VANNOY:
How to fund your business. Hi, this is Mike Vannoy, vice President of Marketing at Asure. And this is a really important topic that I think gets overlooked. Most small and mid-sized companies, you know, you got a, you got a founder who’s an expert in their field, right? They, they know everything there is to know about running a salon, remodeling, kitchens running an accounting firm performing architectural services, whatever their business is, they’re expert at that, but they kind of Asureme finance and loans. This is done through your local bank, and maybe this bank is lo better than that bank, but as they try to grow their business, and even a successful business can be strapped for cash, as you have money tied up in inventory and capital. And if you figure out a formula that you wanna put gas on how do you, how do you do that?
And I think so many times entrepreneurs and business owners find themselves running a successful business, and they go to the bank and they can’t get a darn loan because of whatever number, number of reasons. So the purpose of today’s show is to really help entrepreneurs and small business owners understand how big this world is of finance. There’s all kinds of ways to get creative financing from all kinds of different sources. And I got a, an amazing guest to help me unpack this topic today. Kate Howe, she’s the founder and c e of Happy Mango. She founded Happy Mango to bring greater transparency to credit reporting with better information. Kate believes that credit markets can be made to work better for both Bowers and lenders. Kate was previously the treasurer of a broker dealer subsidiary of Morgan Stanley, where she worked for over 12 years across various functions. She earned an MBA from Harvard Business School, a BA in accounting from LBN College. She’s, she is a charter financial analyst certified public accountant, and a financial risk manager. It doesn’t get much better for credentials than that. Kate, welcome to the show. We’re really looking forward to today.
HAO:
Hi, Mike. Thank you for the intro, the introduction, and thank you ha for having me.
VANNOY:
So, let’s maybe just start out k kind of what, what is the, from your perspective, what is, what is the landscape of financing options look like for small business owners? And maybe, maybe disagree with me or validate my, my opening remarks that I believe most entrepreneurs, no matter how talented they’re and how successful they are running their business, probably don’t understand all the options that are available to them.
HAO:
<Laugh>, I think that’s, Mike, that’s probably a fair assessment because not because, you know, small business owners are incapable of doing that. I think they’re very capable of doing many things, but myself included, we would rather spend time thinking about running our business. Yeah. Rather than thinking about financing options until the time that we have to. And you, I think you are also right that, you know, there’s our traditional, traditionally there, you have to, you have to go to your local bank for any financing needs. But nowadays with technology, with different resources, there are a lot of resources and also a lot of hidden gems when it comes to small business financing. So hopefully in today’s discussion, we can uncover some of those hidden gems for your audience.
VANNOY:
So take, take it away. I’m, I’m curious how you see this. There’s kind of a spectrum the way I think about it for, for like small business financing, whether it’s traditional lending, it’s indexing, it’s all kinds of other, other things. How, how, but I see it as a, on this continuum of risk and rates, right? There’s, there’s riskier stuff that is more expensive money, there’s less risky stuff that’s not as expensive, but there’s a million options in between. How, how do you see it? And then I’ll, I’ll give, give it to you. Just take us through what, what you see these options are for, for small businesses.
HAO:
Sure. So I’m gonna break the answer to that question in two parts. Ok? Part what, part one, let’s talk about what are those types of financing choices. And part two, let’s talk about, you know, where you can get those. You know, and part one, let’s talk about part one first. So, in terms of the basic types of financing to finance your business, they’re really, in my mind, three types. And if you ask an accountant, then you say there are two types. And the two types are in debt financing and equity financing debt, meaning that you borrow money from someone and you have to return the funds later. And equity financing is something that you, is an investment to your business. You don’t have a set timeline to return those money, but expectation of those who give you the money is that, you know, you are going to give them something in the future, in return could be shares, appreciating shares, ideally, right?
So that’s for equity financing. And in my mind, there’s also a third type of financing. And I believe some small business owners are already using it. And if they’re not consciously using it, I would encourage them to think about it. I would call them the customer financing. So for those consumer facing businesses, maybe you can do a crowdfunding to get your future customers to give you funds now and then, you know, get promise some, you know, future prototypes of products that we may have in the future. We’ve seen very successful campaigns in the crowd financing. We’ve heard about them in media. But for other companies who that are more wholesale you might think about how to get your customers to pay you sooner and pay your vendors later. So, stretch out that cycle. That is a very important way to finance, especially for small businesses. You know, that way you don’t have to pay interest rate. It’s kinda free in a, in a way, but it’s available. Its an available option to you. So for today’s discussion, my understanding is that maybe Mike, you want me to focus a little more on the debt financing the potential options that’s out there. Is that fair?
