ARTICLE INDEX

 

Introduction

After speaking, teaching, and guiding my own clients and others for so many years regarding literally thousands of small business transactions totaling over $1 billion with which I had become involved, I thought it was timely to share my experiences for the benefit of any budding entrepreneur or business enterprise that might be in search of necessary funding. My abilities to timely and often create financial solutions come from a number of unique factors, which I mention only that the reader might have a better grasp of the source, originator of the commentary, and guidance offered herein.

In order to gauge credibility, I myself make it a practice to seek as much information as possible regarding the source of information upon which I might intend to rely. I’m simply “reversing tables” to get you started and on the road to hopefully a much broader and deeper understanding of the small business financing alternatives available in the marketplace.

First, I have been blessed to have acquired and mastered an extremely wide range of diverse and often unrelated disciplines – “more than most people have toes!” By age thirty-five I rose to become co-head of an existing national law firm. I became a recognized and distinguished trial and appellate attorney practicing within state and federal trial courts, regulatory agencies, federal appellate courts nationwide, and even the Supreme Court of the United States. I typically faced the very top law firms throughout the United States regarding litigation issues that involved experts only within every conceivable discipline – accounting, finance, investment banking, engineering, corporate executive officers and board members, stocks, bonds, securities, and rate regulation matters of every type or description.

I started from scratch and headed my own business services firm as founder and CEO with as many as fifty-five personnel (employees and independent contractors) which was ultimately sold to a subsidiary of Citicorp after approximately 20 months of operation with then annualized revenues of over $1.5 million. Virtually every conceivable challenge (positive and negative) that a start-up or early stage company might face became a part of that experience.

The search for financing became a continuous and daily factor in that enterprise. I certainly acquired a direct personal attachment for the plight of the small business owner and the monetary challenges that evolved. It was not accidental that the company I later founded, Execunet, would be focused entirely upon the client interests and their small business financing needs.

As well, I would in due course become involved in several other entrepreneurial ventures and personally experience the seemingly overwhelming challenges of a raw start-up enterprise and the urgent need for available, timely, and required financial tools and facilities for that journey. That I already had and further developed a solid practical accounting expertise was a natural byproduct of all of those experiences.

As the originator, founder, and chairman of the only all volunteer national non-profit organization in the United States dedicated to small business financing and funding (before the age of Internet dominance), I developed, as more than one banker would observe, the singular stature of “knowing where all the money was located”! That was my function as head of that organization. From this diverse base of knowledge and experience, I was able to mold my own unique vocation dedicated to assisting small businesses in the pursuit of necessary financial support. I have been blessed for so many years in making a real difference in the business community. I hope this work adds and further creates benefit for any and all entrepreneurs and business owners.

My referrals originated primarily from bankers everywhere who came to view me as “Mr. Fix-it” and in more recent periods, “Dr. Woody, The Money Man”! There would be endless awards and accolades to follow for my contributions to the economic growth of the metropolitan Washington area and dedicated efforts to support and aid the small business community. See, www.execunetfinancial.com.

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In summary, this work brings the complete wealth of all those diverse disciplines “to the table” for the reader herein – experienced lawyer and distinguished national trial attorney/appellate counsel with widely diverse accounting and wide ranging business skills and acumen, former CEO of his own enterprise and start-ups, entrepreneur, educator and teacher on business financing/entrepreneurial subjects, unique expertise in every facet of small business financing, and advocate for women, minorities, and historically disadvantaged groups in business and entrepreneurship. Unlike any previously published work, this text lays out “the real field of options” and explains how the “game is actually played”.

In almost every deal along the way, I discovered one constant theme that would repeat itself over and over again. Entrepreneurs and business owners might have an overwhelming grasp of knowledge regarding their own special business niches. All were technically qualified and well versed in their markets and operations. However, few if any had a “clue regarding the world of business financing”.

It might be noted that these limitations were not limited to business owners. This circumstance was as well a natural by product of highly experienced bankers and account representatives/managers throughout the entire financial industries. All knew a lot about their funding areas, but had little or no experience regarding the entire array of financial options, products, or opportunities available for small business.

Virtually all were consumed with mastering being among a few of the trees, while I was viewing everything from the canopy of the tree tops downward.

