Doctors, Lawyers, Accountants and Financial Planners Get Taken Over by the Net

Can technology replace professions where human touch is needed?

Recently, I gave a talk at the AltLend Conference in Las Vegas where discussions about innovative finance options for small businesses were center stage.  Speakers including members of the U.S. Small Business Administration alongside presidents and CEO’s of lending sources that span the gamut from traditional bank loans to alternative lending.

One panel member, Brock Blake CEO of www.Lendio.com, stated during the conference that loan brokers are akin to travel agents–and should be phased out and replaced by technology.  In my opinion, this is not, and should not, be the case.

Financial advisers, accountants and loan brokers fall into a category of professions where human touch and real-world experience factors heavily into decision making when it comes to situations that affect another person’s life and livelihood.  While there is most certainly a place for technology to improve and expand the lending industry, I think its true purpose is to supplement the work that loan brokers do.

In the same way that you would contact a lawyer if you were served a lawsuit or visit a dermatologist if you had a bad rash, you would want to work with an experienced loan broker to receive expert advice and help in securing a business loan.  While the Internet can help you research and learn about any given topic, there is no true replacement for personal, expert assistance.

I think we need to be careful in viewing the Internet and technology as the sole answer for problems in the small-business lending world.  When a business is looking for good, solid advice for loan options and enters into the phase of preparing their business for a loan application, technology should take a backseat to an experienced loan broker who can walk the small-business owner through the process in order to achieve the desired results.

We hear often that switching to a more autonomous lending process on the web is what will turn business lending on its head and revolutionize the industry, but we don’t often hear the flip-side of this argument.  While the net can provide speed and convenience in lending, it often times comes with an incredible price in terms of interest and factor rates and short amortization periods.

Technology can solve for many things and changed industries forever, but if the premise is false about the ability to properly and responsibly do this, it will ultimately cause more problems then it tries to solve.

The Long View: Don’t Be Tempted by Fast Cash

The most important thing you need to think about when taking a business loan is how it’s going to affect your cash flow.  I always advocate for taking the loan with the lowest monthly payments and the longest amortization possible.  But not everyone agrees with me.  Many in the alternative lending space will opt for taking a short-term loan with the quickest possible payback.

In a blog post recently, Sean Murray, chief editor and publisher of Daily Funder, wrote:  “As a borrower, the very idea of committing yourself to monthly payments 5 years from now should be considered very seriously,  The average length of a marriage prior to a divorce is 8 years.  A 5-year loan is more that half as long as a marriage!”

Short vs Long

I’ts a worthy exercise to compare the pros and cons of a six-month loan versus those of a five-year loan.  In this scenario, let’s pretend that there is a retail store owner who is looking for  $50,000 to expand his inventory.

If he took a short-term loan, one likely loan offer would be to receive $50,000 and pay the lender back $60,000 over six months.  In this case, the lender would take $468.75 each business day from the store owner’s checking account, or $10,000 a month.

If he chose the five-year note, he might expect to pay an interest rate of 15 percent and have a monthly payment of $1,189.50.  The interest expense would total $21,370.

So which is the better deal?

I suspect that Sean Murray would say that with the five-year deal, the borrower is incurring double the interest expense of a short-term loan, and thus, it’s a poor choice.

I disagree.  You see, the five-year loan probably doesn’t have any prepayment penalty.  So let’s say you are in fact ready to pay the loan off in six months.  At this point, you will have incurred approximately $3,600 of interest charges, and you can pay the loan off and not pay another penny of interest.  Taking the short-term loan would have been a mistake.

Under the longer term loan, you’ve incurred $3,600 of expense in the first six months instead of $10,000.  And if things don’t go quite as well as planned, you have a longer time to pay off your investment.  In fact, under the longer loan, it will be about 18 months before you’ve incurred the $10,000 of fees.  And at any time during those 18 months, you can pay off the loan without any penalty.

