Launching Advice from the Experts: Rob Weber
Got Partners? Got A Prenuptial? Barry Bendes
Create a Template for Your Business: Doug Crisman
Finding Money for Tech Start-ups: Carl Kopfinger
SBA Loans Launch New Businesses: Don Swartz
Corrections or additions?
These articles were prepared for the January 4, 2006 issue of U.S. 1
Newspaper. Some articles have been adapted from the weekly Survival
Guide section for 2005. All rights reserved.
Launching a Business
Many entrepreneurs learn the hard way, by trial and error, but often
the successful ones have learned to take advice.
Ezekiel Fleming says he owes his much of his success in building his
Trenton-based insulating business to good advice from Lorraine Allen,
the regional director of the Middlesex-Mercer Small Business
Development Center (SBDC) at the College of New Jersey. Fleming was
one of 15 entrepreneurs who received a New Jersey SBDC Success Award
in December.
“What the SBDC did was to get me organized,” says Fleming. “I knew how
to do the work, but I didn’t know how to gain assurance or get into
position for a bid. Or the financial aspects, how to keep overhead
low, gain a profit in a short period of time, and put money away so I
wouldn’t get into debt.”
Fleming wanted to translate his experience with an insulation company
in South Jersey to open his own firm in Central New Jersey. Now his
Trenton-based start-up, Airseal Insulators LLC, provides
weatherization and all types of insulation to government entities in
Mercer and Camden counties and Atlantic City; he also does work for
homeowners.
“Zeke went step by step,” says Allen, who offered her consulting
advice on a dozen occasions during the launch process. “He is an
example of a start-up entrepreneur who maximized resources and
followed the step by step process.”
Fleming made it easier for himself by tapping the expertise of the
SBDC (www.njsbdc.com). Here’s how:
Registered the business. By the end of 2004 he had registered his
business as an LLC and was directed to Allen and the SBDC by the New
Jersey One-Step program (www.state.nj.us/Business.shtml).
Set up record keeping. Allen and the SBDC counselors showed Fleming
how to set up and run a business, how to keep records, how to divide
responsibilities between himself and a partner, and how to get
business insurance.
Devised marketing plan. Under Allen’s direction, Fleming devised a
marketing plan and began working on his official business plan.
Fleming learned that, before writing his business plan, he needed to
figure out who his customers were.
Applied for state certification as a small/minority owned business.
Bid on government contracts. Fleming took an SBDC course on
procurement and began to look for opportunities to bid on contracts.
(New Jersey allots money for county-run and municipality-run
weatherization programs for the elderly, low-income families, and some
first-time homeowners.) The SBDC walked him through the steps, from
preparing the bid, to participating in the bid conference, to
fulfilling the bid award.
Recovered from a mis-step. After a year of working with the SBDC,
Fleming officially launched his business in July, 2005. Everything
went so well that he wanted to expand, and go from one truck to
several trucks, and that was when Allen stepped in. Keeping in mind
that a home improvement company’s reputation is of great importance,
Allen advised him to concentrate on quality, not quantity. “He took
his licks and came right back and got grounded again,” says Allen.
“It is a not a field where you want to make mistakes,” says Fleming.
“I wanted to grow fast, and Lorraine said, `Let’s think about this.’
We decided to pay attention to detail, to do things right and
correctly, to gain a positive reputation rather than grow real fast.
It is so hard to build a reputation once it is torn down.”
“I am new to the world of business,” says Fleming, “and I want so much
to be successful that I will take direction. If you bump your head as
many times as I have, you learn.”
Fleming grew up in Trenton, the only child of a single parent. (His
mother died when he was young. His father worked as a delivery person
for the New Jersey State Museum and owned real estate on the side.)
“My father taught me his work ethic,” says Fleming. “He said that
everybody fills a position, that there are national positions and
local positions, and that once you find your position it is important
to be the best. He slowly but surely bought one house at a time, and
at one time he owned five houses in Trenton.”