VANNOY:
I, I won’t even say that. I, I, what I wanna focus on is the areas of the, the op. I want people to understand what options they have available to them that they might not otherwise be, be aware of, right? So the, okay, the, my, our mission with the show is to share the best information we can with small businesses to help them grow their business. And so, I, I’ll lean on your expertise of where do you think, okay, like your words, where, where do you think these hidden gems sit?
HAO:
Okay. So maybe we’ll start with debt financing then. Okay. So the debt financing, in terms of the typical I would look at them into maybe three different types of structure in terms of the structure of the financing. Number one is a term loan. No matter who you get it from, it’s basically money you get upfront. And then you have to make payments over time to pay off the loan. And the second type is a line of credit, depending on the need. You may tap into the 100% of the line or maybe a portion of that, but you have a promise up to a certain capacity funding available from your lender. You can tap into it anytime during a set term, and then you would repay them over time. And the last type is in some, it may be available for a certain type of small businesses that carries inventory that has a lot of a lot of receivables. So that’s the factoring. So you, that’s another way of financing your business. So those three kinda are, in my mind, are the three basic structures when it comes to debt financing. And now here’s a question. Can,
VANNOY:
Can you take just one minute and a define factoring? So, I think most people know what debt is. I’m taking a loan. That could be from a bank, it could be from a rich uncle, it could be from country club friends, right? Line of credit, usually with a traditional financial institution. But if you ever watch Shark Tank, you know, that also can come from private money. Also, I’ll give you, extend you a line of credit, right? Mm-Hmm. <affirmative>. I think fewer people know what factoring indexing type financing is against inventory or receivables. Could, could you just put a definition there for us?
HAO:
Yeah, that would be great. So so this is really let’s talk about factoring. Factoring is really about when you have already performed certain services, already sold something to a customer, when the customer hasn’t paid you yet. And then going back to my earlier point, maybe try to avoid that situation to start with <laugh>. But sometimes when it is unavoidable you know, when it’s unavoidable, you have a, what’s called a receivable on your books. Something that your customers who have already received your service or goods knows that they will have to pay you back at some time in the future. Yeah. So you know the amount, and you also know when they, they’re supposed to pay you back. There’s a deadline there. But what you need now is cash. Where do you get the cash? That’s when the factoring can come into place.
There are factoring providers factoring funding providers where they would take a cut on your total, let’s say your total receivable funds would, how much you expect from your customers is a hundred thousand dollars. And the factoring company may say that, I’m gonna give you $70,000 today, and when it is time for your customers to pay you, the customer will pay us directly. So that $30,000 would be the fees and other, you know, interest that it will be collected by the factoring company. So it is essentially a way to speed up your cash flows, but with a cost.
VANNOY:
Yep. Yep. Got it. Thank you. Okay. So two, two fa two families. You put a third debt equity in customer oriented financing. You kind of unpack three different versions of debt financ and term line of credit and, and factoring. Anything else? Yes. You wanna add to to, to debt financing, or do you wanna talk about options for equity?
HAO:
I think that for we should talk about debt financing because that’s actually the more widely available way of financing, because equity financing it’s is hard. It requires someone who knows you or knows your business very closely and willing to take a lot of risk with you. Yeah. so it’s great if you can get it, but it is not as widely available as debt financing. So let’s maybe focus on that a little bit. On the part of debt financing, I think that as Mike, you start with earlier that it’s really about where you get it from whom you get it. So we all know our local banks is a potential resource, but some of us might have already gone down that path and may not have had very positive experience. I’m saying this because a lot of, I used to work in the banking industry and my my understanding of the banking industry is that there’s, there usually are a lot of rigid requirements when it comes to bank financing.
You may end up spending a lot of time with a loan officer and have to submit a lot of information, and there’s no guarantee at the end of the day, there will be a yes answer. So it’s, you know, the convention the convention, how these things bank financing works is that it takes a lot of time upfront and, and then you are, if unless you have a stellar credit and the strong established business performance to show you are unlikely to get any. So that said, there are a lot of sources, resources today, even from the banks that could supply the funding need for small businesses. You know, I’m gonna start with who are these players? Okay. Some of the traditional banks are opening up potential options and trying to be more flexible with small businesses. They would provide micro loan businesses and serve some pro products that are geared toward their local small businesses.
And I would spend more time on that a little bit later. And then there are credit unions. So don’t forget the credit unions, credit unions, there are, there’s a huge variety of different type of credit unions. As a matter of fact, a lot of them provide small business financing as well. And just like banks, many of them are also directly linked to the sba. So if you are interested to have like a startup loan, we don’t have a lot of business history. If you’re interested in the SBA loan, both banks and credit unions could be your potential, potential resources. And then there’s a third option, which may be one of the major hidden gems when it comes to small business loans. These are what’s called a C D F I loan funds. So CDFI stands for Community Development Financial Institutions. These organizations are not for-profit.
