Showing posts with label Business. Show all posts

Saturday, December 5, 2015

There's No "Cash In A Flash" - Don't Be Desperate!

In the search for capital and financing, desperation and a lack of a realistic time frame, some sustenance funds and a healthy perspective are absolutely poisonous!

Perhaps the worst mistake that entrepreneurs, project leaders, innovators and executives make is when they approach financial sources or established management consultancies with desperate demands for "cash immediately," accompanied by such desperate pleadings as "we need this money yesterday!" or "we'll lose this opportunity if we don't receive funds within x period of time!"

Sources of capital as well as management consultancies (at least the responsible ones) are not in business to bail out companies and clients. They are in business to help solve business problems within an appropriate time frame, and to help clients achieve realistic and reasonable objectives. The more desperate that you appear, the less likely it is that you will attract either quality consulting or an infusion of capital.

Don't forget that providers of capital and consultancies are in business to make profits and to generate fee income. They do not generally want to salvage other people's wrecks, if the situation requires lightning speed, desperate need, cash-in-a-flash, and there is insufficient capital available to conduct a due diligence review and to properly process a request for a capitalist intervention.

If a capital source or a consultancy is overly responsive to your desperate entreaties for money in a hurry, they are likely not seriously interested; setting you up for a "fee gouge"; or just simply incompetent. Any firm which does not require some serious due diligence before it will entertain your request is engaging in a questionable practice.

If you are searching for capital, be prepared to endure for a reasonable due diligence period, be prepared to pay some fees for professional engagement and/or due diligence, and never speak of desperation or pressure. Imposing your desperation or pressure on a capital source or a consultancy will generally cause them to turn you away.

Ironically, and lamentably, getting capitalized (especially when being represented by a qualified management consultancy as your advocate and negotiator) requires that you have some of your own capital to sustain your business and to pay fees, and that you have adequate time to allow for the capitalization process.

Thank you, as always, for reading me.

Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog

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Wednesday, November 11, 2015

Sorry Has Become a Four-Letter Word

“SORRY” Has Become A Four-Letter Word

Douglas Castle for Global Edge International Consulting Associates, Inc.

An profound and prolific apology after a colossal foul-up or political disaster has become an actual perfunctory insult to the offended or wronged parties. It sounds insincere, feels weak and needy, invites other questions (and other concessions) and makes you look foolish. In brief, it can kill or negotiations and actually sabotage your customer relationships. No one says this better than author and success coach, Oren Klaff of “Pitch Anything”. The idea is to just work right past the error or gaffe and move forward, selling more strongly than ever. The text that follows comes from a recent email sent to me by Oren [I've left all of the grammatical and syntax errors intact, for which I make no apologies]:

“Funny things pop out of my mouth from time to time. No preparation. No planning. It just happens.

