Financing the Smallest Small Businesses—Business Fuel Podcast #52
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Recent events in Washington have done nothing to inspire confidence in small business. Just yesterday the SBA reported that $140 million dollars to approximately 700 small business owners are stuck in the backlog of 7(a) loans resulting from the government shutdown.
Fortunately, there are other sources of financing for small business, even the smallest small businesses looking for the capital they likely wouldn’t be getting from an SBA-guaranteed program anyway. Stephen Sheinbaum, President and CEO of Merchant Cash & Capital (MCC), shares his insight into the changing landscape of small business lending, why alternative (non-bank) financing options are important to the small business landscape, and why a higher-interest loan product might make sense for your small business.
Information you need, the podcasts you trust, this is the PatrickWiscombe.com podcast network. Bringing you interviews with top business professionals and business financing tips to fuel your American dream. This is The Business Fuel Podcast heard exclusively on Lendio.com. And now, here are your hosts, Ty Kiisel and Patrick Wiscombe.
Sponsorship: This podcast is sponsored by Lendio.com. The online source you need to find the right business financing to grow your company. Check them out for free at Lendio.com to get your business growing right now.
Patrick Wiscombe: This is The Business Fuel Podcast. My name is Patrick Wiscombe. Thank you for tuning us in and taking us along wherever and however you are accessing the podcast today. Coming up today, we’re going to be speaking with Stephen Sheinbaum who is the President and CEO of Merchant Cash and Capital. But first, let’s bring in the producer and co-host of the podcast, Ty Kiisel with Lendio. How are you?
Ty Kiisel: Doing well. We’ve been busy here at Lendio getting ready for a conference with the American Bankers Association.
Patrick Wiscombe: Great. Well let’s say hello to Stephen Sheinbaum, President and CEO of Merchant Cash and Capital. How are you sir?
Stephen Sheinbaum: I’m well, thank you.
Patrick: What does Merchant Cash and Capital do?
Stephen Sheinbaum: We provide financing to businesses on a nationwide basis. We provide growth capital, working capital, expansion capital, and just about any type of funding a company needs. Our deals range from $5,000 – $50,000. We’re able to go from A to Z in just about a week.
Ty Kiisel: That’s like an instant loan when compared to a bank loan.
Stephen: So many people have a hard time getting a loan from a bank because of all the regulations they face. What makes it even more troubling is they have to spend so much time doing it. We are so much more efficient. We recently rolled out some technology where someone can come to our platform and populate 10-12 fields and within 24 seconds, find out if they are approved or not.
Ty: The events going on in the country today are a real confidence killer for small businesses. As of this recording, we are on day 16 of the lock out. The SBA has been shut down. However, the SBA shutdown hasn’t really affected the main street owners you and I work with every day like it has bigger businesses. Is that fair to say?
Stephen: To some degree. We do businesses with hundreds of merchants every month. Many of them have SBA loans but need additional gap financing to supplement. At Merchant Cash and Capital, we’ve created a window for people who are dealing with the SBA. We loan them money, then allow them to pay it off at a significant discount.
Ty: Would you describe the particular loan products you offer? And why are they relevant to main street business owners?
Stephen: We have a variety of products. They relate to payback methodologies, credit buckets, and whether it is personally guaranteed or not. We started the business not as a lender, but as purchasing future revenue at a discount. We were giving a merchant $100,000 and buying $115,000 of future credit card sales. The way we would get paid back is with a fixed percentage of future credit card sales until such time as we would receive the $115,000. This means the merchants payment is variable in nature. This was a non-collatoralized product, meaning they didn’t have to have any collateral. This allows a merchant to receive funds and deal with the seasonality they face in their business. With this product, we have projected 3 month to 15 month deals. It depends on what happens with their revenues. For merchants who are a little more flat line, we have fixed payment plans. We just debit the money out of the account every day. And this makes it easy for the merchant because they don’t have to worry about sending us the money. We also have programs for people with FICO scores as low as 500.
Ty: In the spirit of full disclosure, I should say that MCC is one of the lenders on the Lendio platform. One of the things I really like that you’re doing is that your loan products start at $5,000 and go up to $500,000. Most banks don’t like to do loans under $100,000. 59% of businesses coming to Lendio are looking for $50,000 or less. To most main street businesses, that’s a big number wouldn’t you say?
Stephen: Oh yes. We’ve done about 30,000 advances and the average is about $43,000. So I think you’re dead on.
Ty: When most people think of alternative lenders, they think the interest rate is going to be high. Can you share with us some logic as to why that might not necessarily be a bad thing?
