Low-Rate Lending Options for Small Businesses

Microloans and the Community Advantage Program are two ways you can potentially save on interest payments.

You got through the holidays and made it back to your business.  Congratulations!  Now it’s time to give your business a gift by lowering your interest rates. The coldest months are a good time to hunker down and analyze how to squeeze more profitability out of your income statement. Reducing interest expense is probably the least painful way to do so.

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    According to a study by the U.S. Small Business Administration Office of Advocacy, only 12% of businesses use a business loan for capital when they are starting out. Business and personal credit cards account for almost twice as much of entrepreneurs’ starting capital.  That’s a little surprising because most savvy business owners are aware that carrying balances on credit cards results in interest rates well over 16% these days, according to bankrate.com. Some “fintech” solutions may have effective interest rates that are even higher. The fintech industry includes names like OnDeck and Kabbage.

    Credit cards and fintech loans are easy and fast, and entrepreneurs love that combination. For many entrepreneurs, ease and speed are worth the extra expense, until they start adding up the cost. 

    Pre-Check

    Here are some options that might work for you.

    Microloans

    The SBA offers microloans to borrowers who, for whatever reason, cannot qualify for regular bank financing. When an entrepreneur gets started by running up credit card balances, it may adversely affect the personal credit score of the owner, a double hit because it locks out the entrepreneur from many typical routes of refinancing.  Enter the microloan.

    “Taking out too many credit cards will reduce personal credit scores and make it even more difficult for a traditional lender to offer a loan,” says Patty Ajdukiewicz, relationship manager for the Economic and Community Development Institute.

    The Economic and Community Development Institute (ECDI) provides SBA microloans to qualified individuals who can meet certain basic eligibility requirements and show repayment ability. Microloan rates range from 9% to 12%. That is more expensive than a traditional bank loan, but a fraction of the costs of credit cards and fintech.

    Ajdukiewicz notes entrepreneurs should anticipate having to pledge all available collateral when they refinance a credit card loan. While a credit card may leave fixed assets unencumbered, the lender is compensated for that lack of collateral with a high rate. An ECDI Microloan could cut the interest rate in half, but you should anticipate a lien against your business assets, and perhaps personal assets as well.

    Community advantage

    For slightly larger transactions, Growth Capital Corporation’s Community Advantage program is also available.

    “I’ve got one now that we’re approving today. They’re 13 years old and have revenues of $1.3 million.  They have over $100,000 in credit card debt. Thirteen years and they have never gotten good advice,” says Kate Kerr, program director.  She adds that most of the clients she works with have one or two credit cards, perhaps to take advantage of refund points or free travel. But some companies might end up with dozens of cards, and the debt load quickly becomes unmanageable. 

    A key difference between responsible term loans and credit card debt is the ease with which the transaction is completed. Credit cards are the easy path, but you pay for the convenience. Expect a much higher degree of due diligence from a lender like Kerr. The rate is much lower, but you must have your financial statements in order. 

    For example, businesses need to have their tax returns filed so that the loan can be underwritten, Kerr says. Your accountant may have the ability to get you an extension on your taxes, but if you’re in the process of applying for a loan, that is actually not at all helpful.  SBA-backed loans such as Community Advantage or microloan typically need financial statements current within 120 days of application.

    You can also refinance high-rate loans through most traditional banks. SBA’s loan guarantee programs are available to assist any participating lender, if there is not sufficient capital or time in business to justify a conventional loan. 

    If you must use fast credit, use the business name

    When the outstanding debt is in the name of the business, it is easier for a bank to refinance the higher rate debt. SBA only asks that the bank obtain the applicant’s certification that the debt incurred was exclusively for business purposes.  If the balance includes personal expenses as well, these amounts must be excluded.

    When the outstanding debt is in the name of the individual owner, it is much more difficult. Lenders must document the specific business purpose of the credit card debt and the applicant must certify that the loan proceeds are being used only to refinance business expenses. Documentation required will include a copy of the credit card statements and individual receipts of any expenses in excess of $250.

    If you must start your business on a credit card, at least try to get a card that is in the business name.  That will make a future refinance request much easier for the lender to process.

    Ray Graves works in lender relations in the SBA’s Cleveland office.