For example, a few weeks ago during a presentation to a group of financial analysts I said, “Guys, I can’t sugar coat this for you ... I’m not #@%! WILLY WONKA.”
Although, I thought that was HILARIOUS at the time ... no one laughed. There was just some uncomfortable coughing and a few chairs shuffled.
My first reaction was to apologize, so my mind starting forming the words, “ ... uhh, sorry about that ..."
But my training kicked in, and I told myself: Keep moving forward, don’t explain yourself, do not act ‘needy’ or seek validation.
Ok, sure, I know that apologizing is necessary when we’ve clearly hurt someone else, violated a rule, or done something we know to be wrong. And saying sorry is a necessary step in some situations to repair the social fabric that keeps us connected to other people.
But in business, a gushing apology can be exactly the wrong move.
For example, WE ALL want to keep our clients happy, so it can be tempting to say “sorry” for things that get off track —
- but It’s important to recognize that apologizing unnecessarily can actually undercut your professionalism by displaying neediness and diminishing others’ confidence in you.
It reminds me of the other day when a CEO called and asked if he could see me. He had a serious problem, so we booked a meeting.
That’s how every week starts for me. Like an episode of SUITS, at 9am Monday, some kind of trouble walks through the door and I have 24 hours to save the client’s company or The Senior Partners Will Be Very Mad.
This client shuffled his way into my waiting room, downcast and dejected.
His shoulders slumped. He was in big trouble. When a guy looks like that, it’s either a woman problem or a money problem and given my track record, people usually don’t want my advice on women.
He told me what had happened at his company. His servers had crashed during a live event. Customers lost money.
“I have to go on the road and give my largest customers a personal apology,” he said, “or I’m going to lose a lot of business.”
“Tell me what you plan to say,” I said. ”Let me hear your pitch.”
And then came the El Niño of Bad Ideas:
He was going to apologize for a flaw that made the servers crash;
He was going to give discounts; and refunds.
And he planned to use the history of his relationship with the client, like Sal Tessio in The Godfather.
Sal Tessio: Can you get me off the hook, Tom? For old times' sake?
Tom Hagen: [shakes his head] Can't do it, Sally.
[Tom watches sadly as Sal is led to a waiting car]
Obviously, Sal was killed in that scene; as my client would get killed if he pleaded for forgiveness.
So, when he was done pouring his heart out, I poured him a cup of something strong and let him sip it slowly, preparing him for what I would say next:
There will be No Discounts. No Refunds. No Sob Story. “In fact,” I said, “you’re going to visit the customers, give them ONE quick and sincere ‘sorry’ and then upsell them to a higher level of service.”
His eyes opened wide.
I told him, when you highlight and dwell your own mistakes you trigger the Recency Effect — the tendency to blow things that have just happened out of proportion.
In the business world, apologies, explanations, not to mention sappy pleas for mercy do nothing but stir up emotions and anger. My client needed to focus on the future.
First, I told this this CEO to read my book, PITCH ANYTHING. On page 157 I show that offering discounts and acting needy will actually harm a business relationship more than it helps.
Look, even your toughest clients will agree, the past is a done deal. It’s gone. Dust. They will accept that now is the time to turn over the Etch-a-Sketch and give it shake, wipe the slate clean.
Why You Should Only Give a Single Brief Word of Sorry After a High-Profile Mistake
No matter how sincere, your mea culpas can come off sounding empty. Only by taking the right action can you repair your broken reputation.
Consider for a moment, what do Charlie Sheen, Anthony Weiner and Tiger Woods all have in common?
They all apologized right after a major personal crisis.
I believe, in the US, this type of apology has become so cliché, it's lost all its credibility, because In short, we don't buy post-crises apologies anymore.
Here’s my four-point plan for cleaning up after a any mistake:
1. Write a one-paragraph Big Idea nods to the mistake, but talks about the future. Then memorize it. Here’s an example:
Today’s servers are the most complex devices man has ever invented. They move terabytes of data in microseconds, and we humans have come to rely on them. Or perhaps the word is OVERRELY, for they are machines and they can fail. In fact, these failures are a right-of-passage for any fast growing company, letting them know, it’s time to upgrade, improve and invest in more infrastructure than ever before ...
2. No one expects you to be perfect. Accurately describe what new systems or procedures you're installing as soon as possible and sell the client that new level of service.
3. Pitch the client like you would a new account. Don’t count on their goodwill, just their desire to buy great service at a fair price from a good company. Give a CLEAR description your new improved level of service. If you need best pitch your industry has ever seen, jump over to Pitch Mastery, I’ll make sure you get it done.
4. Get professional help. If you find yourself in a “situation” where you’ve really messed up and first three steps above aren't enough to tamp-down the crisis, enlist the support of a credible third-party professional who knows how to build a script to handle this kind of situation. The president has a script writer, so do Fortune 500 CEO’s and franchise athletes ... you’re no less important and you should have one too.
Whatever you do, best not expect a gushing apology to work. We live in a jaded, cynical society that has had its fill of sketchy executives, politicians, celebrities and athletes. So truly, a modern crisis means never having to say you're sorry. It means MORE than that: fixing your act, communicating the fixes as they're done and then quickly reestablishing your reputation.
Don’t wait to learn how to handle yourself until you’re in a tight situation. If you haven’t already, buy PITCH ANYTHING now. And do sign up for a free trial of Pitch Mastery.
Forward this email to anyone you think might benefit from it, so they can get on our mailing list.
I have to run, another client just walked in the door, he’s wearing thick glasses and has a large computer. I’m not sure what the problem is here, but I'll bet it's hard to pronounce.
See you next week when I cover the right way to start of any presentation (things I learned the hard way).
-Oren
oren@pitchanything.com"

