Are you a small business owner who is trying to raise some capital for your small business? Have you thought about getting a microloan? In episode 65, hosts Elizabeth Larkin and Gene Marks are joined by Paul Quintero of microlender Accion and answer the following question:

“I started my small business using my own money, but now I’m ready to scale up. I don’t want to use my credit card and I don’t want to get into too much debt. What are my options? Also, what’s a good way to gauge how much debt my business can sustain? Is there a calculation?”

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Transcript

Elizabeth: Welcome back to another episode of the Small Biz Ahead Podcast. Today, we have Paul Quintero from Accion on. He’s gonna be talking to us about small business loans. And Gene, you had a story about this.

Gene: I do, I do. I know Accion well. We’ll get into it with Paul and what those guys do, and all of that. But, they provide loans, microloans, and other bigger loans to small businesses. But, I was in Chicago last year. I think it was a Hartford related thing. But, there was an event going on and there was a guy that was speaking at the event. And he was an Accion customer. And the guy, I remember him. He was this big, burly guy. He was awesome. He ran a food truck that did BBQ ribs in Chicago.

So, you know, he’s running a food truck and he needed to grow. He wanted to buy two more food trucks. Business was going really, really good. And banks weren’t so crazy about doing business with the guy because he’s a small business. Right, we’ve all been there? And he went to Accion. And what Accion did is, they said, okay we can lend you X amount of dollars; which was great. However, let us work with you and we can get you better deals on the stuff that you want to buy.

Elizabeth: That’s amazing.

Gene: Yeah, so they went out with him; the person from Accion. They helped him buy another truck. They helped him buy equipment. So for the, I don’t know, the $20,000 that they lend him, he got way more bang for the buck than just a typical bank saying, here’s your check now go and good luck and buy it. That’s the kind of service that Accion provides and I thought that was really awesome.

Elizabeth: Yes, and banks aren’t going to give you a $20,000 loan, but Paul’s gonna get into that.

Gene: Correct. Looking forward to it.

Elizabeth: Alright. We’ll be right back with Paul, after a word from our sponsor.

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QUESTION: What Are the Alternatives to Credits Cards When Financing My Small Business?

Elizabeth: Today’s question has no name, and no location, and we don’t know what kind of business they run.

Gene: This person’s just embarrassed to be on our show.

Elizabeth: Yeah, yes.

Gene: I think that’s what it is.

Elizabeth: So we’re just gonna make something up about them. Okay, so here’s the question:

“I started my small business using my own money, but now I’m ready to scale up. I don’t want to use my credit card and I don’t want to get into too much debt. What are my options? Also, what’s a good way to gauge how much debt my business can sustain? Is there a calculation?”

So Paul, we’re gonna let you take a stab at this one and then Gene and I will jump in.

Gene: So Accion. It’s A-C-C-I-O-N, correct?

Paul: Yup, correct.

Gene: And your website… You had told me before, it was us.accion.org, is that correct?

Paul: That’s correct.

Gene: Okay.

Elizabeth: We will put all this in the show notes.

Gene: Sounds good. You know Accion is a non-profit organization, right? But you do lend money to small business owners. So is that what you’re primary role is?

Paul: It is. Really, our mission is access to capital and the business education that goes to that so you can succeed. And what I believe makes us different particularly from the for-profit is that support. If money was the only challenge, we could all cut a check and call it the end of a day. But, I think we all know, that how you use that money is critical. And so we spend a lot of time educating people on that. We spend a lot of time working with individual owners to make sure that they’re using it for their highest and best use.

You mentioned earlier, an example in Chicago, where someone was looking for a loan. They were looking for equipment but there were other solutions and other options that could maximize how that capital could be used. That’s one of the reasons that non-profit lenders, like ourselves, are different. We care about the owner and their transformation and their growth. We do a lot of things to support them cause that’s what our mission is about. Which is very different than the private sector, that wants to create a transaction; which is very good. No problem there. But won’t necessarily be there to support you post the transaction on things that you may need.

Gene: So say I do want a loan. Now, first of all, if it’s a small dollar loan like a lot of businesses have $25,000 they need or something… I mean, for starters, I’m assuming that banks themselves, they don’t like to lend to people of that… You know, for if I’m looking for that amount of money. Is that a fair statement?

