Whether you’re just starting a business, you’re in a cash-flow pinch, or you’re looking to scale, every business owner needs access to money. What do you need to know when it comes to finding the right funding sources for your business? “Small Business Stacey” interviews Seth Block of ThermoCredit to unlock the vault to these questions and more. #ASmallBizLife  #WhereMarketingMeetTechnology

Episode Transcript

Stacey:  Money, Money, Money, Money. Hey everybody, “Small Business Stacey” with another episode of Small Business Marketing Success Interviews. Now when it comes to money, it’s something every small business owner wants more of, right? You need money either to start your business or money to scale your business and sometimes you just need some money for those “Oh Crap!” kind of moments.

So when researching for today’s topic, I found out the top reasons small businesses fail. And this survey said that 19% are out-competed, 23% don’t have the right team, 29% run out of cash, 42% there’s no market need for products or services, (they should have done their marketing) and 82% experienced cash flow issues. So that’s why I am thrilled to have Seth block from Thermo Credit with us here today to help us get the money to grow and scale our businesses. Welcome to the show, Seth.

Seth: Thanks Stacey. Thank you for having me.

Stacey: All right. This topic of money, this green stuff. Mmm. Did you grow up being a multi gazillionaire and just so excited to help small business owners or how did this journey start for you?

Seth: Well, to tell you how this journey started, no, I did not grow up with a gazillion dollars. Quite the opposite. But to tell you how I got into this, you really need to back up to what I was doing before. And that was, I was a CFO. I’d been a CFO for several companies in Texas, mainly Houston, and one of those companies, actually the last one that I was at before this one, it was a startup. And when we started that company, we went out to raise money and we talked to a couple of different investors and we ended up settling on an investor that was willing to put up half a million dollars. He would own 50% of the company. We would own 50% of the company. But the catch was we had to pay him back $1 million in two years. He had to get a 100% return on his money. So off we went, the business was successful almost immediately.

We had done our market research. It wasn’t an absolute need for them, for the product. We were a prepaid dial tone company, which I don’t know people even remember, you know, a handheld telephone, but that’s what we were doing back then. And there was a huge market in the prepaid space. Today there’s a huge market in prepaid cellular. Back then there was a huge market in prepaid dial tone. So we started the business. We were very successful and after about 18 months, we had a little over 13,000 customers. We were profitable. And, I thought we were ready to go to the banks, get millions of dollars. We put together a deck, went to several banks, large and small in Houston, and were denied every single time. The reason being was we hadn’t been in business for three years and we didn’t have the personal wherewithal ourselves to backup a $1 million loan.

In other words, if we couldn’t pay it back through the company, they wanted us to pay it back personally and we couldn’t prove we could pay back $1 million. So we started looking at alternatives. I went out and started looking at other types of lenders and some small investors. My partners went out and looked at some large investors, mainly corporations. And at the end of the day, we had two options. One was to go with an alternative lender who would give us half a million dollars and give us the working capital we needed to go forward. I found a small investor who was willing to put up another half a million dollars for a 20% interest in the company. I liked that deal. My partners found a large, long distance company out of Dallas that would put up the million dollars plus give us the working capital to grow. But they would own 80% of the company.

So option one, we retained 80% of the company, option two, they got 80% of the company. We ended up going with option two. I was outvoted. And the reason being why my partners liked it so much is because they felt that being the subsidiary of a very large company would have benefits to us. So fast forward two years, we’ve got over 200,000 customers. We are operating in 27 metropolitan markets. Erik Estrada, I don’t know if you remember him, the CHIPS guy. Yeah, he was our national spokesperson. And like I said, we were growing and growing and people were looking at us as an acquisition target and we started getting offers. One, in particular, was really good. We had a company offer us $500 per customer, little over a hundred million dollars for the company. And we liked that deal. They gave us a letter of intent.

We took it to our board, which of course was controlled by our parent company. And they rejected it. They said, if it’s worth 100 million today, it’s worth 200 million a couple of years from now. So what happened a couple of years from now, regulations had changed. The industry wasn’t hot. The company was in financial trouble and they ended up selling us to a competitor for a fraction of what we would have gotten two years earlier. My partners and I got nothing out of the deal. I’ll tell you something. If they had sold two years earlier for $100 million, I would have put millions in my pocket. And back then millions was a lot of money to me. I mean, heck, it still is today. So with that lesson, I actually went and started doing some consulting work for awhile. Started talking to companies who were having trouble getting money. The banks were turning away from technology, from communications and I saw an opportunity, and myself and another guy put together a business model, pitched it to several people.

