds silly, but again, I see these kinds of mistakes all of the time.

One of the biggest mistakes that we see is that owners try to raise too much money. They think about how much money they need for the next several years — instead of what they need to make real progress this year. At this point, we often advise owners to go take a cold shower and call us in the morning. If you’re looking for a loan, you need sufficient collateral and cash flow to cover the debt.

The market for capital is inefficient, and in many cases results in gridlock for entrepreneurs, lenders, and investors. The smartest thing owners can do is to make sure they understand how the process works. You should figure out how much money you need and what the best loan or equity solution will be for you. Find an adviser or mentor you trust, one who has been around the block before. Understand what documents your lender or investor will demand, and make sure you have them together before you begin your search. Check your personal and business credit scores, and make sure they are in order.

Remember that when you’re speaking to a potential investor or lender, you’re entering a two-way partnership. They are investing or lending in order to make money. Just as they are interviewing you, you should do the same. How many investments have they made in the last year? If it’s a loan officer you’re talking to, how many loans have they made? What is their personal approval rate in the organization? Who will be making the final decision, and how much influence will they have?

I can’t speak for the investment community, but I can assure you that in the lending community there are thousands of loan officers sitting in bank branches across the country, wanting to keep busy so they can protect their jobs. The more applications that they have open at once, the busier they seem. Don’t put yourself, and your dreams, at their mercy. A properly structured loan or investment in your company can make all the difference to you and your future.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/04/22/what-business-owners-get-wrong-when-looking-for-capital/?partner=rss&emc=rss

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You’re the Boss Blog: Do Your Board Members Represent Your Interests?

February 5, 2013 by Leave a Comment
Searching for Capital

A broker assesses the small-business lending market.

Whenever small-business owners and entrepreneurs come to me looking for capital, I encourage them to think about the trade offs involved in choosing debt or equity. Sometimes there is no choice, and they have to pick one or the other. But often there is a choice, and that’s when it’s especially important to think things through.

The decision gets trickier when a company already has investors, particularly if they are venture capitalists. In these cases, there is often a board of directors, and they get to vote on whether there will be additional rounds of financing. That vote can prompt some interesting questions.

When the board members are venture capitalists, the vote can create potential conflicts. Are they voting based on what’s best for their own investment in the company or what’s best for the company? If the company is doing well, the investors generally would prefer there to be another round of equity investing — at a higher valuation than when they first invested. This way, the investors can show a return, even though the entrepreneur faces further dilution of his or her ownership stake.

This is what I call the venture capital treadmill. Once you’re on it, the investors always want the next round completed and the round after that. There are times when debt financing may be better for the entrepreneur, but that won’t help the venture capitalists prove that their investment is growing. The board members have a fiduciary responsibility to represent the best interests of the company. But how can they do this if their jobs are ultimately measured by the success of their own investments? Should board members with financial stakes in the company be prohibited from making these votes?

Above all, this is another reason that, if you choose to take on equity investors, you should interview them carefully. It’s not just about the money. As much as possible, you want to try to make sure that your interests and the investors’ interests are as closely aligned as possible. It’s a lot like getting married — both parties need to understand each other very well.

What do you think?

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/02/05/whose-interests-do-your-board-members-represent/?partner=rss&emc=rss

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You’re the Boss Blog: The State of Small-Business Lending

January 8, 2013 by Leave a Comment
Searching for Capital

A broker assesses the small-business lending market.

As we begin the New Year, I thought I would share some perspectives on where I think we stand in terms of access to capital and what I think will happen with small-business lending in 2013.

In part, my perspective comes from reading various reports about the state of small-business lending. These reports, however, don’t tell the whole story. For example, the Small Business Administration releases numbers that apply only to S.B.A.-backed loans. And the data that comes from the Federal Deposit Insurance Corporation about bank lending activity includes credit card loans. Meanwhile, the alternative lenders don’t release any aggregate numbers at all.

This makes it hard to get a clear picture of what’s happening. Obviously, no one person or company has a handle on all of the credit markets, but as a loan broker, I speak every day to business owners who are trying to borrow money and bankers who say they want to lend it. Here is what I see happening on the front lines.

