So the detail required in your application was a big surprise.  Were there any other surprises?
We had a HELOC on our home and used part of the SBA loan to pay it off – that was difficult to explain to the SBA!  Roll forward a year or so later, I was holding a contract to sell my house.  Surprise, the house was part of what secured the SBA loan.  We had to go back and work with the SBA to renegotiate the loan.  I also think at first we had a false sense of security since we didn’t have to pay loan back for 30 years.  The reality is you have to pay it all plus interest, so you better be doing a good job running your business now.   By the way, the hardscape division sucked money out of the company.  Within a year we had to close that division.                                             

Did you have to sign a personal guarantee on the loan?
We did have to sign personal guarantees.  The business gets so intertwined with your personal finances.  If the business goes under, I lose everything.    But the personal guarantee was not a surprise.  We have to sign personal guarantees all the time.  Look, we have to sign personal guarantees with John Deere Nursery to get a $30,000 line of credit to buy plants for our clients.

I have to ask you, In the end, was it worth all the work?
We successfully borrowed $100,000, consolidated all our lines of credit into a 30 year fixed rate a little over 3%.  That’s better than you could get anywhere else by far.  The drought lifted just as the economy fell apart.  Thank God we got the loan.  We can budget better and we can better manage cash flow because we have just one payment and the interest rate is fixed. We were able to survive.  

Who, based on your experience, is the ideal candidate for an SBA loan?
Someone who has something in their business that is going to give them an edge with the SBA, like being a woman-owned business.  Or for example, if you wanted to start a tax preparation business that served the Hispanic community, that was the kind of thing that seemed to appeal to the SBA.   Your industry association may be able to let you know if there are special SBA loans that you can qualify for.  One thing we learned, just because you have a great new innovative business idea doesn’t mean the SBA will be interested in loaning you money.  Their job isn’t to fund innovation. 

What advice would you give someone who is considering an SBA loan?
Run! Run, run, run!  No, seriously, no doubt about it we got a good interest rate. 

Dave Price started his landscaping design and architecture firm in Atlanta with a $100 investment.  Fourteen years and several local and national awards later, Bennett Design & Landscape’s designs have been featured in Southern Living and Atlanta Homes & Lifestyles. 

Sandra Chesnutt is a Marketing Director with Ftrans.  Ftrans combines professional receivables services with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.  Liberating you from funding challenges and receivables hassles.

That’s not the end of the story though.  You tried again!  What was happening in your business that prompted you to again seek an SBA loan? 
Georgia was in the midst of a major, four-year drought and had been declared a state of emergency.  In our business, we were laying people off; all around us, other landscape businesses were shutting their doors.  It’s hard to sell landscaping when people are not allowed to water their lawns.  But we had cash and we had the line of credit and we decided a good strategy for staying in business would be to bring our hardscape business, or stone work, in house instead of subbing it out.  We could keep the business going and we would also be able to control the quality over that part of our projects.  To get started, we knew we would need a large investment in massive trucks and saws and blade sharpeners to haul and cut stone.   Through our industry association we heard about an SBA disaster assistance loan program.  We knew of eight landscape businesses who had applied and seven had been approved.  It was worth a shot.

So this was a different type of SBA loan, an SBA Disaster Assistance loan, and you applied directly to the SBA not through a bank. 
Correct.  We were assigned two SBA staff who helped us apply, one of them took us from zero to completion of the application and the second was more of an underwriter.  Believe me, both of them were dry and serious.  Again, the questions the SBA wanted answered were very specific:  How was the loan going to change our business?  Why did we have one bad year in the middle of seven great years?  What specifically did we do to turn it around? How will not getting the loan hurt our business?  How will you maintain your business if you don’t get the loan?  All these questions had to be answered in detail.  I had to document how I was going to use every dollar.  As in, “I’m going to use $5,000 for this specific piece of equipment.” Our SBA guide suggested we include $15,000 to be maintained in a separate account to use for cash flow and I included that in my explanation of how I was going to use the money.  I had to prepare projections for the next five years, both with and without the loan.  At the end, our application binder was five inches thick.

