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.

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.

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.

 

 

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.

Are You a Tortoise or a Hare Entrepreneur? (It Matters)

The entrepreneurial ecosystem is dotted with ambitious go-getters itching to follow in the footsteps of the Facebooks and Googles of the world–creating fast-growing, fast-flying companies with large numbers of early adopters. I like to call these hopefuls hare entrepreneurs, as the race to produce and succeed is done at a fast and furious pace. But, the truth is, the majority of successful entrepreneurs are tortoise entrepreneurs–those who are growing businesses slowly and steadily. 

Entrepreneurs who fit in the tortoise category are most often also building lifestyle businesses, or, businesses that VC-backed tech entrepreneurs patronizingly deem slow and small. In reality, lifestyle businesses afford business owners the luxury of maintaining life outside of work, instead of allowing a fast-growth company to devour every semblance of work-life balance. Lifestyle businesses grow more organically and steadily while meeting the need of some consumer cohort, rather than rushing partnerships and working harder just to satisfy demanding backers who want to see next rounds and rising valuations.

For every sexy, new startup with a business plan that pitches to angel investors and venture capitalists based on soaring company valuations, growth assumptions, and income projections, there are hundreds of startups trudging through the early stages of starting a business with borrowed money from friends and family, savings and small business financing. Most companies take years to mature, not months. Most small businesses show meager profits the first year, not millions in sales.

Hare entrepreneurs who start successful companies with meteoric growth need to be seen as the exception, not the norm. The reality is that most startups don’t have the opportunity to raise venture capital and need education and advice on where to look for money to grow their companies.

To that end, this column is for the tortoise entrepreneurs of the world. Tortoises need financing, too, even if the process isn’t as glamorous or riveting as the hares would have you believe. I’ll examine the different financing options available to tortoises at different stages of a company’s journey, like SBA loans, factoring, and purchase order financing, and wade through the pitfalls and the triumphs of each. Small business owners increase their chances of success by understanding the types of loans available and which loans make sense for their particular businesses.

As a tortoise entrepreneur myself, I intimately understand the complexities of steady business growth and small business borrowing. This is my approach too. While tortoise entrepreneurs aren’t seen as the obvious icons and heroes of American culture, they are responsible for groundbreaking products, necessary services, and millions of jobs.

Five Elements of a Successful Business That Loan Underwriters Often Pass Over

When applying for a loan, small business owners and loan officers trade hundreds of pieces of paper, and dozens of numbers and ratios are crunched.  I would like to suggest five subjective elements of the process that often get overlooked, and which, in my opinion, are critical elements of a successful company.

Would, and have,  the entrepreneur lend themselves the money?

In our work at MultiFunding, one of the first questions we ask an entrepreneur is “would you lend yourself this money and are you willing to bet your house?”  If there is a moment of hesitation, it’s time to dig and understand why.  Sometimes, it’s a sign of a business in trouble.  Other times it’s an indication of a plan that has not been properly thought out.  Or perhaps it’s an indication of an entrepreneur who doesn’t believe in himself and/or doesn’t have the backing of hi family. 

Whatever the reason might be, if you’re an entrepreneur looking for money, it’s really smart to ask the question “would you lend yourself this money.”  If the answer is no, be ready to ask yourself why?

Do customers of the business recommend the product or service to their friends?

A critical element of a successful business is happy customers – and we don’t think loan underwriters talk to customers nearly enough as part of their due diligence.  It’s fairly simple.  If customers love a product or service, and actively tell their friends about it, that’s usually a great sign of a successful business.  If customers churn and burn in a business, there is an imminent problem on the horizon.  These issues often get forgotten in the underwriting ratios that get crunched.

Are the employees of the company happy, engaged, and committed?

Do the employees of a company love coming to work?  Are team members engaged and happy?  What is the employee turnover?  Would employees jump out of a window to help a company succeed or would they prefer to jump out of a window instead of coming to work?  A happy team is a critical element of a successful company, and it is one that usually never comes up in the loan process.

Does the small entrepreneur have a mentor or mentors who they rely on and bounce ideas off of?

Being an entrepreneur is a lonely and frightening adventure.  Every good entrepreneur needs and deserves a good mentor.  I would love to see loan officers ask to talk to the mentor.  How well does the entrepreneur take advice?  Does he actively like to bounce ideas around?  How flexible and nimble is he in his thinking?  These are critical elements in a world that constantly changes.

With a snap of the fingers can the entrepreneur produce a current financial report about their business that they can explain and understand?

Entrepreneurs who run their businesses without understanding the fundamentals of the numbers are like drivers driving around town with their eyes blindfolded.  Good, accurate and timely accounting is a critical component of success that should not be overlooked.

