Alternative Lending Helps Small Businesses

Small businesses rely on capital to fuel business growth. Some are able to generate working capital from operations. Others, however, are forced to consider taking on debt or new stockholders because they can’t. Since most entrepreneurs would prefer to avoid giving up voting rights and/or access to profits, debt is the preferred path among those whose businesses don’t self-fund. With the recession of the past few years, however, small business lending became  much harder to secure. Ami Kassar, who founded Multifunding, published a blogpost yesterday in the New York Times, discussing the current status of small business lending in the United States.

small business lendingKassar studied numerous reports from organizations like the Small Business Administration (SBA) and the Federal Deposit Insurance Corporation (FDIC). He noted that SBA loan data, even when combined with bank lending data, fails to tell the whole story since there are so many alternative lenders who don’t aggregate and report their business activities. Kassar related his own experience as a loan broker to fill in some of the knowledge gaps resulting from the (un)reported numbers. Below are excerpts from his comments:

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.

Educate yourself on alternative lending in your area. I attend meetings of the local chapter of the Commercial Finance Association and have met some folks who are staunch supporters of small businesses through their practices rather than the mere words that we often hear from politicians or some of the large banks who really have a poor track record with small business. It very well may be that your capital needs could best be served by this emerging category of providers!

 

Ingenuity Expressed in Art(isan) Entrepreneurship

John Bogle, founder of Vanguard mutual funds, attended Princeton University and was fascinated with entrepreneurship. In his senior thesis in 2006, he cites Joseph Schumpeter as the first economist to recognize how start-ups are so vital to the national economy. Schumpeter was understood to advocate for the fact that entrepreneurs are motivated by the following two characteristics (more so than materialism):

  1. “The joy of creating, of getting things done, of simply exercising one’s energy and ingenuity,”  and
  2. “The will to conquer: the impulse to fight,…to succeed for the sake, not of the fruits of success, but of success itself.”

Certainly, these characteristics are resonators for many entrepreneurs; perhaps most especially so for art(isan) ones. What? Art(isan) entrepreneurs? What is meant by this juxtaposition of terms? Heretofore, many have considered the creative types to be an island unto themselves, rather that a subset of he entrepreneurial movement that is sweeping our land. Yet, if we were to characterize creative types as right brain entrepreneurs and those who pursue STEM education, career opportunities, and new enterprises as left brain, we can create a new construct that is helpful to understand how to encourage the greater number of people to flourish in what is generally regarded as the Creative Age, successor to the Information Age.

Creative thought processes may be said to represent divergent thinking at its essence–the ability to hold an idea without passing judgment of any type. Systematic and analytical processes, therefore, tend towards convergent thinking-a deliberate effort to arrive at a conclusion based on facts and data. In the Research Triangle Park area of North Carolina, we are seeing nothing short of an epic surge of entrepreneurial fervor, much of it trumpeted as helping our economy–both local and beyond–to improve through enhanced job creation, capital flow, and value creation. Yet, virtually all of the media attention is on savvy technology start-ups that seem to rely almost exclusively on the left brain mindset.

Thankfully, there are overlaps such as the digital art required for serious gaming that brings the two sides of the brain together. Outside of such obvious blends of thinking modes, most who inhabit the incubators, accelerators, and entrepreneurial playgrounds of our region are tuned out as to how art(isan) talent can establish entrepreneurial enterprises. 

The art(isan) population has been challenged to find itself, both locally and nationally, as economic recession has caused many galleries, academies, and the like to cut back on programs, space, and staff. Those who have graduated with degrees in various creative fields from design to fashion, studio arts to music, have found employment hard to come by. In times past, many graduates became instructors in the arts or pursued employment in businesses that served entertainment venues. In order for the creative class to find optimal professional engagement, however, new ways will need to be discovered to help art(isan) entrepreneurs convert their passions into their professions. Like a hero on a journey (think of epics like The Odyssey), artists and artisans must set out to manifest her ideals in her creation. 

Creative types do not need skills training from career development types in order to become successful (and more readily accepted) entrepreneurs. What they need is to find people who appreciate their contributions. Just as indie music has shown huge demand for music that is not recorded in an album format, carried on mainstream radio, and performed in huge concert venues, there exist niches for virtually every type of created expression if the artist/artisan will labor to identify the target market. 

The opportunity to showcase one’s talent in a coffee shop, a multi-artisan boutique, or a street show are all vital to artisan entrepreneurship. By inviting others to experience one’s proof of concept, feedback can be gleaned that shapes the creative offerings going forward. Once enough traction is gained within a target market, the artisan can make decisions about what part of the production and delivery of talent she wants to play without fear of being unable to earn a living just as powerfully as any other entrepreneur.