=> The Takeaway: Don't apologize unless you've truly hurt someone personally, lest you appear weak and incompetent. Take a lesson from the universally disliked (but desperately envied and admired) Donald Trump. Don't get caught in the quicksand of an apology. Don't make it into an issue. Don't spend time falling into the trap of back peddling.

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Charlie Sheen, Tiger Woods, Heidi Fleiss, Gucci, apologies, success, business, negotiating, GEIconsulting, Douglas E. Castle,

Thank you, as always, for reading me,

Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog

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Wednesday, October 21, 2015

WHY WOULD CONGRESS KILL AMERICAN JOBS AT ELECTION TIME?

WHY WOULD CONGRESS KILL AMERICAN JOBS AT ELECTION TIME?

A vote is scheduled to take place on the house floor in late October of this year. The proposed legislation, if passed, would forge a pathway for the reopening of the doors of the U.S. EXPORT-IMPORT BANK.

What is the U.S. EXPORT-IMPORT BANK you ask? The U.S. EXPORT-IMPORT BANK is a U.S. government agency that assists American Businesses in providing financial and other technical assistance to compete in global trade with an emphasis on exports of American goods to foreign countries. During the height of the depression, FDR pushed through the creation of an agency as part of his NEW DEAL strategy that was designed to assist small and medium sized American companies in their efforts to export goods, manufactured by American workers, to overseas customers. The U.S. EXPORT-IMPORT BANK was born. Over the next few years, and after some tinkering, the bank was retooled in 1945 and, up until July of 2015, was the one place American companies could access assistance in financing the manufacturing and sale of American exports when traditional sources of loans for production and credits for purchase of such goods were not available in the traditional banking arenas. Presidents throughout the years, from John F. Kennedy to Ronald Reagan, wholeheartedly supported this tool that was successful in making the international markets a "more even playing field" for American business. Just as important, the U.S. EXPORT-IMPORT BANK not only increased the bottom line of mid-American businesses, but permitted these work horses to maintain and hire American workers. If that were not enough, at the end of each year this modest agency, staffed by several hundred workers, actually returned a profit to Uncle Sam, last year writing the U.S. Treasury a check for approximately $1 billion dollars. So the question begs, what happened?

When a cabal of individuals with a net worth north of $100 billion dollars and a stable of corporations dominating the energy and manufacturing landscape of the U.S. decides to pursue its radical extremist political agenda, which involves the nixing of governmental involvement in American business, you have the emergence of a narcissistic brand of treason in the form of the Koch brothers. Whether playing the role of king maker for jihadist candidates of the marginal tea party or just settling old scores with mainstream GOP party leaders and detractors, Koch Industries and its "beard" known as "Americans for Prosperity", (the irony never escapes me), decided early in July of this year to flex their substantial political muscle and terminate, with extreme prejudice, the only champion of the spirit and essence of government/private sector cooperation, the U.S. EXPORT-IMPORT BANK. So why did they do it?

Well, the easy answer would be, "because they can." This would also be the correct answer. Although Koch industries and their wholly owned ventures were once benefactors of $16 million dollars of loans from the U.S. EXPORT-IMPORT BANK that they closed for business, these hypocrites have the audacity and money to demonstrate to the public that their influence does not end at controlling the direction of social issues in conservative America. They had to go one step further. By forcing their puppet legislators to fail to renew its charter, the Koch machine made good on their claim that their newly found political power extends to American industry and, does not, indeed, end at issues relating only to gay marriage and legislation designed to obstruct voter registration. It is a vulgar display of power at best, and at worst an exercise in its willingness to destroy smaller American businesses, which make up 90% of the customers at the U.S. EXPORT-IMPORT BANK, just to make a political point. The problem however, the great miscalculation made, was the Koch brothers’ inability to understand that in the process of this most Un-American activity, they neglected to factor in the destruction of American jobs and their failure to recognize that American workers vote, and they vote in big numbers, the unemployed in particular, those same trampled upon workers who live in districts represented by the Koch brothers’ puppet congressional representatives.

