Why SBA?
October 19th, 2018

Since small business owners sometimes have difficulties obtaining loans from banks, one of the tools available to banks to help them is the SBA guarantee.  SBA provides a 75% guarantee across its largest program – the 7a, to banks that request it.  What this does for banks is to allow them to take risks that might be somewhat outside of their normal credit policy and use the SBA guarantee to mitigate that risk.  The SBA has its own credit guidelines that are very similar to banks but with a slightly wider latitude, and banks have to underwrite to SBA guidelines which are very similar to banks.  The same credit quality that banks use is what SBA uses.  So although the SBA guarantee allows a bank to stretch their credit guidelines, it doesn’t want bad loans any more than a bank does.  So a loan that might be considered high-risk to a bank is not likely to be approved by SBA either because its’ funding comes from the Federal Government. 

The most significant benefit of SBA loans is that SBA offers to a borrower considerably lower monthly payments on loans because of the longer amortizations offered by SBA.  Real estate receives a term of up to 25 years, equipment up to 10 years, and working capital 7 to 10 years which can considerably lower borrowers’ monthly cash outflows. 

In SBA’s fiscal year 2018  it approved more than 72,000 loans for a volume of over $30 billion spread over all its’ programs.  Of these 72,000 loans to small business owners, how many might not have gained needed financing were it not for the SBA?  In the world we live in today where the government is not exactly held in the highest regard the SBA loan guarantee is an example of where government can make a significant contribution to small business.

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Who????????  Joseph Schumpeter was an Austrian political economist born in 1880.  In 1932 he became a professor at Harvard and remained there until his death.  He is credited with the concept of “creative destruction” – the process by which something new brings about the demise of something before it.  Suppose you own a bookstore; or drive a taxi; or hang telephone lines.  We are all familiar with the concept and could devote several pages to examples of it.  So?

Today’s entrepreneurs are operating in an environment that can change on a dime.  The successful business you may have run for years all of a sudden faces someone who can do it faster, cheaper, prettier – whatever.  R.I.P.  Sears.   For the entrepreneur to stay in business and grow he or she has to be constantly aware of the world and business environment around them.  How many retailers watched Amazon growing and figured that it was a clever idea and not much of a threat.  Borders didn’t.  Barnes & Noble didn’t, just to name a couple of the most obvious.  In today’s world social media rules.  But it doesn’t rule everything.  Local and national news is important – wherever and however you receive it.  But you have to look for it and understand if it has any implications for your business, and sometimes you have to act on it. 

One example is the current tariff fights.  A lot of things sold in retail stores come from China.  Do tariffs affect any of the costs of what you’re buying?  Toys are one example of a product where the costs are going to go up.  There are dozens of other examples out there.  Are any of them going to affect your costs, hence your prices, hence your profits?  You may be cruising along making money hand over fist (especially in this economy) but something may be appearing on the scene that could replace your product or service or do it better.  The railroads owned the passenger business.  Then Henry Ford threw a monkey wrench into the wheels, and the rest is history.  Pay attention to the world around you.  You never know where a wrench might come from.

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Purple Flag Flying
October 11th, 2018

You head down to the beach for a nice relaxing day.  You happen to look toward the lifeguard stand and a purple flag is flying.  Purple???  Everybody knows the familiar flags: green, let the good times roll; yellow, be careful where you roll them; red, don’t roll them at all.  But purple?  The purple flag means marine pests present in the water – things like jelly fish, stingrays, sea snakes, and other pests that can cause minor injuries.

Are there any purple flags flying at your business?  Maybe costs are creeping up but your selling price hasn’t kept up because you are afraid of losing sales because of your prices being higher.  Maybe you’re getting a little lax about making sure all bills are paid on time, especially credit card bills.  Credit cards are used at one time or another by most small businesses.  The upside is that your credit card is the line of credit that you can’t get from your bank, which is of immeasurable value.  Another upside is regular payments on your credit cards (along with everything else of course) is one of the fastest ways to build up your credit score which is one of the most critical requirements for banks and certain other types of financing.  The downside is that it doesn’t take but a few late payments to damage your credit score.  It’s critical that you stay on top of it.  So there are just a couple of pests to watch out for.  There are plenty more.  Out of sight out of mind.