For all of us who are survivors of the Great Recession, the reality of business is that despite the best plans, things change, which is the very point that Sean Murray made in his post.  And because they change so quickly, the smartest thing a borrower can do is get the longest amortizing loan, with the lowest monthly payments, and minimal to no prepayment penalties.  This is some of the innovation we have started to see in the alternative lending space in the past year, and it’s a good step in the right direction.

Remember one rule when taking a loan–focus on your cash flow, and make sure your monthly payments don’t keep you up at nights.

5 Money Mistakes You Don’t Want to Make

When looking for capital, many business owners make these critical errors.

Entrepreneurs are often so busy running their businesses that they make common mistakes that could wind up costing valuble time and money.  Make sure you avoid making any of the blunders below.

1.  Being Disorganized

Yes, taking care of your day-t0-day operations and putting a heavy emphasis on satisfying your clients should take precedence over organizing your receipts and updating your financials, but these important things can’t be ignored for too long.  Lenders see out-of-date financials as a sign of poor money management, and it can reflect poorly on you as a business owner and on your ability to pay back a loan.  Set aside a time each week (or every other week, if absolutely necessary) to update your balance sheets, accounts receivable, inventory, current liabilities, and your profit and loss statements.  All small-business owners should reasonably be able to discuss the numbers from these financials for the past two weeks of their business, especially when seeking a loan.

2.  Being Ill-informed

One of the biggest pieces of advice that I repeatedly give small-business owners and entrepreneurs is to know their options.  There are hundreds of loan programs available, and not knowing about the different sources of capital can end up costing you more money in the long run.  For example, taking a cash-advance loan because it’s fast and convenient could have you paying back thousands more than an SBA express loan would.

3.  Not Networking

Imagine a startup CEO who solely networks with lenders who require companies to have been in business two years before even considering them for loans.  Or a company that makes apps not returning phone calls from a tech investor.  Many small-business owners fail to identify the most appropriate financing targets for their specific business.

4.  Borrowing Too Much

When considering a loan, many small-business owners think too big.  Don’t make the mistake of borrowing money to fuel your business for the next five or 10 years–you only really need enough money to make progress this year.  Borrowing a large amount of money not only means that you will need sufficient collateral and cash flow to cover the debt but also that you’ll have to pay back that amount plus interest.  Think about what you can actually afford and how it will affect your business.

5.  Blindly Trusting Your Partner

Entering into a relationship with an investor or lender should be a two-way partnership, just like a marriage.  As a mutually beneficial relationship, people make a loan to or invest in your business to make money, and you are taking the money or giving up equity in order to improve your business and cash flow.  Just as lenders and investors interview you to see if you are a good fit, you should also interview them to achieve the same.

Ask loan offiers questions about previous loans they have made and what their persoal approval rate is within their organization.  Ask potential investors how many investments they’ve made in the past year, and carefully consider how much influence the investor will have in making business decisions.  Know that there are thousands of options when it comes to lenders and investors, and that not all of them will be right for you and your business.

Are You a Venture or a Debt Entrepreneur?

This decision is far more personal and emotional than rational.

A few weeks ago, I was fortunate enough to attend the Inc. 5000 conference in Phoenix where I participated on a panel called “Where’s the Money!”  As a part of the panel, I spoke about debt options and alternatives and another colleague represented the venture and angel community.  Our advice to the audience seemed to be bi-polar.  “Only borrow as much money as you need,” I said.  “You’re going to sign on the line personally and have to pay it back.”  “Raise as much money as you can as fast as you can, ” replied the venture capitalist.  From his perspective, entrepreneurs should build businesses aggressively and quickly.

As I looked out at the audience I perceived some legitimate confusion.  I told the audience the story about my very first Inc.com column where I asked the question, “Are you a tortoise or a hare entrepreneur?”  How you choose to build your business will often be directly connected to how you decide to fiance it.  This decision is  far more personal and emotional than rational.

