Which Business Financing and When? Finding the Right Fit for Your Business – P2Binvestor Small Business Webinar Series
Looking for more information about the different kinds of lending products available to your business? Look no further. P2Binvestor invited several experts to talk about the types of business financing out there and at which point in your business’ lifecycle you should employ each. Many business owners believe a bank is their only option, and others believe equity is the best way to go. The answer for most businesses is that a combination of funding and business financing sources is a smart move. Just like you should diversity your stock portfolio and retirement accounts, you should think about the barnimportance of diversifying how and when you acquire cash for your business.
What if you are in the market for a bank loan? You can work with a bank, but also think about working with a credit union that offers commercial lending options and other business-friendly products such as company credit cards. If you need to shore up cash-flow issues, have slow-paying customers, need to manage seasonal fluctuations, or need cash for expansion, you should consider invoice factoring or receivables financing. Crowdfunding is a popular method these days, and while it takes quite a bit of work, it can also pay big dividends if you do it right. CDFIs (Community Development Financial Institutions) and non-profit lenders can be your best bet if you’re a retail shop, restaurant, or other local consumer business.
This webinar features business financing information and presentations by Ron Pino of Elevations Credit Union (commercial bank loans), Dennis O’Carroll of Juno Financial (receivables finance), Chad Lucero and Jeff Barnett of Capital 2 Thrive (purchase order finance), Leigh Lepore of Crowdfunding Strategy & Information (crowdfunding expert), Krista Morgan of P2Bi (crowdlending), Alan Ramirez of Colorado Enterprise Fund (CDFIs and small business lending), and Rachel Russell of Colorado Lending Source (SBA loans and small business lending).
Krista Morgan: Good morning, everyone, and welcome to today’s webinar, Which Type of Financing and When? Finding the Right Fit for Your Business. This webinar is part of P2Binvestor Small Business Webinar Series, and we’re very happy to have everyone joining us. I’m Krista Morgan, Co-founder and Chief Operating Officer of P2Binvestor, and I’ll be moderating the webinar today. What we’re going to do is introduce you to a couple of different lenders and financing companies who are going to tell you about themselves, the kind of financing they provide to businesses and talk about when it’s a good time for business to come to them: when in the life cycle, what stage of growth, and even what challenges you might be facing. We’re not, I will say, going to cover every possible type of financing because there are many, and what we will be doing is hosting more of these webinars to cover future financing options. Our goal is really to provide business owners and decision makers with some information about the kinds of financing and loan products available to them. I’d like to introduce our panel today. We have a really big group here at our office. In order, we have Ron Pino from Elevations Credit Union, Dennis O’Carroll of Juno Financial, Chad Lucero and Jeff Barnett from Capital 2 Thrive, Megan Sheehan of Colorado Enterprise Fund, Rachel Russell of Colorado Lending Source, Leigh Lepore of Crowdfunding Strategy & Information, and of course, me, Krista Morgan from P2Binvestor. Each panelist is going to provide a brief run-through of what they do. We’re going to keep it to under five minutes a person, talk about the kinds of businesses they work with and when it’s appropriate for a business to get in touch. We will save time for questions at the end, so if you have questions as you go along, just type them into the chat box, and we promise that we’ll get to them. Without further ado, let’s jump right into it, and I’m going to pass the microphone over to our first panelist, Ron Pino from Elevations Credit Union.
Ron Pino: Thank you. My name is Ron Pino. I’m with Elevations Credit Union. I’m a Senior Commercial Lender. A little bit of background about Elevations. Currently, we are a $1.3 billion institution with over 100,000 members and offer a wide variety of products and services, and obviously, consumer banking is what credit unions are most known for now. My arena is business banking within the credit union platform. With that being said, as far as who’s a good fit for Elevations, good perspective business clients are clients who are interested in building long-term relationships with Elevations. We’re not transactional-based although we do just do some lending transactions. We’re looking to build long-term relationships. Ideally, locally owned and operated, which means they either reside in the State of Colorado or preferably within our footprint which is Adams County, Broomfield County, Boulder County, and Larimer County. We are looking at expanding our charter specifically to Denver County as well as possibly Weld County. The biggest thing with us, we’re looking for mature businesses. We don’t do startup financing right now. We don’t offer SBA. We’re looking for mature businesses that have been at least three years in operation and are profitable. With that, we can end up to about $7 million in aggregate lending needs right now. Some of the industries that we lend in is… We work a lot in commercial real estate. Whether owner occupied or investment, we’ll do either. Construction is a big arena for us right now. We’re doing a lot of construction lending – both commercial and residential. Professional services, medical professionals, manufacturing, retail stores that are non-cash intensive, obviously, technology service provider, for-profit education. And then we also do have an energy-lending program that we partner with Denver and Boulder County. Kind of some of the arenas, of course, we do a lot more than that, but specifically, these are some areas that we’ve been focusing on.