After graduating from Notre Dame High School in 1984, Fleming briefly
attended Kutztown State and then joined the Air Force. Working as a
jet mechanic in Texas, he learned to be organized and do everything
according to a protocol, a skill that carries over to his current
work. He learned the delivery business at a multi-national firm,
Honeywell, and then worked for an independent Dover-based firm before
starting his own.
Now Fleming has a two-year contract in Atlantic City, a month-to-month
contract in Camden, and is participating in a trial with Mercer County
that could lead to a year-long contract. He has been self-financed
until now but has applied for an SBA-backed loan to buy another truck
and more equipment. The SBDC is also advising Fleming on how to build
a website.
His current formula for success: “I show up and I answer my phone.”
– Barbara Fox
Airseal Insulators LLC, 17 Lee Avenue, Trenton 08618; 609-695-5450.
Ezekiel Fleming, president.
New Jersey Small Business Development Center, 49 Bleeker Street,
Newark 07102. Brenda Hopper, statewide director. 800-432-1565; fax,
973-353-1110. www.njsbdc.com
Free management consulting and affordable training for entrepreneurs
through 11 regional centers, also satellite centers and incubators
New Jersey Economic Development Authority, 36 West State Street, Box
990, Trenton 08625-0990. Caren S. Franzini, CEO. 609-292-1800; fax,
609-292-5722. E-mail: njeda@njeda.com. www.njeda.com
Self-supporting, independent state financing and development agency,
offering incubation space and funding.
New Jersey Commerce, Economic Growth and Tourism Commission, 20 West
State Street, Box 820, Trenton 08625. Virginia Bauer, CEO/secretary.
609-777-0885; fax, 609-777-4097. www.commerce.state.nj.us
Coordination of government and private resources to provide technical,
financial and other assistance. For businesses seeking information or
assistance, call 1-866-534-7789.
Top Of PageEntrepreneurs’ Groups
Employers Association of New Jersey, 30 West Mount Pleasant Avenue,
Suite 201, Livingston 07039; 609-393-7100; fax, 973-758-6900. John
Sarno, executive director. www.eanj.org
New Jersey Entrepreneurial Network, 600 College Road East, Suite 4200,
Princeton 08540; 609-987-6656; fax, 609-987-6651. Robert Frawley,
president. www.njen.com. Also 609-279-0010.
New Jersey Entrepreneurs Forum, Box 313, Westfield 07091;
908-789-3424. Jeff Milanette, president. www.njef.org.
Rutgers Center for Entrepreneurial Management, 111 Washington Street,
Newark 07102; 973-353-1062.
Venture Association of New Jersey, Box 1982, Morristown 07962-1982;
973-631-5680; fax, 973-984-9634. Jay W. Trien CPA, president.
www.vanj.com. Also 973-267-4200, ext. 193.
Top Of PageLaunching Advice from the Experts: Rob Weber
Rob Weber suggests that between 60 and 70 percent of products brought
to market annually will die away within their first year. And in a
cruel twist, the winners are often far from the most useful entries.
Pet rocks and corn cob holders can barely be kept in stock, while
improved bicycle helmets and cheaper lawn mowers gather dust. The new
products that flourish – no matter how frivolous – are those that are
placed on the right shelves in the right way.
Weber founded the Wayne, Pennsylvania-based ENSONIQ, a provider of
digital audio products (Email: rweber@antiphony.com). “I think
probably the greatest mistake the new business person makes,” he says,
“is that he gets swayed from his original market strategy – if he has
one at all.” For Weber, marketing plans must be precise, yet flexible.
Market focus. How many times have you heard it on TV? “This is a great
product, it dices, slices, chops, cures measles, and babysits the
kids.”
“Entrepreneurs get lured in by their own product,” says Weber. “They
fantasize about its uses until they believe that every person with a
pulse is a potential customer.” This something-for-everyone approach
not only dilutes the image of quality and turns away buyers, but it
also diffuses and burns the new company’s resources in a scattershot
approach.