There was part of me that wanted to snap back at the venture capitalist and suggest that “venture entrepreneurs” are not really entrepreneurs after all because they’re always betting with somebody else’s money.  I wanted to align myself with the folks in the room who still owned 100 percent of their fast-growing companies.  After all, I thought to myself, no one has really “been there and done that” if they haven’t put their house on the line.

The truth, though, is that this is not a black and white issue.  Venture entrepreneurs take on a kind of risk all their own.  They risk building a company that they don’t have control of.  And they sometimes risk moving so fast that they can miss important and subtle changes in their business models that you only find when sweating it out.

On the other hand, debt entrepreneurs take different risks.  They put their necks and their houses on the line, and they risk being swept away by well-funded venture outfits who might choose to pursue similar business models to their own.

Both the debt and the venture entrepreneur are risking their time, which is after all the one personal asset we all share.  So once you’ve decided to invest the time, think carefully about which finding approach you feel most comfortable with and stick with it.  It’s almost like the old Apple and IBM debate–the answer to which machine or approach you prefer is completely up to you.

The Absolutely Best Time to Borrow Money, as published by Inc.

Consider taking out a business loan when you least expect you’ll need it.  Here’s what I mean.

At my loan brokerage firm, I receive calls from small business owners everyday who are desperate for loans–not only to save their businesses, but just to keep the roofs over their heads.  If they had called me a few months earlier, when financial needs were just emerging, securing a loan or line of credit would have been much easier.

It’s common sense, but many small business owners ignore the fact that it’s easier to get a loan when you don’t need one than when the situation is dire.

The High-Interest Treadmill to Avoid

Imagine a scenario in which it’s the middle of the summer and your air conditioner blows up on you.  It’s going to cost $25,000 to replace it and you need to do it quickly.  There is not much time to think, or your business is at risk.  If you have a line of credit in place for an emergency like this, you can write a check and pay a low interest rate of 5 percent to 6 percent until you figure out a longer-term plan.  If you don’t make that contingency plan, and you don’t have the cash on hand, you could be forced to call a quick short-term lender who will charge 60 percent to 80 percent interest.  This is what you don’t want to do.

Small business owners tend to have short-term memories and wind up concentrating on present victories and defeats.  If things are going well, you probably think that they’ll continue that way.  But if the recession made anything clear, it’s that the world can change quickly and unexpectedly.  No one is immune.

Just as people take out life insurance plans to help take care of their affairs in case of unforeseen death, so should owners have lifelines for their businesses.  The most successful entrepreneurs anticipate potential problems down the road and plan accordingly before hitting them.

You Know You’re in a Good Position to Borrow When…

If your business is doing well, now is the right time to evaluate your contingency plan options.  When cash flow is steady and building, banks will line up to give you money at the best rate possible.  A line of credit can be a lifesaver in case of an unforeseen emergency or during a slow season.  While there might be some small expenses to get a line of credit set up, once you have it, you only pay for it if you use it.

If you have accounts receivable, your industry is showing growth, and you have good credit, you’re in a good position to take a loan or a high line of credit at a good rate.  With business that is turning profits, you can be confident that you’ll also be able to pay back the loan, which is something that helps all small business owners and entrepreneurs sleep better at night.

You Know You’re in the Worst Position to Borrow When…

On the flip side, if you wait until you aren’t able to make your payroll or aren’t able to pay your lease, it will be more difficult to get any sort of loan because banks and alternative lenders are hesitant to lend money to a business that is at risk of shutting down or going bankrupt.

When you get desperate, your choices dwindle and you may be stuck with a high interest loan with short amortization period that will leave you right back where you started after a few months.  This is when businesses can get sucked into the trap of short-term loan renewals that they have trouble getting out of and rates that they struggle to pay.

For many businesses, a call for a lifesaver loan is completely avoidable if a loan or line of credit is taken a little earlier in the game.

Are you prepared to weather potential storms looming on the horizon?  Do you have a small business contingency plan?  Let me know in the comments section below.