So your traditional business banking service, we offer the same as what you’d expect in a large bank with the exception of probably full-treasury management services. But checking the savings account, money market, CDs, merchant services, payroll services, online banking, bill pay, and SEPs – we offer all those services. But in conjunction with that, obviously, we offer lending services as well. I won’t get too deep into the lending products overview, but as you can see on the first page here, we offer of course a business credit card, just a basic Visa business credit card for small purchases, quick application, times and turnaround – really for smaller financing needs. We offer your traditional operating lines of credit, that fund day-to-day operational needs that are usually secured by accounts receivable, equipment, real estate, something of that nature. We also do equipment finance. People looking to purchase equipment for their businesses, we can do that. Commercial vehicle loans as well, which really falls in the equipment loan arena. It’s pretty similar to that particular product as well. And then on our last page here, obviously, kind of what we do the most of right now is commercial mortgage loans and, I’d say, construction loans. As you can see on the commercial mortgage loans—see, it’s right there—three, five, seven-year fixed rate on 20 to 25 year amortization, depending on what type of property you’re looking at. I think the advantage in this arena, when you’re working with a traditional finance institution like ours is going to be, really the rates and terms. We can offer extremely competitive rates, longer-term amortization period, and we’re pretty creative in our overall cost break-down to make things affordable for people looking to get into this arena.
And then, I’d say, the biggest competitive advantage we have right now is really the construction lending arena. This is an area of need that we have seen start to boom again. There’s a lot of under-built properties, residential properties. So we’re seeing a huge need for construction lending, and so we do construction-lending projects that are generally 12 to 18-month-term loans. We handle the draws, the in-house throughout the projects. We have a third-party inspector come out and inspect the property during construction and really quick turnaround and extremely competitive rates on those particular products as well. And then of course, your traditional term loan for bank finance, tenant finish, equipment, and I’d say, debt consolidation, business acquisition needs, things of that nature as well. If you have any questions, my contact info is on this next page, and feel free to reach out if you have any questions. Thanks.
Dennis O’Carroll: Thanks, Ron, and thanks, Krista, for having me today. My name is Dennis O’Carroll, and I am the CEO for Juno Financial. A little bit about Juno. I founded Juno back in January of 2012 with my wife. That’s because she came up with the name. We’re based here in Denver, Colorado. We’re a specialty finance company, and our goal is to help small businesses reach their goals by providing financing. One of the things that we think sets us apart is the respect and professionalism that we deliver to every client or every prospect. In the alternative financing space (I won’t pick on any particular product) there are still some predatory practices out there that you have to be aware of. We try not to do that. We don’t just try. We don’t do that. There are tricks in people’s contracts. There’s poor behavior out there. So we go the opposite end of the spectrum and treat everybody very professionally and respectfully. We have a nationwide footprint, but we focus here in Colorado since we live here. What do we do? What does Juno do? Juno provides financing to small business that unfortunately can’t get traditional bank financing. There could be many reasons why they don’t qualify for bank financing. They could be very new, a startup. It could be that one of the owners has some personal credit issues. Those are things that we can work around generally. We’re a specialist. We’re a generalist rather. We don’t focus on any one industry. There are plenty of finance companies out there that focus on, for instance, construction. They do it very well. And so we let them take care of that business, or trucking is another big one. So we are a generalist, and we look at all kinds of companies. For us, variety is the spice of life, and we don’t want to limit ourselves. Another thing that we do that sets us apart is we truly partner with our clients to help them be successful. It gives us personal satisfaction, professional satisfaction, and at the end of the day, it reduces our risk if they’re successful.
Who do we serve? Why businesses make sense to come talk to Juno? If you’re a small business, you don’t qualify for bank financing. You’re growing fast, and you need a capital to fuel that growth. I always hear, “I can do bigger deals if only I could pay more people or buy in more product.” That’s kind of a perfect customer for us.
You have to have credit-worthy business that you’re selling to. We want them to pay their bills on time. The industry average to collecting invoice is about 45 days. What happens frequently when you work with a company like Juno or P2B, that day’s outstanding comes down, which ultimately reduces your financing cost. Juno typically works with companies that have $3 million or less in revenue. We can work with startups and do. The benefit here is, as long as the business is generating revenue, generating receivables, they might qualify. We have to do our due diligence to make sure that it makes sense, but we work with plenty of startups and early-stage companies. As I’ve said before, we’re a generalist. There are certain things that we exclude, like trucking and transportation. Most construction is difficult for us. And any third-party reimbursed medical kind of falls out of our box. What is factoring? I’m going to go through this very quickly. It’s an alternative form of financing, so instead of a typical bank where they’re going to lend against your receivables or inventory, we actually buy your invoices at a discount. The way this happens is you’ll get… typical terms you can expect to see from a factoring deal, that’s a silly amount, the advance rate, discount rate, recourse days, etc. The way it works is it’s very similar to a line of credit. You send us your invoices. We verify them. We give you funding. And then when your customers send in their check to pay that invoice, we return the difference less our fee. Some of the nice things about factoring is it can grow very quickly as a business grow quickly. So if you got great growth, rapid growth, don’t worry. That line of credit, that facility amount can go up in as little as one day if things look good.
Here are some of the benefits of factoring:
It allows the company, small business that’s growing to hire more sales folks or operations folks. You can bring on new customers, take on larger orders, improve your cash position. You turn your receivables into cash. That allows you to take advantage of potentially vendor discounts. You can use the funds really as you see fit. It also enhances your business, so you’re able to finance your business without adding debt. When it’s time to go talk to a bank, they’re going to look at your balance sheet, and it’s going to be pretty clean. It also allows you to build your credit profile because you’re paying your bills on time now. It also make investments in your company if you need a piece of equipment, and for whatever reason, Ron can’t help you out on the equipment financing side, you can still get that working capital that you need.The last thing that I’ll leave you with is Juno works with companies, and we really want you to succeed. It gives us a lot of pride when a company graduates from us to a bank.