The guys at Thermo Capital really liked the business model and we funded it in the beginning part of 2002. And we’ve been doing this ever since. And what I really try to work with companies today on is not only helping them with their cashflow, not only helping them with the money they need to do acquisitions, not only helping them when they get into one of those, as you described those situations, you know, a tax bill or something like that. I really try to work with them to allow them to hold onto as much equity and certainly control of their company so that they don’t end up with the same mistake we made. And that’s, that’s my story.

Money To Scale Your Business

Stacey: 
It’s fantastic. I love that you actually have that experience of building up a business, understanding what you need to grow with the cashflow issues because it’s not just like you’re some banker in a suit sitting behind a desk making this decision whether to fund or not fund a company. You get what it’s like to be a business owner out there today.

Seth: Yeah. And that’s what I tell people all the time is “Look, I’ve sat in your desk. I know what it’s like.” It’s not just us. Most alternative lenders that are out there if they’re non-bank, they’re very entrepreneurial driven. A lot of them do have good business backgrounds. So to me, it’s a very legitimate choice for people.

Stacey: Well, Seth, you mentioned alternative lending. So there’s the standard form of lending and alternative. Can you kind of differentiate between the two and are there any others?

Seth: Sure. So to me, when you look at what I call traditional lending, you’re really talking about commercial lines of credit in SBA loans. I find that for most small business owners, when they go to the bank, for the most part, the bank is going to push them to an SBA loan just because they’re guaranteed. With these types of loans, they’re really looking at a couple of things to get those done. What they typically like is to see a business that’s been around for at least three years. It’s been profitable for that period of time. And they can look at the prior cashflow of that company to determine how much to lend to them. Then they’re also going to look for a second and maybe even a third form of repayment. So they’re going to look at the cashflow. They’re going to look at the assets of the company, and they’re also going to look at the individuals and their personal wealth to see if they can get paid back. They’ll want a personal guarantee.

Alternative lenders, and there’s all flavors of alternative lenders, but for the most part, alternative lenders look or focus much more on what a company’s doing now, not what they’ve been doing for the last three years. And they’re also focused more on the collateral that that company has. So, again, not all of them, but most of them, we’re going to look at the collateral before they look at the cashflow of the business.  Then they’ll look at the cashflow of the business and say, is the company profitable today? Are they profitable enough to service the debt? And if they’re not, can they be very shortly with this new loan that they’re getting? Because the one thing that alternative lenders don’t want to do is lend into a business that’s headed towards bankruptcy. Other than that, they’re pretty open and they’re pretty creative, on finding ways to help companies.

Stacey: I’m curious, with alternative lending is part of the criteria you mentioned collateral such as their customers, clients or patients? To me, the business value is in the list. Do they factor that in at all?

Seth: Some will. I can tell you when you start getting into acquisition financing, they will look more at that. There are really two types of lenders. There are senior lenders, which are lenders who have a security interest in the company. They’re in the first position if anything were ever to happen. And then you have what I call mezzanine lenders and these are guys who come in behind them. Those guys are definitely going to look more at the value of the customers, the value of the list, the value of the contracts. There are few lenders that I know of that lend. Let’s say you’re a software company and you’ve got contracts with your support contracts and other contracts with your clients, they’ll lend against those contracts, the value of those contracts themselves. To lend just against a customer list, they’re really leaning more against the cashflow than they are the list itself.

Stacey: Right. That makes sense. Do you find that there’s a difference between the physical brick and mortar locations versus online businesses?

Seth: No. We’ve got several companies that don’t have a brick and mortar location. Their CFO may be in Utah and their CEO’s in Florida. They’re doing everything in the cloud. That’s becoming more and more commonplace. I’ll tell you, interestingly enough, it used to be when we first started Thermo, we would always go out to our client’s location and visit with the account. See the business being run. That’s harder and harder to do today. Lots of companies there is no physical location. You’re doing everything virtually and they’re doing the background checks based on that.