Their funding comes from US Treasury and other private sources. And what they’re known for, or their loans are known for, is that number one, they usually carry much lower interest rate. Number two, they usually provide you with free, what they call technical assistance or business advisory to, they may help if you don’t know how to do accounting, for example, if you don’t know how to, for the very small, small businesses, if you don’t know the very beginning of how to do factoring, for example, they may have coaches free for free to provide you those services. Yeah. Free classes, free advisory services. And then because they’re funded by the government, by not-for-profit, they typically would offer a little bit more flexibility when they come to, when it comes to working with borrowers. They may have less restrictive covenants requirements and less strict requirements on reporting guidelines. So I would encourage small businesses, especially those, those ones that are starting up those ones who have not explored CDFIs as a potential funding source to look up the C D F I. There’s a US treasury website where you can use to help you to find where your local C D F I loan funds providers are.
VANNOY:
So I, this is an area I don’t know a, a, a ton about. So how first of all, I guess we’ll, we’ll stick a a, a note in, in the show note linked in the show notes to the, to the treasury site. We’ll, we’ll, we’ll get, provide that for everybody. But how, other than going to that site, tell us more about these things. I’m Asureming they’re kind of purpose driven. Like there’s a grant to fund and an initiative to do X or Y or Z and then these these CDFIs have a mission that they’re, they’re proactively trying to help, whether it’s an, an urban area reestablished jobs in a, in a downtown that had been vacated 20 years ago, or or it’s rural development what, whatever the thing is, there’s, I’m Asureming this is more per cause driven. Am I thinking about that? Right.
HAO:
You’re absolutely right. And there’s usually a, a cause associated with it. It could be driven by like you said, it’s could be driven by geographic location. You know, you have to be in a certain area. It could be driven by demographic focus, it could, maybe it’s minority based business, maybe it’s women based, women owned business. We have organizations that specialize on providing as business assistance to immigrants. We also have clients who specialize in providing assistance to entrepreneurs that are, you know, in a certain geographic, in a certain neighborhoods, for example, based on zip codes. We also have examples of more broader focused loo funds that provide small business just because they’re starting up. And then they are maybe in the, their state, they’re usually very localized financial organization. They’re not nationwide, most of them. They’re mostly localized. And then based on, so if you can find your at, usually within the state that you are residing in, they will be at least a few C D F I loan funds that are popping up that will serve just broadly, generally small business needs,
VANNOY:
Rough order of magnitude. Are there dozens of these hundreds, thousands of these in the country?
HAO:
Yes, there are hundreds of these. Okay. Across the country. Ok. Some of these are very large. They almost operate almost like a bank. There are, some of these are more niche or smaller. They would focus on, you know, specialized causes. So there, there goes in Vari variable. There’s a big variety of such organizations, and they usually are very flexible in accommodating their, their customers. So I believe as a borrower, besides the basic quantifiable terms, such as how much you can get their interest rate, where you need to pay things off, and what are the debt cabinets, cabinets, besides those kind of hard requirements, quantifiable terms of the loan, I think what the borrower really wants to look at is the flexibility from the lender. Yeah. And these could come from the hard requirements in the terms of the room, in terms of, you know, reporting requirements.
You know, how much inventory you can carry, things like that, your turnover, your margins, some lender who would set kind of hard requirements on those. But there are also lenders who are willing to be more flexible. Not only they may eliminate or they ignore all those requirements. They may even be more accommodating in terms of how, how can you define what is a repayment term that would work best for you? So, for example, one of one of our bank clients who now we’re talking about bank lending, you know, some, this bank is a traditional bank. But they decided that they want to start to help energize their local community, small businesses. They launched a minority business owner microloan program. And in this program, they would eliminate the for the first 12 months, it’d be interest only, or even 24 months, it would be interest only. And then subsequent to the remaining terms would be principle and interest. An idea is to help those small business that are starting or small, that are coming out of the pandemic to help them give them sufficient time to establish or reestablish themselves before they have to make, you know, the traditional term loan payments on time.
VANNOY:
Well, it sounds like because these CDFIs and or banks who kind of go, go to market with a si a similar strategy because they are purpose driven, it’s not just that they might offer more flexibility, they might offer expertise along the way. Right? So the, the Yeah,
HAO:
You’re absolutely right.
VANNOY:
Yeah. Cause cause the, the perverse kind of not so funny joke is when you’re, when you’re starting a small business, when you need the money, the most is when you’re least capable of borrowing. Cause you don’t have any equity, right? You don’t, you don’t have anything to offer as collateral. And if they don’t know you personally, they’re vouching your character. And sometimes that’s not enough, depending how much money you’re asking for. You need expertise where to, you know, what to do, how to what, what are the different options, et cetera. And that when you’re big enough and financially have the financial wherewithal to be able to qualify for loan, that’s when you don’t need it anymore. Right?