So pay attention to what flag is flying and keep your snorkel handy just in case.  You don’t want to get stung.

 

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Mentoring
October 9th, 2018

Mentoring is one of the most important and beneficial assets that a small or startup business could have.   There is general consistency in the definitions of mentor – advisor, coach, experienced, supporter, etc.  But one thing is generally consistent throughout – over a period time.  All of the qualities contained in the definitions are out there, but it generally comes with a cost, most often hourly fees.  For a short-duration assignment that may not be much of a problem.  But what of a longer term need, especially for startups?  Paying for long-term mentoring is probably not feasible, especially for startups or very early stage businesses.

There is an answer and unfortunately it not widely known in many places and that is SCORE.  SCORE is a resource partner of SBA and stands for Service Corps of Retired Executives.  SCORE is a national volunteer nonprofit organization founded in 1964 consisting of mostly retired and semi-retired business people with 30 to 40 years of business experience who offer mentoring services to small businesses, both startup and existing, at no cost and with no limit on the length of engagement.  Since SCORE’s founding more than 11 million clients have been served.  There are SCORE mentors who have worked with their clients for three and four years.  All at no cost to the client.  Because SBA provides partial funding for SCORE, its services are free.  There are approximately 13,000 volunteer mentors around the country in over 300 chapters.  SCORE volunteers range from high-level corporate executives to long-time successful small business owners.  The list of skills is almost endless.

The national consulting firm Pricewaterhouse Coopers audits SCORE chapters every year.  In the data for the latest fiscal year SCORE was credited with over 300,000 mentoring sessions around the country.  For the level of expertise of SCORE counselors, imagine what those 300,000 hours of time would have been billed at.

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65 + – $$$$$$$$$$$$
September 28th, 2018

“Help, I’ve fallen and I can’t get up!”  Some of you may remember those TV ads.  There is no telling how many times that ad has been parodied over the years.  But, it was really something of a starting gun to what has become a mad dash to provide products and services to meet the needs of the rapidly-growing population of people over 65.

Gillette has spent three years designing and testing a razor built for care-givers to shave others.  Best Buy is about to drop $800 million to buy a tech company that created a senior-friendly phone.  And instead of “Help, I’ve fallen and I can’t get up!”, how about sensor-packed shoes that can detect falls.  These are just a few examples of what’s happening in the marketplace targeted at our rapidly-aging population.

The health-care market, which is about as broad as you want to define it, is booming.  There are specific niches that investors might be more interested in than others.  For the entrepreneur there is a huge and growing huger market out there for the right products, but it comes with a big caveat – a lot of other people know it and are after it.  If you can find a place where you can dance between the toes of the elephant, you may have the opportunity to create a company with significant growth potential that can attract outside investor interest.  But there is also the very real chance of getting stepped on by the elephant.  It’s like the Wild West, but there is gold out there.  But if you plan to mine it and plan to look for investors to help you mine it, you will have to convince them that no one is going to be able to jump your claim until you all cash out.

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Reprise
September 25th, 2018

 

After a brief hiatus of four years it’s time to pick up the pen and return to discussing the entrepreneurial world that I live in.  As a result of active participation in mentoring with SCORE, one high growth and one Main Street incubator and an accelerator, plus regular presentations of a small business financing program that I created, my awareness of so much that is going on in the entrepreneurial ecosystem has been dramatically heightened.  And right now – approximately four months from the end of 2018, I am beginning to see the smallest hints that the party is not going to go on forever, meaning that there are beginning to appear cautionary signs on the horizon.

The majority of what I wrote came in 2010, with the recession still strong and healthy.  There were the upcoming elections and what they could mean for small business.  The housing disaster was underway.  Higher bank capital requirements resulting from over-aggressive bank activities and its effects were having a negative effect on small business lending.  And now, in the words of one of America’s greatest philosophers, Yogi Berra, I’m beginning to feel a little bit of deja view all over again.  Just a little, but nonetheless, it’s there.  And because it’s there, and because thanks to the internet small business financing options have mushroomed due to the unwillingness (and in their defense, inability to do certain things because they are so heavily regulated) of banks to provide things like the short-term financing that so many businesses need, it’s time to start talking about things affecting entrepreneurs in today’s economy, especially as they relate to financing, and to shine a spotlight on various things that should be spotlighted, both the good the bad and the ugly.

