A Loan Broker’s Responsibility to Small Business

Helping small businesses get into bank loan financing should be the driving force for brokers.

At my loan brokerage office, our mission is clear–we want every company we work with to get to a point where they are bankable through an SBA-backed loan or another traditional bank loan.  If a company is considered “bankable “, that is, they meet all of the criteria necessary to receive financing through an FDIC-insured bank, they’ve earned the right to get the cheapest loans that will allow them the best opportunities to grow and create jobs.

This being said, we’re not naive to think that every company is bankable: in fact, most are not.

In cases when we work with these non-bankable companies, our driving force is always to help them get to the point where their chances of being approved for a traditional loan are greatest.  While small businesses work towards this goal, it’s likely that they will pay more for capital through alternative loans.  However, we don’t want them to get stuck in the land mines of alternative lending or be forced into endless renewals.  We guide them and help them maneuver the lending landscape, identifying the lenders who will work with them and celebrate when they graduate to a bank loan.

We attack this challenge on a micro and macro level.  On a micro level, we treat each company and entrepreneur we work with care and concern for the longevity of their business, and do our very best to help them find financing that works for their unique company.  We also speak out for the need of reform and transparency within the alternative lending space.  These high-cost loans as a last resort recommendation for small business owners.

On a macro level, we have created tools like Banking Grades which has evolved to Entrepreneur Bank Search to help companies we don’t have the opportunity to help.

I also personally take my position as an advocate for small businesses within the lending industry as a serious endeavor.  My published work, in addition to speaking engagements at conventions and lobbying our government, is all aimed at helping create a path to bankability for entrepreneurs.

It’s time to step up as loan brokers and accept the responsibility that we have to act on behalf of entrepreneurs in order to help them receive smart money for their businesses.  Brokers who act with their best interests in mind at the expense of small business owners are doing a great disservice to the small business industry and the economy as a whole.

As a loan broker, it’s vitally important that we always treat borrowed money for a client as a means to an end.  The “end” for some businesses will be to pay off a loan.  In many cases, however, the “end” is becoming bankable and entering into an affordable, FDIC-insured bank loan.

 

MultiFunding Turns 5

Dear Friends,
On January 1, in addition to celebrating the New Year, MultiFunding will turn five.
On one hand, I want to slow down, take a breathe and celebrate. After all, it is an accomplishment. I want to jump up and down with the team and discuss the victories along the way towards this milestone.
And on the other hand, the five-year mark is just another day on the long journey of building a business. I’m sure it won’t really feel any different.
As so many of us know, being an entrepreneur is tough and can be extremely lonely. I can’t really compare the last five years to anything I’ve ever been through or done before. Those who haven’t traveled this journey simply wouldn’t understand it.
Entrepreneurs are a club of sorts. When we get together, we understand each other. Some people dream about being an entrepreneur one day-but fantasizing and doing are very different things.
In my mind, entrepreneurs are heroes and our entire economy is driven by the success of those who choose to join this club. As I’ve fully realized how tough it is to build a company over the past few years, I’ve become more resolute and determined than ever to help entrepreneurs connect with the resources they need to help feel safe and protected on their journey to success.
Can you think of a brand or a company that truly stands for helping entrepreneurs and small-business owners? Some like to make that promise-but if you dig under the covers you will find lots of concerns.
My focus for MultiFunding, as we continue to grow, is to really, truly help other entrepreneurs. We will treat other entrepreneurs as we would hope to be treated, and consider every client we work with to be the hero that they are.
For those of you who have joined us and helped us in our adventure over the past five years, I am forever grateful. And to those who want to be a part of the mission going forward, we welcome you with open arms.
From our family to yours, we wish you a Happy Holiday season and a prosperous and healthy 2015.
Best,
Ami & The Team

The Missing Ingredient in “Shark Tank”

Adding a lender to the panel of sharks would give the show more depth and educational value.