How To Plan For Borrowing Money

Stacey: Great. I’m guessing that a smart business owner knows that the best way to plan and plan is the keyword here. You want to have the money available, not when you’re in crisis, but have it already available and assessable to you. What should a small business owner know or have in place to start that process so that they don’t have that “uh oh” moment.

Seth: Sure. So a couple of things they’re going to want to have. One is, they want to have good financial reporting all the time. I tell people to stay current on your financial reporting, always have it together. And to that point, if somebody calls me, the typical process when somebody calls me is we talk a little bit, I see if it’s a fit for me, or if it’s somebody I need to refer out. And then, I say, “Look, I’m going to want to take a look at some data” and I send them a nondisclosure agreement and we execute that nondisclosure agreement. It’s always for their protection, not mine. But then I send them a data request and that data request is going to include last year’s financials, their most current in house financials, maybe an accounts receivable, aging, accounts payable, aging. If there’s equipment involved, that equipment list. I send them that list and if I get that information back, the next day they’re moved to the top of my work pod. And the reason it’s twofold, one is they’re serious and two is if I ask somebody for something and it takes me a month and a half to get it, I’m assuming they really didn’t have their financials in place and they’re putting them together at the last minute and every lender thinks that way.

So I would urge people to make sure their financials are current. Have good agings they have good reporting. That’s really key for a lot of lenders is that their taxes are current. And what that may be, the situation that they run into is that they get hit with an unexpected tax bill or they can’t make their tax payment, their tax bill. Banks typically are not okay with that, but alternative lenders, will be okay with that if there’s a plan to satisfy that deal. For instance, we have done several deals where someone’s come to us, they got hit with a big tax bill. $100,000, $150,000. And we look at it and say, “Oh, we can lend you $300,000 on your assets.” But part of that transaction is we actually pay off the tax bill with the proceeds. So we get a payoff letter from the IRS. And that’s part of the whole funding transaction is that we wire the money to the IRS upon closing. So that’s one way to satisfy that. The other way is to have a good payment plan in place, and adhering to it. So a lot of times we’ll see folks who put a payment plan in place, but they’re not living up to it, which means the IRS or whoever the taxing authority is. I find the IRS is probably the least aggressive. I find that the States are more aggressive. So once they’ve identified you as not paying your sales tax or whatever tax they’re hitting you for, they become very aggressive.

The IRS is also a little more aggressive when it’s on payroll taxes because those are trusted funds. You’ve collected it from your employees and you haven’t sent it to the IRS. States are the same way. They look at sales tax, you collected it from your customers and you didn’t give it to us. So those are trusted funds. And because of that, they’re a little bit more aggressive.

Stacey:  I hear about those businesses all the time. And especially now, as we’re recording this, we are in that tax season and people may close out their year strong. And then realize in the beginning of the year they have this huge tax bill. Another “uh oh” moment.

Seth: Yup. You’re right about that and it happens all the time. If they need to borrow money, it can be done under that situation. What gives people pause is when you find a company that has basically been funding their growth by not paying their payroll taxes and stuff, that usually gives you a little bit of pause cause it’s the absolute worst way to fund your business. For one, the penalties can be as high as 50%. That’s pretty expensive money and they can go after you personally for that. So, in my opinion, it’s just not a good move. And whenever I see a company that has funded their growth by not paying their taxes, it gives me some pause.

Biggest Mistakes Made When Looking For Business Financing

Stacey: I’m sure you’ve seen a lot of mistakes through your journey, both learning from your own and working with so many business owners. What are the biggest mistakes that a business owner should be aware of when they’re going out looking for financing?

Seth: Well, I would say the biggest mistake is going after the wrong type of financing. I find that a lot. I’ll give you an example. I had a client, he was a client on the technology side and he was actually starting a construction business and they were building a plant and doing all these things. And he wasn’t coming to me for the financing, but he was telling me the story. He’d gone to his local bank and they said, “Oh yeah, we can do that loan for you.” And he got into it with them and about a month into it, they came back and said, “We’re going to need to move you to an SBA loan.” And they moved him to an SBA loan.