 I would bet my money on almost any company that met the five criteria above.  Your ideas and thoughts are most welcome.

 

What the Jobs Act and Shark Tank Have in Common

Tonight, I am flying cross country and it’s one of those rare opportunities to think.  I have been trying to put down on paper for a few hours why I generally have a visceral negative reaction to the Jobs Act which got signed into law today.  I hope I have got my message down, but that will be up to you to decide.

Today President Obama was joined by Republicans, Democrats and entrepreneurs (including several friends of mine) to sign the Jobs Act into law.  The legislation makes it easier for entrepreneurs to raise money from everyday Americans, hopefully creating a whole new spigot of capital.

The President touted this legislation as a tool that might help the next Twitter or Facebook get off the ground.  In his remarks, he expounded upon the myth of American entrepreneurship.  Think big, get investors, shoot for the stars, and anyone can conquer the world.

This is the myth of entrepreneurship.  Have a billion dollar idea.  Write a business plan that will show you will have at least $100 million of revenue in three years.  Get investors.  Have rounds of capital.  Go public.  Make magic happen.

I think that this myth explains American’s fascination with the show Shark Tank where entrepreneurs go before a group of big name investors and try to sell their souls so that they will invest in their companies.

I think that my visceral negative reaction to the Jobs Act and Shark Tank is that we’re sending the wrong message to entrepreneurs and our young people.  I would like to see just as much pride in starting a restaurant, your own franchise, or your own manufacturing or distribution business.  These are just a few examples.

In my opinion, the last thing these main street entrepreneurs need is crowdfunding (passed in the Jobs Act today).   The first thing an entrepreneur should do is try to figure out how to execute their business model without selling off shares to investors.   After all, the investors never go away in their company. 

We should be encouraging our entrepreneurs to bootstrap their ventures.  We should be doing everything in our power to open up lines of credit and loans at reasonable prices to small business owners.  We should be doubling down on efforts like SCORE and/or the SBDCs to provide mentorship.  We should look for creative ways to improve the accounting and books of small business owners. 

I would love to see our media tell the stories of main street business owners and what they’ve done to survive the recession.  These should be our heroes, ahead of the founders of Twitter or Facebook. 

Yesterday, I want to visit one of my favorite (and first) clients.  She runs a day care center.  We fought like hell for 11 months to get her an SBA loan (after she was declined by Citibank) and now she has deployed the funds to double the size of her facility.  Kids were smiling, and about a dozen new jobs have been created.  Together, we sat and debated her next expansion plans, where she will hopefully double in size again.

In my mind, the owner of this day care center, like tens of millions of other main street entrepreneurs, are American heroes.  It is highly unlikely (in my opinion) that the Jobs Act and crowdfunding will do anything to help them.  It’s the furthest thing from their minds. 

The Jobs Act, like Shark Tank will likely do more to expand the myth of American entrepreneurship instead of focusing on the hard work of helping and encouraging main street small business owners.  While it might all be good for Silicon Valley, I don’t think it will help Main Street.  And that is disappointing to me.

Jobs Act – Meaningless for Most Small Business Owners – My Two Cents

I’ve been off the grid for about a week and am catching up on all of the small business articles.   There is a lot of buzz and excitement about the Jobs Act – and associated CrowdFunding legislation that passed the House and now the Senate is fighting about.  In a political season, this is being dubbed as the “small business funding solution”.

Here is my two cents.  Unless you’re a high tech start up and a Silicon Valley junkie – there is likely nothing in this legislation that is going to help you.  Ninety nine + percent of businesses in America aren’t on the fast track to IPO and don’t think they have the next Facebook or Twitter on their hands.  Most small business owners are ordinary people trying to do their thing and satisfy their customers.

It seems to me that @StartUpAmerica has taken over the political agenda when it comes to small business financing.  Many articles I have read espouse the idea that the vast majority of “high paying” new jobs come from fast growing technology companies.  I don’t buy it.

Imagine a race

On the one starting line are 100 Main Street Entrepreneurs.  They want to start a contracting firm, a new restaurant, a retail store, or perhaps open a Franchise.     Let’s assume that on average they will each employ 10 people.  If at the end of the year, 70% of them survive, that’s 700 jobs added to the economy.

On the other starting team are 100 Silicon Valley, StartUpAmerica Entrepreneurs.  They have a billion dollar company in mind, and they want to revolutionize the world.  Let’s say that they will also each start with 10 employees.  But realistically, at the end of year one, 20 of the companies have survived and 1 of the 20 is really rocking and rolling.  If the rocking company has 100 employees, and the other 19 survivors still have their 10 – this team has added 290 jobs.