Paul: It is a fair statement. We have heard based on the market. But nowadays, less than half a million, or 500 thousand, or 250 it’s just not cost-effective. In some markets, less than a million… A million is considered a small loan for some institutions. So what’s happened is, the cap between what you need to get through tomorrow and what an institution can cost effectively provide you because from their perspective it costs them the same to issue a million dollar loan as it does anything smaller, is huge. And therein lies the challenge, and therein lies the opportunity, and why we need to be there for those that are trying to take that first step, or second step, or third step but are a long ways away from borrowing a million dollars from an institution.

Gene: Got it. So walk me through the process a little bit though, Paul. Say I am interested in getting a loan. Say, I struck out at the bank. I don’t even want the option of credit card financing. It’s so expensive. So, how would I work with you? Walk me through the step by steps.

Paul: Absolutely. Depending on how you reach us, let’s assume it’s though the web. So what would happen is, we have a very short one page form they start with; where we get some basic information. And importantly we do, if you have credit, need to pull your credit reports. That’s where we start. That creates either a situation where we know you’re already eligible. Or B, if you’re not because if there’s some real credit challenges, than it’s an opportunity for us to actually walk through your credit report. Look, here’s some of the issues that you may or may not have been aware of that could be limiting your credit profile and how to improve those.

Gene: And let me… I apologize for interrupting here, but when you talk about being eligible. Say, I’m starting up a business. Or say my business isn’t necessarily profitable. Or say, I was looking for some financing for a home-based business. What makes me eligible for a loan? When would you get an application where you would be like, yeah this person is definitely a good candidate with us?

Paul: So we’ve had… Let’s take the home base because we see and we’ve done a lot of, for example, daycare services.

Gene: Okay.

Paul: So if someone wants to start a business at home, this is a business that there’s no real collateral. And sometimes you’re just beginning. So what happens is… Often times, there’s some informal level of services already being provided. And someone’s coming to us because now they really want to either create an addition, buy some equipment for the daycare center, or the like.

And so what we try to start with is, a sense of what your business revenues and expenses are but also on the household side. And that’s something that folk often miss. When you’re starting a business, I think Peter feeds Paul, and Paul feeds Peter. And it goes from one pocket to the other. What we’ve learned is that the difference between business and personal is very blurred at that initial stage. And so we try and take… Our loan consultants work one-on-one with you to really understand both the household side of the equation and the business because what we don’t want to do, is have to take on debt that’s not sustainable. So we need to understand that.

In terms of eligibility, we have different programs and different types. De novo meaning you’re just starting the daycare. We can have a situation where you’ve already been in operations for several months. But one of the typical documents that we would look for is three months of bank statements. What we’ve learned is, not everybody’s a good bookkeeper. But the bank statements give at least a proxy for cash activity. And we use that plus the conversations we have with you, plus what you may share in the short application to triangulate around what’s really going on economically, so that you don’t have too much debt that you take on.

Gene: So, when you’re saying that… I’m assuming business owners come to you saying, “Well, this is what I need.” But your conversation, I bet you, is bringing people down to Earth and saying, “Well this is really what you can afford based on your-

Paul: Correct.

Gene: Not only your business but like you said, your personal expenditures as well. You can service X amount of debt and that’s what we would recommend. Is that-

Paul: That’s exactly right. And I think, often times, that can be a difficult reality. But remember, we’re a mission-based organization. We’re gonna tell you what we feel, and what we see, and what we’ve learned over almost 25 years. You can sustain because it does no one any good for you to embark on something that could damage. We take a Hippocratic code of lending. Try to do no harm, but you’re exactly right.

The way you get there is by educating people on what their earning. I would say, as obvious as that may sound, most people don’t actually understand where their money’s going. They might get the revenue but they don’t really understand all the expenditures. And I think when we’re able to sit down with them and show them… And one thing to tell something someone but when you show them something they see, oh that makes sense. And then the focus on, well how do I modify that? How could you not spend on this or that? Or how can you gain more revenue? It gives them a focus that’s really helpful, and transformative. And also, it helps them understand how we’re calibrating loan size to what their means can provide. And that’s what we’re trying to do, educating people on the relationship between your size of your business and the debt you can take on and then how to grow it.

