Transcript – Episode 43

Fred Dunayer:
Welcome to the SCORE Small Business Success Podcast, Been There, Done That. To get free mentoring services, as well as to see the wide variety of resources available for small businesses, visit our website at www.score.org or call 1-800-634-0245. Now here’s your host, Dennis Zink.
Dennis Zink:
Episode number 43: Small business loans. Fred Dunayer joins me today in our studio as co-host, SCORE mentor, and our audio engineer. Good morning, Fred.
Fred Dunayer:
Good morning, Dennis.
Dennis Zink:
Fred, our guest today is Ty Kiisel. Ty, welcome to Been There, Done That.
Ty Kiisel:
Hi, I’m glad to be here.
Dennis Zink:
Ty Kiisel is the Main Street business evangelist, author, and marketing veteran with over 30 years in the trenches. He has been writing about small business and small business finance for OnDeck since 2014. Ty makes the maze of small business lending accessible by weaving personal experiences and other anecdotes into a regular discussion of one of the biggest challenges facing small business owners today.

The world of small business financing has changed quite a bit over the last few years. Ty, what’s the difference between the way a small business owner gets a loan today and the way they did years ago?
Ty Kiisel:
I think the biggest difference is where they’re able to get capital. In the old days, not too many years ago, the local bank was the partner for just about every small business. If you needed a couple of thousand dollars, you could go into the bank, sit across the desk from one of the loan officers, and because of your relationship with that particular bank, you could walk out with a few thousand dollars on your signature, but that isn’t possible anymore. It’s just a lot harder for small business owners to go into the bank and get a loan today than it used to be.
Dennis Zink:
What are the best ways they do it (get a loan) today?
Ty Kiisel:
There’s lots of ways. I don’t know that there’s one particular best way. I think that, depending upon what you’re borrowing money for and how much money you need, there are a number of options that you can look to that will provide the capital that you require. For instance, some lenders specialize in loan amounts of below $50,000, whereas the bank wants to lend a half a million dollars or more, and everything in between.
Dennis Zink:
Do you think changes in financing have been beneficial to small business?
Ty Kiisel:
I think the world today provides enough options that it’s actually pretty darn good for the small business owner. I say that with this particular caveat. In the old days, the bank was the one-stop shop. If you needed money, you went into there and you would apply for a loan. It didn’t require a lot of savvy on the part of the business owner; whereas today there are so many options that are so specialized that it requires the small business owner to be a little more savvy about what he’s looking for and why, so that he can make informed decisions about where to look and what type of financing is going to make sense for his business or her business.
Dennis Zink:
In my experience, and I’ve had my share of loans over the years, I always use more than one bank. I developed at least two relationships so that I could play one off against the other. Is that still done today?
Ty Kiisel:
I think that for those businesses that have a really good personal credit score, a really strong business credit profile, and they’ve been in business for a few years, and they have those multiple relationships, they’re in a position to do that. Most small business owners … For example, the Federal Reserve Bank of New York came out last year and said the average small business owner spends 33 hours looking for a loan. The percentage of small business lending that banks are doing has been steadily declining for several years since … I think the Federal Deposit Insurance Corporation identifies, since about the year 2000, the percentage of small business loans that are part of a total bank’s loans are in decline.

There are fewer options like that available, but, fortunately, there are lots of technology companies that are leveraging technology for specific loan purposes to help small business owners, much the same way that companies like Amazon have changed the way we shop, Uber’s changed the way we hail a cab, other technologies are changing the way we make hotel reservations and make airline reservations and all those kinds of things. It’s not quite the same as it once was, but there are options that small business owners have that can help them.
Dennis Zink:
I used to borrow at prime rate, mostly because I had two different bankers that I would play one against the other, and they wanted my business, so I made them really work for it. That’s very unusual to be able to get that rate as a small business. What is the going rate today, typically?
Ty Kiisel:
Oh, boy. I don’t know that there is necessarily a going rate. There’s a big relationship between access and cost of capital today. An SBA loan is probably one of the cheapest loans that you’re going to be able to find with interest rates that are the lowest, but they’re also more difficult to get.

On the other end of the spectrum is merchant cash advance. It’s not really a loan, it’s an advance on credit card sales. Those are relatively easy to get. If you’ve got four or five thousand dollars in credit card transactions every month, you can get a merchant cash advance. However, those interest rates are incredibly high.

Depending upon the capital source and how easy it is to get, rates vary from, like what you’ve described your experience was, to several hundred APR depending upon the particular provider and everything in between. A lot of small business owners are able to get interest rates that are maybe credit card-ish or lower.