As part of representing the interests of my business owner clients, I routinely attempted to explain all of the nuances relative to their then specific funding needs. However, that was the mere “tip of the iceberg”. There was so much more that they needed to learn about basic financing in order to successfully continue their journey.

When it comes to operating an enterprise and mastering its financial requirements, the appearance of a successful business is no more valid than standing in a garage makes you a car.

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The Cheapest Money On The Block – Banks

If one visualizes the entire array of small business financing options as a rainbow of different colors with two distinct ends such as an arc, the banks would typically be viewed as being on one end representing the lowest cost money. This type of financing also represents the most risk aversive version.

There is one corollary that should be kept in mind when gauging various alternative financing options. In the real world of money, the lesser the perceived risk the lesser the overall cost. The flip side is the greater the perceived risk the more costly that form of financing. From that perspective, the discussion for sources of commercial funding for the small business starts with the banks, which generally represents the cheapest money on the block!

Bank financing is perhaps one of the most misunderstood forms of commercial funding, in part caused by the banks themselves.

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Banking has become a victim of its own thirst for profits and efficiencies, where the concept of relationship with the small business lender has become more akin to empty marketing rhetoric.

I like thieves. Some of my best friends are thieves. Why, just last week we had the president of the bank over for dinner.

W.C. Fields

In an attempt to clear the fog away from these and a host of other misconceptions, the very nature and structure of banking has somehow gotten lost in translation.

To the small business owner, I would suggest the following for your serious consideration. The bank and its representatives are not your friends any more than the IRS and/or any other service provider out there. The bank is in the business of making money, just like the small businessman. The banks are quite pleased to accept your deposits, charge endless fees, and even offer more services (usually with fees) because that is their business. The more depositors and the larger the deposits, the more money it can invest to gain a return, and the more it can lend out. Their primary aim is to
“make money”!

The bank has private shareholders who expect and are quite active in insisting that their return expectations be met. The bank has a board of directors who monitor how the bank conducts its business with an eye to improving not only its services, but as well to increasing profitability. These are the identical goals and objectives that exist with most every small business.

Banks have a new image. Now you have “a friend”, your friendly banker. If the banks are so friendly, how come they chain down the pens? Alan King

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So the “name of the game” is to learn how to play under “banker rules”. The bank generally has the cheapest money. If you want that money, learn the inside track, conform to their parameters, and benefit from the relationship by understanding all of the positives and negatives in every deal. In the world of commercial finance, I have always advised that the client to adapt and meet the challenge.


“Learn to adjust yourself to the conditions you have to endure, but make a point of trying to alter or correct conditions so that they are most favorable to you.”

William Frederick Book

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Unconventional Or “Hard Money” Lending

As the terms might adequately imply, unconventional lending is precisely that. When the banks or mortgage firms can not do the deal, where does one turn in order to get it done in the commercial real estate arena? Traditional financing tends to focus on the credit worthiness of the borrower(s), sufficient cash flow from the enterprise to demonstrate adequate coverage to carry the new debt, and increased value once the project is completed or renovated.

In the hard money world, the primary emphasis is typically with “value”, current “as is” and/or “as completed”. The other components can be “soft” and/or even non existent if the “value” issue has a high “sex appeal”. As the term certainly implies, these deals are for the strong, resolute, and determined, since the rates and conditions can be quite “hard” to swallow.
It’s really very simple. These financing outlets exist to support real estate deals that no one else wants or will touch. These are by definition carriers of high risk. Although these sources are not literal mirror images of “Guido” from lower side of the worst Jersey docks, I’ve heard of some deals where the analogy was not far off the mark.

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Successful Equity Financing

From at least one perspective, as will be noted later, whether equity capital is truly the “cheapest path” may be open to some debate. When you have one or more equity partners, you have “crawled into bed” (so to speak) with others. Crawling out intact might become the worst experience of your business life. The point is merely that the terms “risk” and “attendant costs” are relative factors. The advice that one should carefully measure all aspects of one’s available options never had a more profound meaning. Choosing wisely is one heck of a lot more than a casual admonition.

I have consistently advised my clients and students that finance vehicles or facilities are much like “tools”. Each has or may have a place and time within a business journey. Within some of these general tools, there are specialized versions that fit specific niches and circumstances. Knowing when and where that tool might fit becomes the challenge – the entire purpose of this work.

