PayPal; Amazon (Why not?  They’re already selling you wheat germ.); On Deck; Kabbage;  Square Capital.  In 2018 these five online lenders originated over $11 billion in loans, almost all to small businesses.  In another segment of the small business lending space lives peer-to-peer lending.  Online lenders such as Lending Club and Prosper have been operating in this space for several years.  Another one of the major players – Funding Circle, reports that they have originated $9.5 billion in loans.  Again, a high percentage to small businesses.

Most banks, especially smaller banks, can’t compete in this market because traditional banks still have to use conventional underwriting methods to underwrite almost any loan request including very small loans such as the sizes that any small business owners often need.  It becomes cost prohibitive for a bank to go through the same process for loans that are often higher risk and don’t make the bank much money.  Adding one zero to a loan request (say $500,000 versus $50,000) for example takes almost the same process as a small loan request.  So why make small loans?  Small business owners needing working capital or inventory financing for example don’t have time to wait for a loan committee to make a decision.

The mega banks are getting there.  But unless smaller banks can figure it out they are going to continue to lose small business customers.

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Maybe even a lot more depending on which bike.  Tariffs again.  One specific example illustrating last week’s post, “Higher Prices at the Store” is the bicycle industry.  For example, a Richmond, Virginia company founded in 2014 makes lightweight bikes for children.  It has generally been selling 400 to 500 small two-wheelers a year.  It designs the bikes and they are made in China.  The company paid a 10% tariff on its last shipment, and if new tariffs are imposed on certain consumer goods the cost to the company could even go higher forcing it to pass along most or all of it to their customers.  What that would do for their sales is hard to predict, but a good guess would be that their selling prices would have to go up with potentially negative effect on sales and earnings..

China dominates the American bike business.  90% of bikes with small wheels come from China.  Many other bike accessories such as coaster brakes (80%) and signaling equipment (approximately 70%) come from China as well.  Almost 100% of imported rubber tire tubes come from Taiwan Vietnam or China.

So there is your next bicycle, and that is just one specific industry.  Other things such as furniture and clothing could be dramatically affected.  How many small businesses that have Chinese-made components have started thinking about a strategy to deal with higher tariffs?  Looking even longer term, how might lower sales and earnings affect the ability to borrow money for expansion, inventory financing, working capital and other needs?  We may be looking at a ticking time bomb. 

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Tariffs are on, tariffs are off.  But it looks like they may be coming more on soon.  So far tariffs have been imposed only on things such as washing machines which now cost almost twice as much as pre-tariff.  But now tariffs are being imposed on some consumer goods – clothes and shoes for example.  A lot of shoes are made in China.  Some large department stores like Nordstrom and J.C. Penney (already in trouble) are reporting lower sales.  Dress Barn is closing all 650 of its stores and Payless will close all 2,600 of its stores in July.  And they are just two examples of what is happening in retail.

So just for a moment think about what this means for the economy.  By the end of July 3,250 stores in just two chains will be gone.  What it means is jobs, jobs, jobs that are going to be gone in a flash.  How many employees work at those two chains?  Service jobs, like much of retail, provide jobs for entry-level and low-wage workers – a great many of whom are women.

The economy is booming.  New job creation is strong.  But if a low-wage service industry employee is out of a job for a month or two while looking for a new job, before they find one there will probably be some things that they normally buy that they now cannot. Do you sell any of those “some things”?  You’d better look and if you do it could negatively impact your sales and earnings.  You might want to start to think about how you are going to deal with it if it happens.  There is a lot happening in the economy and probably sooner rather than later the strong economic growth that we have been experiencing is going to start slowing down.  It is becoming more and more important to be vigilant.

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The US economy is rolling along but with it consumer debt is rising, credit card delinquencies are rising, and student loan debt according to Forbes has reached $1.5 trillion on which the delinquency rate is now 11.4%.  That’s $165,000,000 that is not going to be spent into the economy.  An unpaid student loan debt totally precludes a small business owner from any conventional financing including SBA loans because it shows on your credit report.  Rising consumer and student loan debt is beginning to cause banks to raise interest on some loans as well as credit cards.  Credit card delinquency rates in the first quarter hit the highest level since 2012.  This and rising student loan debt is especially prevalent among the Millennials.  Being saddled with high student loan debt is causing some younger people to have to postpone buying decisions – such as a house, with all the related spending that goes with it. 