    Grasshopper
    Next up: PODCAST: SBA's Raymond Graves and Compass Consulting Service's Tameka Taylor
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  • PODCAST: SBA's Raymond Graves and Compass Consulting Service's Tameka Taylor

    To help mark the Small Business Administration’s National Small Business Week, we recently invited the SBA’s Raymond Graves and our own COSE Expert Network member Tameka Taylor, president of Compass Consulting Services, in to discuss the state of small businesses today, the issues they’re facing, and the best way to overcome those challenges.

    To help mark the Small Business Administration’s National Small Business Week, we recently invited the SBA’s Raymond Graves and our own COSE Expert Network member Tameka Taylor, president of Compass Consulting Services, in to discuss the state of small businesses today, the issues they’re facing, and the best way to overcome those challenges.

    Topics covered during the podcast include:
    •    employee retention;
    •    workplace communication;
    •    the economic climate for small business; and
    •    social media best practices.

    Listen to the podcast here.

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    Next up: PODCAST: What Every Small Business Owner Should Know Before Visiting Their Lender
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  • PODCAST: What Every Small Business Owner Should Know Before Visiting Their Lender

    COSE recently sat down with the Small Business Administration’s Ray Graves and Compass Consulting’s Tameka Taylor to talk financing. More specifically, we wanted to know what sort of things entrepreneurs should keep in mind when it’s time to approach their lender for financing. Want to hear their insight? Download the podcast.

    COSE recently sat down with the Small Business Administration’s Ray Graves and Compass Consulting’s Tameka Taylor to talk financing. More specifically, we wanted to know what sort of things entrepreneurs should keep in mind when it’s time to approach their lender for financing. Want to hear their insight? Download the podcast.

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    Next up: SBU Analysis: Drilling Into the Numbers
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  • SBU Analysis: Drilling Into the Numbers

    In my last blog on this subject (which I suggest you read before reading this blog), I described how the typical income statement masks the real causes of performance (both good and bad) for all but the simplest of companies.

    In my last blog on this subject (which I suggest you read before reading this blog), I described how the typical income statement masks the real causes of performance (both good and bad) for all but the simplest of companies.

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    So, let's take a look at another company which has more than one group of customers and products/services. The example here is for a hypothetical swimming pool/spa firm (disclosure: I served on the board of such a company for several years, but the example does not portray the performance of that firm). 

    Pre-Check

    The traditional income statement for this firm looks like this:

     

    $

    %

    Sales

    2,000,000

    100.0

    Cost of sales

    1,400,000

    70.0

    Gross margin

    600,000

    30.0

    As portrayed in the first blog, the cost of sales includes direct labor, materials and managerial expenses. The first takeaway is that this firm, in the year shown, has $600,000 to cover all other expenses (i.e., rent, insurance, utilities, etc.) and pre-tax profit. 

    Unfortunately, this traditional income statement does not give a true picture of where the company is making money—or losing it—because it lacks the detailed examination of the profitability of customer groups and product/service groups.

    This firm has three Strategic Business Units (SBU): Pool Design, Chemicals, and Repairs/Maintenance. The analysis of those three SBUs shows the following:

     

    Design ($)

    Design (%)

    Chemicals ($)

    Chemicals (%)

    Repair/Maintenance ($)

    Repair/Maintenance (%)

    Sales

    200,000

    100.0

    1,000,000

    100.0

    800,000

    100.0

    Cost of sales

    140,000

    70.0

    680,000

    68.0

    580,000

    72.5

    Gross margin

    60,000

    30.0

    320,000

    32.0

    220,000

    27.5

    Obviously, these three SBUs are not equal in size or performance. And that is typical when you employ an SBU analysis of performance. Without knowing anything about any given company's SBUs, I already know two things:

          1. Not all SBUs are created equal in size and/or performance.

          2. Not all SBUs have the same potential for growth and profitability.

    So let's dig down some more. Each of these SBUs have distinct customer groups into which the firm sells. Let's take them one at a time.

    Pool Design

    Pool Design is a relatively specialized service few pool service companies offer, and this SBU represents a distinctive competence of this firm. From a cost standpoint, most expenses are for highly skilled engineering talent and CAD hardware and software. This portion of the business is highly cyclical—in a slow year, the full talents of an engineering staff are underutilized; in growth years, the full time engineering staff is hard pressed to handle the volume. Contract labor is adjusted up or down to keep the SBU in balance. Design frequently presents add-on opportunities to capture new Chemical and Repair/Maintenance customers. This SBU has two separate sets of customers: Municipal/Institutional customers and Hotel/Fitness Center customers.