If you’re trying to start a business today, you can almost forget about going to a bank for financing. This situation hasn’t changed much in the past year, and we don’t see it changing any time soon — with a few exceptions. If you are opening a franchise outlet that is on the approved S.B.A. list or if you have solid personal collateral outside of your new business, you’ve got a shot.

In 2012, frustrations about the difficulties involved in financing start-ups resulted in a lot of political capital being focused on one possible solution, crowdfunding. Unfortunately, crowdfunding hasn’t taken off yet, and I don’t think it will in 2013. It will take time to iron out the kinks and figure out how to make it work — how to strike the right balance between helping companies and protecting investors.

On a happier note, things have definitely gotten better for companies that are clearly creditworthy. In 2012, if you owned an existing business and you had collateral, cash flow and good credit scores, it was a good time to borrow money at low rates. And I think that will continue for some time. Banks are now hunting eagerly for these borrowers.

The problem is that there are not nearly enough of them. And that’s why a group of alternative lenders — including factors and merchant-cash advance lenders — are lined up and ready to supply money to most of the rest of us. The challenge is that these borrowers face high rates that make it tough to grow and expand as much as they would like.

The alternative financing industry is growing rapidly and, I believe, will continue to grow in 2013. These lenders are extremely entrepreneurial and are leaving the banks behind with their speed and use of technology. Many are backed by premier investment banks and Silicon Valley venture capital powerhouses — investors who understand that entrepreneurs and small-business owners are throwing up their hands in frustration over how long it can take to get a loan from a bank, especially if the loan is backed by the S.B.A. More and more businesses are willing to pay the price of the alternative lenders just to be able to get their capital and move on.

There are some indications that the price of alternative lending may be coming down a bit as the industry gets more competitive. I expect this to continue in 2013. That said, there is still a wide discrepancy in pricing between bank loans and alternative loans.

Despite the growth of alternative financing, we have heard little from Washington about the challenges small-business owners face when borrowing money. For reasons I still don’t understand, access to capital for small-businesses was pretty much a nonissue in last year’s presidential campaign. When we do hear from Washington in 2013, I expect the conversation will be mostly about the S.B.A., which is fine as far as it goes. I am all for the S.B.A., but as I have written previously, it represents a tiny piece of the overall puzzle – and should be thought of as such.

The largest banks continue to tout their small-business lending records, but the numbers they provide to back this up are less than convincing. We regularly speak with small-business development officers at these banks who are ready to throw up their hands in frustration at their inability to get their clients the help they need. My expectation is that this will not change much in 2013, as the bigger banks simply aren’t equipped to handle small-business lending and Washington puts little pressure on them to figure it out. Community banks, meanwhile, continue to be friends of small businesses, and relationship banking continues to be critical in completing loans.

I hope that in 2013 we will find ways to break the gridlock. While the economists say the recession is over, many of us in the small-business community are still reeling from the aftershocks. My hope is that in 2013 we will find new ways to get lower priced capital into the hands of more small-business owners and entrepreneurs.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/01/08/the-state-of-small-business-lending/?partner=rss&emc=rss

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You’re the Boss Blog: Reflections on the Third Anniversary of My Pink Slip

December 17, 2012 by Leave a Comment
Searching for Capital

A broker assesses the small-business lending market.

Today marks the third anniversary of my pink slip from corporate America. Three years ago, the bankruptcy trustees at the corporation where I had worked for close to a decade fired me. The next day, I started working on building my loan brokerage.

For some, anniversaries are a time of celebration. And while I do believe that keeping a business afloat and growing for three years is an accomplishment, I would rather use this milestone for some reflection and to share what I think I have learned.

I know that it’s a cliché (and one that’s a little strained right now, with all of our minds on Newtown, Conn.), but the closest analogy I can think of to building a company is parenting a child. Both come with constantly evolving challenges, demands, and highs and lows.

You can read the books, but more often than not, you react with your gut. You can plan a perfect outing for a day, but if your child is sick that morning you’re out of luck. You can think your child will go to Harvard, but he or she might have different plans. You will pick  activities for your children, but eventually they will start to choose for themselves. And no matter how hard you try, there will be times when you will like awake at night and second-guess your choices. You have to be flexible and adaptive. Most importantly, you have to be patient.