For example, a highly qualified borrower can go to OnDeck and get a 5.9% interest rate. Depending upon their credit worthiness and the lender’s tolerance for risk and how risky they perceive that particular loan to be, interest rates could vary a lot. For younger businesses or businesses that maybe don’t have a perfect credit profile, they’re going to pay more than what your experience was and sometimes a lot more.
Fred Dunayer:
It should be mentioned that we’re recording this in October of 2016. Depending on when you’re listening to this, those interest rates may or may not be close to the same.
Ty Kiisel:
Right.
Dennis Zink:
Generally, when you have a small business and you apply for a loan, you’re going to have to sign personally. Is that the case with OnDeck? When does it ever not become the case, if so?
Ty Kiisel:
That is the case with OnDeck. We would require a personal guarantee. Unfortunately, for most small business owners that we’re probably talking to today, a personal guarantee is going to be a requirement at just about any place you go, whether it’s the bank or an online lender like us or wherever. A personal guarantee is probably going to be part of the equation.
Fred Dunayer:
That makes sense. I was doing some accounts receivable factoring, which is similar to the merchant cash advance, at one time. The philosophy was if the customer is not willing to put his life on the line financially, why should we?
Ty Kiisel:
There are some benefits to that. For instance, if you go into the bank, they’re going to want to see specific collateral to secure whatever financing they typically do. Online lenders like OnDeck, for instance, and we don’t do merchant cash advances or factoring, but an online lender like us doesn’t require specifically-identified collateral, but what we do require is a general lien on business assets and a personal guarantee to secure the loan until the balance is paid in full.

What that does is it allows a lot of … And we’re not the only people that do that. There’s lots of lenders who do that now. The benefit to the small business owner is if they don’t have collateral that a bank would accept, like real estate or heavy equipment or something like that that can be collateralized at the bank, they would be turned away; whereas they can now have capital available to them, provided they have a healthy business and can demonstrate the ability to repay a loan.
Dennis Zink:
Ty, what’s the time frame that a small business can expect to wait until they get an approval from you?
Ty Kiisel:
You can get an approval within an hour or so, sometimes as quickly as a few minutes. You can have money in your bank account as quickly as a couple of days, often as quick as 24 hours. When you compare that to the average bank loan that’s going to take several weeks, that’s really quick, which makes a really good argument for knowing why you’re borrowing money, because if you’re borrowing money to, say, for example, take advantage of an opportunity to purchase quick turnaround inventory at a discount, you haven’t got several weeks to wait to make that purchase. You need to react right now.

If you’re a restaurant and your pizza oven craps out, you need to get back up and running as quickly as you can. Several weeks waiting for financing for a restaurant could actually put it out of business. Depending upon what you need the loan for, one of the considerations that you should be asking is how long is it going to take me to get the funds, which leads into the four things I think you need to ask yourself before you apply for a loan.
Dennis Zink:
Ty, a couple minutes? I’ve never heard of that. Please put a hundred thousand dollars into my account, and I can wait a minute or two.
Ty Kiisel:
Yeah. It’s much faster than going into the bank. We’re not the only ones that are able to do that. A lot of online lenders are able to respond that quickly. Part of the reason is because the availability of data about your business is available to us. We’ve been in business since 2007. We’ve provided over $5 billion to small businesses, just like the folks that are listening to this podcast, and have made literally tens of thousands of small business loans.

One of the things that makes this possible is the availability of a lot of information, if you’ve heard of big data in the media. When your business comes to OnDeck, for instance, we’ve probably lent to literally thousands of businesses just like yours. When we are doing an evaluation of your credit, we’ve got a lot of businesses to compare to when you come to us for a loan. There are other businesses just like yours that we can make a comparison to your business.

We can look at you and other businesses like you and can make a determination based upon your business information as to your potential credit worthiness, the likelihood of you repaying the loan, and all of those decisions. Because it is data-driven as well as reviewed by people, it makes the process much faster.

Getting an answer in an hour or two may sound insanely fast, but we use technology to help make those decisions, so it’s very possible. At the bank, for instance, most of that process is a very manual process. You’re gathering people together, you’ve got this manual process that just is going to take a lot of time. The blending of technology to meet a business’ needs is what makes it possible for lenders like OnDeck to respond so quickly.
Fred Dunayer:
When you’re talking about being nimble and being able to operate that quickly, do you offer a line of credit type offering as well as regular loans?
Ty Kiisel:
Yes, we offer a line of credit up to a hundred thousand dollars. I guess you would say that the range of small business loans that we offer is between $5,000 and half a million dollars. Depending upon your need, I’m sure we’ve got something that’ll fit for your particular business.
Dennis Zink:
How long does a business need to be around? How mature does it have to be to be able to be in the ballpark to get a loan with you?
Ty Kiisel:
Online lenders, generally, and OnDeck, specifically, typically are looking for a year in business with somewhere around a hundred thousand dollars in revenue and a healthy business demonstrated by a positive cash flow, as opposed to the bank that wants to see a million dollars in revenue and four, five, six years in business. Depending upon the age of your business, that’s going to also determine where you should look. Online options are, if you’ve got a year under your belt, the options increase for you quite a bit.
Dennis Zink:
Is technology the key factor in driving all these different changes today?
Ty Kiisel:
Technology is a factor, but I think that what we’re seeing is a shift in paradigm as far as how you consider a small business owner and a small business when lending. For example, it wasn’t too long ago that you’d sit across the table and if you had collateral, you had a good personal credit score, and you could sit across from the bank and get a loan. Personal credit score became a big huge factor in how you were evaluated.