In the past week’s episode of Shark Tank, Curt Campbell, an entrepreneur from the tiny town of Fish Creek, Wisconsin pitched his company www.oilerie.com to the sharks for an investment.

In his pitch, Mr. Campbell talked about putting it all on the line for his company, and told stories of having his power and cable shut off at earlier stages in the business.

While Mark Cuban did make an investment, I thought his response to Mr. Campbell was genuine.  He thanked him for telling his story of his ups and downs candidly, and spoke about how he taught more to budding entrepreneurs watching the show then any of the sharks could.

As I reflect on Mr. Cuban’s comments–it reaffirmed my thoughts that there is a key component missing in the show–one of the sharks should be a lender, not an investor.

After all, every time an entrepreneur needs money for their business–they should consider debt and equity options.  Sometimes the choice is very black and white–because in some cases there isn’t a lender or an investor who would do a particular deal.  But in plenty of cases, the choice is gray, and this should be highlighted on Shark Tank.

I would love to see a lender on the show, sitting side-by-side with investors, asking the entrepreneur questions about their cash flow, collateral, and credit.  Entrepreneurs should know that these issues matter.  Additionally, I would like to see the sharks sharpen their value proposition to an entrepreneur, when and if there is a viable lending option on the table.

It would be fascinating to watch an entrepreneur have to make a decision in front of millions of watchers between taking a loan and keeping control of their company but have to risk their house a collateral or taking an investment.  That’s a far tougher decision between giving “x” percent of your company up to on shark or “y” to another.

It might even be juicier to watch an entrepreneur decide between a 6 percent interest loan that requires them to put their house on the line versus a 30 percent loan that does not.  Or, it could be compelling to watch an entrepreneur realize they have forfeited a loan option because they previously took on an investor who is not willing to personally guarantee a loan.

These debates would add a compelling component to the show, add to its drama, as well as its educational value.  I hope the producers consider it.

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.

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.

Ami Kassar, WSJ Capital Insight: Improving Transparency for Alternative Lenders, Loan Brokers

Create standards for transparent pricing and reasonable penalties.

My last post seemed to stir up some controversy.  I’ve been labeled a “merchant cash advance industry hater” regarding my push for more transparency on short-term loans.  I want to be clear I am not an opponent of alternative lending.  I think there is, and should be, an ecosystem for entrepreneurs to be able to borrow money if they do not initially qualify for bank loans, including even loans backed by the U.S. Small Business Administration.

The reality in America today is there are hundreds or perhaps even thousands of alternative lenders lined up and ready to lend money to entrepreneurs.  They come in all different shapes and sizes – short-term lenders, factors, micro lenders, merchant-cash-advance lenders, hard-money lenders, equipment-leasing companies, just to name a few.  And as they are not regulated by the Federal Deposit Insurance Corporation, they have a great amount of flexibility in their pricing, marketing, and contracts.

In a perfect world, all alternative lenders should help small businesses get to the point that they are “bankable.”  For many small businesses, being bankable means that they can graduate to bank loans when profits increase, credit scores improve and collateral is built up by gaining assets such as vehicles, buildings, inventory, and accounts receivable.  And amongst the alternative lenders there are gems that try to accomplish exactly this – and maintain transparency pricing that is clear and easy to understand, with no or minimal pre-payment penalties.

One question is how we can help these lenders raise to the top of the pile, and make it easier for weary and time-pressed entrepreneurs to pick them over others.

I suggest that it’s time for a “TRUSTe” initiative for small-business lending.  TRUSTe issues its TRUSTe seal to businesses that meet it requirements for protection of consumer data.  To display the privacy seal, the businesses have to complete a certification, submit to ongoing site monitoring and participate in a TRUSTe consumer-dispute resolution program.  The idea is that when the consumer sees the TRUSTe seal, according to TRUSTe, the business “demonstrates it commitment to protecting consumers and respecting their personal information.”