What do you think was the true cost for this loan including hidden costs?  What did it cost you in time and money in addition to the interest you paid? 
We had to pay for a home appraisal and about $2,000 for a commercial appraisal.  The application fee was around $1,000.  The overwhelming expense was my time.  I would say I was involved for maybe an hour, maybe five hours a day, three days a week for more than four months.  I was constantly answering questions that required digging in the detail behind my P&Ls.  I had to take myself away from other duties to explain anything out of the ordinary, like why was Shop Supply Expense different this year compared to that year.  Once we started preparing the application, he would go over and over each response.  To gain approval, every response in the application had to be worded just right.

Compare that with how long it took us to get our $60,000 line of credit:  one week.

To come – Part 3: In the end, was it worth all the work?

Dave Price started his landscaping design and architecture firm in Atlanta with a $100 investment.  Fourteen years and several local and national awards later, Bennett Design & Landscape’s designs have been featured in Southern Living and Atlanta Homes & Lifestyles. 

Sandra Chesnutt is Marketing Director with Ftrans.  Ftrans helps small and medium sized businesses looking to accelerate and improve their cash flow by providing an AR line of credit combined with AR management tools for a cost effective way of liberating you from funding challenges and receivables hassles.

Your story is a classic start-from-scratch American small business story.  Can you share a little bit about how you went from not having a business to a $5 million business with 13 employees a few years later?

My partner and I both had full time jobs.  He was a landscape architect and we thought why not make some money on the side designing and installing small landscape projects for homeowners?  We soon realized that once we earned our customer’s trust on the small jobs it quickly went to, “I need a new driveway or retaining wall.”  Within a year we thought we had enough business for one of us full time and a small office in the basement.  A year and a half later we had an office manager, and a couple of employees and we were both working in the business full time. 

Whenever owners of small or start-up businesses ask around about financing they are often advised to look into an SBA loan.  When you started thinking about getting an SBA loan, how did you research the process and how did you get started? 

Around that time we already had a $60,000 working capital line of credit and an additional $15,000 line of credit secured by our building, plus a HELOC on my home.  We knew nothing about SBA loans.  We already had depository and lending relationships with a couple of Tier 1 banks so we started there.  They explained the process to us, looked at our P&Ls and Balance Sheet and gave us packets outlining the process step-by-step.

With your existing lines of credit, you had already been through the underwriting process before. What was different about applying for an SBA loan?

The level of paperwork involved.   We learned it wasn’t just a lot of paperwork for us; it was a lot of paperwork for the bank too.  We also had a misconception.  We thought, here was the SBA with a pile of government money to help small businesses to grow the economy.  We found out that the banks are really lending their own money and the government was just acting more like the FDIC, as a back up.

The bank was much pickier than for a standard line of credit.  The SBA wanted to know specifically how you were going to use the money and how it was going to impact your business.   In the end, both banks told us this is going to be a mess.  It’s going take a lot of your time and your chances of getting approved for the loan are maybe 30%. We were bankable but weren’t nicely fitting into the criteria.  They explained that we were not a minority or female owned business.  We weren’t doing work for the government. 

To come – Part 2:  That’s not the end of the story though.  You tried again! 

This post is part of a series on funding small and medium sized businesses; first-hand accounts from people who have been through it from knocking down SBA loan hurtles, to how venture capitalists and private equity partners think, to what’s new in getting an old school line of credit. 

Dave Price started his landscaping design and architecture firm in Atlanta with a $100 investment.  Fourteen years and several local and national awards later, Bennett Design & Landscape’s designs have been featured in Southern Living and Atlanta Homes & Lifestyles. 

Sandra Chesnutt is a Marketing Senior Manager with Ftrans.  Ftrans combines outsourced accounts receivable management with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.

Accounts receivable remain one of the most important assets of a company.  They are the primary generator of cash.  Tighten and reduce your cash conversion cycle by reducing your business’s accounts receivable days outstanding to generate more cash.   To do this, consider your business’s complete revenue cycle from customer acquisition to invoicing to payment receipt.  Is your business following accounts receivable best practices?  What is the propensity to pay and credit worthiness of your customers?   How does the business handle aging receivables?  

Companies such as Ftrans offer complete accounts relievable and credit management solutions that help businesses address cash and revenue cycle concerns.   Implementing these best practices enables accounts receivable funding for your business without a Catch-22.

“The formation and growth of small businesses depends critically on access to credit,” Mr. Bernanke said in the text of his remarks. “Unfortunately, those businesses report that credit conditions remain very difficult.”