    Let's see what this SBU looks like when breaking it into two SBUs:

     

    Municipal/Institutional ($)

    Municipal/Institutional (%)

    Hotel/Fitness Center ($)

    Hotel/Fitness Center (%)

    Sales

    120,000

    100.0

    80,000

    100.0

    Cost of sales

    84,000

    70.0

    56,000

    70.0

    Gross margin

    36,000

    30.0

    24,000

    30.0

    This is one of those rare times where both SBUs have the same Gross Margin percentage. If viewed from a new customer acquisition process, these two SBUs are "keepers" as long as labor costs are kept under control.

    Chemicals  

    Pools and spas require regular testing and chemical products to maintain water quality. Chemicals are delivered via tank trucks (larger quantities) and in smaller containers that might be delivered with small vans or pickup trucks. In either case, but especially in the case of the tank trucks, drivers must have commercial licenses and all personnel need to have HAZMAT certification. This area of business serves three separate customer groups: Home, Municipal/Institutional, and Hotel/Fitness Centers.

    Let's see what these SBUs look like:

     

    Home ($)

    Home (%)

    Muni/Institutions ($)

    Muni/Institutions (%)

    Hotel/Fitness ($)

    Hotel/Fitness (%)

    Sales

    500,000

    100.0

    300,000

    100.0

    200,000

    100.0

    Cost of sales

    300,000

    60.0

    240,000

    80.0

    140,000

    70.0

    Gross margin

    200,000

    40.0

    60,000

    20.0

    60,000

    30.0

    The Home customer SBU carries the highest margin as well as the highest sales. Deliveries can usually be made one or two times per month in season and often with less expensive driver labor. Municipalities and Institutions tend to be larger volume accounts that are serviced more often than the Home customers and usually by the higher cost tank trucks. Because of the gallonage requirements of these customers, other pool supply firms often bid at low margins to capture the volume business. It should be noted also that municipalities and sometimes institutions tend to pay slowly. The Hotel/Fitness segment presents many of the constraints in pricing and delivery found in the Municipal/Institutional market, but the margins could be higher because of other relationships (i.e., the firm's Design SBU might give a leg up on the competition). 

    So, this level of analysis for the Chemical market present very different sales volumes and margins. If the owner has a choice, which of the three SBUs would he want to grow, given the above information?  If this level of analysis were not available to him, he would have to make strategic decisions with insufficient information about profitability and volume.

    Repair/Maintenance

    This segment of the business is a logical extension of services to Chemical customers as well as those who don't buy pool/spa chemicals from this firm. The major requirements in this SBU are for trained and experienced service technicians who have good trouble-shooting and problem-solving skills. Obviously, these technicians require a service vehicle and appropriate tools. They tend to be relatively highly paid, and the firm's ability to control labor costs and hold to established hourly billing rates is essential to success. The Repair/Maintenance segment services the same three customer groups as the Chemical segment.

    Let's see what this segment looks like broken into three SBUs:

     

    Home ($)

    Home (%)

    Muni/Institutional ($)

    Muni/Institutional (%)

    Hotel/Fitness ($)

    Hotel/Fitness (%)

    Sales

    400,000

    100.0

    300,000

    100.0

    100,000

    100.0

    Cost of sales

    280,000

    70.0

    240,000

    80.0

    60,000

    60.0

    Gross margin

    120,000

    30.0

    60,000

    20.0

    40,000

    40.0

    As with the Chemical segment, the sales volumes and gross margins of these three SBUs are very different from each other. Again, absent this level of analysis, a decision maker would have a hard time determining which SBUs to grow and/or which SBUs to "fix" (such as the Municipal/Institutional SBU, which carries a very low gross margin).

    Takeaways

    Given the above, here are four things you can take away from what you just read:

    1. Drilling down inside the business creates a very different picture of a complex (i.e., multi-SBU) enterprise than the traditional income statement provides.

    2. Most businesses that are not organized to capture financial performance information by groupings of customers and products/services need to convert their financial information systems to capture the proper data. In my experience, this could easily be a major goal for the management team for at least two quarters if not more. It requires re-thinking about how the firm does business.

    3. What is shown above could easily be drilled down even further. For example, are there major customers inside a given SBU that are unusually profitable or unusually unprofitable? 

    4. Pareto, the Italian economist, came up with Pareto Analysis at least 500 years ago and states that 20% of a typical company's customers make up 80% of the firm's volume. That same 20% may or may not generate 80% of the firm's profitability. Doing a Pareto Analysis SBU-by-SBU frequently provides additional insights and might well be a strategic exercise worth doing.

