Perseverance is something that has always served me well. I truly believe that if you stick with most things long enough, you can figure it out. Just keep moving forward and eventually you will break through. This belief was certainly needed when I recently went for financing.
In order to buy the business I needed to get a loan. An SBA (U.S. Government Small Business Administration) loan to be specific. For those of you who have never gone through the process, it is a time consuming process where you get a loan that is backed by the U.S. government. This means that if the loan defaults, the bank will get back anywhere from 75% – 85% of the loan back from the government. The idea is that it will encourage banks to lend more.
There are two types of lenders; preferred and standard. A standard lender has to get the loan approved from the SBA while a preferred lender can approve the loan as long as it is within SBA guidelines. Since I really don’t expect anyone at the SBA to understand ecommerce and it would take less time, I thought going through a preferred lender was the best approach.
Now I had to figure out which banks to talk to and who was preferred. Thankfully the SBA has a list of the top 100 lenders by volume. My strategy was pretty simple; go to the preferred lenders that do the most loans and start dialing. I started with 5 and then expanded from there.
The great thing about entrepreneurship is that optimism meets reality on a regular basis. What do I mean? I thought the process should be relatively straightforward and that the banks would be happy to lend for most loans since their risk is minimal. WRONG! The process is arduous, each bank has their own forms (that are pretty much copies of the SBA forms), and they are in the business of protecting their SBA preferred lending status rather than lending. Oh yeah, there are some ridiculous rules as well.
For example: You need to have direct experience in the industry of the business you are buying. I get it somewhat from a risk perspective but it doesn’t make sense in many technology businesses. Let’s look at the golf cart business. According to this philosophy, if I worked in the golf industry (I could be a caddy, sell golf clubs, or run a golf course), I am qualified to run an ecommerce business. By this logic, I also know how to market since “I was in the business”. Maybe this makes sense if you are buying a dry cleaner, but for many it is only a philosophical understanding of business and not reality.
My rant aside, it doesn’t really matter how I feel about it, I live in the real world and have to play by their rules. What I can do is reframe the conversation and help the banks see that I am in the ecommerce business and what matters are operations, marketing, and technology skills. These are things I have and I can speak to from experience.
I digress. I started contacting banks, filling out applications and started getting shot down. One, two, three, four, five banks…no, no, no, no, and no. Uh oh. This was going to be tougher than I thought. Here are the banks that I actually filled out an application for in the process. There were 5 others that denied me before I even completed the application
- Wells Fargo
- US Bank
- Celtic Bank
- Ridgestone Bank
- Bank of the West
- City National Bank
- Sacramento Bank of Commerce
Why am I getting shot down you ask? I have a great credit score, no debt (besides grad school), and have enough experience to operate a business. The challenge was threefold:
- The business had a loss in 2013
- I was not putting up any collateral (i.e. real estate)
- The business was pure dropship and this meant there was no inventory to put a lien on.
The loss: There was a manual Google penalty that hit the business in 2013. The owner didn’t react quick enough and he had a loss for the year. Didn’t matter if it was the first loss in 10 years and was fully explainable.
No collateral: I don’t own a house so the bank couldn’t attach a lien on it. It doesn’t matter that the SBA clearly states in its rules that not having collateral is not a reason for disqualification on its own. Philosophy meets reality once again!
No inventory: Don’t have a house, no problem. We will put a lien on the inventory. No inventory no bueno.
Ok, so I had some things I needed to overcome (understatement). What did I do? I kept on moving forward, talking to people, found a broker, networked, and applied to more banks. I figured worse case that I could wait for the seller to do his 2015 tax returns and I would have certified financials which show the business is cash-flowing more than enough to overcome view of the 2013 loss.
Finally, after two months of working on financing….SUCCESS!!! I went into underwriting for Celtic Bank (#6 SBA lender) and got approved. What did they see that others didn’t? Luckily I got a great SBA loan officer, was able to speak to the underwriter, and they miraculously had a bank president who understood the impact of a google penalty (that was a huge surprise). I also had the opportunity to present lengthy explanations of the business to the underwriter and loan officer. This made all the difference.
What did I learn in the SBA process? #1 Start early #2 Start early, and #3 Find the right bank for your loan.
If you want to get my contact at Celtic, please shoot me a message.