Jeff Barnett: My name is Jeff Barnett. I’m with a company called Capital 2 Thrive. We’re a little bit different here at the table compared to everyone else because our background really isn’t coming from the finance world. We came from the manufacturing world. We started Capital 2 Thrive recently because we have a successful toy company that we could not get funding for when we got a major order. We got an order from one of the largest retails in the world, Costco. It was in over-million-dollars. We had great margin. We could not find the lender to give us money based on that purchase order to manufacture that product. So we did start our company. And so our full focus is specifically on funding reduction for companies, funding purchase orders. We discovered this void in the marketplace. We put ourselves out there. We work a lot of times with small startup companies. It’s one of those situations where you have a product, and your dream is someday that a target, or Wal-Mart, or some major retailer’s going to come to your booth and trade shelf and say, “We want that product.”
Unfortunately for most companies, if they do that, it could bankrupt your company because you’re not prepared to take that type of growth on. We allow you to take that growth on if you have those opportunities.
We have a lot of great experience in manufacturing internationally, and we will pay for production internationally. We also assist in negotiating with the vendors that you’re dealing with. If you have a manufacturer in China, we might be able to get you a discount based on our payment terms, knowing that we’re coming to the table with the money to pay for that production. We also provide tools. One of the things we started doing with our customers is providing them what we call the capital assurance guarantee, so that even before you have a purchase order in hand, if you go to a retailer—you’re an outdoor goods manufacturer. You go to an REI—you can walk into the buyer at REI and say, “Not only is our product unique, if you place an order with this, if you trust us with placing a PO, we will be able to fulfill that order. No problem. We already got our financing in place.” We provide a structure in how we do our financing that will minimize the rates that you’re charged by working with companies like Juno and P2Bi. That’s what Capital 2 Thrive does. I’m going to pass it over to Chad Lucero.
Chad Lucero: Good morning, everyone. My name is Chad Lucero, and I’m also with Capital 2 Thrive, and I think Jeff did a very good job of explaining really what we do and what we focus on. What I want to talk about briefly is when you should be looking at utilizing a Capital 2 Thrive, and there are a litany of times when you want to look at a company, such as ourselves.
Upfront, if you’re in the process of actually planning and pricing your product, one of the things that we find—we did it ourselves—we didn’t structure in into the cost of our product the cost of financing. So we work with our companies and our clients to make sure that they’re looking at all of their costs upfront because if you actually take the cost of the financing in and you build that into your product, it’s truly only pennies, but then you don’t have to impact your cash flow and your working capital. You can actually pay your bills. The production is happening without you putting money out. We’re taking care of that. You’re not losing anything. You’re not impacting your margin because you’ve already structured that in.
Those type of things are very important. Now, if you already have a product that’s out there—and we work with companies that have been out there for two, three, four, or five years, 10 years, and they’re just looking at growing—we can also help you at that point in time too. You don’t have to have a brand new product that’s just coming out to market. What I’d like to leave you with is that, when you’re looking at building your business, constantly think about the cost capital to where you can build that in, and you don’t have to impact your margin. Utilize somebody else’s money to grow your business, and that’s really what we’re here for. We do a lot of education because it took us a lot of years to figure this out. We’re happy to give out some of our education and our hard knocks along the pathway. Thank you for listening to us, and I’m going to hand it off to our next speaker.
Megan Sheehan: Good morning, everyone! My name is Megan Sheehan. I am a Loan Officer with Colorado Enterprise Fund. When should you come to Colorado Enterprise Fund?
Well, first of all, feel free to call us or look on our website anytime. We, Loan Officers, are always happy to chat with you. Most of the businesses that we do are startups, and obviously, banks need to see two years of tax returns, they’ll fund you. A lot of the speakers have spoken about crowdfunding and stuff. You can come to us during or after you’ve done your crowdfunding. Let’s see. We are a 501(c)(3) non-profit that has been around for 38 years. We’re Colorado-based, and our funds are exclusively for Colorado residents. That being said, we do have some businesses that have investors or owners that live outside the state, but the majority owner has to be a Colorado resident. We are part of The Community Development Financial Institution Industry, meaning that we’re not a bank, but we focus on community impact, and all that we do is small business loans. We provide loans from $1,000 up to $500,000. Our average loans size is about $30,000, but typically, we are actually seeing more requests in the range of $50,000 to $100,000. We’ve done about $32 million in loans since 1990, and just in this last fiscal year alone, we have done $8 million in loans. We do all sorts of businesses, including restaurants, breweries, salons, retail manufacturers, food trucks, daycares, and lots of services providers. As you can see here, 52% of our loans go to startups. The only kind of industries that we don’t do are marijuana, adult entertainment, gambling – those kind of industries. Moving on to a little bit about our programs, like I said, we do loans from $1,000 up to $500,000. We can structure a loan as a term loan or a line of credit. Our lines of credit can go up to $125,000. Those are two-year terms, but our term loans can be extended anywhere up to 10 years, depending on your loan size.
