It’s sooooooooooo easy.  The small business owner needs cash – fast, maybe for a new opportunity; maybe a new piece of equipment; maybe a fast infusion of inventory to meet an unexpected demand.  Even if the business owner has a relationship with a bank, fast isn’t going to happen.  First of all the loan may be too small, but if not, it still has to be underwritten to some degree and then approved by someone.  By the time it goes through that process the need may have gone.  But with an online cash flow lender, a usually simple application online and an approval within a few hours or maybe a day and the money is sent to your account.  Slam bam thank you ma’am.

Some cash flow lenders, based on the average amount that a business keeps in its checking account will make a loan – sometimes large, as soon as they get from you your bank statements for a certain period.  One or two other things may be checked but that can be done in minutes by the lender while waiting for the bank statements.  Once that is completed, the loan is made.  Fast.  To repay the loan the lender might take a small amount out of the checking account every day or several times a week.  No big deal; so small you’ll hardly miss it. Doesn’t hurt a bit.  But by the time the loan is paid off you could have had an APR in the range of 45%-plus with some lenders.  It is an unregulated industry.

These lenders lend hundreds of millions of dollars a year because there is a demand for it.  They are filling a need that banks won’t.  So if the small business owner needs cash fast they have to understand that it may cost them – big time.  But the cost of not getting the cash could be worse.  So the moral of the story is go in with your eyes open and read the fine print.

More on alternative lenders coming.

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Economics 101
June 18th, 2019

A few of you may have had to take Economics 101 in college.  A few of you might have even been able to stay awake for the whole class.  When the good times are rolling it doesn’t seem to be a real big deal to catch a couple of winks.  Don’t’ worry, the good times are still going to be rolling when you wake up.  Supply and demand – Economics 101 at its most basic.  There is lots of demand because we have money in our pockets, and lots of supply to fill that demand.  Business is good.  The fat lady hasn’t even gotten to the theater to sing yet.

The stock market just keeps going up, setting new records.  Jobs are plentiful, so much in some cases that there aren’t enough people to fill them putting a damper on opportunities to continue to grow.  In terms of unfulfilled demand, just look at the long-haul trucking industry.  I have seen figures as high as 50,000 jobs going begging in that industry alone.  Wages are continuing to be forced up to attract new drivers.  But the shortages still exist.  House prices, the major source of most people’s personal wealth are high.  Consumer sentiment is high.  The Small Business Optimism Index continues to set new records.

And just to keep the party going a little longer, interest rates are probably not going to keep going up as it appeared just a few months ago but instead may be dropping slightly, offering a longer window for small businesses to borrow at very favorable rates if funds are needed to grow their businesses or purchase big ticket items such as real estate.

“We have six exits from our aircraft….  In case of a sudden decrease in cabin pressure oxygen masks will drop down from the overhead bin.  Place the mask….”  It may be time to at least pull out the seat card in front of you to familiarize yourself with how to get out of this plane that just keeps flying higher and higher.

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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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