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Specialty Areas Which Present Banking, ABL, and Factor Funding Challenges

A. Government Contractors

For the banks, the reality of lending within the government contractor world is a “mixed bag” of sorts. There are a few banks that have created specific divisions or departments specializing in government contractor business. These banks attempt to staff these with experienced specialists with years of direct hands-on exposure to the industry group.
Their primary function is to selectively identify and acquire the best prospects from a risk perspective for the bank’s involvement.
However, here the road splits based on the degree of knowledge and informed judgment of their respective credit committees. Be very focused on one of the basic realities of bank lending. The credit committee rules – there are no exceptions! Regardless of what the lender representative or even their manager says, a deal is not done until sanctioned by that committee.
Only a very few banks in my experience have a truly focused group of specialists and solid credit committee cooperation to get the deals properly done within federal contracting.
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Banks and other lenders are all attempting to get a solid handle on “function” and characteristics that affect “the risk of lending”. Accordingly, they seek, often rather clumsily, direct, candid answers as to every portion or part of any contract(s) at issue. Confidence in management becomes a key factor as well as the growth prospects of that enterprise. Solid and reliable financial records are mandatory, often becoming direct conditions for funding for the applicant.

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Banks are slowly figuring out that the traditional way of doing business has extremely large gaps in the risk evaluation process. Adding collateral and expanding the liens is nothing more than reacting to symptoms. It does not center upon the real issues of knowledgeable lending and/or effectively gauging real business risk. This change of attitude is making quantum leaps in better knowing and understanding the business at issue, the resident market, competitors, and the real prospects for the business to have a relatively long life with the bank.
How does it benefit the bank to have a relatively short relationship with “one hit wonders” that in the end become problem “children”? Banks tend use criteria that in fact measure nothing of value when it comes to true risk evaluation. What the bank requires is a most thorough knowledge of management, marketing plans, the actual market at issue, and definitive indices for meaningful risk satisfaction parameters.
The huge lending market of federal contracting is a prime case in point. The reality is that the banks (lending representatives and especially credit committees) have marginal information at best on any of these factors when making loans. In federal contracting, the so-called fast growth “wonder firm” could be in a deficit mode faster than any bank might be able to effectively react to with any degree of real safety. The banks which blindly chase fast growth contractors have not a clue as to the true risk factors involved in the deal. They are mostly just “rolling the dice”. When in doubt add collateral or get rid of them!

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Going Green’s Financial Impacts on Small Business

This work covers the entire spectrum of small business financing opportunities and as well offers solid advice with regard to non financial professionals and key support areas requisite for a journey of success and profitability. Not to be ignored is the already present and rapidly escalating “brave new world” occasioned by global warming and its severe consequences. Although still in its early stages of full recognition, our combined environmental contributions to this circumstance can only exaggerate any and all downstream adversities at every level our society and especially for small business. Governmental authorities and business at all levels have been fairly slow to effectively react to date. However, a day of reckoning and accountability is clearly within sight.

It is not beyond the pale of foresight that as these realizations become more vivid, and/or as the adverse effects closer that governmental authorities will have to react in some rather radical and unconventional ways. More stringent methods and efforts to stem the tide of unparalleled adversities at every level of our society are fairly inevitable. It is not a question of whether, but when!
Our joint seeds of environmental inaction will reap much more than a few meager days of a fitfull wide spread reckoning. The real test is how we reap and face what we have sown. If our history of indomitable entrepreneurial perverserance and creativity becomes the measure, it will be transformed into something far better than before.

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Whether the mechanisms or new policies brought to bear come in the form of “carrots” or “sticks” or combinations of both, the days of reckoning are coming. So how does that affect the qualification for and access to capital and financing for small business? How will that affect the bottom line? How is small business to adapt?

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The best advice for small business is to take the reins, investigate and seek new ways to “get ahead of the curve”. Turn what might appear to be adverse influences in the marketplace into new options and opportunities. Join with others to further level the “playing field”. Seek new ways to revolutionize your market place. No one is going to hand it you on a “silver platter”.
“If stupidity got us into this mess, then why can’t it get us out?”
Will Rogers
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