Knowing how to count votes is an essential skill in the American real politic. For example, the great state of Texas, with the direct involvement of the U.S. EXPORT-IMPORT BANK, (prior to the Koch brothers closing its doors), racked up $23 billion dollars in export sales of American goods made by American workers. The equally great state of California, with the direct assistance of the late U.S. EXPORT-IMPORT BANK, sold in the overseas export market a total of $13 billion dollars of American made goods, much of it generated in the agro-business and aerospace business, and much of those goods shipped out from the port of Long Beach, California. With the presidential election of 2016 now in full swing, both parties must stretch their collective memories to recall a time when a Republican nominated for President of the United States, was victorious without carrying the state of Texas. Of equal consideration, Democratic nominees for President must carry the great state of, yes, California to win the coveted seat in the White House. American workers displaced by the demise of the U.S. EXPORT-IMPORT BANK, those that produced a total of $36 billion dollars of American exports in Texas and California, will be lining up at the voting booth, not only in the 2015 congressional races, but more importantly in November of 2016 for the American Presidential election. This reality, whether or not factored in by the Koch machine, is now playing out as a new Speaker of the U.S. House of Representatives is sought to replace Speaker Boehner this fall.

Bakersfield, California Congressman Kevin McCarthy was given marching orders last July, by the Koch political colossus, to bolt the doors of the U.S. EXPORT-IMPORT BANK, and through the smoke filled back rooms of the U.S. Congress, he did just that. Unfortunately for Rep. McCarthy, the Republican from Bakersfield, California, fellow Republican Stephen Fincher from Tennessee and Republican Congressman Steve Stivers from Ohio have led the charge for a showdown in which, a bill, through a special procedure known as a "discharge protocol”, is scheduled to hit the House floor on October 26^th, 2015. If it passes, as it is predicted to do in the Senate before winding up on President Obama's desk for his signature into law, it will result in the revival of the United States U.S. EXPORT-IMPORT BANK. The Obama administration, as the Kennedy and Reagan administrations before it, supports the EXPORT-IMPORT BANK. If the bill is signed, among the losers will be the governments of China and Russia who have their own worldwide Import/Export banks and who were delighted and encouraged last July when the U.S. export bank was closed. The winners’ bracket is said to include mainstream American business and American workers, including those who were scheduled to lose their jobs at Boeing and G.E. if the U.S. EXPORT-IMPORT BANK is not reopened. Finally, one last note about that list: remember the whip that followed his marching orders from the Koch brothers, Kevin McCarthy? It turns out that many voters in his district directly depended upon the American Institution of the U.S. EXPORT-IMPORT BANK as they earned millions in profits, stayed in business and accessed overseas markets with exported agricultural products. Oh, and by the way, those products were shipped out of the U.S. in McCarthy's neighboring congressional district by American workers punching a time clock at a place called "The Port of Long Beach, California."

--by DOUGLAS CASTLE

Chairman of Global Edge International Consulting Associates, Inc.

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Saturday, August 22, 2015

Increase Profitability With Zero-Based Budgeting

INCREASE PROFITABILITY WITH ZERO-BASED BUDGETING

By Douglas E. Castle For GEI Consulting

Originally Published In the GEI Blog

In business, our basic financial objectives are to 1) increase the number of units sold; 2)increase profit margin per unit sold; and to 3) decrease fixed and semi-fixed expenses – all of this so that our company may consistently maximize profits [assuming, of course, that we do not sacrifice quality and service standards] as operations continue. While we have neither the space nor time to delve into the revenue and unit pricing objectives, we can tackle the expense reduction issue head on by utilizing zero-based budgeting.