I think that companies are built in a similar fashion. You’re always trying to figure it out. You’re constantly experimenting with new things. You learn by trial and error, and sometimes you fail several times before you figure something out. But you don’t give up. I recently spoke to an M.B.A. class, where one of the students asked me what my five-year plan was. I wanted to answer that it was to try to make payroll next week. Instead, I told the class that my plan was to try to build my company at whatever the right pace was as long as it could hold true to it’s values and do right by its customers. I suspect that my answer confused some of the students.

And I don’t think it’s their fault. As a general rule, entrepreneurship is not thought of or taught as a journey. More often — especially at business schools, I suspect — it’s about how to get big quick, how to get venture capitalists behind you, how to become the next billionaire. It’s about planning your exit before you complete the launch.

Too often, I find that lenders don’t reward agile development processes – even though this is ultimately the best way to minimize risk. I think more companies fail trying to get big too quickly than being cautious and pragmatic. Too many companies try to build management teams before they know how to walk.

I am optimistic that when I look back in five or 10 years, I will be glad that I took the slow-growth approach. But the opportunity for reflection always passes quickly. Tomorrow morning — I am happy to say — the doors will open and the phones will ring again.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/12/17/reflections-on-the-third-anniversary-of-my-pink-slip/?partner=rss&emc=rss

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You’re the Boss Blog: The Small-Business Issue the Candidates Are Not Talking About

October 6, 2012 by Leave a Comment
Searching for Capital

A broker assesses the small-business lending market.

This week’s presidential debate disappointed me. We heard a lot of references to small businesses, regulatory relief, health care, deficits and especially tax rates. But neither candidate thought to mention one critical ingredient to economic growth: capital. If small-business owners and entrepreneurs can’t get their hands on capital at affordable prices, their tax rates won’t matter because they won’t be able to produce any profits – or jobs.

I don’t understand why neither party is talking about finding ways to improve the flow of capital to small-business owners. That said, I do believe that the Obama administration has done some important work in this area. Raising the limits of Small Business Administration loans and improving export programs has helped many companies. Many are optimistic that the Jobs Act and supporting crowd-funding legislation will help in the future. And the president’s 15-day pay initiative is starting to ease the working capital crunch to those companies that supply the government.

At the same time, credit at reasonable prices remains as tight as can be for companies without pristine credit, cash flow and collateral. As a result, the merchant cash advance and factoring industries are flourishing, and charging small-business owners exorbitant rates. Here are a few suggestions I would love to see both campaigns work toward:

  1. Let’s get a consistent definition of precisely what is a small business, and let’s mandate that all reports from banks and government agencies use it. Otherwise, we will have to continue to guess how much lending is actually going to true small businesses.
  2. Let’s find a better alternative to merchant cash advances. If you’re one of the lucky small-business owners who can get a bank loan today, you can expect to pay an interest rate of 4 percent to 6 percent. But if you’re like most owners who need capital, you will find yourself pursuing alternative sources of financing that can charge as much as 70 percent or 80 percent (and no, I’m not talking about money from loan sharks). What if the banks and regulators managed to sit down and find a way for the banks to lend to slightly riskier customers and charge them, say, 8 percent or 9 percent interest? While higher than those of standard loans today, these rates would give owners a chance to survive, flourish and add jobs.
  3. Let’s have the government create incentives for big companies to implement the 15-day payment initiative with their small-business suppliers. If that fails, maybe we should publicly shame the big companies that are the slowest payers.
  4. Let’s make certain that the auditing and reporting requirements for crowdfunding will not be cost prohibitive for small-business owners. If small-business owners have to pay $20,000 in legal and auditing fees to raise $50,000, they might as well go to the loan shark up the street.
  5. Let’s increase financing for Score, which helps mentor small-business owners.

Personally, I think opening up capital for small businesses is far more important than a change in tax policy. What do you think? What policies or recommendations would you make?

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/10/05/the-small-business-issue-the-candidates-are-not-talking-about/?partner=rss&emc=rss

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You’re the Boss Blog: When Looking for a Loan, You Can’t Fight Gravity

August 31, 2012 by Leave a Comment

Searching for Capital

A broker assesses the small-business lending market.

Getting a loan for your business is not a simple proposition. There are many types of loans, and many criteria that go into evaluating how much you can borrow and what you can expect to pay. There are thousands of lenders to pick from, and each one may have a slightly different proposition to suggest.