Gene: How often do you give loans that don’t require any collateral? You were giving the example of the daycare service-

Paul: Almost all of what we do doesn’t require-

Gene: Interesting.

Paul: And when I say, doesn’t require collateral, I mean daycare. We do nail, beauty, barber. We do even things that have quote “collateral.” So if you’re starting a food related business, you might have… You think it’s equipment. It’s worth something because you pay for it. But our ability to sell it and monetize it.

I would tell you that, we do loans from as little as $500, for those that are trying to start credit, to as much as $250,000 and we break it into two categories. We call microloans, anything $50,000 or less and small business loans about $50,000. Our average microloan is about $12,000 in the United States and our average small business loan is just under $100,000. In the $12,000 case, 90% of what we do is really unsecured, in the sense that it’s not collateral. And that’s because we’re in a service world. That’s what most people do and so we’re very comfortable with that. But it also means that… We talked about this earlier, is why we spend so much time understanding your cash flow. We want to make sure, okay we’re not gonna lend based on collateral but we need to lend based on your ability to repay. And we want to make sure that it’s a comfortable level.

Gene: You know, I think you’ve already answered this question but just to make sure, if I’m looking for a loan from you guys, what should I do in advance? What kind of homework can I do to make sure that the process is as easy as possible and that I can get myself comfortable that I’m eligible for financing?

Paul: Absolutely. Well, let me talk about some conceptual preparation and then if you really want to accelerate it, some documents that you could have ready. The conceptual preparation is, what do you need the money for? It may sound obvious, but it’s not often clear. Or when you have that conversations, making sure that the use of funds is actually going to accelerate what you’re trying to create or develop.

Gene: In other words, it’s gonna provide some type of return on investment, correct?

Paul: That’s exactly right. And I often hear this expression, “Oh, I have a problem,” “What’s your problem?” “I need money.” I’ve always said, “Well-”

Elizabeth: I have that problem.

Paul: And that’s the problem. But the problem really is the problem. Sometimes what you really need is, I need a contract. Or I need to define my customer setting so I can sell more. Or I need to hire someone, and in that case you can attribute it. But can you calculate, if you hire someone, what you gonna generate from that hire? And so the more you’ve thought about how the money can fuel your growth the better. I like to say, capital is like gasoline. You know, if you put gasoline in a little tank, and you light it up, it just gives you a nice warm fire. But if you put it in an engine of a car that’s been designed to move forward, you can really go places. That car concept is how you’ve thought about where that capital can be used to accelerate your growth. So, that’s step number one.

But then beyond that, having some awareness of your personal credit is important. So at Accion we have a minimum 575 FICO score that we use because we’ve found that below that level there are some significant credit challenges that have to be worked through. And we will help you do that but we find that you probably are dealing with a lot of challenges that would make even a $12,000 loan very onerous. And we don’t want to create that.

Gene: So again, with apologies for interrupting, so you have a minimum 575 FICO score. So, obviously if I’m below that minimum, I really wouldn’t want to be coming talking to you unless I just need some advice on how to improve it. Where do I go, first of all, to get my FICO score?

Paul: The FICO score is hard. I think the actual score, an official score, is a source called myFICO.com where you can buy one. B, there are sources like Credit Karma that can estimate what your score is. I believe, or used to be a free service. But they take a profile. If you have credit, then some banks are now providing this because they realize that this is so valuable. So I’m aware of at least two; Capital One being one, and JP Morgan Chase being another. But I’m sure others. But it would be good to ask your bank whether they provide a credit score, FICO score to track that.

But those are really the only ways to find that score. So either estimated by some sources, provided by others, or you just buy. It’s called myFICO.com. Now you can get free, once a year, your actual credit report but it will not give you the score.

Gene: I see.

Paul: It will give you the history and that’s nice to look at too if you’ve never looked at it. But, I think for practical purposes, the other options… And if you don’t have any, that’s not a problem. I just share that when we pull, we will be sharing not only the report with you but going through that. So, it’s not a requirement but it’s always nice to know where you stand.