HAO:
Yeah, you’re absolutely right. I think the, the, the idea of the CD I program, which was launched by the, the US Treasury Department maybe 20, 35 years ago I, I will check my history on this. I think it’s approximately, let’s say, 30 years ago. And the idea of that is exactly to solve this problem, to provide a a affordable loan, but also at the same time to provide the small business who need some business guidance. You know, as we started this conversation, we talk about business owners doesn’t wanna think about this because they have a business to focus on. But when they want to think about it, when they need to think about this, they should be able to get easily, get these kind of resources. And these CDFIs provide free services when it comes to, you know, coaching from accounting to marketing. So for example, one of our clients, they provide free consulting services for, for marketing, for online marketing. So, you know, a lot of business could benefit from that and could, it was very helpful for street vendors, for a lot of the consumer folk facing businesses like bike shops or, you know, restaurants to start a very success. They help them to start successful social media marketing. And then you can see these business continue to grow, and ultimately it helps lenders in the end to get their loans paid, repaid back.
VANNOY:
That’s great. That’s great. Any guidance that you would have for small business owners to how we’re, we’re gonna provide the link to the treasury site, but any other suggestions and guidance for small businesses, how to seek these opportunities out?
HAO:
Sure. I think the number one number one advice, or maybe I wouldn’t call it a warning, just to be aware that if you wanna start this process, you want to make sure that you would be willing to spend some time to cultivate that relationship with the CD advise. And that starts with maybe gathering your own business information to make sure that you have sufficient information documents in place. So the loan officer or the, the assistance provider that would be working with you from one of these organizations would make it very easy for him or her to understand what your business is all about, to understand your goals. So these, I guess by contrast, is very different from you get funds from some, some kinda online lender, right? You know, it’s not just about click a button, then, you know, you get some cash, but then you have very rigid repayment, you have very, you know, potentially high interest rate. It’s very different from those kind of funding sources. It takes a little bit more time upfront because the organizations, you know, the lender needs to understand you more, but once you spend time build up that relationship, it will pay off in the future because these are the lenders who are willing to provide more flexibility and more willing to cultivate the relationship and work with you to grow your business in the long run.
VANNOY:
Can you share some pros and cons? So you, so you, we, you talked about three different buckets, debt equity in customer based or oriented financing. We’ve obviously focused so far more on, on debt options. What are some of the pros and cons of, of going with, with the different alternatives that you’re talking about?
HAO:
Yeah, so I think of, if we look at those three types that we talked about earlier, you know, debt equity and the customer focused financing, maybe the analogy I would use is that, you know, the, the debt financing is kind of like your your main course. That’s the bread and butter, that’s the most likely choice that you may have. To, for financing and equity financing is kind of like the dessert. You know, it, it would be nice if you can get it, but sometimes you gotta have to skip it <laugh>. And the option may not even be available to you. And I think the the customer the customer financing, maybe it’s more like a cocktail or <laugh>, it’s something that, it’s more, it may be more available for certain niche operations. You know, certainly you are, you come up with a new, new wa new smartwatch, for example, and then you are selling it online.
You can use crowd financing or you know, sometimes you just, because your relationship with your customers and your relationship with your vendors, you can stretch out that payment cycle for yourself a little bit longer than usual. So, but at the end of the day, debt financing is still the main, your main course. And and if you really need it do you think you may need it down the line? Maybe start cultivating that by starting a relationship. Starting understand who your lender, your lenders are in your local area. And also very importantly, making sure that your documents, your accounting is in a clear clear shape. You know, it’s maybe very, you know, worthwhile to have an accountant to make sure that to have a good accountant to make sure that your books are in shape to make sure that your tax are filed properly. Because all of those documents, no matter who you go to, to, to ask for funding, those are the, the starting point that you will need those information.
VANNOY:
Yeah, we talk all the time. We focus a lot on HR oriented topics on this show. And it all, everything starts with great documentation, right? In, in, in great bookkeeping. So I wanna, I wanna on the, on the what you, the cocktail, I almost, in my brain, I’m, I’m bifurcating the, the customer based into a couple buckets. There’s, there’s the, what I’ll say is the cocktail of, there’s, there’s endless of, you know, crowdsourcing kind of technology orient start a FinTech startups ways to get to get money. But I do think that there is something that just about really good sound business practices that are, that are probably at the front end of that spectrum. It’s not the cocktail, it’s your, it’s your daily MIT vitamins, right? It’s your D vitamin daily, vitamin C, vitamin B. That is just good business practices.