Weber’s advice for startups is to focus like a laser on one specific,
and very limited market group. Concentrate on serving them better and
winning a major purchasing share from them. ENSONIQ decided to sell
music synthesizers to hobbyists. Its strategy deliberately left out
hackers, professionals, and semi-professionals. While these groups
were large and enticing, Weber saw he could not stretch his product –
or his marketing efforts – to address the needs of all of these
audiences.
Controlled growth. As the product grows more successful, the market
will change. Entrepreneurs should forecast their products’ lifespan
and whom it will serve at given periods. Then owners can plan the
amount of funding they will require over a five-year period. Of
course, even the smallest niche market is never static. It is
important to be flexible and to update the product. The goal is to
have the customer dialing your number because “they always have just
the right item for me.”
Raise less money. By beginning with a small but solid toehold, the new
company can dominate a position and leverage its experience. Nothing
so entices investors as a track record. Big plans are invariably more
attractive when you can show that a lot has already been achieved with
very little.
“If you’ve got some patience,” says Weber, “it’s amazing how little
first round funding you can get away with.” Venture capitalists are
fond of pointing to a very attractive sports blog that is seeking
funding to become a regional print magazine. It is a highly favored
prospect, far more likely to draw funding than an unproved business
plan for a sports magazine would be.
The CEO’s endless role. “If you have the idea that you are going to
fund your firm once, get over it!” exclaims Weber. “A CEO’s primary
job is to maintain cash flow for the company.” As obvious as this may
sound, many company owners neglect this part of their job description.
“You may be selling yourself to venture capitalists, your stock to
shareholders, or your product to buyers,” says Weber. “But you as CEO
are always the salesman.”
Top Of PageGot Partners? Got A Prenuptial? Barry Bendes
Every business begins with a marriage and launches in the whirlwind of
a honeymoon. It is a frenetic, wonderful time. There is intense
product research to be done, successive meetings with vendors and
potential clients, and marketing campaigns to plot. Finally your
product is flowing on and off the shelves and capital is at last
coming back into the firm. Now it begins.
You wake up one morning, look across at the other principals in the
company, and wish you’d had a better pre-nuptial agreement. The
honeymoon is over.
“Too many people start a businesses as if it were a hobby,” says Barry
Bendes, an attorney with Roseland-based Wolf Block
(www.wolfblock.com). “They either want to treat it as a part-time job
or they want to delve into the intricacies of today’s problems with
never a thought toward tomorrow.” The companies that endure are the
ones that foresee the eventualities and have already set in place
boilerplate solutions.
Assigning roles. Most businesses are launched by the combined energies
of the entrepreneur/inventor and the supposedly more silent backer –
emphasis on the “supposedly.” It would contradict all human nature to
imagine a truly silent angel who merely opens his purse and never his
mouth, quietly pouring his coin into the company coffers. Once the
product is ready for market, this previously taciturn capitalist often
demands a say in everything from hiring and vendor selection to the
color of office furniture.
“It’s a simple matter of running through all the possible upcoming
decisions and working out placement of responsibility,” says Bendes.
You can model yourself on other firms, but there are no absolutes. In
many firms the board holds final firing/hiring veto, in others that
responsibility rests with department heads. The trick is to hammer out
specific, shared duties beforehand. Think of what best makes the
company run smoothly, rather than what gives you the most power.
Resolving differences. Disputes, death, and taxes: count on them. The
former can prove somewhat less traumatic than the other two if there
is an agreed upon dispute management plan that includes several
fallbacks. “The absolute last thing you want to do,” says Bendes, “is
take your problems to court. The second to last thing you want to do
is air them before a strange lawyer.” Less drastic and far less costly
dispute resolution methods include establishing an inter-company
mediation, or arbitration, or even a grievance committee.
Partner-level disputes may most easily be handled through board member
or outside mediation.