Why not offer a similar service for alternative lenders? Create a set of standards for clear and transparent pricing, reasonable penalties for paying off the loan balance earlier than is called for, as well as disclosure of the fact that they may attach liens to some or all of a borrower’s assets.  And if alternative lenders meet these standards, they can place the logo on their websites.

Of course, loan brokers like myself who charge fees to help entrepreneurs reach lenders -and to arrange their loans- also aren’t currently regulated.  Some may see that as a problem.  As recently reported, some commercial loan brokers are unscrupulous and others are no doubt expensive.

To be fair, I believe we too could benefit from having a similar set of standards around clear and transparent pricing, as well as a seal that shows which of us have track records of properly educating our clients about all the risks and pros and cons of the various products we peddle.

The hope for all companies is that eventually the borrowed money will come at a reasonable rate with the best possible terms.  What we have to do as an indusrty is make sure the path to get there is thoughtful and reasonable.

Why the SBA Won’t Partner With Alternative Lenders

Taxpayers would be exposed to too much risk.

In a recent Forbes column, the CEO of Lendio, posed the question: “Should the SBA Make Room for Alternative Lenders?”  His argument was that banks aren’t the only place small businesses can go for capital anymore and that alternative lenders have a “big role to play in the future of small business lending.”

But in my opinion, the U.S. Small Business Administration–a government agency supported by taxpayer funds–and alternative lenders–private lenders that take on higher risk loans in exchange for higher rates–are opposite by definition.  Thus, the idea that the SBA would guarantee loans by alternative lenders is akin to the great apples-versus-oranges debate.  It’s not a realistic or intelligent scenario to hope for.

The SBA’s mission is to encourage small-business owners growth through its guarantee program, which encourages lenders to take on riskier loans then they ordinarily would.  A typical SBA loan would have a 10-to-25- year amortization period and an interest rate of about 5%.  With loans like this, small-business borrowers can keep innovating and keep expanding to the benefit of the overall economy.

On the other hand, alternative lenders fill the gap for small-business owners when SBA loans are not an option due to weak financials, slow cash flow or poor credit.  These non-SBA lenders give money at very high annual-percentage rates–from 30% to as high as 200%.  With rates like these, alternative lenders can take on much greater losses then SBA lenders, which allows them a luxury of using much faster and more limited underwriting than would be required for an SBA loan.

Because the SBA is dealing with taxpayers money, the rules and regulations set in place are for the benefit of the entire economy and all tax-paying citizens.  If the SBA were to dole out loans as rapidly as alternative lenders do, taxpayers should, and likely would, jump up and down screaming because of the amount of risk that they would be exposing taxpayers money to.

It’s easy for alternative lenders to fantasize about a scenario in which the SBA embraces them and adopts their swift underwriting process, which at times can be based on a mere three bank statements and credit check, in exchange for lower rates on quick loans backed by a guarantee.

But it’s not realistic.  The SBA should never, and could never, back what alternative lenders do.

And if alternative lenders were to provide funds at SBA rates, typically ranging from 5.5% to 6%, they would be dead in short order, because of their loss rates.  While alternative lenders don’t publish their loss rates, I have been told of default rates running from 6% to 10%.

Although the likelihood of these worlds ever meeting and co-mingling is extremely low, there are steps that both sides could take to come a little closer to each other.

For example, the SBA could look for opportunities to become more streamlined by ridding itself of outdated rules that bog down the approval process.  At the same time, if alternative lenders could create transparent and clear pricing that business owners can understand based on APR’s as SBA lenders do.  This would allow owners to properly compare apples and oranges.

Are You Ready to Risk It All for Your Idea?

Your business may make money someday, but in the meantime, don’t jeopardize your financial security.

How much do you believe in your idea? It’s a simple question with a not-so-simple answer. When prompted, most entrepreneurs and inventors would probably respond with a canned response that echoes the value proposition of their product or service. They’ll list key differentiators, market position, sales projections, and more. But, this doesn’t really get to the root of the question–how much do you really believe in your idea, and what are you willing to sacrifice for it?