Like when you negotiate terms with a supplier, if you can negotiate 30 days later, if you can negotiate paying net 45 instead of net 30 or net 30 instead of due upon delivery, and you mm-hmm. <Affirmative>, let’s say buy a hundred thousand dollars of this stuff a month, that 30 days is the exact same impact to your cash flow is going to the bank and getting a hundred thousand dollars loan, right? If you get, if so, if you have a hundred thousand dollars a month in supplies that you can delay paying. And then on the flip side of that same coin, if you can have a do upon receipt in a way to actually, maybe you only do credit card, but then there’s fees, or maybe you have a way to auto draft your customer upon delivery and pull the money in versus waiting for them to pay the invoice.
So the standard net 30, cuz that’s just the way you’ve always done it. In net 30, there’s another a hundred thousand, or presumably you’re paying the supplier a hundred thousand, maybe you got another $125,000 in your sales. If you can accelerate that by 30 days, that’s a hundred plus 1 25, that’s two and a quarter, that’s a quarter of a million dollars that you could have avoided the need for a loan by improving the cashflow of your business. I, I just think there’s some really fundamental financially oriented business practices that so many entrepreneurs that no blame, no finger wagging, they just don’t realize that these kind of opportunities to self-fund your business exist. What, what, say you.
HAO:
Yep. You know, I, look, I absolutely agree with that because that is one of the probably most overlooked way of financing besides thinking about banking or in richco, right? That daily vitamin I, by the way, I love the term <laugh>. I think that we should all think about taking that daily vitamin, especially for small businesses, how to just have using that to enrich our business without having to, you know, really spend a penny on seeking financing and spend the time in getting financing,
VANNOY:
Right? I mean, theoretically, if you don’t have to pay suppliers until your customers pay you, theoretically you don’t have a need for financing. So the more you can structure your business, your contracts, your sales process, negotiation with vendors i I just couldn’t possibly encourage our, our, our customers small business owners, employers enough to focus on the fundamental business practices to avoid the need for financing in the first place. So okay. Let, let, let, so we talked about the different types of financing, debt, equity, customer oriented, date oriented. There’s one end of the spectrum that’s the cocktail <laugh> at the end of the meal, the the crowdsourcing FinTech startup kind of a world. Then there’s the taking your daily vitamins, just setting up your business practices in a way that avoids the need for financing. What do you see are the big challenges that that employers face today? Where, where, where do they see, where do they get themselves, maybe not in trouble, but what are the sticking points that prevent them from getting the financing that they really need or want?
HAO:
Yeah, I think this is mainly a, a question for or a challenge mainly exists for early stage and smaller startups. Especially the companies that do not have a long profitable operating history. That is prob that’s the kind of business that faces the most challenges. If you have, you know, five years of operating history of, you know, steady growing and the sizeable revenue, everyone would come to you to lend money to you, right? Right. So I think for, for those companies that are just starting up, or for companies that are struggling a little bit, we all came, just came out of the pandemic and there could be some very challenging operating history in the past couple of years. I would encourage those business to make sure that you take a look at your books, get your, again, get your documentations on in shape and then that would help you to go a long way when you explaining your choices and history, operating history to your potential lender.
VANNOY:
Yeah. looking at you online before we, we spoke you, you talk about the nice, the word nice not being in finance and it can be and needs to be in finance. What, what do you mean by that?
HAO:
I think that, you know, coming from a financial background, yeah. Working, having worked in the finance industry a lot of it is so much driven by numbers, by the quantifiable results, you know, the transactions, the speed, the growth, and that is the case for most of the financial institutions. So, you know, in one of the blocks that are re wrote recently in thinking about the opportunities for the future for the financial industry. So that’s the context of that, that i, I, my idea is that for the financial industry to continue to grow, to be to, in a way to, to fight off the, the you can say maybe the invasion from the tech industry into the financial services area is you have to be nicer to your customers. Think about how you orient your services towards your customers needs. So that is my hope for the financial institutions.
I know that my clients who are unhappy mango have mango being the technology platform that serve financial institution, serve financial institutions. We help financial institutions to make loans to small business, for example, you know, my, my clients are practicing that unhappy mango. They make their products they innovate the products continuously to come up with new ways that can accommodate their local business or, or consumers need. They also come up with ways to provide more flexibility. So and that flexibility is a way of being nice. So an example is that we would let we create, so we, as a technology provider, we create tools to let our lenders implement such things as they would let their borrowers to pick the date of the month to make the payment, to pick the payment frequency, and then to easily request maybe a deferral or change of long terms when their business you know, requires such changes.
Maybe they just didn’t get the customer the payment that they wanted this month, and they need to delay the payment for the next month. So the traditionally or so even some of the online lenders, if there’s not such flexibility is extremely difficult for the borrower to still to make, you know, the payments on time. And if they don’t make the payments on time, it’s a de, you know, it’s a delay. And then they, their credit get dinged and gets more difficult down the line. It’s kind of that snowball to keep on rolling the snowball problems. But our lenders are willing to work with their borrowers to address their need to accommodate their needs when situations like this come up. So that’s what I mean by being nice. It doesn’t really hurt the financial institutions and it help the borrowers tremendously. The small business owners or the consumers, they help them tremendously to, to be able to have that flexibility. But the lenders in the end, they have a higher probability of getting the loans paid back and then higher probability of continuing that customer relationship. So that’s the idea of behind being nice.