Stephen: First and foremost, the cost of the product is reasonably expensive. The least expensive program is a 9 month program where we charge 14%. But the logic is, we are not a bank. We are borrowing money from a hedge fund or equity investments, etc. Our cost of capital is exceptionally more expensive than a bank. And if someone can get money from a bank, they should. But we are providing money to those who generally can not get bank financing. Some people use their personal credit cards. Our rates are lower than a credit card. And if you can avoid bringing on partners, that’s a good thing. There’s an expression that debt at any cost is better than equity. That cost of the capital then becomes extremely reasonable.
Ty: I’ve been an entrepreneur a few times over the years and I used home equity and credit cards. Eventually, you run out of home equity. I think anything that provides additional capital is a good idea. Over the last few years, it seems like there have been more and more alternative lenders getting into the marketplace. How does one decide if lender is reputable or not?
Stephen: I think that is really important. It’s imperative that you go online and do your homework. You can find out how long someone has been in the industry. Are they a direct funder or are they a broker? They can check with The Better Business Bureau. Check with NAMAC – National Association of Merchant Advance Companies. Make sure the company is really well capitalized.
Ty: What do you see as the future in small business lending in regards to the smallest small businesses?
Stephen: There is a tremendous ground shift taking place. There are a variety of financial and technology firms putting money into the space. They are creating the ability for merchants to be funded in a matter of hours instead of days. There’s a shift away from traditional banks to companies such as ours which have the capital and technology available to make the experience that much easier.
Ty: Most people equate the decline in community banks with the financial crisis of 2008. But in reality, it’s been going on long before that. Do you think we will continue to see community banks disappear?
Stephen: It’s becoming increasingly more difficult for a small community bank to exist as a stand alone. It will be interesting to watch going forward. The government is trying to give all this money to the banks which in theory should be available to consumers. But with all the new regulations, they are having a hard time putting the money out on the street. It’s really unfortunate.
Ty: I read about a large community bank in Oklahoma that merged with an alternative lender to broaden their ability to reach out. Do you think this is a trend that will continue? Do you see a day when Merchant Cash and Capital buys a bank or becomes a bank?
Stephen: That is not hard to envision at all. It’s a very natural evolution. We have started to explore that option.
Ty: Let’s change gears a little bit. Describe what you look for in a potential borrower. You have products that range the credit score gamut from 500 to 800. How does the borrower prepare to come in and talk to you?
Stephen: We tend to look at borrowers in 3 different ways; we try to understand what their balance sheet looks like, we try to understand what their income statement looks like, and we try to understand what their cash flow is like. Each of those three tell a very different story. We look at their credit score, not for the number, but to see what type of person we’re dealing with. It gives us a little insight into the soul. We try to clean them up from a liability perspective. Are they current with their taxes and their vendors? In terms of preparation, the merchants who do their homework are the ones who have success. They’re ready to talk about their business, they know what their costs are, they know what their revenues are, they can explain what has caused the current problems they are having. In the end, if we end up knowing their business better than them, that’s not a great customer.
Ty: Everybody assumes that when you’re looking for equity funding, you’re going to have to create a pitch. I don’t think they relate that to when you go into a lender, you’ve got to do the same thing. You have to have your ducks in a row and present your business in a good light, right?
Stephen: I could not agree more. They also need to understand the ins and outs of money so they can explain why their bank balances are high in certain months and low in others. They need to understand payment terms, all those types of things.
Ty: If you were to give one piece of advice as we wrap up, what would it be?
Stephen: There are a host of companies that want to give financing. And if people will do their homework in preparing to meet the lenders, they will get the money they need.
Ty: That’s great advice. There are options available. People like you are playing a critical role in keeping main street going. I appreciate you being on the podcast and think the advice you have given is really good.
Stephen: Thank you so much. I really appreciate it. As you mentioned, we do business with Lendio and I think you’re a phenomenal company.
Patrick: Thank you to our guest, Stephen Sheinbaum. Check out everything he does at MerchantCashandCapital.com. Before we wrap up, tell us about your Forbes article Ty.
Ty: We’ve been talking a bit about credit ratings. I write about credit scores and why they’re important. For most small business owners, their personal credit score is every bit as important as their business score. I also make some suggestions on how to improve it.
Patrick: So go to Forbes.com and search for Ty Kiisel. Plus you can read all his stuff on Lendio.com and Lendio.com/blog. So for Stephen Sheinbaum, Ty Kiisel, I’m Patrick Wiscombe. Thank you for listening. We’ll talk to you next week.
Bringing you interviews with top business professionals and business financing tips to help fuel your American dream. This has been the Business Fuel podcast, with your hosts, Ty Kiisel and Patrick Wiscombe, heard exclusively on Lendio.com