Planning for succession. Unlike marriage, business partnerships are
not designed to last until death do the parties part. While you are
still laboring at the term-sheet level, it is wise to construct some
sort of buy-out plan. Figure the tangible and non-tangible assets of
ownership, then decide how partners may divest themselves of holdings
while still keeping the company functioning as steadily as possible.
For partnerships that do last right up to the doors of eternity,
problems may still exist for those struggling on this mortal plain. If
no previous arrangement was made, the surviving company principal may
find himself newly partnered with a wholly disinterested widow.
This is tough enough if the deceased functioned on the funding side of
the business, but if he was CEO, he may well have carried all the
basic operating secrets to the grave. “Not only must a line of
succession be clearly and legally established,” says Bendes, “but all
partners should take out insurance on each other.” Personal wills and
corporate contracts should be checked to avoid conflict.
Slicing the pie. “Amazing as it seems,” says Bendes, “many companies
start up with absolutely no contingency for handling profit. The
capital at last begins rolling in and the two or three partners have
made no evaluation as to whose labor merits what percent of earnings.”
Just as frequently company partners decide to give themselves salaries
that are dependent on a steady income flow. If profits fluctuate for
one quarter, the entire firm, even though strong, could have trouble
paying those salaries. A well forged profit participation plan laced
with fiscal reality contingencies may not engender more income, but it
goes a long way toward keeping spending efficient and keeping everyone
satisfied.
If you have enough optimism to start a company, you probably have
enough faith to believe it will last into the future. So why not take
all that energetic preparation you and your partners are lavishing on
the honeymoon and carry it on over to planning for your business’s
tomorrows. After all, yours could just be one of those seven percent
of American businesses that gets passed down for three generations.
Top Of PageCreate a Template for Your Business: Doug Crisman
In l976 Steve Jobs and Steve Wozniak sat in a garage, eating an apple.
They pondered the idea of forming a computer company. Four years
earlier Tony and Maureen Wheeler sat at their kitchen table writing.
Having just returned from an unguided trans-Europe and Asia jaunt,
they thought that there might be some money in publishing a guide book
or two called Lonely Planet. Not every business rises to the level of
the companies these entrepreneurs founded, but at some point a great
many dreamers do decide to expand into a real business.
For Doug Crisman, founder of Oldhorses (www.oldhorses.com), a
consulting company with offices at 212 Carnegie Center, such
transitions demand less an infusion of cash, and more a restructuring
of time, talent, and mindset.
When most sole-proprietors gaze into a future of expansion, they see a
frightening infusion of cash, overwhelming logistics, and a loss of
control. From this position, Crisman moves his often fearful clients
along a continuum toward greater leverage. That is, he helps transform
their company profits from more active income (profitable production)
toward more leveraged, or passive, income from investments or the
labor of employees. It is a shift that begins in the mind, and Crisman
admits not everyone can make it. Here is a roadmap:
Think as an investor. The owner who stops thinking, “I’ve got to make
$50,000,” and begins to say, “I’ve got to have $50,000 in assets,” is
well on his way. Says Crisman: “When a person makes the initial jump
from employee to self-employed, he has gained a great deal of freedom
and control, but not much leverage. I don’t really call such freelance
consultants a business.” No matter how successful the tangible product
or service, the entire assets of the company rest on the owner.
Identifying new leveraged assets presents the largest creative hurdle
to success. Products, people, methodology, and distribution channels
all can be linked for leverage. Ancillary items or services, produced
by others, can be added to the company’s offerings. This can achieved
either by hiring employees or by linking up with other sole
proprietors, who provide a broader market base.
One of the most popular expansion methods is to link a product and/or
sales capability to a larger manufacturer. The producer, or in some
cases wholesaler, bundles your offerings with his and handles the
fulfillment for both from the orders you take in from your retail and
online outlets.
Freeing fixed costs. Instead of being inundated with an avalanche of
monthly expenses, tweak as many as possible into variable costs. This
move can slash overhead substantially. For example, very few sole
proprietors or partners have the gift of salesmanship. Hiring a
salesperson on straight commission creates a no-cost asset for your
firm.