VANNOY:
So the people that watch this show are typically small and midsize business owners and executives trying to grow their business, right? They’re not the bankers, but your product, your company, you, you, you can, you can provide our audience with a unique vantage point into the psychology of the lender. So from, from the lender’s perspective. So your customers, what are the things, yes. What are the mistakes that employers make when they try to come and, and get the loan? And, and I’m not looking to make an overt pitch for your company, cuz you’re obviously your customers are, are are banks, if we can help you, awesome. Yes. but I really wanna help, yes, <laugh> help get into this psychology so that if I’m a, I’m an entrepreneur, I wanna go to the bank, there’s an advantage for me to, to understand what’s the motivation of the person on the other side of the desk.
HAO:
Well, if I could speak for my clients, which are the banks credit unions and the C D F I loan funds that we talked about earlier, my clients are honestly and wholeheartedly, wholeheartedly wanting to help small businesses grow. They do. And then the products that they provide on our platform, if you look at the terms, are very flexible and very affordable. What has been the challenge is for the small businesses sometimes. So understand, they need to be willing to spend time to educate the lenders about themselves, about the businesses. It’s not to say that the, so there there’s a, there’s a conflict inherent conflict here because as we talk, talked about from the very beginning, most business owners don’t want think about financing. They don’t until they have to. But when they have to, it is when they feel like, well, I gotta have cash tomorrow. But that is really difficult to have if you wanna work with lenders who wanna work with you because they don’t know you yet. So I would advise that if you are thinking about financing, maybe start building that relationship early. Starting besides the daily vitamin, but starting to think about, you know, who are your local lenders, who you want, you wanna start a relationship with, starting that, building that relationship early so that when it’s time for you to get financing, people already have some ideas of who you are, what you do.
VANNOY:
And I would, I would, I would a, I would beg forgiveness that <laugh>, if my metaphor is terrible, but it for all, for all the employers that listen today, if your kid comes to you, if your, if your 18 year old kid comes to you and says, you know what I’ve decided I want to be a dentist. I want to go to this school and it’s gonna take this many years, but I need to, to spend this much time studying. It’ll take me this, this long. If I put myself through school, I’m wondering if you can help me with the financing of such and such and this will be the dollar amount and the the timeframe. What does that conversation look like? Versus that same 18 year old kid coming to you on a Friday night saying, dad, I’ve gotta have a thousand dollars today. <Laugh>, I mean,
You’re, you’re a lender. You’re as a parent, you’re a lender in both scenarios, which, which kid is the conversation that you wanna actually have? Which one is raising red flags all over the place? And so you might be running a great business and you got a surprise in your hands that you got a, a cashflow issue that you need a loan asap. But you gotta understand is if you’re a lender, there’s red flags going off all over the place. Why do you need this much money on such short notice and you didn’t expect it before? Why couldn’t we have had this conversation a week ago? Right. What, what guidance can you give employers to, I guess, be as proactive in their communication with the banks as possible? Cause it’s one thing to have, you know, good bookkeeping and good records, and maybe you have, maybe you can pull up a balance sheet and a statement of cash flow and, and a p and l on you know, for the latest period. Maybe you can do that on, on demand because you, you got your, your bookkeeping house in order. But that doesn’t mean you can go get a loan on demand. So what, what, what’s, what’s your guidance for employers here?
HAO:
Yeah, I, I would say it doesn’t mean, usually it doesn’t mean you can get affordable loan on demand. Cuz you know, nowadays you probably all your audience are probably getting, you know, text messages, emails from all these, you know, online lenders. But to really get a loan from a trustworthy lender who are, who’s willing to accommodate you work with you, that takes time to build a relationship. So I would start with knowing learning about who are the local lenders, you know, maybe go to the treasury website, which which will send to the audience after. But that, that you don’t know who the players are. You know, maybe meet them and call them up, understanding what they do when you have time, and that that will be very, you know, just to start doing some of the groundwork over time that will help you to, to, to get your financing when you need it.
VANNOY:
Very good. Any other guidance that you would give? So, so you commit this from the perspective of how you help lenders to be nicer, more flexible, help their customers grow, find ways for win-win scenarios, right? So, so you’re helping the lenders to do that. Any other guidance that you’d wanna give? Small business owners, mid-size executives at mid-size companies who, who need financing and have not been successful? What, what else would you wanna say to those folks today?