When you’re in the market for a loan, it’s smart to do some homework and figure out where you fit. It’s also smart to hear several opinions. That said, once you’ve heard the same thing several times, you probably have a pretty good idea what your prospects are. At that point, you have a decision to make.

At MultiFunding, this is where we often see small-business owners get stuck. This is particularly true if the owners don’t love the terms of the financing they are being offered. In this situation, there are several important points to consider.

First, despite the general sense that the loan market has been all over the place, it’s actually pretty competitive. Lenders fight with one another to get different types of loans. But once you’ve figured out where your company fits into the ecosystem, you really can’t fight gravity. If you are eligible for a certain type of loan, it’s unlikely that you are going to be able to twist a lender’s arm into offering you a more favorable type of loan. The first loan you are offered will have certain pricing and conditions that are associated with the risk the lender is taking. Once the bank has made this calculation, it rarely changes.

That said, it’s important to remember that the type of loan your company is eligible for today could well change six months or a year from now. Companies change and evolve, and so do loan markets. It’s important to review your loans on an annual basis. Some small-business owners get stuck because they think the loan they pick will last forever. This is not the case.

Once you’ve nailed down your loan type and pricing, you should step back and ask yourself questions like, “Will this loan allow me to focus on growing my business and making it more profitable?” and “Will I stop lying awake at night worrying about cash flow?” If so, it’s probably worth taking the loan.

Right now, we have two clients who are trying to fight gravity. One of them is an electronics distributor. Because the business shrunk by 50 percent during the recession, its bank — even though the business stayed profitable — decided to call the line of credit. Since then, the distributor has been slowly paying down the credit line and holding on for dear life. In the last three months it has twice needed to take emergency financing in the form of expensive merchant cash advance loans.

What the company desperately needs to do is to pay off the line of credit — and move to a factor. While the factor will be more expensive, it will lend the distributor all of the working capital it needs. As a result, the owner will be able to sleep at night and focus on getting the company back to pre-recession levels. At that point, there will be no problem going back to a bank and getting a new line of credit.

We have another client who has a high-end used car business that owns its own real estate. It has been banking with the same bank for seven years where it has a floor-plan line of credit (against retail inventory) and a real estate loan. But the bank was sold and the new parent company won’t do floor-plan lines anymore. In today’s loan market, finding a floor-plan lender for used cars can be all but impossible. We actually managed to find our client one, but he wouldn’t accept the terms. He is trying to fight gravity, and it will catch up with him eventually.

It’s not enough to understand your own business — you also have to understand credit markets and where you fit into them. And most of all, you have to understand that they keep changing.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/08/16/when-looking-for-a-loan-you-cant-fight-gravity/?partner=rss&emc=rss

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You’re the Boss Blog: Who’s Making More Small-Business Loans Now? You May Be Surprised

September 3, 2011 by Leave a Comment

The Agenda

How small-business issues are shaping politics and policy.

Last week’s news that total commercial lending is up for the first time in three years but small-business lending continues to fall got The Agenda wondering: Is that true across the board? Or are some banks actually making more small-business loans, while others are making fewer?

We know that the biggest banks are making fewer Small Business Administration-backed loans. Perhaps, then, they are also making fewer traditional small-business loans as well. So The Agenda dove back into the Federal Deposit Insurance Corporation’s lending statistics — and discovered a surprise.

As of June 30, the nation had 7,522 insured banks, which The Agenda divided into three cohorts. The vast majority — 91 percent — have fewer than $1 billion in assets. A much smaller group has $1 billion to $10 billion in assets. The 107 institutions with more than $10 billion in assets –the conventional line between big and small banks — constitute just 1.4 percent of the industry but control 79 percent of all assets among American banks.

Here’s what we learned: though small banks are often said to have a propensity for small-business lending, total small-business portfolios fell by 1.6 percent in the last quarter in both of the two categories of smaller banks. Big banks — the ones that are supposedly gun-shy about small companies — actually increased their total small-business loan portfolio by 0.9 percent.

The Agenda dove a little deeper. Among the big banks, those with $10 billion to $100 billion in assets increased their small-business loan volume by 1.6 percent. And the very largest institutions — the 19 banks with more than $100 billion in assets — increased their small-business portfolio, too, though only by 0.4 percent. Of course, these numbers hardly suggest an open spigot of capital for the small-business borrower, or really for any borrower.