Can You Be a “Mensch” in Business?

The balancing act between profits and ethics.

Running and building a business is a tricky balancing act.  Top that challenge off with building a reputation as being a fair and honorable entrepreneur and everything is all the more difficult.  I’ve recently struggled with the question about what makes an entrepreneur a good person in business.  Or to use a common Yiddish word, what makes a person a “Mensch” — a person of integrity and honor.

I like to think that I aspire to be a “mensch” in business, but if I really am or not is a subjective judgment.  Some might argue that because I run a for-profit business that it would be impossible for me to do really honorable things.  And while there is plenty I am proud of in how we go about our business, there are many instances where I wonder if I made the best decision.

There are so many shades of grey in the balancing act of maximizing your profits and value and doing “the right thing.”  Often the right thing is subjective.  I know of some business owners who bring few ethics to their business practices and compensate for it by donating a fortune of money to charity.  Others run “social entrepreneurship ventures” where they are focused on doing good but sometimes can’t sustain themselves.

What is the “right” amount of profit to make and at what cost?  How do you answer this question?

Ultimately I think that every entrepreneur can only answer the “mensch” question for his or herself.  To answer a question with some more questions, here are some things to think about.

I think it’s fair to say that if you can positively answer these questions, you are a “mensch” in business:

  1. Do your employees love to come to work?  Have you created a work environment and compensation structure that makes people want to get up in the morning?
  2. Do your suppliers like to do business with you?  Are you considered fair and are they able to operate their business fairly while they work with yours?  If you were in their shoes, would you be happy to have your deal with them?
  3. Would you refer your best friend to your company as a customer?  Do you have the confidence in your product or service that you wouldn’t think twice about referring people you know to your company?

If you can answer all these questions positively, you’re acting as a mensch in business.  If your answers are all affirmative and you’re profitable and business is thriving–you’re in a lucky and fortunate situation.  You’ve managed the ultimate balancing act.

And if your answers to one or more of the questions are NO–it might be time for some soul searching.  Short term profits could give way to long term problems before you know it.

 

 

A New Group of Alternative Lenders: Investment Lenders

How we refer to lenders helps shape the industry.

Over the past year there has been an important shift in the alternative lending landscape for small business owners and entrepreneurs. A new group of non-bank lenders have entered the market and are willing to lend to businesses at amortizations that spread three to five years at interest rates that are typically in the mid to high teens. Some of the primary players in this category include Lending Club, DealStruck, Fundation and Funding Circle.

These new players create a big and important shift from the short-term cash advance or on-line daily ACH lenders who typically lend money at six-month amortizations with APR’s that can range from 30-200 percent. Some of the big players in this market include OnDeck and CanCapital, among others.

In my opinion, any entrepreneur who is looking for an alternative loan should consider one of these new players first, before considering a cash advance.  While their credit standards are tougher, if you are lucky enough to get one of these loans, your rates will be a fraction of the price of the cash advance lenders, you will have reasonable monthly payments vs. daily debits from your checking account, and you will have no or minimal prepayment penalties.

That being said, many entrepreneurs still don’t know about the new players–and a big reason for this is there is not a name for their category of lending.

“Alternative Lenders” is a broad term that often refers to many of the big names in the space and encompasses a lot of types of loans, including cash advance merchants. These new lenders are not short-term cash advance lenders, so it would be unfair to pigeonhole them into this grouping.

I would like to suggest that we call the new group of lenders “investment lenders”. The reasoning behind the nomenclature is that these types of loans give businesses enough time to take a loan to make an investment in their company, let the loan improve their business, and pay it back over a reasonable period of time. This is in sharp contrast to the cash advance lenders whose short-term loans often force the borrowers into multiple renewals and increased rates.

If we can all agree on a term, it will be a good thing for the lending industry and entrepreneurs. I think the term “investment lenders” provides an important contrast and distinction between the two products and I plan to use it in my talking and writing about the industry going forward.