Artisan holiday support

Sell Your Business Even if Others Can’t

In reading about the issues facing small businesses in the United States since the recession began in late 2007, I have heard about many sectors that have fallen behind historical performance levels. One that I hadn’t considered very much until this week is what is called the “business-for-sale” sector, which has seen a huge drop-off in comparison to all metrics known prior to the recession. While many have spoken about the large amount of private equity not in circulation, many of the reasons it is being withheld translate to other types of business buyers.

Whether you are representing an equity firm or your own personal business interests, it is likely that you have been trying to figure out when the economy may turn around. In classic business theory, it would be ideal to buy at a deflated price right before the economy picked up so that your investment could piggyback onto the general trend of successful recovery. Such market timing could make your investment produce very high–perhaps unprecedented–returns.

Since the economy appears to have stabilized, though not surged forward in a demonstrable way, what are these people who would otherwise be buying small businesses thinking? Observers of the business-for-sale sector wonder when they will see a positive change. They are anxious to see more acquisition activity.Buy sell dice

Hindrances to Business Sales

Whether you listen to political pundits, talk show hosts, or economists, all would concur (at least publicly) that small business is key to the overall recovery. Yet, if small businesses are not churning ownership, it is hard for them to obtain the necessary working capital to fund growth and operations. BizBuySell.com conducted a survey of 260 business brokers from around the country to attempt to determine whether market conditions were improving. A whopping 70 percent indicated that financing for business acquisitions has not improved since 2011. These findings and percentages are consistent with survey results from last year, showing a trend of stagnation.

With commercial loans harder to come by (according to the survey), many buyers can’t get the financing they need to do deals.  Business brokers say that banks have made the loan process even more difficult in 2012, decreasing the chances thereby that buyers will begin investing in businesses for sale. Mike Handelsman, group general manager for BizBuySell.com and BizQuest.com, reports that borrowing is particularly difficult for new or young entrepreneurs. Since banks and similar entities have taken the position that a track record of success is one of the top determinants of future success, newcomers to the small business arena–either startups or acquirers–are handcuffed. 

Handelsman cited other factors of concern to business brokers from the survey. Concerns about the U.S. national debt,  political deadlock (re: the fiscal cliff), long-term unemployment and small business/personal tax rates (14%) also appear to diminish buyer confidence. However, he did offer some tips for sellers:

Seller financing is not necessarily the right strategy for all business succession scenarios. But under the right circumstances, a seller’s willingness to finance a portion of the sale can dramatically increase the number of potential buyers and create more advantageous sales terms (e.g. a higher sale price). Sellers also need to plan for the sale, and make their businesses as attractive as possible to buyers.

Here are a few ways to plan for the sale and make your business attractive–

  • Install an outside board of directors, with positions filled by non-competing entrepreneurs rather than the typical CPA, attorney, banker, and family friend.
  • Stop paying executive perks out of business accounts–clear separation will help show your commitment to professional management.
  • Document the tasks and procedures performed by the executive team. When it has been documented, the business is worth far more money because it is no longer dependent on the personalities.
  • Have a CPA review your financial statements–audit if you can afford it–especially if you have never had it done before.
  • Work with a transactions attorney to advise on deal structure and terms so that you can think through tax implications that may cause you to accept certain types of offers.

Chin up! If you follow these best practices, you will be one of the first ones to sell your business, regardless of whether many others sell theirs at the same time.

 

 

Wanna Start an Entrepreneur (Political) Party?

In an article for Entrepreneur Country’s November issue, Joe Haslam critiques the last year’s election cycle in Spain. Similar to what we experienced in the United States, top candidates for the highest office in the land lauded the importance of small business. In like manner, candidates spoke highly of the value of entrepreneurship and pursuing a dream to start a business. In Spain, the Conservative Partido Popular claimed to be in sync with the perspective that high growth startups create jobs and fuel the economy on both a local and national level. Our candidates voiced similar opinions. Akin to our own situation, the conservatives claimed that the establishment was too focused on taxation and government spending to be able to encourage the right kind of economic growth.

The Partido Popular proposed (if elected) to introduce within its first 100 days in office and Entrepreneur Act meant to encourage and support the establishment of more new businesses. Issues like limited liability and zones for new business creation would be included in the legislation. Open discussions between successful entrepreneurs and the Partido Popular team charged with creating its platform were held to tackle the business registration process and the need to enforce competitive fairness procedures. Unlike the United States, this party won (but they have failed within the past twelve months to deliver what they promised.)