    Jeffrey C. Susbauer, Ph.D. is Associate Professor Emeritus at the Monte Ahuja College of Business, Cleveland State University where he has taught strategic management and entrepreneurship courses since 1970.  A long-time consultant to scores of businesses, a member of the boards of advisors to over 60 companies, he co-founded and serves as the principal instructor for the COSE Strategic Planning/CEO Development Course for the past 36 years. The course is concerned with providing entrepreneurs with education to guide their vision, strategic thinking and execution in their businesses.

    Learn more about the Strategic Planning/CEO Development course or contact Jeff via email.

    Grasshopper
    Next up: Tax, Risk Management, Employee Benefit Strategies You Need to Know
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  • Tax, Risk Management, Employee Benefit Strategies You Need to Know

    During a recent workshop at the Greater Cleveland Partnership, the team from Apple Growth Partners spotlighted tips and questions business owners should keep in mind as it relates to tax planning, risk management and employee benefits.

    When was the last time you took a step back and examined whether your tax, risk management and employee benefit strategies accurately reflect the current (or even future) state of your business?

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    If it’s been awhile—or even if you just need a quick refresher—check out these tips delivered by the team at Apple Growth Partners during a recent workshop the team presented at the Greater Cleveland Partnership’s offices.

    Business tax planning

    Pre-Check

    There’s been a lot of discussion lately surrounding the state of the tax landscape in the United States. Making sure your business is maximizing the value of its tax situation is critical.

    Here are six things to keep in mind when it comes to business tax planning.

    Tip No. 1: Ensure you are taking full advantage of the accelerated depreciation on fixed-asset purchases. Instead of expensing an acquired piece of machinery out over five years, it’s possible to expense it all in Year One.

    Tip No. 2: Look into research-and-development credits to unlock tax savings.

    Tip No. 3: Think about your future growth. Will you need to pull money out at some point? What about succession planning? Sit down and create a model of what you want your business to look like 10 years from now? And also 20 years from now.

    Tip No. 4: If you have purchased a building, did you do a cost segregation study? Just like with the machinery example in Tip No. 1, it’s possible to expense a portion of this purchase right away. This can create good cash flow for your company.

    Tip No. 5: Take a moment to review and evaluate what the impact of the new tax bill might be for your business.

    Tip No. 6: Think about the form of entity your business takes. If you’re a C-Corp, why? What happens if you sell your company? There’s a chance you might not want to be a C-Corp on exit because a potential buyer likely won’t be interested in buying the stock you have in your company. They’ll want your assets.

    Risk management

    The Apple Growth team also laid out three tips relating to the risk management side of your business.

    Tip No. 1: When you’re purchasing goods, have you considered adding specific terms and acknowledgments to the deal? This will allow you to put limitations on the terms you are accepting and offering.

    Tip No. 2: Make sure you understand the liabilities and penalties you could incur due to an accidental release of confidential information.

    Tip No. 3: Do you have a disaster contingency plan in place to ensure continuity of operations?

    Employee benefits

    Employees are the lifeblood of your business. And a strong employee benefits strategy will go a long way toward keeping your staff happy and productive. Here are six questions to keep in mind.

    Question No. 1: For qualified plans, are employee deferrals or loan payments being deposited in a timely manner?

    Question No. 2: Does the current design of your plan allow your business to maximize contributions? If not, you should consider making changes. Keep in mind many changes cannot be made after March.

    Question No. 3: Will you need to perform an audit at some point in the next two years?

    Question No. 4: Are fringe benefits being reported accurately?

    Question No. 5: Is employee data, such as Social Security numbers, accurately recorded?

    Question No. 6: Are employee achievement awards, such as gift cards, reported accurately. Those awards are considered taxable income.

    Grasshopper
    Next up: The Magic of SBU Analysis: The Traditional P&L Statement
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  • The Magic of SBU Analysis: The Traditional P&L Statement

    Does your Profit and Loss Statement look like this?

    Does your Profit and Loss Statement look like this?