Beyond that, for most of our loans, three months of bank statements is really what we look for. And if you want bigger loans then we will ask for prior year tax return because once you get beyond $25,000, a little bit of history, you’re probably at a bigger level of operation. We’ll want to have a little bit of sense as to where you’re going, from a cash flow perspective. Our process, just so you know, for that $12,000 loan in 2016 averaged 13 days. So from when the time you applied to the time you got funded. And most of that time was waiting on that document; the three months of bank statements. So if we had the statements it’d be six days.

Gene: Right.

Paul: And we’ve done things in a couple days. It depends how ready, how clear the purpose is but we try to work to do this as expeditiously as possible.

Gene: One of the disadvantages of working with you, when I compare you to online lenders or to even credit cards is, it does seem to take more time. Right? I mean, with a credit card you’ve been pre-approved, so you get the cash right away. If you go to the online lenders, those guys, that’s what they do. They give you the money within 24 hours. But you certainly pay the price when you do that; way more expensive. Like you had said previously, you don’t get the kind of consulting and support that you would get if you were working with more of service organization.

Elizabeth: Yeah, I would think if I was starting a new business. So, I was a first-time business owner, I would strongly prefer to go with someone who was actually going to sit down with me, go through my financials, explain everything. Just getting a credit card, you’re just getting the credit card in the mail and they don’t know what you’re doing with it. This sounds like a really good alternative if you really want that support. And Paul, you also provide other services to businesses. You do business consulting, right?

Paul: Well, what we do is we embed the education in the process because what we learned is… First of all, we have a lot of partners in every part of the country that provide formal classes and education on all sorts of topics. So we work with the score center and the SBDC, Women Business Development Centers, we have non-profits in many of the cities that we work in that work one-on-one and provide courses. But what we found is, when you separate the course from the opportunity to leverage the information that you’re teaching in that course there can be large gaps. So, the example I would give you is, raise your hand if you’re listening to this podcast if you took either Calculus or Algebra, or Trigonometry. You’d probably have a lot of listeners say, yeah I took that. And then let me ask, how many of you are using it right now? And so what happens is-

Elizabeth: Zero.

Paul: You have to do things at a teachable moment. So what we found is, one of the business owners actually looking for capital, that’s when they’re most open to learning about options, learning about their personal credit, learning about the ins and outs of their business, learning about their options. So we embed that. We’ve found that, that’s been the more effective way to create a very important teachable moment. Although, we have partners that can do the more classroom setting, or more formal education process if that’s what someone’s looking for.

Elizabeth: Great.

Gene: Very cool. Paul, thank you very much.

Elizabeth: Thank you so much.

Gene: This was a great conversation, again it’s Accion. It’s us.accion.org.

Elizabeth: We’re gonna include all of this information in the show notes so you’ll know exactly where to go. And their website, they have a blog, they have tons of small business advice on there. I feel like it’s also… I think you did an event, Gene, at a community. I think it was reSET in Hartford and Accion was involved.

Gene: Correct. And also in Chicago as well.

Elizabeth: Yeah.

Gene: I did an event with Accion. They’re excellent. And before I let you go Paul, just being in the credit world, do you consider this to be… If you’re a small business looking for financing, and let’s assume that you at least meet some minimum requirements of credit score and the ability to service some debt. Do you think this is a good time to get capital?

Paul: If you are ready to use capital to grow your business, it’s always a good time. The thing I would say, just to contrast, many of us had to do this work through the recession. What I’ve learned is, it’s not whether the economy’s good or bad that matters. It’s whether it’s stable.

Gene: Right.

Paul: Because with stability comes planning, and with planning you can make some investment decisions. If you’re at a point in your business development where you have a decision that you can make, it will grow your business. What I believe is that the economy is as stable as it’s been in a long time. It may not be growing the way we want it, but stable. And with that you can do a lot of things. So yes, it’s a good time from that perspective. And in a few years from now, we find that things sink than I would say, “Hold off.”

Gene: Right, fair enough.

Paul: But yes. But, premised on that you have a plan on how you want to use that capital.

Gene: Great. Paul, that you very much.

Elizabeth: Thank you so much for being with us. Again for the listeners, we’re gonna put all these links into the show notes. You can find Accion. You can figure out how they can help you and more. And a link to their blog. And we’re happy to have you all join us today. Thanks.

Paul: Thank you so much.

Elizabeth: Alright, we will be right back in a couple days with our next episode. Thanks for joining us.

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