Responding to last week’s post about the decline in small-business lending, a commenter who identified himself as seltzerman suggested that the situation wasn’t as dire as the numbers made it seem. “There are other unmeasured events that are cushioning this blow,” he wrote last week. “There is still lending (involuntarily) to underwater homeowners in the form of accumulated mortgage payments that have not been paid. There must be at least a couple entrepreneurs in that pool who have rented out rooms in their homes and are diverting a year or two of unpaid mortgages into some small business.”

If there are, The Agenda would like to hear from them. Please send a note. I’ll be happy to keep the conversation confidential.

Article source: http://feeds.nytimes.com/click.phdo?i=4567b5877685b48eec9ab3b19b6c937c

Filed Under: Small Business Tagged With: , ,

You’re the Boss: What Some Banks Don’t Want You to Know

June 29, 2011 by Leave a Comment

Thinking Entrepreneur

Several weeks ago, the top small-business bankers at Wells Fargo agreed to take questions from You’re the Boss readers. For reasons that escape me, I’ve found that bankers are often reluctant to tell small-business owners precisely what they expect from borrowers, so I couldn’t resist contributing a few questions.

Hoping it might be useful to all small-business owners, I asked for specific guidelines that relate to the minimum requirements the bankers look for when considering a loan. I referred to the well known “Five Cs” of credit: character, cash flow, collateral, capital, and conditions. Basically, I asked the bankers to pretend that there were no public relations people or lawyers in the room and just tell us what they really want from us. For example, how do they define good character? Is it O.K. if you’ve been married four times? What if you don’t go to your son’s baseball games?

Somehow, the bankers managed not to answer any of my questions — although they did mention that it was a good idea to clean up your credit report. Gee, thanks! I can’t tell you that I understand the downside of giving owners some real insight into what banks are looking for. Maybe the bankers don’t want to take a chance on scaring anyone away, but it seems to me it could save us all a lot of time. And judging from the comments, I’m not sure they did themselves any favors. Because I think this is important information, I asked my own banker if he could shed some light on how his bank evaluates loans. He is Matt Sloan, from American Chartered Bank, a mid-sized bank that specializes in small-business lending and has locations around Chicago. Here are his thoughts:

Deciding whether to provide credit to a business can definitely be as much art as science, but there are some material factors to consider:

1. How much equity or net worth does the business have on its balance sheet? This is extremely important as we need to know what happens if the company has a rainy day or if our economy goes through another recession. Does the business have enough capital to survive if it loses a major client? On the same note, what is the overall leverage (debt to equity) of the company? Less than four to one? That’s fair. Three to one? That’s good. Two to one? Excellent. If a business makes $100,000 and the owners pull out $200,000 in distributions, then the company actually lost $100,000 from our perspective. (Believe me, we see this happen.)

2. What type of collateral is supporting the loan? I don’t see many banks providing unsecured loans in today’s climate so there have to be enough “eligible” receivables (90 days and under), “clean” inventory (sellable), equipment and/or recently appraised real estate to cover the loan amount.

3. Cash Flow. The years 2008 and 2009 were rough for many businesses, so if you were able to survive and rebound in 2010, more power to you. We analyze the past three years to understand trends, but we completely understand how difficult the economy has been. So, if a company has turned the corner and can show that its cash flow can support its debt payments at a multiple of 1.2 or 1.3 (meaning that it is taking in at least 20 percent more than the debt payment), the it is a good banking candidate.

4. Character. Do I want a new client who doesn’t return phone calls and doesn’t treat me or my team with respect? No. I want to work with solid, ethical people who are looking to build long lasting relationships. End of story. It’s better for both sides.

5. Conditions are a tricky topic because a good company can perform well in a bad economy (and vice versa). So, let’s leave that one alone.

I hope this clears up some of the confusion surrounding the crazy banking environment we live in.

Thank you, Matt. I will add one more thing. I found American Chartered Bank through my accountant. He knows which banks are lending, what they are like to work with and what they are looking for. And he has a relationship with the banks that the banks don’t want to mess up. If your accountant can’t help you, and you need to borrow money, it might be time to consider finding a new accountant. If you are looking to borrow money, you probably need an accountant who does more than your tax return.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=8e9ac9c8ec91ef70c0300cc50b9f2650

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