Our average rate on our loans is about a 10%. This depends on the loan size as well as your personal credit score. If your credit score is, say, under 500 or in the 500s, we’re going to be seeing rates of maybe more around the 12%. The highest possible rate that you get is a 13% with us. To do a line of credit, we would probably be looking for a business to have contracts – maybe in the construction industries. That’s where we see a lot of those, or also just for business that have seasonality. Typical uses of our financing. We’re very flexible, and businesses use our funding for whatever purposes suit them at the time. Many of them are listed up here. They include working capital, equipment, inventory, purchase of a business or franchise, gap financing for real estate. You’ll hear in a moment, from Rachel, about the SBA 504 loans where the owner needs to bring 10% to the table. If you’re short on that 10%, reach out to us or talk to Colorado Lending Source in your bank, but we can help on the gap financing. Also, any businesses that have a mission to provide healthy foods to low-access areas can get special rates and terms with us. One thing that’s included as part of our rate is access to our one-on-one business advisers. These are actually funded through the US Small Business Administration, and they’re tailored to your needs. So if you need help with marketing, or cash flow planning, or budgeting, or even legal assistance, these people are here to help you. If you’re interested in applying, please feel free to contact me or visit our website. Everyone has to submit an online application. And as far as the timeline, it depends on the size of your loan, but we generally tell people, it’s a four-to-six-week process from initial contact with a loan officer to disbursement of your funds. Again, my name is Megan Sheehan, and my direct line is here. Feel free to email me, and I’d love to answer further questions.
Rachel Russell: Thanks, Megan. As Megan mentioned, Colorado Enterprise Fund is a great partner of Colorado Lending Source. It’s great to be on this panel together. I’m going to talk a little bit about Colorado Lending Source. We are a local, non-profit organization located in Denver. Looks like we’re having a little bit of a delay, and we will move in here in a second. Here we go. All right. Colorado Lending Source, like I said, is a local, non-profit organization located in Denver. We are what’s called a certified development company and a lender service provider. What that means is we are certified by the Small Business Administration to facilitate their two main loan programs: the 504 and the 7(a) Loan Program. As an organization in 2013, we did 276 loans to small business in Colorado, and so we have a pretty good economic impact here in Colorado. We always partner with a private sector lender to facilitate these two programs, and we have a variety of other aspects that we are involved with, including economic development partnerships, entrepreneurship training, and also these two main loan programs. I’m going to start with the 504 Loan Program. This program is intended to help a small business buy, build, renovate commercial real estate that its owner occupied. It’s not intended for investment properties but owner-occupied commercial real estate, and it facilitates a lower down payment for small business owners. Typically, with a conventional, commercial, real estate loan, you’d be looking at a much higher down payment. With our typical structure, it would be 50% of the loan would be provided by your private sector lender (whoever you choose to work with), 40% of the financing would be provided by Colorado Lending Source on behalf of the Small Business Administration, and then the small business would be required to come in with 10% down. In these loans, our 40% portion are fixed for 20 years, and the last funding rate was 4.96. So it’s a very attractive 20-year, fixed-rate on these real estate loans. Our partner lenders often also do 10-to-20-year terms on their portion of the loan, and usually we see those at about 5.5-6%. It’s a very good rate and a low down payment for the customer.
The times that that structure would change would be if the property is a specialized property, such as a gas station or a hotel. The small business would have to come up with additional 5% if it is a startup in addition to a specialized property or looking at a 20% down payment. That’s the only time that that would change. We see a lot of businesses that take advantage of this program. We have great partners that we work with to ensure that this is out there, and we just love for you to keep it in mind if you’re ever in a position to buy or build your business. I’m going to move along to the 7(a) Loan Program. Colorado Lending Source helps facilitate this loan program as a lender service provider. We partner with community banks primarily in Colorado to help them offer this product to their customers. 7(a) Loan Program can be used for a variety of different purposes, including real estate acquisition or building as well but also a litany of other small business needs. So we see a lot of that refinance request, business acquisition, startup expenses, leasehold improvement, working capital, inventory – really, any business need that you might have, the 7(a) Program is a good catch all for that. What that program is a government guaranteed loan. So if you’re a lender, we really want to be able to help you, but if there’s something about the business that falls outside of their conventional credit policies, such as maybe one of the owners has a low credit score or insufficient collateral to have it fit in their conventional credit box. The Guaranteed Loan Program is a great way to mitigate that and allow for banks to still be able to assist you. The rates for these loans vary. The lender can choose to charge a fixed or a variable low rate. It really just depends on a variety of factors. The rates will range between 6% and 8.13%, depending on if it’s fixed or variable. This is just a great program to keep in mind if you’re not necessarily in a position to obtain a conventional bank loan, but you’re almost there, and the bank is willing to work with you. This is a great litigant for those situations. Just to finish up here, we also have Ice House Entrepreneurship Program that we facilitate as an entrepreneur training program, and our next session starts in September. It’s a 10-week program located in Denver, and there’s an informational session on the 26th of August from 5:00 to 6:00 at our office. So if you have any interest, please feel free to give us a call, and we’d be happy to talk to you about that as well.
I’ll pass it along to Leigh.