HAO:
So, so this, this is probably gonna be the, the one of the last, the hidden gems, but hopefully we be a major one is that, you know, for a lot of the rejections of financing requests, the B lenders the traditional ones I’m talking about the traditional, you go to a bank and you get rejected most likely besides, you know, your operation history of the business. The other red, big red flag is the credit score of the business owners, because especially for small business, the business owners are the guarantor by default of the business. If you don’t have a strong credit history or strong credit score, that’s gonna be difficult. So this head and gem is that some of the organizations are really,
VANNOY:
I I wanna I wanna pause you there because this is something I think a lot of, a lot of people start, especially entrepreneurs starting businesses, don’t realize someone has convinced them that, oh, I have an llc, therefore I have limited liability. My credit sucks, but the business is gonna borrow the money <laugh>. Well, if your kid comes to you and says, no, dad, I’m not borrowing the money. This my, my, my LLC is borrowing the money, you’re gonna think, well, your LLC doesn’t mean stink to me. You’re, you’re the one I’m who I’m lending this to. Your bank’s gonna think the same thing, right? So unless your entity has assets to provide as collateral, the bank is like, okay, that’s intellectually interesting, but you’re gonna sign the personal guarantee on this regardless of your entity structure. I’m not overstating that, right?
HAO:
You are not overstating that. So especially for small business, your first loan, you can be, you can be Asurered that you or you can be guaranteed that you’ll be the guarantor on that loan. So yes, so their personal credit score really matters. But the hidden gem that I’m gonna try to uncover hopefully this available for, for most of your audiences, that is that a lot of the the lenders who are willing to provide you flexibility are also willing to look at different ways to substantiate your credit. So, for example, if for some reason you don’t have a great good credit score on the happy manual side, our lenders are willing to look at your cash flows, are willing to look at other ways that you can substantiate that you have a strong business. So that credit score won’t be a red flag. They, if you have a way to substantiate that your cashflow is strong, you have a strong customer base, they may be willing to overlook that credit score. So that’s the kind of the, the flexibility I was talking about. You know, the, the flexibility they would come in the form of how the loan is structured, flexibility that comes in the form of how they assess you. So it’s very important to understand the lenders, the players in your local market, and who among them are willing to provide you that kind of flexibility.
VANNOY:
So, so let’s make this real. I’m a, I’m a a business owner. I’ve got a nice little business on my hands. I’ve, I’ve, I did $450,000 in revenue last year. I put $75,000 in my own pocket out of that, and I’m growing 10% per year. But for whatever the reason, maybe it’s my fault, maybe it’s life circumstances, health issues, doesn’t matter. My, let’s say my credit score is terrible. What practical advice Yep. Would you give that business owner if they wanted to get a loan <affirmative>?
HAO:
So I’m going to use an actual example of customers on our platform. So someone like that came to a bank saying, or came to a credit union or, you know, loan funds asking, oh, I want, I i I got rejected by, by another bank. Well, do I have any options? My credit score is so low. So what happened in this case is that our lender actually give this individual a credit builder loan at the same time giving this individual a business loan. The business loan is approved based on the case that you just made earlier. It’s a very strong growing and cashflow strong business. So business loans, business loan is made. And then while at the same time our lender said that, I’m gonna help you build your credit, you, you know, by having a credit building loan with us, you can make payments, a small amount of payments. It could be like $1,500 a month. And then, but as long as you make that cash payment consistent every month for six or 12 months by the due date, that could boost your credit score by 30 to 60 points over six to 12 months. So our, that’s another example of our lender, how they are willing and ready to help these borrowers as long as, you know, they understand what you do and who you are and what your goals are.
VANNOY:
So is it safe to say that if you’re in a position that you can’t borrow, so you just, I think laid out maybe the ideal scenario for, for a small business owner that I they’re they get the business loan and the credit building loan. Probably safe to say that a lot of people aren’t gonna get the business loan, they’re gonna need the credit building loan first and gonna have to demonstrate some period of, of compliance.
HAO:
Mm-Hmm.
VANNOY:
<Affirmative>. And, and, and maybe it’s an unfair question they ask. Maybe, maybe, you know, or don’t how long un unless, unless the person’s credit is complete trash, let’s just say it’s not good. How long would it take to rebuild credit worthiness to a reasonable point? Using just a, a, a credit rebuilding borrowing strategy initially
HAO:
At least a six month. Okay. So if you don’t, if you have a bad credit score or you don’t have a credit score at all expect to take six months for you to get to a reasonable level. I’m talking about maybe from below 600 or no credit to, to the 600 level to kinda you know, clear some kind of boring threshold. Yeah. So six months is usually the minimum amount of time it takes.