Typically, budgets are mapped out or structured based upon existing expenses, which are looked at line by line, and where each expense line is multiplied, too often unquestioningly, by some increase factor (i.e., some percent per month or some percent increase per year). When the budget variance reports (actual versus budgeted expenses) are examined monthly or quarterly, the previously mentioned approach artifically inflates the quality of performance; if this budgeting approach is continued unchecked, actual expenses will be consistantly lower than their budgeted amounts (as if operations were running quite efficiently) even as the company is losing money by the boatload by overspending. This simplistic time-saving type of budgeting, while exceedingly common, leads to over-inflated budgeted expenses, poor variance feedback, and consequently, to poor expense controls and policies. Some real-life examples:

==+ In very large companies, I have actually seen cases where discontinued departments and functions were actually given budgetary expense allocations because nobody cared to check on whether or not those departments or functions were still in existence. And this error was compounded with each fiscal year. Governmental departments and divisions of Not-for-profit entities are notorious for doing this, as are some For-profit entities – especially the larger, more structurally complex ones.

==+ In other large companies, I have witnessed a managerial mentality where “If we don't spend every bit of what we were budgeted for this year, we'll lose our allocation for next year. We'd better use it before we lose it!” This type of thinking guarantees expense inflation and incredible waste. And once again, governmental departments and divisions of Not-for-profit entities are notorious for doing this, as are regular For-profit entities – especially the larger, more structurally complex ones.

Needless to say (but I'll say it anyway) the two above procedural and mindset errors create tremendous financial problems as well as a crass distortion in the evaluation of actual performance. The possible “cure” for this erroneous protocol and reasoning is to employ a zero-based budgeting session at least once per year. The process is actually simple, and I've distilled it into several straightforward steps which you can follow to do a zero-based budgeting at some regular intervals throughout the year:

Step 1: Create a Budget Review Group comprised of major stakeholders and other participants who will not be threatened by the results of the process and who have a substanital interest in the profitability of the enterprise;

Step 2: Access a line-by-line expense budget (like the type you would use to perform a variance analysis) as a worksheet;

Step 3: Examine each line of the expense budget in terms of its utility. What purpose does it serve? Is it necessary? Should it be discontinued or continued? Is its relevance increasing or declining? Does it directly serve the purpose of generating profits or of supporting profitable operations for the business?;

Step 4: Eliminate budgeted expense items as appropriate. Reduce other expense items to their appropriate level. Remember that the key question to ask in a zero-based budgeting scenario is “Does this expense support revenue growth or production of goods or services to support those revenues?” Reconstruct the budget based upon these crucial revisited assumptions;

Step 5: Take the reconstructed budget and make the necessary eliminations, cuts and reductions to the actual business, as if you were looking at the business as an outside “efficiency expert” or cost accountant. This is a politically perilous step, as it will likely undermine some free benefits to certain individuals, destroy some hidden agendas by starvation, and stop the methodical step-by-step process of internal fiefdom-building amongst certain power-mongers within your managerial infrastructure.

Despite the temporary discomfort caused by the reshuffling which invariably follows a zero-based budgeting “correction,” the results are almost always worth the investment of time and effort. In sum, zero-based budgeting can give your organization a refreshed and clear prospective that will enable you to more readily serve the purpose of profitability for all stakeholders.

Reduce your corporate waste footprint with zero-based budgeting. Be environmentally-friendly.

Tags, Labels, Keywords, Categories And Search Terms For This Article:

zero-based, budgeting, business, financial, analysis, increase, profits, success, cost containment, variance analysis, GEI Consulting, Douglas E. Castle, financial analysis, accounting

Thank you, as always, for reading me.

Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog

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Friday, August 14, 2015

Insiders Are Selling Their Shares? What Should I do?

Insiders Are Selling Their Shares!

What Does This Mean?

And What Should I Do Now?