Leigh Lepore: Hi, everyone! Let’s talk about crowdfunding. My name is Leigh Lepore. I’m run the Crowdfunding Consultancy based here in Denver. We help small businesses and entrepreneurs understand crowdfunding and the different types of options that are available. It actually helps them set up campaigns and run them to get funded. Let’s talk about the crazy world of crowdfunding. Really, it’s not quite so crazy. It can be. It’s been in the media quite a bit, but there are two primary things I want you to get out of this. The first is that legitimate businesses are raising hundreds of thousands of dollars, even millions of dollars through crowdfunding. The second thing is that there are different types of crowdfunding, and you should figure out which one is right for your business. Some are more regulated than others, so you should decide which one is most appropriate for you. What exactly is crowdfunding? In its most basic form, it’s the pooling together of small amounts of money from a group of people who have a common interest. That common interest is your business, the success of your business. That little bit of money can be as small, in some cases as $1,000, $25, even $1 that people are investing in your business. It’s a lot of people, so the number of investors can be as large as thousands of people. The good thing about this—what’s making crowdfunding successful—is that it spreads out the risk. When you have thousands of people who are investing as little as $1, they individually take on less risk. The other thing to consider that’s making it successful is that it takes advantage of the internet and social media. So it’s making it easier for entrepreneurs to let the world know that they have an investment opportunity, what the details are of that opportunity and then sharing it through social media.
In the last six years or so, a number of platforms have popped up – crowdfunding websites that are making it easier also for entrepreneurs to take advantage of crowdfunding – websites such as you’ve heard of Kickstarter, Indiegogo, P2Binvestor is one, Lending Club, Early Shares, CircleUp, and so on. There are a number of them out there. Let’s go to the next slide.
How do we know that crowdfunding is actually successful? Well, it’s generating billions of dollars each year. Around the world, we’re seeing that the number of funds in dollars that are being generated per year is almost doubling. In 2013, it was approximately $5 billion, and in 2014, the expectation is over $10 billion. What’s interesting to know about this is that the money is going to an inventor who invented something in their garage. It’s a musician who’s launching their next album. It could be a restaurant here who’s opening in a new location or even a small business who’s had several successful products and is looking to launch their next big product.
Let’s get into the details in the next slide. I talked about there being different types of crowdfunding. There are actually four basic types. The fourth I’m not including here is donations. If you want to talk to me about that, feel free to reach out. But the three that are really most applicable to small businesses are rewards, debt, and equity. Now, I won’t go through all the details in this, but really—maybe you can take a screenshot, or we can get you this slide—but use it as a reference later on for the details that are included. In regard to rewards crowdfunding, this is kind of the sexiest, most popular type of crowdfunding if you will because everybody’s into the new Kickstarter, creating a pretty campaign online. What’s great about rewards also is that you can use it as a marketing campaign. You can actually launch a campaign for little cost or really no cost and get market feedback from the crowd on your product before you launch it. Debt-based crowdfunding. There are really two types of debt-based, basically small business loans which is really based on the profitability, how established your business is, loans between $1,500 and $500,000. These are accredited investors only. P2Bi is an exception to this, so I’ll let Krista talk about the details and what they offer. Certainly, from small business loans, there are also individual loans. So these are loans that are up to $35,000. You can use them to launch a business or grow a business. What people really like about debt lending or debt-based crowdfunding is that it’s an easy process. It’s paperless. You go online. You can get pre-approved in some situations within a few hours. You can even get funds within a couple of days.
The last one is equity crowdfunding. This is really for established businesses. Oftentimes, platforms are looking for you to have $1 million plus in annual revenue, a couple of years in operation. You need to have high growth. Investors are looking for you to have a good trajectory path so they can have a nice return on their investment. The average raise is about $200,000. They’re only accredited investors. Again, you go to a website, create a campaign, build your case, set your terms, share it through social media. What’s great is, oftentimes, there’s a community of people who are already looking forward to invest in your type of business on these websites. So that’s crowdfunding in a nutshell. Feel free to reach out with any questions, and I’ll hand it over to Krista.
Krista Morgan: I like this primer on crowdfunding and the primer on factoring. I feel like we’re basically putting all the pieces together and tell you about what we do. P2Binvestor is a financial, tech company. We are a lender, but we really think of ourselves as tech because it’s such a big part of what we do. We are based in Denver, but we operate nationally. What we’re doing is crowdfunding working capital, loans, and we’re doing it with this unique combination of crowdfunding and technology. We started this business because we sort of thought the business lending needs a bit of a shake up, and actually, everyone in this room has a different approach to business lending, and everyone is looking to find creative ways to get businesses funded because the reality is that if you need a loan… there’s nothing wrong with your business. Every single business, as they grow, is going to see some kind of cash flow or need some kind of financing to keep going, and it’s normal. What we need, what the business need are lenders who can understand their challenges and grow with them as they grow. Our philosophy here at P2Binvestor is that you might need $200,000 today, but hopefully, you’re going to need $500,000 six months from now, and our aim is to be able to support you through your high growth period. So what we’re doing is offering a relatively large, low-cost loans to B2B businesses that are secured by receivables or some kind of future contract revenue. I’ll go into the details of our product. I will say that one of the things that makes our products a bit different is we actually put in a rate guarantee into our loan. So we wanted to find a way that allows businesses to try before you buy, which isn’t really possible in business lending, but we came up with this idea of a rate guarantee, which was that, if your business is growing, and you have been funded with us, and you get an offer from a bank to get really low-cost financing, then we will let you out of your contract – no questions asked.