Absent credit availability in the form of small business lending, businesses must actively manage their cash conversion cycle, which is the time it takes to convert a business’s cash consuming activities into cash payments.   In other words, businesses must manage to a low cash conversion cycle which means having cash tied up in business operations for as few days as possible.  Clearly, a shallow credit market highlights the importance of managing to a low cash conversion cycle as this may be one of the few ways for businesses to have the liquidity necessary to fund their operations.   

How do you manage your cash conversion cycle?   Focusing on revenues and expenses is important.   However, equally important, and perhaps more complex is developing a better understanding of your business’s working capital situation.   Analyze your accounts receivable and accounts payable outstanding days, including inventory, to understand how movements in each affect your cash conversion cycle.   Good cash cycle conversion management equates to better revenue cycle management which equates to an increase in the health of a company.   For more information on cash cycle conversion, click here.   Additionally, consider solutions from companies such as Ftrans which provide full accounts receivable management solutions.

Yet, Our research indicates that the community banks that typically serve SMBs  just aren’t structured to handle the the highly specialized risk assessments required to successfully underwrite C&I loans.  Nor are they staffed right now to properly manage the rigorous monitoring of these loans.

Dan Drechsel, Ftrans CEO, explains further. 

Next:  Banks say they aren’t lending because there is no demand.  Do you believe that?

Next up:  Will banks help SMBs recover?  Is there actually a demand from SMBs for financing?

“Our collective challenge is to help ensure that creditworthy borrowers have access to credit so that, should they choose, they can expand their businesses or increase payrolls, helping our economy to recover,” Bernanke said at the event at the Chicago Fed’s Detroit branch.

…

Outstanding loans to small businesses have declined to about $660 billion in the first quarter of this year from almost $700 billion two years ago, Bernanke said. It’s “difficult to answer” how much of the drop comes from declining demand and how much from supply, he said.

…

Bernanke said he would offer “a little bit of guarded optimism” on lending.

…

“We’ve still got a long way to go but I’m hopeful that we’ll see improved conditions for credit going forward,” he said. “The Federal Reserve views this as being absolutely central to the recovery.”

…

Bernanke said the central bank is training its bank examiners and giving them the “message that encouraging lending to small businesses that are well positioned to repay is positive, not negative, for the safety and soundness of our banking system.”

And they all lived happily ever after!  But seriously, this raises a big question on my mind that could tell us if we are inching forward or not.   What do you think?

Is the economy held back because banks won’t lend?

Or are banks unable to lend because small to medium sized businesses just really don’t need additional capital? 

Full Business Week article:

http://www.businessweek.com/news/2010-06-03/bernanke-says-u-s-unemployment-imposes-heavy-costs-update1-.html

In this one-on-one, I spoke with Michael King, serial entrepreneur.  He’s currently a Regional Sales Manager with Ftrans, helping small business owners finance their growth opportunities with accounts receivable financing.

The small business owner is an American icon.   All kinds of Americans dream of owning their own business.  How did you get started?  What personally lured you?

When I started in the importing and wholesale distribution industry in the mid 80’s, going to China and India and Asia was exotic and different and not that many people did it.  From about 1986 to 2006 I was involved in importing products for the home, seasonal decorations and gift products, eventually owning two businesses in that space.  We sold to independent retailers and to major big box retailers as well.  We hired designers, went to factories in Asia to make our products and sold them to retailers in America. 

I’m interested in hearing more about the business you started from scratch.  Looking back, how well were you able to predict your cash needs?

Having gone through the ups and downs of owning a business before, and successfully handling it, I thought, with the right partners, we could grow to a decent size.  Our target was $1 million in the first year which we reached. 

In that industry, even with a lot of experience and very competent partners, you have to find the right product and get in front of the right customers.  Product lifecycles last maybe three years.  It’s almost a fashion industry.  You might have $6 million in sales one year and if you don’t guess right on a trend, your sales might be $1 million the next year.  When you start out, you plan for the worst case scenario –and the worst case may actually be selling a whole bunch.  You’ll owe a lot to your vendors for inventory and you can have your cash all tied up in accounts receivable.

You bootstrapped this business.  What was that like?