By: Douglas Castle For Global Edge International And The Global Edge International Blog

When insiders, particularly officers, directors and owners of large blocks of stock (5% or more of the total shares issued and outstanding) are suddenly starting to sell off their shares of stock in a publicly-traded company, especially one in which you have an investment, before you take action, extend your very best efforts to try and determine what the underlying reason for the selloff is. Depending upon that reason (or reasons), you may wish to either: follow suit and liquidate some or all of your holdings; just sit tight and maintain your position; or actually purchase more shares. While this article does not provide financial, tax, investment or legal advice, it may help you in making a more-informed decision in terms of your own investment tactics or strategy with respect to your investment in that specific company. Since we at GEI Consulting are extremely imaginative, we'll refer to the subject company as “Company X”.

There are a host of reasons why significant shareholders may be selling off their shares in Company X, and an outline of some of the most prevalent possibilities are discussed below:

==+ They have come to the end of a statutory, regulatory or contractual stock holding period, and they are selling off some of their holdings to establish some liquidity – this is, of itself, harmless and is generally acceptable, especially in the second or third year following an IPO, or after a year or two of having commenced a C-Suite position in a more-established company.

==+ They are either retiring or contemplating retirement (they are at an advanced age) to pursue personal interests, and wish to 'cash out' to enjoy the benefits of a financially-substantial departure from a successful career.

==+ They are selling off shares and either reinvesting in Company X or lending the post-sale proceeds to Company X, presumably because Company X is illiquid or is accumulating losses. This type of activity can either be interpreted as admirable and positive heroics, or as a prelude to a death knell in the event that the tight cash situation is not just temporary or seasonal.

==+ If they are selling off shares (which they might have gotten very inexpensively early in Company X's evolution, or through the exercising of options or warrants) and using the proceeds to buy additional shares, it generally means that they believe that the stock is undervalued and is due for an increase through a market revaluation.

==+ If they are selling off substantial numbers of shares and not reinvesting proceeds in Company X, it generally means (barring an individual holder's personal financial hardship) that they believe that the stock is overpriced and is headed for a valuation adjustment in the downward direction.

Depending upon the circumstances (some of which are set forth above) and the underlying reasons, take action appropriately.

In order to get information on these substantial trades by influential shareholders, some good sources are these:

http://insidertrading.org/

http://www.insider-monitor.com/

http://insiders.morningstar.com/trading/insider-summary.action

http://insidertrades.org/

http://www.insider-monitor.com/insider_stock_trading_report.html

http://online.barrons.com/public/page/9_0210-instrans.html

http://www.secform4.com/

Generally speaking, the pundits (they generally like to call themselves that) tell us that when it comes to aggregate insider buying and selling, the following general rule applies [although in taking a close look at the individual circumstances involved as described above in this article, the general rules are possibly a gross oversimplification]:

When the buyers outweigh the sellers (in terms of number of parties and aggregate volumes), insiders are generally bullish (optimistic) about the short-term prospects of Company X;

When the sellers outweigh the buyers (in terms of number of parties and aggregate volumes), insiders are generally bearish (pessimistic) about the short term prospects of Company X.

Also, in the interest of keeping our nomenclature crystal clear:

"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

Thank you, as always, for reading me.

Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog

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Monday, August 10, 2015

Peer To Peer Lending For Startups

PEER TO PEER LENDING FOR STARTUPS

If your startup or fledgling enterprise requires additional working capital, a peer to peer (sometimes abbreviated as P2P) business loan might provide a partial solution to your capital needs. These loans, which are generally in the $10,000.00 to $35,000.00 range (although there are exceptions in certain cases and larger sums may be available) are generally available for terms of between six months and five years, and they vary widely with respect to costs, terms and loan covenants. These sources are not constrained or subject to general banking regulations

While these loans are universally priced higher than bank loans, today's bank loan approval criteria make it extraordinarily difficult for a business with a limited operating history (or any small business for that matter) to obtain a loan. The loans available from banks and other traditional lenders look to such security as second mortgages on the homes of principals and also take into effect FICO credit rating scores – and, as we know, very few entrepreneurs have sterling personal credit reports.