Instead of the press attacking the government for failing to deliver on campaign promises, it seems to make excuses ranging from the need to defend political appointments to challenges in addressing new issues that have emerged since the election. Since the Entrepreneur Act has not only not been passed, but officials now say it may be 2014, many–including Haslam–who have investments in the entrepreneurial market in Spain–have become disheartened. They no longer try to persuade talented young creative talent to stay rather than seek their fortunes in emerging markets such as Brazil, Korea, Mexico or India. 

Within the sunny setting of Santa Monica, California, there exists the home office of the Entrepreneurship Party. Not to be outdone, the Ukraine boasts its own Party of the Industrialists and Entrepreneurs. Haslam wonders aloud whether a third party focused on issues that matter to entrepreneurs and small business owners would be a better alternative than encouraging the constituents to join existing parties who have such crowded agendas that entrepreneurship is just another plank in the platform. He also draws an important distinction between business people who have only worked for big businesses and those who have grown their own enterprise organically, from the ground up. The latter group seems to have the highest likelihood of being able to be empathetic to the issues that matter, as evidenced by people like Michael Bloomberg. Bloomberg  made an appearance at a TechCrunch Disrupt event to hype the new Entrepreneurial Fund in New York.

In some Western countries, politicians have followed a path of making money in the private sector prior to entering into public service. Contrastingly, an Economist article is cited claiming that many in Eastern countries see politics as the way to make the most money  fastest, and a pattern or nepotism is only recently being challenged by outsiders. In the end, it is suggested that entrepreneurs may be able to make the most difference by tackling specific issues, whether you are looking at Bill Gates’ second career as a philanthropist and the great work he is doing through his foundation, or the chairman of Zappos tackling an array of issues in Brazil through private sector initiatives.

Yet, it would be fun to see an Entrepreneur Party and how many votes it could garner, wouldn’t it? Would you just be a social media follower of such a party, or an activist?

 

 

 

What to Do When Financing Fails

Having been in business in the same town for almost twenty years, a Midwest company was accustomed to expansion and going after market opportunities. The owner had kept her business competitive by continuously improving product offerings and learning from the input of both customers and target customers. With a loyal, experienced operations team, she felt that she had the recipe for long-term success. However, when the recession of 2008 hit, she was unable to obtain a renewal of her line of credit by which she had historically been able to normalize cash flows.

The case study above illustrates a business principle–that we must always as business owners prepare for the unexpected and have the flexibility to adapt to changing market conditions. If we seem surprised when an action that we did not anticipate occurs, then it follows that either: 1.) our planning is incomplete, 2.) our systems and processes are too unresponsive to key indicators, or 3.) we have not established a feedback loop that provides us as small business executives with vital, timely information. Regardless the reason, it is poor management to not have a contingency strategy or tactic in mind for situations that may arise.

What should an executive team do when financing from lenders or investors falls through? First, the reason  for such a collapse in financing is normally attributable to one of the following:

  1. Partners or new regulations restricted the financing source from making (continuing) the deal.
  2. A more attractive alternative was available to the lender/investor from another source at the same time.
  3. The company failed to read the market conditions and adjust the financing request accordingly.

To stabilize the business in response to one of these situations, the owner and top finance executive should always seek new sources of funds–even if today’s source has been very reliable. If you have built relationships with other providers of financing, you may be able to reduce the risk any one player undertakes by spreading it among several. Alternately, you may find that some institutions have differing standards for new clients than for existing ones and may want the entire financing facility.  In either scenario, it is incumbent upon you and your team to perform due diligence. Find out how the bank (or alternate source) has shown commitment to other borrowers. In many cases, your accountant or attorney may be able to recommend new sources for you. Others in your trade group may have similar referrals to provide.

Being able to lay out both your best case scenario and a worst case one will show a new source your planning strengths and help to establish credibility. Ask questions about how credit facilities could be expanded as you hit milestones. Offer your plan for reporting your financial and operating performance. Discuss what the loan covenants may look like and have frank conversations about how your team will accommodate the request to demonstrate creditworthiness.

To avoid a recurring financing problem, owners should try to over-finance their operating needs whenever possible. It is extremely valuable to have credit available that is not being used–this cannot be overstated! Given that this funding source may dry up at any point, you never want to have to go back to the lender or investor because you failed to anticipate growth. 

The other recommendation is that you look at different types of credit. If you traditionally have only taken out installment loans, look for lines of credit–and vice versa. There are additional types of financing that may also be advantageous to consider–accounts receivable, factoring, purchase order financing, contract or project financing, asset based lending, leasing, etc. By using more than one type of funds from more than one source, you are diversifying your vulnerability to a credit restriction that could be deleterious to your business success.