Like Dennis said earlier, we believe that we are here to bridge companies through a high-growth period, at which point they can then go and get a more traditional kind of finance. The way P2Binvestor works is that we go out. We find businesses that are offering their customers payment terms – maybe 30, 60, 90-day payment terms. We underwrite the loans. We actually fund the loans out of our own line of credit in the first instance, and then our loans are put onto our online platform, which is only open to accredited investors, and investors can look through all the different loans, choose which ones they like, and allocate funds which are then spread across all of their receivables in that pool, and they earn a return, a better return than what they might get, certainly what they might get in a traditional savings account.
Really, the fact that we are crowdfunded gives us two advantages, which is, one, we’re able to spread the risk of our loans amongst a lot of people, which allows us to do things which a traditional lender might not be able to do. Two, it gives us a lot… we basically just have access to a lot of capital, which means we can turn around from one day to the next and increase, double the size of your line if you need it. The capital is really… Crowdfunding gives us an immense amount of capital. We have three products. Our main product is a factoring product, like Juno, and Dennis is saying, he tends to work with companies under $3 million, and actually, a lot of our companies are over $3 million, which is we do a lot of partnering together. The other thing we offer on our receivables product is the option of non-notification. We receive quite a lot of customers, but they don’t know that we’re involved with the transaction. We stay kind of behind the scenes. And then I also want to mention our contract-revenue-funding model. We’ve been specifically working on a product for companies, like a staff company that has an ongoing flow of guaranteed revenue for, say, a year or two years, and we can look at advancing them at a much more affordable rate than, say, like a cash advance. We can advance against that future contracted revenue to allow them to increase their growth. This is debt-based crowdfunding. What we’re doing is combining crowdfunding and technology to just give companies a better business loan. Technology lowers the cost of our operations, and crowdfunding lowers our cost of capital. And instead of giving our crowd—like they do on Kickstarter—rewards, we’re giving them a return, and that’s the benefit. You can see here some of the companies that we’ve funded. We work in a whole, a wide variety of industries. We have natural foods. We’ve been working in staffing companies. We got clean tech. So we want to see, we want to help a lot of businesses. We are growing very quickly. We’ve made about $6 million in loan in the past three months and funded almost $10 million in invoices. So we’re very excited to talk to a lot of businesses about what we’re doing, and our contact information is there. Please don’t hesitate to reach out. I think what everyone here around the table will tell you is that you reach out to any of us. If we can’t help you, we will usually refer you to someone who can. That’s a very collaborative community, is what I would say. That’s it. Are we ready for questions? Awesome. I actually had a question. We got questions already.
I actually had a question for Colorado Enterprise Fund and potentially Colorado Lending Source. You guys are very Colorado-focused. How does someone in another state find a local CDFI, and are there people everywhere and just for those people who might have joined us who are not in Colorado?
Rachel Russell: That’s a great question. On the 504 loan side, we are limited to only working with loans that have real estate located in Colorado. However, on the 7(a) side, we can actually work anywhere in the country with small business lenders, small community lenders that have the need for our assistance. So we can work outside the State of Colorado on that program, but on the real estate program, it’s limited to here in Colorado. We have a large network of CDCs or Certified Development Companies throughout the country that we’re happy to refer small businesses to or local SBA District Offices in other states that can kind of lead them to their local resources.
Megan Sheehan: That’s a great response, and I think you can always start with your local bank and ask them if they know of any local CDFIs in their area. We are funded partially by banks because banks all recognize that there’s a portion of people that they can’t serve. So a bank is a good place to start. Looking up on the SBA website. That is the Small Business Administration website. They always have lender relation specialists that you can call and ask where you can go for funding. Colorado Enterprise Fund is part of the Opportunity Finance Network. So if you Google Opportunities Finance Network, there’s a really great webpage that you can search by your state to find similar organizations that do funding like we do.
Krista Morgan: Awesome. Okay, I have a whole lot of questions.
Who are some of the leading crowdfunding sources for debt and equity, Leigh?
Leigh Lepore: In regard to debts: Lending Club, Funding Circle, Prosper, and then of course, in receivables, I would have to say P2Binvestor. In regard to equity, you have Early Shares, MicroVentures. CircleUp is one of my favorites. They’re focused on consumer products, and there are a number of others that are out there doing really good stuff. Fundable is another. They actually do not only equity, but they also do rewards.
Krista Morgan: Awesome. Erin, where am I going next? This one. So, what are the benefits… Oh, here we go.
Ron, what are the benefits of a credit union over, say, like a major national bank?
Ron Pinto: I’d say some of the benefits in regards to credit unions as opposed to larger national banks, very similar to community banks, decision making is all local. Decision making, for example, all of our decisions and all of our loans are underwritten locally between me and a credit analyst and then taken to a local loan committee where our loan committee is comprised of senior managers that vote on the loans to approve them or deny them. A benefit to that, I think, is that we have a lot more flexibility in painting a story around maybe what some larger banks would just decline right away or consider difficult credits. We can talk through those credits and get those deals done. And so it’s just a much, I think, overall, a better avenue for financing if you’re looking at the local level, working with a credit union, or even in some cases, in the community bank. We don’t do SBAs, so we refer a lot of stuff right now to community banks for SBA, but the credit union platform is great, too, primarily from a lot of the work that they do in the community. On our side, a lot of the revenue we generate goes back to our local communities, which is atypical of a lot of the banks just in general. So, I think in regards to the great rates that we can offer, a local decision making, timely responses, and then the money that we give back to the local communities is really kind of the benefits that set us apart from the large nationals.
