How to Cure Entrepreneurial Brain Freeze

Some entrepreneurs spend months trying to raise more money than they actually need to achieve proof of concept.  Many get stuck on the grand vision of their company’s future instead of deploying the resources and assets at their disposal.  I call this entrepreneurial brain freeze.  When I started my first venture, it took me six months to get a meeting with angel investors.  I was so excited that I spent 72 hours straight marathon writing a business plan and financial forecast in order to convince the investors why I needed $2 million to start my company.

I showed up in a fancy suit and tie, and the first thing that the investors did was rip up my forecast and asked me what I could do with just $200,000.  I was initially shocked that they would lowball me like that, but in the end, realized they were right.  This experience taught me, in retrospect, that if I had just tried to raise $200,000 instead of $2 million months earlier, I would have reached the starting line much faster.  I had to cure my own case of entrepreneurial brain freeze.

At my loan-advisory office, we speak with business owners who show the common symptoms of brain freeze: they’re stuck within the confines of their company vision and unwilling to stray from their buttoned up business plans.  Before discussing funding options, we first ask them what they need the money for and why.  The reality is that usually there is a way to meet their objectives with much less money.

The business owner might be foregoing short-term profits by seeking less startup capital, but they are moving commerce sooner, and that is what’s important.  The best proof of a viable business is active commerce, not funding.

A few weeks ago, I met an entrepreneur who wanted to start a golf simulator business.  He wanted to raise money for his own facility, with two owned or leased machines, and also wanted more capital to market his business.  At the time of the call, though, he didn’t even have a proof of concept, no customers on the horizon and yet wanted to borrow or raise a couple of hundred thousand dollars in equity.  I had to take a step back with this entrepreneur instead of pushing him toward a loan that he would later regret.  A better option was to partner with local golf stores by installing his simulators in their shops.  By piggybacking off of the store’s existing customer base, the entrepreneur was drastically cutting his marketing dollars while also achieving a proof of concept in exchange for profit sharing with the existing golf store.

Instead of seeking $500,000 to launch his business, the entrepreneur only needed $50,000 to get started.  This is a much more reasonable goal.

If you’re trying to borrow money before you’ve gotten one customer, you’re likely going to give away more equity than you have to, or it’s going to cost you way too much to borrow money.  There can be huge benefit in shrinking a grandiose vision, shaking off the entrepreneurial brain freeze and proceeding with calculated baby steps rather than rushing a new business the the finish line.

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.

 

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.

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.

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.

Ami Kassar: Has Small-Business Lending Really Improved?

Many small firms still face an uphill battle.

Lately, I’ve seen a number of reports that seem to declare small-business lending has improved over the past year or so. From my perspective, the answer isn’t always so clear.

It’s no secret that small businesses took a big hit during the recession, and that the path to recovery has been slow and arduous for most. Banks tightened up on lending, sales came to a near halt, and the decreasing value of real estate and other hard assets meant that collateral wasn’t as reliable as it was pre-recession.

While small businesses work to recuperate and pick up momentum from a variety of initiatives aimed at boosting sales and making credit easier to access, owners still have an uphill battle toward the finish line of financial stability and healthy growth.

In the wake of this environment, we’ve seen the rise of an alternative-lending industry with hundreds of players charging high rates and happy to lend to almost anybody, irrespective of credit. These lenders don’t report on their lending activity like the banks and SBA lenders do, which makes it even trickier to understand the state of small-business lending.

It’s almost like the small-business lending world is bi-polar.

A small percentage of small-business owners are bankable either with an SBA loan or a traditional bank loan. From the population of small-business owners that we work with at our loan brokerage, this group is about 15%. It seems to us, in our office, that these businesses are having an easier time getting these loans on the margin due to the fact that some businesses have taken giant leaps toward rebuilding success over the past year, and therefore become more profitable, rather than banks loosening up their criteria for lending.

The credit-worthy group has gotten bigger and it seems the approval process has gotten easier, but the fact remains that there is still only a small percentage of businesses that are bankable.

On the flip-side, nonbankable small-business-owner options have increased exponentially and these business owners are more likely to get a loan today than they were a few years ago. But when it comes to tracking and measuring the performance and price of these lenders, it’s an impossible task because these alternative lenders have no requirements to report and I dare to say no one really even knows who they are.

It seems to be that when venturing to answer the tough question as to whether the lending environment is getting better or not, it’s far more gray than black and white. Rather than tricking ourselves into thinking we know the answer with various surveys and reports, we should all work collaboratively to find a way to meaningfully answer the question.