“Never has there been more human talent available than right now, when
the corporate world is shedding so much of its personnel,” says
Crisman. Contract workers can handle the full range of duties, and
often the tasks need not be outsourced any further than your own
county. Control remains with the owner.
Repeatable leverage. McDonalds and Home Depot succeed because they
remove emphasis from the individual and place it on the process. Each
shop and each job has a fixed, though not petrified, formula, that a
new franchisee or employee can use and repeat to generate more assets
for the company. Small businesses can copy this method by carefully
structuring all tasks so that new employees can easily pick up the
work when there is a vacancy.
Sales focus. “It’s more important to have a great sales manager than a
few genius sales people,” says Crisman. If the method for selling is
incisively laid out, the actual sale becomes infinitely easier.
Finding that exact blend of direct, retail outlet, website, E-mail,
phone, and other selling avenues demands a strategic campaigner, not
just a lot of good foot soldiers.
Top Of PageFind the Funds: Joe Benjamin
You have the idea of the century, but whether you’ve just come up with
a window cleaning robot or the next bio-technology solution, you will
need money to finance your new venture. Where do find that angel
investor or venture capital fund to finance your start-up?
Joe Benjamin founded YoungStartUp.com (www.youngstartup.com) in 1999
as a consulting company designed to assist early stage investors
particularly in regards to their investment presentations.
“Starting any company is an extremely difficult task,” he says. “You
must be able to produce results, have a solid business model, and
build the right relationships.” Once in front of the people with the
money, he has several suggestions for the new entrepreneur:
Do your homework. Know what your potential investors are looking for.
Be prepared with the information they are interested in about your
business.
Practice your pitch. “This is a sales game,” says Benjamin. Make what
you are selling sound appealing. Practice your elevator speech. You
have about 10 seconds to interest your potential investors. After that
they’ve tuned you out.
Don’t speak in jargon. “A big mistake a lot of science people make is
to talk a lot of science jargon. They need to speak basic English,” he
says. “Initially your investors aren’t interested in exactly how
something works.” Instead he suggests practicing making your product
sound appealing. “You may have the solution that will solve the
world’s problems, but if your investors don’t see it as a winner they
are going to blink you out.”
Benjamin suggests keeping your approach short. “Don’t tell everything
all at once.” Several “buzzwords” can help get your point across, he
says, including the words “patent” and “partnerships.” If you have a
patent on your product, make sure to mention it, he says.
Partnerships, too, are valuable assets an investor wants to know
about.
Don’t look too hungry. “Don’t come to your investor from a standpoint
of need. You want to build excitement about your product,” he says.
“You need to have the attitude that you will succeed. If you aren’t
sure you’ll succeed, why should someone invest in you?”
Canvas friends and family. There are a limited number of ways for a
new company to get funds, says Benjamin. Bank loans or borrowing money
from friends and family are two typical ways. A third way may be to
hire someone to do research into potential investors. He cautions,
however, that this method takes money away from your business that
could be spent elsewhere.
Look to angels. Angel investors are another source of investment
money. An angel is “a private individual with discretionary income who
is looking for a place to invest it,” says Benjamin. Usually, he says,
this person is a professional or a retired executive who has income
other than that which he or she is investing. Angel investors can be
particularly valuable in the early stages of a project when a company
does not yet have the measurable milestones a larger venture capital
fund may want.
Move onto venture capital investment. Venture capital funds are the
largest source of money for entrepreneurs who have moved past the
friends and family and angel investment stages. Each fund has a
website describing the types of companies in which it invests, the
geographical area in which it likes to invest, and the amount of money
it typically puts into a company. The fund’s portfolio companies are
listed on the site and provide insight into the types of businesses
that are likely to appeal to the fund’s partners.