Own A Small Business? Consider Your Supplier Carefully

Many suppliers claim to be friends of small businesses, but do they really have your best interests in mind?

As small businesses continue to forge ahead and play a large part in reshaping the economy, suppliers are more vigilant than ever in advertising to this market and playing up their advocacy of small to mid-sized companies.  Lenders and other suppliers promote their small business advocacy and claim to “fight for the little guy,” but this isn’t always the case.

Unfortunately, small business owners often get taken advantage of by larger suppliers that concentrate more on their bottom lines than the needs of small business owners.  So how do you separate the good from the bad? Before you enter into a relationship with a supplier, here are some things that you might want to think about:

  1. Do Your Research.  A quick web search of the potential suppliers name will yield some worthwhile clues about the supplier’s credibility and relationship with the small business community.  If you see more negatives than positives in your search results, this is a good indicator that you should look for another avenue.
  2. Seek Flexibility.  Small Businesses evolve and change, and suppliers that work with small businesses know this and should adapt accordingly.  A supplier that wants to lock you in to a long-term commitment likely doesn’t have your ever-changing business needs in mind.
  3. Evaluate The Sales Process.  A pushy salesperson that wants to close a deal within one short phone conversation likely isn’t on the side of small businesses.  If you aren’t comfortable with the sales process or the salesperson representing the supplier, move on and find a supplier that truly cares about small businesses and takes the time to walk you through options and processes without the rush to close the deal.
  4. Comb Thru Their Website.  If a company is dedicated to helping small businesses, their website should be indicative of this initiative.  Look for educational tools and resources specifically geared towards small businesses.  If these are present, there is a good chance the supplier deals with numerous small businesses and makes them a priority.
  5. Know The Terms.  Terms in a suppliers agreement should be transparent and easy to understand.  If there is a wealth of legal minutia and you find yourself second-guessing your comfort with the deal, your instinct is probably correct.

Improving Transparency in Online Small-Business Lending

Website launch tackles issue of lending transparency.

Writing and talking about improving transparency in small-business lending is easy.  Actually doing something about it can prove difficult.  I hope that my company has taken one step in helping in this mission today with the launch of VisibleLending.

Visible lending is an open directory of short-term online business capital providers.  We have scoured the internet and found roughly 200 companies that exclusively promote short-term lending products, either in the form of loans or cash advances.  Recognizing that there was no obvious spot on the web where all these companies were compiled, we felt the need to create the VisibleLending site.

Now, these companies located in one place and users have the opportunity to write about their experiences with these lenders or brokers, and to add new companies that we either missed or that have recently entered the market.  Lenders have the opportunity to become more transparent by adding the names of their principles if they don’t include them on their website, as well as add their physical addresses.

We hope that the site will help to raise awareness about both the macro and micro economic issues created by these loans.  And we also hope that some borrowers, who are considering these short-term options, will come to MultiFunding and use our services to hopefully help them find better loan options for their businesses.

Hopefully, as the site grows organically and gains some traction, cream of the crop lenders in this category will raise to the top and if it’s the most appropriate loan for a borrower to make, this will serve as a guide and a resource to help point them in the best possible direction.  In addition, we hope that the site will help bring overall attention to this category of lending, and the companies involved in will begin to self-regulate.

So how do short-term online capital providers work?  Sometimes their products come in the form of a loan, where the lender withdrawals daily fixed debits from the customer’s accounts over some months.  In other instances there is a cash advance, where the lender buys a future piece of the company’s receivables and debits a percentage of their credit card sales daily.

These loans and advances are expensive, and are typically required to be paid back quickly.  In a traditional loan, borrowers make monthly payments, which gives them more time to use the money.  But with these short-term, unregulated loans, the payments are made daily and automatically withdrawn from a borrower’s account.  The compounding effect of these rapid, frequent payments make the interest rates higher.  It’s not uncommon to see APR’s ranging from 40–200%.