Does all this mean anything for your business?  It may mean nothing depending on your product or service.  But if you have to buy from a supplier or manufacturer, does anything in that product come from China?  For just one example, depending on whatever happens in the tariff/trade war with China, your supplier’s costs may go up which they will pass along to you which you will probably have to pass on to your customers.  Will that make some of your customers decide not to buy at the higher price?  On the flip side, you may have a good product that was cheaper than the product that consumers were willing to buy before, but if the price on that product goes too high, the consumers may opt for a less costly version of the same product – yours perhaps.

Whatever happens it’s becoming more and more of a good time to look backward at your supply chain and forward to the types of customers purchasing your product to see how interest rate-sensitive they might be, what their ages are and anything else.  It’s prevailing wisdom to know your customer.  It may be a good time to take a closer look both ways.

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If you decide to sell your business what is a potential buyer going to look at first when your business goes up for sale?  Most probably it is going to be “How much money can I make from this business?”  Otherwise why buy it unless they are looking for an expensive hobby. How much cash flow your business generates that will be available to the new owner will also be a major driver of the value of your business, so you must make sure that you don’t leave anything out to your detriment, and be able to document it.

Determining owner’s cash flow is not that difficult if you know your P&L’s inside out.  There are the obvious things like profits – the sales minus the expenses.  But it is in those expenses that many of the important items reside that can be added back to the cash available to a new owner.  There may be interest expenses that you are paying now that the new owner will not have.  Add them back.  Your salary is in there.  Add it back.  There could be depreciation and amortization which, while they are an expense to the business do not require you to write a check.  Add it back. 

A little less obvious are possible perks that you have given yourself as owner.  Things such as a company car; insurance premiums that the company may pay on your behalf; if you have done any business travel are there any personal expenses in there?  Add them back.  Finally if there were any non-recurring expenses during the year – something that happened that was not part of the business day-to-day operations that had to be paid for.  Add it back.  And finally, if your business includes real estate on which you have a mortgage, the interest expense will not be there for the new owner so add it back.  This total cash that the business throws off is going to be one of the most important numbers used in some business valuation formulas.  But it will also be the critical number for a lender if the new buyer is looking for a loan.  It tells the banker how much cash is available to service the debt which is the most critical thing that a lender wants to see first.

So make sure you get everything.  What you might miss might be money left on the table in the final offer that a buyer might make.

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Venture capital is just the beginning – the easy part although most founders who have successfully raised venture capital would probably laugh at that.  Once the capital is raised to start growing the company a founder might think he or she is off and running with bigger and better things ahead, which hopefully they are.  But eventually, if the business succeeds and continues to grow reality begins to set in and the founder has to start managing a real business with all its pieces and parts taking attention away from what the founder really wants to do.  

Most founders are really good at what they started.  They love it and have a passion for it and are determined to make it succeed.  But a business is like a football team.  Success requires blocking and tackling – the stuff that hurts and isn’t fun, and without it the team is unlikely to succeed.  Staying on top of cash flows, keeping track of costs, keeping accurate and current financial statements, hiring, and firing and on and on – these are the blocking and tackling that makes a business successful.  Sometimes the owner needs help and doesn’t know where to find it.

It can often be found at SCORE – one of the resource partners of SBA.  The over 11,000 SCORE mentors around the country are mostly retired business people and business owners who provide expert, confidential advice to small business owners – both startup and existing, at no cost.  In 2017 SCORE helped create over 50,000 new businesses and provided thousands of hours of free mentoring to both startup and existing small businesses.  In the Richmond, Virginia chapter alone SCORE mentors provided over 2,200 hours of mentoring services.  Over half of SCORE’s clients are women and nearly 40% minorities.  SCORE is worth knowing about if you miss that block or tackle.  Or before.

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Answer: O, it’s just Wing delivering the prescription from the pharmacy. WIng???????  Wing is a new drone owned by Google’s parent company Alphabet which just got the first approval from the FAA to deliver commercial packages.  Insane?  Maybe.  But Jeff Bezos has been looking at drone delivery since 2013.  That big brown 800-pound gorilla in the room, UPS, is looking at it too.  UPS delivers more than 4 billion packages a year.  They have more than 95,000 vehicles and 500 aircraft now.  I wonder if their drones will be brown.  But now let’s bring it back to earth.  Those 95,000 vehicles have drivers and those 500 airplanes have crews.  What if UPS begins to move certain small deliveries to drones?  Some people would lose jobs, and that could be just the tip of the iceberg.  It would be easy to envision a dystopian future where drones may eliminate more and more jobs in more and more industries.  But then you could also envision a future with as yet untold opportunities.