Top Of PageFinding Money for Tech Start-ups: Carl Kopfinger
Entrepreneurs with new technology often need patrons to see their
visions through to production and into the marketplace. Investors,
however, often lack the entrepreneur’s enthusiasm for a completely
untried technology. Banks and venture capitalists want to hitch their
wagons to a rising star, and they will scrupulously examine the
booster rockets to make sure it keeps ascending. The entrepreneur must
therefore try to position his company as the investment opportunity of
a lifetime.
For the high tech firm, whose whole industry is only now emerging from
a decade-long slump, this is indeed a daunting challenge. How does one
accessorize what must appear as “just one more software company” so
that public or private funders will hazard a glance?
“There are no more excuses for high technology companies,” says Carl
Kopfinger, vice president of technical financial services for Commerce
Bank (856-751-2739), who spoke for a New Jersey Technology Council
seminar last year. “Venture capitalists are again opening up their
wallets and Thompson Economic studies undeniably show a last quarter
increase in high tech funding.” It is an investment trend Kopfinger
has followed with keen interest for the last 25 years.
Yet no matter how new the product or company, Kopfinger insists the
old business rules apply, and if you want to get funded, you had
better adhere to them.
Be a business first. Long gone are those angels of the l980s who would
invest in almost any idea if it seemed technologically complex enough.
Now even the most exquisitely designed and saleable prototype gets
turned down if it hasn’t got a strong business structure bringing it
to market. This means, like any other service or manufacturing
business, early-phase companies had better hammer out an exhaustive
business plan, come up with capital tables, a cash flow and burn
schedule, and be able to swiftly respond to every item on the term
sheet. The more due diligence performed on yourself beforehand, the
more attractive you are to bankers.
Picture your banker as a person with a very small and busy hammer. He
will constantly keep tapping away to find holes not just in your
product, but in your previous financing, management capacity, and even
your relationship to the board of directors. If you have already given
away the store to get your initial startup capital, no future investor
will want to get in the middle of what could be a sticky bout between
financier and owner. So do some tapping yourself, warns Kopfinger, and
patch up the holes before meeting with lenders.
Skip the window dressing. About 15 years ago it became very popular
for startups to dress up their boards with name experts. When it came
time to merge or sell off, having a roster of names that spoke of
great financial prowess, proven investment track record, or even
renowned technological ability really boosted the price. But today,
while some corporations may be impressed, banks are not.
“Of, course we like to see an applicant who has a substantial team
behind him.” says Kopfinger, “However, we want to know exactly how
active these people are in your project. Are they spread too thin to
be of any real use to your company?”
Venture capital firms and banks have different goals. In the hunt for
funding, the main caveat is to note what each lender wants. Banks seek
long-term relationship. They provide a lower rate, and once the
relationship is established, they may be more easily nudged into a
loan based on your past track record. The venture capital company
wants your new project to succeed swiftly and very profitably. It may
well want to take a substantial ownership interest, and will want to
see a return on investment in a relatively short time. And while the
venture firm may be willing to give you all you ask, with fewer
questions, it may want to place major decision makers on your board as
watchdogs of its own best interests.
Avoid cash burn blunders. Some start-ups, for example “spend far too
much on marketing before they’ve even got anything to sell,” says
Kopfinger. Prodded by initial investors looking for a quick payback,
many new firms make the mistake of putting great amounts of resources
into marketing before they have a full business structure in place.
This scarcely gives future investors the sense of risk control they
desperately seek.
Top Of PageSBA Loans Launch New Businesses: Don Swartz
This past year, the Small Business Administration (SBA) facilitated
over $602 million in loans to 2,800 businesses in the Garden State.
The key word is “facilitated.” There is a common misunderstanding that
the government agency shells out the money, but that is not the way it
works. The SBA does not examine a start-up’s books or drop checks in
its mailbox.
In point of fact, you will probably never see a loan official from the
SBA. You will only notice his signature at the bottom of your bank’s
loan as a co-signer. Don Swartz, economic development specialist with
the SBA, explains the loan process. Swartz has served as a supervisory
loan officer for the entire northeast. Today he handles the offices
for southern New Jersey. The Mercer/Middlesex region are serviced both
by his southern office in Gloucester County, at 856-415-2283, as well
as the northern office in Newark, at 973-645-2434.