As the driving force behind the product or service, you are financially responsible for giving your idea room to grow and, you hope, succeed. Many entrepreneurs and inventors think in lofty terms, imagining where the business will be in years to come, without considering what it means for them in the short term. But that’s a costly mistake, because when it comes time to seek out financing, the burden rests solely on your shoulders.

The Collateral Crunch

Lenders need collateral in order to give you a loan, and that collateral can come in different forms. Think of collateral as a security measure for the bank that helps assure the lender that you have an additional source of loan repayment should your cash run out.

Collateral will typically be equipment, business buildings, account receivable, and inventory, but if the business is just starting, it’s not likely that these sources of collateral exist. This is when the lender will turn to home and personal assets for collateral. This is common practice and something nearly all entrepreneurs have to deal with when seeking a business loan.

A personal guarantee puts your assets on the line, making you the loan’s co-signer. If your business goes under, you will be personally responsible for repaying the loan, and the creditors will be coming after your personal assets for repayment. Many entrepreneurs chose to start a business with personal savings or other forms of borrowing money (friends and family come into the picture here) rather than risk this scenario.

But, for those entrepreneurs that need capital to give their idea wings, it’s worth asking if your belief in your idea outweighs your hesitancy of offering up your personal assets for collateral.

How Much Should You Risk?

All small-business owners should expect to sink personal funds into the endeavor, but there is a limit for everyone on how much you should risk. You may think you are on the brink of the Next Big Thing, but is it worth putting up your house, your mothers house, every credit card you have, and then some as collateral in order to make your idea come to life? This is essentially the question that lenders will be driving at when they ask about collateral.

If the answer to that question is no, that’s OK. It doesn’t mean that you need give up on your idea, just that you may need to slow down and scale back. Break your idea into phases, and work on the first before moving on to the next. The amount of money you need to fund the first step is probably significantly less than for the idea as a whole.

Bottom line: Before you go out to borrow money, you should ask yourself if you are willing to put everything you have on the line to make your idea come to life.

How to Navigate the New Small-Business Lending Landscape

The world of small-business finance has changed drastically in recent years. Here’s what you need to know.

Let’s face it, most of us have a romanticized view of small-business lending — the mom and pop shops of yesteryear heading down to the local bank to take out a loan — but the reality is that the world of small- business finance has changed drastically in the past few years. Now, hopeful entrepreneurs seeking funds are left to navigate the post-recession fallout in order to realize their dreams.

Access to capital is a critical issue for small-business owners and entrepreneurs. According to the U.S. Small Business Administration, there are 23 million small businesses in America that account for 54% of all U.S. Sales. Since 1990, big business has cut jobs by 4 million, while small businesses have added 8 million new jobs to the market. These small-business owners require capital markets that work to borrow money and grow their businesses.

Lending for small businesses today is completely different than it was before the recession. Banks have tightened up or fizzled out. Credit scores and available home equity have been hit. And as a result, we now have hundreds of lenders that are not regulated by the same standards as big banks and eager business owners seeking loans. This environment creates compelling choices for small business owners, but can also be dangerous territory.

When faced with so many new choices for small businesses, the path to choose becomes less apparent. Terms are more confusing and the money is more expensive than ever before. Borrowers may be attracted to the quick turnaround of a cash advance, or lured in by applications for alternative loans without even considering the availability of a traditional SBA loan. The purpose of this column is to help readers to understand the new lending landscape and navigate through it.

We’ll explore the intricacies of small-business lending to help both the budding entrepreneurs just getting their feet wet and the more experienced, high-growth companies clearly understand their financing options.

The issues surrounding small-business capital are more critical than ever as more and more Americans turn to entrepreneurship in the face of a dwindling job market. Access to small-business lending is crucial for sustained economic recovery, and understanding the options that are best for each unique business is the first step toward success.