They call it bootstrapping  because you’re pulling your business up by your own bootstraps.  Even with an industry reputation, if you want your business to stand on its own, you have to prove that you have the management skills, the need and the collateral in the form of receivables to be able to get lines of credit.   

Starting out, to get us through the first six months, I used my own money.  I used credit cards.  I went to my family and I was fortunate enough to get some money there.  My other partners did the same.   But to fund the business cycle of buying inventory and selling it to customers on account, we had to get our vendors to let us pay on terms, too.   We had a track record and a bit of a reputation in the industry that helped as well. 

After about six months, we’d had good results and at that point we were able to use our AR to get financing with Ftrans.  That worked for us because in addition to getting access to capital more quickly, Ftrans took over many of the administrative burdens of managing our receivables. 

What were some of the decisions you made early on that you think had an impact on your ability to be successful?

We planned big, but we tried to keep internal costs variable.  Using  outsourcing is a good way to do that; we used third party warehouses and accounts receivable outsourcing.  Try to be as efficient as you can.  Empower the employees you have with the right technology so you get the most out of a few employees.  You try to maintain as much flexibility as you can from a cost standpoint so that you can maintain your profitability at whatever sales level you hit. 

Experience is important.  It pays to know who is going to buy your product, how to talk to them and to know what their needs are.   If I didn’t have certain skills in my own skills set, such as design or sourcing skills, for example, I was willing to bring in partners who did.

I always hear about small business owners who are constantly scrambling to find cash.  How were you getting stretched cash wise?         

The industry normal is net 30 days and they don’t get too worried about paying you for 45 days or so.  My DSO was 47 to 50.  Target demanded net 90 on new stores and net 60 for established stores.  I‘ve heard stories of retailers demanding even longer than that.   It helped that one of our partners was well known by one of our big vendors and they sold to us on terms.  It was like an interest free loan.

You mentioned that some of your capital came from family and I’m curious about that.  Was it in the form of a loan or as an investor?  What would you tell someone who was going to invest with a family member? 

Well, you have to be very careful about that!  In my case it was in the form of a loan.  Fortunately, I was able to pay it back.  Obviously, you take a lot of risk in damaging your personal relationships in doing that type of thing.   It wasn’t a ton of money, in my case, but it was some money and it was very important.  Obviously, if you can find partners or get debt financing, I would always suggest doing that before approaching family members or friends.  Personal relationships are too important to ruin over some type of business venture and I’ve seen it happen.

If someone in your family approached you and said “I’m starting a business and I’d like you to invest.”  As a former small business owner, what would persuade you to invest?

It would be more now than it used to be!  I realize what is needed in terms of properly managing the financial side, having good internal cost controls and financial skills and savvy.  Not just having a good idea with market demand and a differentiating competitive advantage, but the ability to run the business side of it.  And I wouldn’t give more than I could comfortably lose. 

Was there ever a time when you thought, “This is not going to work?”  When it became a real gut check?   What did you do?

I went to my vendors and tried to get better terms.  I always tried to be respectful and keep a mutually profitable relationship with my vendors, but I explained that it would help me grow my business and help my loyalty with them.  Sometimes you have to not take salary yourself.  There were times I did have to reduce staff.  There were always hard choices. 

There’s nothing like real life business experience.  If you planned to start another business, what did you learn from your initial experience that you would always have in mind?

I would look at private equity or the angel environment and try to get bigger faster rather than relying on retained earnings or debt to grow the business.  I wouldn’t try to do it all myself.   I would be more careful about picking a business with strong margins, smarter about analyzing competitive pressures.  I got in the import business because I liked to travel and I did a lot of that.  I lucked into a way to make money but I don’t think that space exists now the way it did then.

You think you’d ever start another business again?

Absolutely!  I plan on it!  I’d definitely be an entrepreneur again.  I liked wearing a lot of different hats.   I don’t know about the stock market being the path to retirement.   I’m probably going to have a couple of small businesses that are running well.   I come from a family of business owners; it’s in my blood a little. 

More on Bootstrapping:

The Art of Bootstrapping

Bootstrapping Your Start Up 

Sandra Chesnutt is a Marketing Senior Manager with Ftrans.  Ftrans combines outsourced accounts receivable management with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.

We are pleased to have been selected by Kevin Lawton of trendcaller.com as a “Best of Finovate” company this year.