Peer to peer loans may be a means of paying for some of the initial startup costs associated with commencing your operations, or as a bridge to the successful conclusion of a crowdfunding.

Author and expert Trevor Dryer has written an excellent article on the state of peer to peer lending as of the date of this writing. It is a must read for all entrepreneurs.

###

Understanding the Risks and Rewards of Peer-to-Peer Lending

By Trevor Dryer
If you run a small business, you probably know all too well the challenges of trying to get a loan. It can take days to research options and fill out inches-thick paper applications, only to wait weeks, and even months, to find out you were turned down. All the while cash flow is tight, and you’re struggling to hire new employees, manage inventory, buy new equipment, or open a new location.
As you may have experienced, getting a business loan has gotten more problematic during the last several years. The economic downturn in 2008 created significant obstacles for banks and other traditional “Main Street” financial institutions that traditionally lend to small businesses.

State of Small Business Lending

For example, many banks are increasing their capital reserves to comply with new standards initiated by bank examiners and other regulators, which can undermine a banks’ ability to underwrite small business loans. In addition, compared to large businesses, small businesses are riskier lending propositions because they are more sensitive to swings in the economy, have higher failure rates, and fewer assets to use as collateral.
Small business loans also are not as profitable for banks, because they cost the same amount to originate as larger loans. For this reason, banks tend to put less emphasis on lending in the sub-$500,000 range. This creates a large lending gap for small businesses, which tend to seek out significantly smaller loans; 70 percent of small businesses seek loans of less than $250,000, with more than half of those needing loans of $50,000 or less, according to the Federal Reserve’s “Small Business Credit Survey.”
Realizing an opportunity to reach an underserved market and building on the trend of crowdfunding, new types of small business lenders have emerged. Funded by Wall Street investors, these online and peer-to-peer lenders–such as OnDeck and Lending Club–are leveraging technology and user-friendly Web-based application processes to quickly respond to loan requests from small businesses. By reducing the origination costs, these processes make it more profitable to lend smaller amounts.

Rewards of Peer-to-Peer Lending

Online lenders are exploding in popularity, thanks to their customer-friendly practices and ability to give small businesses fast access to much-needed capital. Industry experts estimate that since 2007 online lenders have originated an estimated $10 billion worth of small business loans, with the majority of the lending taking place in the last few years.
Despite the buzz around online lenders, they still only account for less than 1 percent of total small business loan volume. In comparison, new small business loans originated by banks alone account for roughly $200 billion annually, according to the FDIC.
While traditional lenders still originate the lion’s share of small business loans, there are certainly times when working with online lenders may make sense for your business. For example, if your business needs cash right away or requires flexible payment terms, such as paying a percentage of your credit card receivables instead of a fixed monthly payment.
If you’ve just started a business, getting a loan from an online lender also may be an option to help you start establishing a credit history. Or, if your business has a less-than-stellar credit or financial situation, it could help you repair your rating to help you qualify for a loan from a traditional lender in the future.