Banks drop all their loan applications into three baskets. Those that
meet all the standards, fall in the “YES” basket, and the applicants
receive the check. Those wholly outside the standards, for example,
those indicating bad credit, fall in the “NO” basket and the applicant
gnashes his teeth. The third basket is marked SBA. Those who fall just
a bit short on one criterion, maybe collateral, may get their
applications sent to SBA loan officials.
If the SBA reviewer smiles upon the application, the entire power of
New Jersey’s taxpayers and government gets behind the loan and
guarantees a certain percentage of it. It is returned to the bank with
the SBA’s blessing – and the loan goes through. The applicant himself
did not ask for this SBA review. In fact, he couldn’t ask for it. The
entire process is the lending bank’s call. Loan applications generally
miss the YES basket for four reasons:
Credit issues. The first and swiftest cut comes to those with bad
credit. If this is your problem, not even the SBA can help push it
through. But on the remaining three criteria, the SBA can provide some
wiggle room.
How much you must put in. An equity injection of 20 to 25 percent is
demanded by most New Jersey banks. Lenders want the entrepreneur to
put up this stake to cut down on the chance that he will walk away.
Coming up with this initial capital has proved a towering wall to many
otherwise prepared entrepreneurs, but the banks rarely bend on this
potential deal breaker.
How soon you must repay. Another hurdle involves the repayment
schedule. The return schedule must fit the lender’s risk requirement,
not, alas, the borrower’s ability to repay. “If, for example, you are
investing in inventory,” explains Swartz, “that is material that
should be turning over quickly. The bank may want repayment in as
short as three months. Yet, if it is evident that will not work, they
will refuse the loan.”
What counts as collateral. A real obstacle for many new business is
the universal bank requirement for collateral. The bank requires some
tangible asset against which it can fix a lien. If those tangible
objects are in the form of improvements to a building the business
does not own, they are not collateral. Patents and intellectual
property that are not yet bringing in income are not collateral, but
accounts receivable are. Banks can draw on their value long after a
firm has folded.
Your home, car, stock portfolio, and baseball card collection may also
be considered collateral if the lender so deems.
What the SBA can do to help. Typically institutional lenders turn over
to the SBA applications that fail narrowly in only one aspect. At that
point an SBA loan official reviews all the paper. Perhaps the business
is short 15 percent of the required equity injection, but it seems
otherwise strong. The SBA will not pony up the remaining 15 per cent.
Instead, it will return the application to the lender with an SBA
approval, which entails a positive guarantee for the major percentage
of the loan. With this guarantee, the bank has the peace of mind to
put the loan in the YES basket – and cut the check.
Bank loans get backed on a sliding scale. Notes of under $150,000 are
guaranteed up to 85 percent. For $150,0000 up to the $2 million
maximum, the SBA stands behind 75 percent. Additionally, the SBA
charges both bank and borrower a fee of 2 percent of the guaranteed
portion of the loan.
Legally the SBA cannot turn down a loan for want of any collateral.
“But that law can be quite misleading,” says Swartz. He explains that
if a man applies for a business loan and has no home as collateral,
the SBA will consider his application. But the man who owns his home
and has not included it as collateral gets turned down. “We are
risking the taxpayers’ money,” says Swartz. “I’m certainly not going
to have them stand behind a venture in which the company owner himself
is hedging his bet.”
Where else to look for help. “The SBA should never be considered the
final word for the entrepreneur trying to link up with a bank,” says
Swartz. He points to the increasing support afforded by urban
enterprise zones, empowerment zones, and county-based loan programs.
Each of these will often take a second lien position and give the
business the added cash to meet bank standards. The SBA also has its
own Microloan Lender Program that will find second lien lenders for
amounts up to $35,000.
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