Technology has enabled us to look at the small business lending process from a different way. Personal credit score says something about you, but it doesn’t necessarily talk about your business. It drives how you pay your mortgage, how you pay your auto loan, how you pay your personal expenses, but it doesn’t necessarily describe how a business meets its financial obligations.

Technology is enabling us to look at the business specifically and determine whether or not a business is healthy, whether or not the business is likely to even be able to service a debt. Personal credit score is part of the equation, but it’s not the go/no-go metric that it is with the local bank, because there are, for example, at OnDeck, we look at a thousand different data points to make decisions about your loan, and personal credit score is only one of them.
Dennis Zink:
How should a small business determine the size of the loan? What are some of the factors they should look at?
Ty Kiisel:
I think, in my mind, the first question is what are you borrowing for? What’s your loan purpose? What that’s going to do is that’s going to tell you how much you should borrow.

I grew up in a small business with my father’s business. He was very conservative. That point of view has carried over into me. His attitude was regardless of where you find capital, borrowing money is expensive, or at least there are costs associated with it. If it doesn’t add value or increase ROI potential, you don’t borrow, you save for it.

I was at an Amazon Sellers Conference earlier this year, and I was on a panel. One of the panelists said you should borrow as much money as you can whenever you can because you never know when you’re going to be able to borrow again. In my opinion, you should borrow what you need and no more. The cost associated with borrowing is just too expensive to borrow what you don’t need. If you need $10,000 to buy a new pizza oven, borrow $10,000, but don’t borrow 20 because you have an opportunity and you can qualify for 20. Just borrow what you need. How much you need is determined by what your loan purpose is.

I’m not a sales person, so I don’t talk to borrowers all the time, but occasionally I do. When I ask, “How much money do you need?” and they say, “How much money I can get?” that makes me cringe because it tells me that the borrower hasn’t thought about what they’re borrowing for and they don’t know exactly how much they need. They probably haven’t looked at what the return on this borrowed money is going to generate for them.

The Electronic Transactions Association came out with a survey earlier this year. They asked small business borrowers who work with online lenders specifically, and one of the things that I thought was very interesting is the majority of these borrowers expected to earn a five times ROI return for every dollar borrowed. They were very clear about what they were borrowing for, how much they were borrowing, and what they expected the return to be. Loan purpose, I think, drives this whole profession.
Dennis Zink:
Okay. You gave the example of a loan for a pizza oven, or for an oven. I thought of pizza for some reason. I thought what if you need more dough for dough and you come back for a second ask. Is that good that you’ve established a relationship? Are you more apt to have an easy time getting that second $10,000 if you needed it? How does that work?
Ty Kiisel:
I think most lenders want to have repeat customers, they want to have borrowers come back. I think the average at OnDeck is two loans. Yeah, we do, OnDeck does. I think the industry generally likes to see responsible borrowers return. Most borrowers who are coming to us, for example, are borrowing for growth. It speaks well of the business when they need to come back and feel more growth with borrowed capital.
Dennis Zink:
If I go to your platform, do I speak to a human, or is it I could fill out an online form, an application? What’s the human interaction, if any, that’s involved?
Ty Kiisel:
You start the process by completing a brief one-page application online. Then you have the option as a borrower to go through the system without talking to anybody. The lion’s share of customers actually talk to a loan officer, and it helps through the process.
Dennis Zink:
Why is it important to look at the small business borrower from a different paradigm today? Is personal credit score a reliable metric?
Ty Kiisel:
The traditional financing model rules out a lot of healthy businesses. For example, let’s say you’ve got a business that it’s a small merchant and they do $750,000 a year, but they don’t have any collateral. That would rule them out of most small business loans from a bank or a credit union. Looking at the borrower differently enables a lot more small business owners to access capital. There are just, frankly, a lot of businesses.

The bank is a wonderful option if you qualify there and if you meet their criteria, but there are lots of really good businesses with healthy cash flow and healthy businesses generally that just won’t get success at the bank because they don’t have enough collateral, maybe they haven’t been in business long enough, or they’re asking for too small of a loan amount.