As often happens, the cash advances that eventually lead borrowers into a cycle of renewals.  In order to keep up with the rapid payments schedules, the borrower either renews his or her first advance or loan, and/or adds a second more expensive loan on top of the original.

As a largely unregulated industry, we are not aware of any one source that can accurately report on the amount of money being lent or advanced annually.  We also don’t have information regarding how many small businesses are taking up these loans.  That being said, anecdotally we do know that it’s a big business, with  some billions of dollars being transacted yearly.  And from our experience, as loan brokers, we visibly see the pain that these transactions can create.

As in any directory, we had to make choices about what companies to include and exclude.  In this initial launch, we picked companies that exclusively focus on short-term loans or advances.  We choose not to include companies that promote these loans as one of multiple offerings.  For instance, we did not include merchant processing companies that promote these advances as one of their options.

I suspect that some of my critics will call me a hypocrite for launching this site when sometimes in our loan brokerage we place clients in these short-term loans.  The fact is that we do, and that 3.86% of all the loan volume we have done in the last 12 months is in these short term loans.  I am not suggesting that there is not a place for them in the market.  I am suggesting that they be used carefully and thoughtfully.

Please join us in helping make www.visiblelending.com a viable tool for small-business owners.  If you’ve had experience with one of these lenders, please comment on it.  If you know of a lender that is not included in the list, please add them to the site.  And if you’re a lender who chooses not to list your principles or your address on the site, please include this information also.  We all need to help in the effort to improve transparency.

Who’s Really to Blame for Slow Bank Loans?

Unprepared borrowers are a primary culprit 

Ask any small-business owner to name his or her biggest grip about obtaining a bank loan, and you will likely hear that it’s the tortoise pace at which banks review and approve loan applications.

 

Banks are notorious for their lengthy loan-application proceses, which often take weeks to complete.  Though the economy is in recovery mode, the recession made a huge impact on how banks deal with small-business loans.  Banks now require more from applicants and they are pickier about approvals.

 

In our loan-brokerage firm, we commonly hear from borrowers about issues with bank-loan processing times.  When we dive deeper into the supposed issues, though, we often find that the borrower is more to blame for the lag than the bank.

 

Unprepared borowers are a primary culprit.  Business owners could speed up the process with a timely submission of their up-to-date financials and tax returns, as well as open communication with bank-loan officers.  By contrast, owners with outdated financials or extensions on their tax returns, and who are poor communicators, will often suffer.

 

As a small-business owner myself, I understand how financials can fall by the wayside at times.  We become so engrossed in the day-to-day operations of the company that reconciling our bank statements gets pushed further down the “to do” list.

 

However, if you are seeking a loan, staying current with your accounting, bookkeeping, profit and loss statements and balance sheet is one of the best ways to accelerate the bank-loan-application process — while also relieving yourself and your loan officer of headaches.

 

Two tips for ensuring that you are up-to-date with your financials: Hire a part-time bookkeeper and put in more face time with your ccountant.  Hiring a bookkeep even once a month makes it easier for you to reconcile your bank accounts and keep your balance sheets up to date.  Additionally, meeting with your accountant quarterly instead of just once a year at tax season will help you create some checks and balances.  This will also force you to be more disciplined with your record keeping and tax preparation.

 

Not only will these steps make you more appealing to potential loan brokers, but they will also help you maintain best business practices by knowing where your money is and where it is going.

 

While banks can be very bureaucratic and there are times when the process is just flat out crawling along, in our experience about two-thirds of the time the borrower is the one slowing down the process.

 

What this means for some borrowers is that they are pushed out of the bank-loan realm and enter into the higher-priced world of alternative lending with promised quick turnaround.  The same scenario goes for borrowers who have poor credit, limited collateral or tax issues.

 

The trade-off:  While alternative loans accomodate those who need a quick loan without much paperwork, they come at a much higher cost.  With bank loans, the borrower has the opportunity to get money at dramatically cheaper rates, even if it takes a few more weeks to acquire.