Main Street Entrepreneurs win the race.

Please don’t take my perspective the wrong way.  I think that StartUpAmerica is a positive thing for a specific type of entrepreneur.  And I am all in favor the Jobs Act and CrowdFunding if they will help a segment of entrepreneurs move their businesses forward.

What I am opposed to though is the Silicon Valley StartUpAmerica agenda taking over and leaving Main Street mom and pop entrepreneurs in the dust.  Remember, in our imaginary race this group creates 700 jobs.  They might not be the highest paying but last I checked our unemployment problem is not a “high paying” problem.  Everyone deserves a job.

In some articles I have read, folks suggest that CrowdFunding will help main street businesses and that their fans and customers can become owners and investors in the company.  The proof will be in the pudding, but I doubt that this will be true.  It’s likely that the paperwork and accounting standards that will be required to meet the CrowdFunding standards will simply be too arduous and complicated for a main street business owner to take on.  They have a tough enough time keeping track of their books today.

If the Jobs Act passes the Senate, I suspect we will hear lots of politicians this fall touting their support for small business. Don’t buy the argument.  Let’s hold their feet to the fire (and our own as well) to make sure that we’re all doing everything we can to help ALL entrepreneurs, not just the special ones who think about big companies and IPO’s.  If we focus on lots of singles, our economy will be better off in the long run.

That’s my two cents.

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UPDATE: March 28, 2012
Entrepreneur Magazine agrees with Ami’s Blog Post! 
 
Read It Here

 

 

 

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What Does the Merchant Cash Advance Industry say about America?

Last week, CNN Money ran an article about the merchant cash advance industry and riskier forms of financing.  While I applaud the reporter, Jose Pagilery, for his efforts to point out how many small business owners are turning to riskier forms of financing, I am not sure he went far enough to explain the implications of the collateral crisis, and how it’s hurting small business.

Let me explain.  It’s common knowledge that credit has tightened dramatically for small business owners and entrepreneurs throughout the recession.  What is less discussed, is what they’ve done to survive and where they have turned for help.

For small retailers and service providers, many of them who lack collateral that lenders are looking for, the answer has been the merchant cash advance industry.  A typical loan is six months long.  Here is how it works.  A merchant has a need for cash.  Within a few days, they can typically get a cash injection of about one month of their sales.  As soon as the money hits their checking account, they start paying the loan back in daily increments.  Often times, the money is debited directly from their checking account or credit card sales.

The offer is tempting.  As an example, the lender says, we’ll give you $25,000, and you will pay us back $7,000 over 6 months.  The borrower typically focuses on the $7,000, and calculates the interest rate in their head accordingly.  “So they’re going to charge me in the high twenties for the money.”  But the reality is that the interest rate is dramatically higher than that, because the money is being paid back in six months instead of twelve.

The other reality of these loans is that it’s really tough to pay back an investment in six months when the fees are included. Typical loans have paybacks of 5, 7, or 10 years.  Imagine going to the car lot to buy a car and apply for financing?  You get a loan offer back and you’re going to have to pay for the car over six months.  That’s the nature of these loans.

Typically, after two or three months, when a lot of the money has been spent, the lender comes back and offers the borrower a renewal.  They can get some money in their kitty.  They’ve become used to the daily payments, and they take the extra dough.  Meanwhile, the lenders fees keep adding up.

Lending programs like this have skyrocketed though the recession.  How big an industry is it?  The answer is that I don’t think anybody knows.  But if you run the numbers, you quickly realize that these loans are putting small business owners on a dangerous, high interest tread mill.

This is one of the results of the banks and the regulators creating such tough standards for small business lending.  However, I don’t think we have begun to see the fallout yet.  Eventually, the high fees and cumulative expensive debt will catch up with these businesses, and they will no longer be able to keep up.  By that point, the alternative lenders will have made hansom returns.  But the small business might not survive.

I want to be clear.  There is a need for these lenders in the market right now.  They will tell you that they’re fulfilling an important need and they are.  From time to time at MultiFunding, we put clients in these types of loans.  However, this option should be reserved for clients that have no other options – they HAVE to make payroll or pay taxes – or there is a viable exit strategy. Unfortunately, this form of financing is being presented as the first and best option in too many scenarios.

It is wrong for us to accept this type of lending as the new norm.  We’re putting America’s job creators, the small business owner, at such a disadvantage.  These issues are far more relevant and pressing than the tax and regulatory relief the politicians are running around talking about.

Over the next few months, we will continue to put forth proposals and ideas about how we can work our way out of the collateral crisis.  We hope that you will join the debate.