For example, a loan at the bank, they’re geared for the half a million, million dollar loans and, believe it or not, it costs the bank about the same in underwriting and regulatory burden to write a $50,000 loan as it does a half a million dollar loan. If I’m the bank, what loan am I going to want to write? I’m going to want to write the bigger loan, and it’s hard to blame them.

I think we have to look at this from a different perspective because there are a lot of underserved borrowers in the marketplace right now. I think that you’re going to see, for example, OnDeck has recently partnered with Chase Bank. Our model is what they use for a lot of their smaller loans. I think you’re going to see more of that in the coming years.
Dennis Zink:
What level of expertise does the small business owner need to possess to understand what he’s getting into?
Ty Kiisel:
I think the small business owner needs to be willing to dig in to just exactly what the costs are because small business lenders, regardless of who they are, all talk about the costs in different ways. It might be APR, it might be total cost, it might be a factor rate, it might be a simple interest. You’ve got to understand exactly what you’re paying.

Basically that’s not necessarily an expertise, but that’s a willingness to read the fine print, ask questions, and make sure that you understand exactly what you’re getting into because some lenders are more transparent than others. As far as expertise is concerned, I think you need to understand what makes sense for your business.

For example, there are short term loans that are six months long up to a 10-year loan at the commercial bank. Depending upon your loan purpose, some loan terms make more sense than others. You need to understand, for your specific needs in your business, what makes sense?

If I’m buying inventory, for example, that I’m going to turn in six months, it might not make sense to borrow and pay for that inventory on a five-year note because what happens next year when I need to do the same thing? I’m still paying for the inventory that I purchased this year. A small business owner, because there are more options, they need to understand what option makes the most sense for their business.
Dennis Zink:
Do you ever restructure the loan in midstream? Is that done?
Ty Kiisel:
Typically, OnDeck, for example, is a short-term lender. We lend between six months and three years. We don’t necessarily restructure a loan into a longer payment term, but we will work with a borrower that finds themselves in a bind and try to help them, but we’re not going to restructure a two-year loan into a 10-year loan or something like that.
Dennis Zink:
Does it matter why the borrower is borrowing as long as they can show an ability to repay?
Ty Kiisel:
I think it absolutely does. For example, I think I mentioned this, most of OnDeck’s customers are borrowing to fuel some kind of a growth initiative, which is a wonderful purpose for an OnDeck loan. Borrowing to float cash flow to make payroll would probably not be a good use of an OnDeck loan. Loan purpose, I think, does make sense.
Fred Dunayer:
Ty, is crowdfunding an option for some of these small businesses if time is not an issue in the amount of time it’ll take to get the funds?
Ty Kiisel:
Crowdfunding is an option for a lot of businesses. For example, if you’re an idea-stage startup and you’re trying to launch your business, or you’ve got a brand new product that you’re trying to launch, crowdfunding could be a good option for that. Not only does it allow you to get funds without a loan being involved, it also enables you to maybe market-test. If you’ve got a new product and it flops in a crowdfunding campaign, it might not be a successful product. You get a chance to evaluate that.
Fred Dunayer:
Very good. Is there anything that we have not discussed, or a particular point you would like to emphasize before we close this discussion?
Ty Kiisel:
I think that the … And I hope I’ve articulated this well in our conversation, but I think the whole discussion about what loan makes the most sense for your business can be summarized in four questions. Number one, I think you need to ask yourself as a borrower, “What am I borrowing for?” That loan purpose is critically important. That’s going to inform how much money you ask for and how much you’re looking for. How much you’re looking for is going to also help you determine where should I look because some lenders are going to lend better loan amounts than others.

The fourth question is, “What does my credit profile look like? What does my personal credit profile look like? What does my business credit profile look like?” because, depending upon the lender, some lenders have a greater tolerance for a less than perfect credit profile than others.

I think you need to ask yourself those four questions, figure out where the holes are in your application, and then you can make an informed decision as to how much can I afford to pay in interest cost and where should I be looking and all of those kinds of questions.
Dennis Zink:
Ty, thank you for being our guest today on Been There, Done That and enlightening our listeners on small business loans.
Ty Kiisel:
Thank you. I appreciate being here. I hope what I shared today was worthwhile for your listeners.
Fred Dunayer:
I’m sure it was. Thanks a lot, Ty.
Fred Dunayer:
You’ve been listening to the SCORE Small Business Success Podcast, Been There, Done That. The opinions of the hosts and guests are theirs and do not necessarily reflect those of SCORE. If you would like to hear more podcasts, get a free mentor, view a transcript of this podcast, or would like more information about the services we provour website at www.score.org. Again, that’s 800-634-0245 or visit the website at www.score.org.