Risks of Peer-to-Peer Lending

As with any decision related to your business, when seeking loans from online lenders, it is important to weigh the risks versus the rewards. Behind the slick user interface, excellent marketing tactics, and fast approval turnaround, there are some potential pitfalls that could negatively impact the bottom line for many small businesses.
It’s important to consider several factors when choosing an online or peer-to-peer lender to ensure you don’t get caught off-guard by unpleasant surprises, such as:
● Restrictive or shorter repayment periods. Some online lenders require payment in just six months, which is considerably shorter than the three year intermediate-term loans that banks offer. This would result in monthly payments higher than if you had a longer repayment period.
● Exorbitant interest rates. Many small businesses are used to comparing the cost of loans by using the annual percentage rate (APR), which is the periodic interest rate multiplied by the number of compounding periods in a year, and includes certain non-interest charges and fees. But doing the same when deciding whether to use online lenders becomes problematic because repayment periods are often less than a year, there may be terms that require larger payments in the first few months of the loan, or there are hidden fees not incorporated into the advertised interest rate.
Some online lenders may not even technically be offering loans per se. If you look closely at their contracts, their offers may be structured like a cash advance, which is similar to the tactics used by payday lenders to avoid having to comply with lending regulations. By accepting a “cash advance” instead of a loan, your rights could be greatly limited when compared to a traditional bank loan that offers protections through federal and state lending laws. Because of these variations, you often end up paying significantly more for a loan from an online lender.
A comparison of online lenders by Fit Small Business estimates that average APRs range from 40 percent to 80 percent. Once the various fees are factored in, borrowing from other online lenders could potentially result in estimated APRs as high as 300 percent. Banks and credit unions, on the other hand, typically offer an APR of 6 percent to 8 percent.
● Surprise fees. While banks often include their in the calculation of APR, online lenders can have a number of fees of which you may not initially be aware. You will want to check the fine print closely to understand the types of fees for which you’ll be responsible, including those for origination, daily loan guaranty, and prepayment.
● Lack of a personal relationship. Banks typically forge long-term, personal relationships with their account holders and understand the nuances of the small businesses and the local markets they serve. If you primarily use one bank for all of your accounts, this relationship can translate into lower fees and ancillary perks, such as higher rates on savings accounts or waived annual fees on accounts or credit cards.
These long-term, personal relationships can become more valuable as your business grows, because your bank can provide new financial products or structure financing differently to correspond with your company’s stage of growth. Many banks indicate they would prefer to loan to their existing clients, but cannot if these small business customers don’t meet their lending criteria.
Online lenders do not have the ability to develop these types of personal, face-to-face relationships with small businesses.
● Who is funding your loan? The source of funding for loans also can play a role. Banks rely on FDIC-insured deposits, which helps keep the cost of capital low. Online lenders have high-cost capital from institutional investors and other sources that are looking for high yields, and this capital is at considerable risk if Wall Street loses interest in funding this type of business model or decides to move their capital elsewhere.

New Standard for Borrowers

Online lenders have truly set a new standard for borrowers. They’re improving the user experience with simplified online loan applications and, in some cases, almost instantaneous lending decisions. They’re also expanding into a diverse range of loan options for general consumers, students, and small businesses.
Banks and credit unions are quickly learning from the competitive pressure and success of online lenders. Some of the most forward-thinking lenders are now adopting technologies that will mirror the online lending experience and offer the low interest rates that only banks and credit unions can provide.
These technologies enable loan officers to make faster decisions while reducing origination costs for even small dollar loans, which in turn will increase the number of small business loans banks and credit unions can make and meet the needs of businesses that are seeking smaller loans.

About the Author

Post by: Trevor Dryer
Trevor Dryer is the CEO and co-founder of Mirador Financial Inc., a small business lending platform for banks and credit unions. He has dedicated his career to creating financial technologies that create opportunities for both financial institutions and their small business customers. Prior to Mirador, Trevor launched new financial and payment products at Intuit for the company’s small business and banking divisions. Trevor earned a Bachelor of Arts degree from Harvard University and a Juris Doctor from Stanford Law School.

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Some peer to peer lending match up platforms (for information purposes only, as neither the author nor GEI Consulting endorse or vouch for the quality, integrity or pricing of any of these services) are listed below for your investigation. You must investigate each of these platforms thoroughly before proceeding with the loan application process, and be certain you understand fully all of the terms offered to you. These loans can be very expensive in many cases, but they may well be cheaper than either the cost of undercapitalization or the cost of inviting a stranger in as an equity participant:

Lending Club

Prosper Marketplace

Funding Circle

Upstart

Kiva

Zopa

OnDeck

Labels, Tags, Keywords, Categories And Search Terms For This Article:

business, startup, peer to peer lending, P2P, crowdfunding, loans, capital sources, private loans, loans via internet, GEI Consulting, Douglas E. Castle, entrepreneur, alternative financing.

Good luck in your search for capital, and thank you, as always, for reading me.

Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog

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