There will be plenty of FAA restrictions such as not being able to fly above 400 feet for example, flying only in the daytime in clear weather when the operators can see them and others.  Right now the early tests are being done only in southwest Virginia as part of a pilot program of Virginia Tech.  But tests have been ongoing in Canberra, Australia where drones have made more than 3,000 deliveries successfully.  Then think again about the FAA.  They have to keep track of and guide the thousands of airliners flying around every day now.  So keeping track of hundreds of drones, one of which might stray into the landing path of a commercial airliner, would add a level of complexity to the air traffic control system which may be too much to handle no matter how many restrictions are put into place.

Joseph Schumpeter who is credited with the conceiving the concept of disruption is smiling from his grave.  This could be one really a big disruption.  It could also create new opportunities for startups to take advantage of being able to use drones commercially.  Such as??????????

 

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Tens of thousands of keystrokes have been expended for years writing about SBA loans.  They’re good, they’re bad, they’re complicated, they take too long, and on and on and on.  But what I almost never see is what they really are.

SBA loans are commercial bank loans that are guaranteed by the SBA.  SBA does not make loans except for disaster loans.  Because they are commercial bank loans, banks use their own credit guidelines, but they have to meet the SBA credit guidelines which are very similar to the banks.  Real estate gets a 25-year amortization, equipment 10, and working capital 7.  SBA’s primary purpose is to offer borrowers lower monthly payments in order to save their cash flow because of the longer amortizations.  The important thing to remember though is that the bank is going to underwrite it generally to their own credit guidelines first even if SBA would allow broader discretion and approve it for a guarantee.  SBA requires that a bank approve a loan first before it requests the SBA guarantee.

When people say that they don’t want to bother because of too much paperwork, it is frequently the bank asking for normal paperwork that would be required for any loan.  Nothing is different.  To receive the SBA guarantee, there are certain extra forms required by SBA that are not already required by the banks during the loan approval process.  More often it is in the closing process where much of the paperwork lies, and if a bank does not do much SBA lending and does not have a dedicated SBA department or personnel, closings can be difficult and time consuming.  But is more cash flow because of the longer amortizations not worth the extra effort?  Hundreds of millions of dollars in SBA loans are made every year.  Don’t overlook the possibility.

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Are you are looking ahead to expand or buy new equipment or thinking about getting a loan for your company at some point in the future?  Do you spend much time on social media?  Use social media to grow your brand?  Use social media to take a picture of what you had for breakfast?  You may never think that your social media activity could one day have an effect on your ability to get a loan, but it might.  Lenders and credit bureaus are looking more and more at potential borrowers’ social media activity as part of their credit decisions.

I’m talking here about business loans, not personal.  There are still questions about the legality of using personal social media posts in making credit decisions, but one major credit reporting agency has already dipped its toe into the water.  If at some point in the future looking at peoples’ personal social media posts becomes legal for companies such as banks, it is going to open a dramatic new look into your personality online, and may be opening a very large can of worms depending on what you do when you’re online.

Getting back to your business, your presence online could be a problem, or it could an asset. Think how many people turn to social media and other sources for things like reviews.  If your company is receiving a lot of positive reviews it potentially be an unintended bonus.  Your behavior online can be a tremendous benefit to your company and your brand.  The more positive attention you attract to your company and your products or services on social media the stronger your chances could be of a favorable opinion of your company by a lender at some point in the future.  Like it or not, your social media profile is going to become a more widespread data point in your business activities.  It is already being widely used in things like hiring decisions and now insurance companies are getting in the game tracking data on you from things like your Fitbit.  Where do you fit in?

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More and more businesses are coming up for sale creating excellent opportunities for people who want to be their own boss.  There are several reasons to buy an already operating business rather than starting from scratch.  You have historical financial statements and business tax returns to analyze the past performance of the business in order to determine its future prospects.  Something else very important is that there is already a salary for the owner in place.  If there isn’t it raises a big red flag.  If the business can’t or doesn’t pay the owner, what would it be for you?  Another plus for an existing business is that the day-to-day infrastructure is already in place.  In a startup obviously you have to build it from scratch with the attendant costs, and usually the owner is the last to get paid.

There are as many ways to finance a business purchase as there are businesses for sale.  Every deal is a snowflake.  But often the best way to finance is a bank loan, and at the top of the list would be SBA loans (which are bank loans underwritten just like commercial bank loans but with an SBA guarantee).  And the biggest benefit of an SBA loan is the long amortization allowed, as much as 10 years which can be a significant benefit to the monthly cash flow of the business by keeping payments lower.

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