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.

Five Questions to Ask an Alternative Lender

Finding the right alternative lender can make a huge difference for small business.

A good alternative lender is one who is cognizant of their role within the small business industry–a means to an end.  Alternative lenders should act as a bridge for small businesses to get them out of a financial hole and back into a positive cash flow.  A good alternative lender lends the borrower just what they need to achieve this goal, not the max amount that the borrower qualifies for in order to increase payments and interest.

Because we don’t know a lot about alternative lending industry activities–how much they lend each quarter, the terms of all loans, or even who all of the lenders are–what distinguishes a “good” alternative lender from a “bad” alternative lender is a bit of a gray line.

However, there are some definitive things to think about when seeking capital from an alternative lender to decide if they have you and your businesses best interest in mind, or if they are solely focused on collecting payments.  Here are some questions to ask when pursuing an alternative lender for financing:

1.  What percentage of the time do the borrowers need to come back to the lender for more money?  Knowing the renewal rate of the lender will help you determine if it’s likely your business will get trapped in a debt cycle.

2.  What are the prepayment penalties?  Can a customer get out of the loan at anytime with little to no prepayment penalty?  Or are they locked in to paying the balance of the loan for the length of the loan?

3.  What percentage of clients graduate to bank financing?  If this stat is relatively high, it’s a good indicator that the alternative lender is interested in helping business move into loan products that are more affordable with longer amortization periods.

4.  What is the lien structure for the alternative lender?  Do they take blanket liens on all assets of the company, which can make it difficult to borrow money in the future from other lenders?  Or do they take liens on specific assets that they are borrowing against?

5.  Does the lender offer counseling or advice?  Lenders that loan money without any counseling generally don’t have the borrower’s best interest in mind.  A good lender will offer the borrower counseling regarding cash flow impact and making sure that there is a clear plan for the borrower to be able to afford the loan and make the business better with the 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.

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.

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.

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.