Krista Morgan: I am going to send the next question to Jeff and Chad. Can you just talk a bit about sort of…
What makes this purchase order funding different from something like receivables funding, and also what makes you guys different in particular?
Jeff: Thanks, Krista. I think I lot of the things is we fund before it becomes a receivable obviously, so there’s no assets involved at the time that we provide funding. And that’s a challenge for most companies. What makes us unique is the fact that we also have… in a worst-case scenario, if the product went bad, if the deal went bad, and now you’ve got a container or more than one container sitting on a dock in Hong Kong, we have the ability to get ride of that product. Most normal lenders don’t, through other networks that we have. That’s one of the things that makes us unique compared to what receivable do.
The next question is how long, from start to finish does it take for a business to actually receive funds, and in my case, the factoring model.
The answer is it depends. No one likes that answer, but it can be in as little as three days. It can also take as long as necessary for the client to submit all the information to make the evaluation as to whether or not factoring is going to make sense. So it can go very quickly. And so when I say you can close in three days, it can also fund within that three-day period. It really depends on the client providing all the information necessary to make the fund decision at my level.
Krista Morgan: Okay. We have some more general questions, like…
How does IBITDA and positive cash flow factor into a financing decision?
I don’t think we’ll try to go around to everyone, but I think we’ll just ask Ron, we’ll ask Dennis, and then we’ll ask Megan. Talk to us about that.
Ron Pino: Yeah. For us, it’s critical. It’s a lot of what traditional finance institutions are going to base their decisions off of. EBITDA being positive, having a positive EBITDA and positive cash flow is frankly critical for our world. The main reason is because the regulatory agencies for, whether it’s the banks or the credit unions, the FDIC, and in our case, the MCUA, there’s not much appetite for risk there, especially after the recession and everything that went on there. So the regulatory authorities, for us, especially the MCUA, they’re truly very challenging to work with. We have to abide by very specific rules and regulations, and so, in that arena, it’s absolutely critical for us. Businesses have to be profitable and doing well.
Dennis O’Carroll: It’s important in the sense that we want to see businesses that are growing, and if they’re not currently profitable because they’re a startup, they’re just getting going, they’ve got lots of override upfront, or they’ve got a lot of expenses, we want to see a path. We don’t want to see a campaign that is continually going to burn cash. If that’s the case, it’s probably a bad business model, and no one wants to take that risk. So startups, they don’t have profits yet. That’s okay as long as they’re selling more to bring on new customers. They’re trying to bring in more products so they can get those sales. It’s less important. It’s really the path to profitability that we’re looking for.
Megan Sheehan: Three words – global cash flow. That is something that a lot of lenders and especially Colorado Enterprise Fund looks at. What that means is, in this context, CEF, Colorado Enterprise Fund, would be providing a loan to your business, but you’re personally guaranteeing it. What that means is that we’re looking at a few things.
Can you support your living expenses at home in addition to our loan, in addition to your business expenses and overhead? For us, you do have the cash flow. If you give us five years of financial projection, but you don’t break even until year three, that’s not going to work for us. The most important thing for us is to make sure that you can pay your bills right away. We can give you a three-to-six-month, interest-only period where your payment would be smaller, but we do want to make sure that you have cash flow coming into your household, whether that’s from a spouse or if you have another job. That’s really important. We don’t want to put anybody into a bad financial situation. So cash flow is really important for a microlender. But we do do startups, and so for projections-based startups, it’s really important that people have some kind of outside income.
Krista Morgan: We’ve got a question around just liens then. What they’ve said is…
If we have a business line of credit already, and I want to get more funding on top of it, if we want to do SBA programs, is that possible?
And I know we probably all approach liens differently, like P2Bi, we really look for first lien. There are exceptions to the rules, and it’s really not our place, but maybe Rachel or Megan can talk about how that factors into decisions.
Rachel Russell: SBA perspective, certainly anything that is going to be finance with the loan proceed has to have a first lien position on those. Whether that’s equipment or real estate, that’s definitely something that’s a requirement. However, a lot of times, we see businesses that have gone and gotten an alternative source of financing, especially through lines of credit, and those have a first priority lien on receivables and inventory, any trading asset. The SBA Program, especially the 7(a), can work with that and, basically, take a junior position behind that lien that’s facilitating that revolving credit need. That’s a benefit to the 7(a) Program. I mean there’s flexibility with that because obviously, the business has a need for that revolving credit feature, and the 7(a) Loan Program is traditionally a term loan program. While there are some other sub lines of credit that fall under the Guarantee Lending Program. Most of the time, they’re going to have some alternative financing source that’s already in place. It’s working well for them. So it really depends on the situation, but there is some flexibility.
Megan Sheehan: Liens, if you or your business has a like a federal or a state tax lien, that’s a problem for us because we do have some federal and state funding sources. So if you have any outstanding tax liens, that’s a problem. But if you just have some liens on your business assets, it depends on the size of the loan. For loans that are $10,000 or $20,000 and under, we’re not super concerned about being in a second position, but if you don’t have any other personal collateral to pledge, as you get into the higher loan amounts, it might be more of a concern. So definitely call us and ask us.