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    This year

    Pre-Check

    This year

    Last year

    Last year

     

    $

    %

    $

    %

    Sales revenue

    900,000

    100.0

    1,000,000

    100.0

    Cost of goods

    252,000

    28.0

    271,000

    27.1

    Cost of labor

    230,000

    26.0

    215,000

    21.5

    Overhead

    71,000

    8.0

    74,000

    7.4

    Cost of sales

    553,000

    61.0

    560,000

    56.0

    Gross margin

    347,000

    39.0

    440,000

    44.0

    SG&A*

    410,000

    46.0

    379,000

    37.9

    Pre tax profit

    (63,000)

    (7.0)

    61,000

    6.3

    Tax

    (12,600)

    (1.4)

    12,200

    1.2

    Profit after tax

    (50,400)

    (5.6)

    48,800

    4.9

    *If this statement were generated from your accounting system, the Selling, General and Administrative expenses (such as management salaries, rent, sales compensation, advertising/promotion, utilities, etc.) would be presented to you in detail.  For purposes of this article, detail of those items have been suppressed.

    What does the above P&L tell you?

    Sales have decreased while labor costs have increased as a percentage of sales from 21.5% to 26%. Cost of goods have moderately increased year to year. The SG&A expenses have exploded; a detailed look at the individual components of the SG&A will determine the culprits there. The company has experienced almost a $100,000 decrease in bottom line performance year to year.

    Some more analysis is in order. Why, for example, have the sales decreased while the cost of goods and cost of labor increased (both of the latter as a percentage of the sales)? Did new competition come into your market? Is your product not as competitive as it once was? Did you have to cut your price? Did you lose a customer(s)? Were there supplier price increases that were not passed along to customers? Did scrap/rework increase during the year? Did the staffing in production not get adjusted to the sales environment? Did employees get pay raises even though it was a down year? That does not even address the rapid rise in the SG&A portion of the P&L.

    IF this company is selling one product/service at the same price and cost to everyone through the same market channels and distribution logistics, this level of analysis gives a good overall snapshot of the venture's dynamics. The absence of profit—or very little profit—might even be acceptable if ownership is paying itself 8% to 10% of the revenue. This kind of firm is often referred to as a "lifestyle business".

    The Magic of the SBU

    The example above is what we call a "simple" business, or a "single Strategic Business Unit (SBU) business.” The single SBU business is one which has only one group of customers who buy in a similar manner products and/or services in a  fairly narrow price/cost range. An example of a simple, single SBU business might be a tax preparation service catering only to individual federal, state and local tax returns.

    In most cases, what is described above does not resemble fiscal reality and does not reflect how the business actually is constructed. Even if the products/services are sold at the same price to everyone, this level of analysis does not permit inspection of the real costs of the sale. If, for example, some sales are made via an Internet store, chances are that those sales carry lower overall selling and transaction costs than bricks and mortar sales do. It is also likely that deals are routinely struck to give price or terms breaks to larger transactions and/or key customers, and sales margins per unit are not all alike. 

    The SBU concept has been in place for several decades. General Electric under Jack Welsh, for example, treated each of its businesses as SBUs and evaluated performance and investment decisions by viewing each business as a group of SBUs within those businesses. If it worked for GE, might it not be worth considering in your business?

    Takeaways

    1. Accounting systems that lump all sales into one summary line miss the boat in helping to try to figure out how you make money and where you are making money. Similarly, that same bundling of labor and/or materials costs does the same disservice in your quest to determine the real costs and benefits of a given product/service. 

    2. Because most businesses aren't really simple (and that includes those which appear on the surface to be simple), SBU structure and analysis is the best way to account for differences and similarities in key components of the firm—especially groups of products/services offered to different groups of customers. 

    3. SBU structure helps to figure out the real areas where you make money. Different matches of products/services, priced incorrectly, for example, lead to underperformance of the firm.

    Because most businesses in reality are not simple single business businesses, the next article in this series will help explore different ways to help create SBU structure for making better, more informed decisions to improve performance and for establishing criteria for making decisions to move the company forward into the future. 

    Jeffrey C. Susbauer, Ph.D. is Associate Professor Emeritus at the Monte Ahuja College of Business, Cleveland State University where he has taught strategic management and entrepreneurship courses since 1970.  A long-time consultant to scores of businesses, a member of the boards of advisors to over 60 companies, he co-founded and serves as the principal instructor for the COSE Strategic Planning/CEO Development Course for the past 36 years. The course is concerned with providing entrepreneurs with education to guide their vision, strategic thinking and execution in their businesses.

    Want to learn more about the Strategic Planning/CEO Development course? Click here for additional information or contact Jeff via email.

    Grasshopper
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