VANNOY:
Yeah. So I mean, I would encourage folks that don’t have credit or don’t have great credit. You know, Kate, you talked about, you can’t rush into the lender and say, I need a thousand dollars tomorrow, cuz red flags all over the place. If you spend time educating them on your business in, you know, to some degree building a personal relationship, but mostly to, because they’re gonna have to still have loan underwriters that are mathematically based. And it could be your personality isn’t gonna weigh in so much as the, the, the math, right? And the numbers. But actually building up the business case so they understand the context. This just simply might require more lead time. And so maybe rather than just simply shopping for banks and cursing out banks for not lending your money at the time that you need it, the most, maybe the, maybe the best thing you can do is take out a baby loan in with the, for the sole purpose of just establishing and building credit, be building that business plan all the time that you’re doing it right. And, and that way when you, you do cross this threshold, you’re ready to take off.
HAO:
Yep. That’s, I think that’s very sound advice.
VANNOY:
Okay. what else would you want to cover? Get guidance for our audience? Or is this a good time for me to kind of recap at all?
HAO:
I think we unpacked a lot, but, you know, I’m gonna send you my contact information if there’s anything, you know that strikes recorded with the audience or they wanna find out more, happy to answer those questions.
VANNOY:
Okay. Is it safe to say so you know, the, again, the purpose of of the show is to provide small businesses with the best information we can so they can grow their business. It’s not meant to be a sales pitch for me or for you, but safe to say, not all banks are your customers and play nice, so to speak. If we had customers reach out to you, you could probably put them in contact with your cut bank and your lending customers that might give them a better shot. Is that safe?
HAO:
Absolutely. Ok. Happy to do make the introduction.
VANNOY:
Yeah. So, so, so we’ll do that. So I I I’m just gonna recap for everybody today. So there are, there are basically three types of major, major areas of funding. So you’re, you’re trying to grow your business, you want capital. Let’s just start with, the best way to get funding is to create it yourself through better terms with your suppliers and your customers. If you don’t have to pay your suppliers until after your customers pay you, you might not ever need a business loan. You might not ever need financing. So your business practices is the best financing you could ever give yourself. Then there is the, the, the big families of debt equity in customer oriented financing. Debt is loans. It’s a term loan, it’s a line of credit. It’s factoring based on your inventory or your receivables and then equity where you’re giving up a, a share of your business.
In ex you’re giving away equity to someone in exchange for money. These things are, I would say, rarer. They’re certainly more complex. You got legal involvement and probably at least, at least one party is gonna be probably a pretty sophisticated investor and gonna be, they’re gonna have to trust you and you sure as heck better trust them before you, you give your business away in an equity deal. Most, most of the financing happens in the debt world in the two big the, the, the two big hidden gems. I think as you, as you refer to it, CDFIs consumer development financial institutions where they are purpose driven maybe for a geography building out an inner city. Maybe it’s a demographic based minority owned businesses, women owned businesses, something like that. Maybe it’s for a certain industry, maybe it’s just for immigrants.
Establishing a foothold. Lots of purpose driven c CDFIs that can do a lot more than lend money that can help provide resources and expertise. And then the last is around credit scores. You’re, as a small business owner, don’t be so naive as to think that you’re not, that your bus, if you’re business doesn’t have a ton of assets and therefore collateral to offer a lender, you’re, you’re gonna be on the hook. You’re, you’re gonna be signing a personal guarantee for whatever money, which means your credit matters. And you should be thinking about if you haven’t already starting to establish credit building loans, not necessarily loans to go build the next building or do the big expansion but simply to establish a better credit and improve your credit rating so that when those opportunities present themselves, you can jump on ’em. That’s a lot, that’s a ton of information. I think the, I think, really, really useful action information for folks. Kate, anything you’d wanna say about your business or any message to our, to our customers in closing?
HAO:
Look, I think that the small business is is where my passion is, but where my passion lies, it is also where a lot of my clients, the banks and credit unions or, or loan funds that are using Happy Man, that’s also where their passion is. So there are lenders out there who really care about you, and it’s a matter about finding them and connecting with them. And, you know, as Happy Mango owner. And I’m happy to help my fellow small business and midsize business help find them the most affordable, the most accommodating lenders.
VANNOY:
Well, we’ll put link in show notes for the treasury depart department of Treasury that has links to these sites. We’ll also provide link to your site and anybody who’s watching, if you are looking for a lender that needs to be a little nicer for you we’ll make sure and connect you with Kate. So Kate, really enjoyed meeting you today. Thanks for the information.
HAO:
Thank you, Mike, it’s a pleasure.
VANNOY:
And to everyone else, thanks for today’s show for making time for us. Until next week, everybody have a great week
Speaker 1:
At Asure we build Human Capital Management software and services that help 90,000 companies like yours attract, develop, and retain great people. Our low upfront cost and affordable subscription model allow you to save cash to invest in things that drive growth not overhead. To learn more about how Ashore can help you claim up to $26,000 per employee with the employee retention tax credit, automate your payroll and build productive teams that are compliant with ever-changing HR laws. Visit Asuresoftware.com.