Krista Morgan: Okay. We’re going to head to some crowdfunding question, Leigh, for you. We’ve got two. So I’ll let you just sort of combine the answers, which is…
How much work is it to like run a campaign on Kickstarter or Indiegogo?
I know the answer to that is a lot. And also…
Are there general requirements for businesses who are looking to do crowdfunding, like sort of what does the business look like?
Leigh Lepore: In regard to setting up a campaign on Indiegogo or Kickstarter—so we’re talking about rewards crowdfunding—what we recommend as a minimum is that you’re spending two months in prep, and then you send about a month and a half actually running the campaign. Now, that can completely be influenced by various things. I’ll give you an example. Some of the gaming companies that have raised hundreds of thousands of dollars will end up spending a full year preparing for a campaign. And really, for them, it’s about—well, they’re in such a competitive space—how can they take advantage of running a campaign, while the campaign is running, get feedback so they can further develop the campaign to satisfy their customers, but they’re also looking to make sure that, once they get that money on Day 1, they can launch and they have no issues because there’s a lot of problem-solving that’s done well in advance. In regard to status of a business or being prepared to set up a campaign, again, for rewards, you don’t have to even have a business, but ideally, you know your customers, you know your brand, you know how to represent yourself in the market, you know what your personality is in the market, and you’ve already been talking to people about your idea, about the product that you’re going to launch and getting feedback so that when you launch that campaign, you already have a crowd of people. In regard to the other areas of crowdfunding, as I mentioned with debt and equity, you really want to have some type of established track record. So you need to be generating revenue. You need to have a certain minimum time of operating, etc.
Krista Morgan: Thank you. Okay. Two or three more questions of what we’re seeing, and we’ll try to keep the answers a bit short.
Jeff and Chad, it would be interesting to know how early… when you’ve got a purchase order, but if I’ve got no track record in my business but have a purchase order from Costco, can I come to you, and what are you looking for when you guys are doing your underwriting?
Jeff: Thank you, Krista. That’s a great question. We run into that regularly. What we’re looking for is, essentially, what product line do they have, do they have a track record as far as the individuals who are working within that organization, have they done anything like this before, are they looking to manufacture in the US or are they trying to manufacture overseas? If they’re going either place, have they actually had a run on any of their products? You generally want to test the manufacturer and have a small run upfront if possible. But we want to make sure that manufacturer is going to actually produce the product in the form that you want it, so it turns out the way that the end customers are going to actually want to receive it and buy it.
We will look at what banks look at. The nice thing is that we don’t have the similar constraints that a bank does. If you don’t check all the boxes, a bank most likely isn’t going to fund you. We have some flexibility. We found that, with ourselves, with the organization in the company that we’ve had, that you don’t always fit into the correct box. So it’s nice to have an alternative source that you can go to to look at getting a product produced. Quite often, we find that when we’re working with clients, there are ways to actually lower their cost of production. Some of the ways… some of the hints that we give to our clients upfront are, if you’re a standard company going to get manufacturing, quite often, you don’t have the money upfront to pay for 100% of the product. So your manufacturer won’t give you terms, but if you offer that upfront and say, “Listen. I’m going to bring $500,000 right up front to pay for manufacturing, what kind of a discount can I get?” that’s what we also jump in, and we help that negotiation, because if you can get 2% or 3% off, maybe even 5%, it lowers that cost and certainly, then, lowers the cost of what we charge as well because, now, that’s already built in. So there’s a nice pick-up for our clients. Those are things that you don’t look at when you’re small and starting because you don’t have that revenue base and you don’t have that track record. And manufacturers aren’t going to generally allow a long line of credit if you have no track record. I guess, to sum it up, we’re a little bit more flexible, but we will look at the same portions of underwriting that banks look at, but we have flexibility because you don’t have to check every single box.
Krista Morgan: We’re going to do one last question, and I’ll let Dennis answer, and I know that we share a consistent view on this, but I would just talk about some of the benefits and why that is in fact not true.
Dennis O’Carroll: Yes. You’re right, Krista. It’s not true, and what you see is… That negative connotation that’s out there is because there are some predatory lenders with really bad name, what’s called the F word, because people take advantage of companies no matter where they were in their life cycle. It didn’t matter. They just wanted to get that buck. What we’re seeing is the industry transitioning, and certainly, Krista and I feel the same way, which is we’re looking to fund companies that are on that growth curve and that, on that growth curve, you might not qualify for bank finance (and we’ve talked about it a little bit today, some of those reasons). The bank just might not be comfortable yet. You might have just six months in the business, and you’ve got these great investors or whoever. But you can’t do it.
So it’s really best suited for companies that are going fast. They’re either profitable today or they’re going to be profitable soon by bringing on this new business. So it shouldn’t have a negative connotation. It kind of still does, but we’re going to change that.
Krista Morgan: Great. I agree. All right. We’re going to wrap this up because we promised people it would end at 12:00, and it’s 12:01. I really want to thank everyone on the panel who came to hang out with us here at P2Bi and joined us for the webinar. Again, I would just encourage all of you listening to…
We were thinking about commercial lending. It is complicated. There are a ton of options, and you really should talk to a couple of different types of lenders, and they will be honest with you. They’ll help you get all you need, and they will help point you in the right direction based on what you’re looking for.
That’s it! Thanks, everyone. We’ll see you at the next webinar.