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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 how they actually work if a borrower approaches a bank for an SBA loan.

SBA loans are commercial bank loans that are guaranteed by the SBA.  SBA does not make loans except for disaster loans.  Because they are bank loans, banks use their own credit guidelines as though SBA didn’t exist.  So if a bank doesn’t like small business loans, particularly for startups, they are going to underwrite it more strictly (or not at all) and it doesn’t matter whether or not SBA would guarantee it.  It also makes it easy for the bank to tell the borrower that SBA would not approve the loan when in reality the bank wouldn’t approve it and SBA never knew it existed.  The banks have to approve the loan first before SBA sees it when the bank applies for the SBA guarantee.

When I hear people say that they have given up because the SBA keeps asking for paperwork, it is usually the bank asking for paperwork because so few borrowers provide all the required documents the first time.  To receive the SBA guarantee, there a very few extra forms required by SBA that are not already required by the banks.  And even if it is more difficult, if whether or not the small business owner does or does not get a loan based on whether the bank can get a 75% guarantee, is it not worth the extra effort?  Hundreds of millions of dollars in SBA loans are made every year, including startup loans, and it is an excellent source of financing.

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P2P is the acronym for peer-to-peer lending.  The two biggest companies in the P2P universe are Lending Club and Prosper.  What these companies do is crowdfunding of small loans.  In 2013 Lending Club projected loan volume of $2 billion, and Prosper $350 million.  Almost all of the applications are currently for different personal uses such as refinancing credit card debt.

The way it works is that the platforms receive loan applications.  They analyze them using their own proprietary set of algorithms (which continue to grow in sophistication to the point where they soon might be able to tell whether or not you had bacon on that cheeseburger at lunch), and then if they accept the application they put it on their site for investors to invest in.  Investors can invest as little as $25 and can invest in one or several loans.  With luck, a borrower gets the whole loan funded from a “crowd” of investors anywhere in the country who are looking for a rate of return instead of an equity ownership.

Just a tiny fraction of applications to date have been for small businesses, but this is beginning to change – slowly, very slowly.  But as more and more platforms come into the market, the interest in small business loans will start to improve as new business-oriented algorithms come into place.  The door is beginning to crack just a teeny bit.

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Not much.  Of course, it depends on how you define small business.  If you regularly read the business press, when you see the term “small business,” then see how the story describes them (substantial sales and numbers of employees), you see that it is not talking about your neighborhood hair salon/coffee shop/auto repair shop/retailer, and on and on.

For small businesses with sales in the few hundred thousand range which might be successful businesses undergoing strong growth, or startups with experienced management and a good business plan with good prospects, raising equity through crowdfunding is going to be highly unlikely for the near future.

The primary reason is that the SEC and FINRA have not issued their final regulations yet.  And once they do, it is going to take some time for the crowdfunding portals that plan to do business crowdfunding to digest the new rules.  So for the most part, except for more established small businesses, raising money through Reg D offerings, 2014 is pretty much out.

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McKinsey & Co. and Bain & Co. are two of the top global management consulting companies based in the US.  McKinsey focuses on working with companies’ senior management to solve major problems.  It has approximately 9,000 employees in 60 countries.  Bain & Co. provides management consulting advisory services to some of the world’s largest businesses and nonprofits.  It has approximately 6,000 employees in 60 countries.

So is there anything out there for startups and the small businesses in their very earliest stages of growth?  SCORE.  SCORE is one of the resource partners of SBA (the others being the Small Business Development Centers and the Women’s Business Centers).  SCORE has approximately 13,000 volunteer counselors and mentors in approximately 350 offices around the US.  Almost all of the SCORE volunteers are retired or semi-retired business people with 20 and 30 and 40 years’ experience in a wide variety of businesses.  There are former executives of large international companies.  There are many former business owners.  There are chief executives and chief operating officers of international nonprofits.  The list is almost endless.

Whereas only a small percentage of McKinsey and Bain consultants deal directly face-to-face with their clients, almost all SCORE volunteers are front-line management consultants, and because it is a resource partner of SBA, the services are free.  There is never a charge for counseling and mentoring from SCORE volunteers.  It is one of the most remarkable organizations in the country, and it works at the bottom of the ladder with startups and early-stage companies that will be the job-creators of the future.

 

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