It took them another three months to get a rejection. And when they were rejected, it was for a reason that was there from the very beginning. And it was just at the end of the day, the SBA wasn’t gonna do the deal because they didn’t have the personal wealth to back it up. And they hadn’t been around. That was a startup. And why the lender took them down that path, I don’t know. But I see that happen all the time. But the company wasted four months. They were four months behind in getting going cause they had to start all over again. That to me is a big mistake. There’s pretty straightforward criteria. Did you need to have to get a bank loan? And if you’re not, if you don’t have it, going to the bank is a waste of time.

Even though a lot of times they’ll take you on and put you in their pipeline, but at the end of the day you’re not getting the financing. And so that’s a big mistake I see people make. The other is not understanding where they’re at. And what I mean by that is people get very wrapped up in the cost of funds. And, I see that a lot where someone will go, “Oh, interest rates are 2%. I should be able to borrow money at 3% and you’re trying to charge me, 12 or 13%.” That line of thinking is flawed in two ways. One is first off, the banks are lending typically prime plus. If they’re going to lend you prime plus two or three. So you’re already at 7 or 8% I just saw that the SBA, the maximum that the banks can charge to an SBA loan now is I think 11%.

So I don’t know that they’re charging that, but they have the ability to do it. But if you’re not going to get a bank loan and you’re leery of getting an asset-based loan cause it’s 12 or 13%, they’re not looking at what they’re leaving on the table. If they can take out one of these loans, excuse me, acquire another company, drop 100,000 to the bottom line. If it’s costing them $10,000 a month in interest, well, if they hadn’t done the deal, they left $90,000 on the table. So to me, you’ve got to look at it, not only is the cost, which certainly you want the best costs you can get, but what is the opportunity you’re missing out on by not taking that loan? So that’s a big mistake that I see companies make is that they don’t look at the opportunity and they spend too much time trying to get the loan that they’re not going to get.

Alternative Sources of Funding

Stacey: Right. And so it may be a situation where maybe they’re paying more interest in the short term to have access to this loan or this money. I know when we built out our stores at Dallas airport, we had to acquire the money to do that. And it did require some alternative funding to be able to do that. So I get it. Are you sort of saying don’t take the short term view that your business is hopefully a longterm view and you may need some alternative ways to finance it?

Seth: I am. I would say that you should look at all forms of financing. A lot of times availability of financing and availability of cash to grow your business is more valuable than in a small interest rate. So yeah, I agree with you. You should really look at the longterm situation there. I’ll tell you another mistake that I see businesses making today and you’ve probably heard of these. There’s these merchant cash advance loans that are out there. They’re advertised on the radio all the time. I don’t think they call themselves merchant account advance loans, but they’ll lend you money within a week and, and so forth and so on. And some of these may be good companies. Some of them may be charging a reasonable rate for their money,

But I have seen time and time again, a situation where they’re charging over a hundred percent interest. And I’ll give you an example. I had a client come to me a couple of years ago and he wanted me to take him out of that loan he had signed. He had done this deal and they were sweeping his bank account every day and it was killing his business. And so I said, look, send me your contract and I’ll take a look at it and see if there’s an out. And he sent it to me. And there was no out. And it was because of the way it was structured. I’ll just walk you through that real quick. What they were doing was they were purchasing $150,000 of his future cash receipts at a 1.4 discount, which meant they were giving him about $106,000.

And he had to pay back $150,000 over nine months. So when you look at that, you know it was $150,000 loan, they gave him 106 so what does that 40 something thousand that they kept as interest. So it looks like it’s kind of a 47% loan except that it was only nine months. So it wasn’t even a full year, which makes it like 53% and then, and this is the kicker, and this is what I would really advise people to understand when they look at these loans, they’re paying it back every day. They’re paying back the principal and interest every day. So the average balance wasn’t 106,000 it was actually 50 something thousand. So if you’re paying 40 something thousand on an average $50,000 loan and it’s over nine months, it’s like 106% interest. I got to tell you, this guy had no idea and it was just because he hadn’t read the contract well enough. He hadn’t asked somebody to give him an opinion on what the true cost was. He just signed it because it was quick money. So that’s another mistake I see people making today is just understand. Not that I’m saying these loans are bad, or if you have an opportunity that’s going to put half a million dollars in your pocket, sure. Pay 50,000 for it. But understand what you’re paying.

Stacey: Know your numbers. Read the small print. Work with a professional like you, huh?

Seth: Yeah. And look, anybody who’s looking at one of these, I’m happy to tell them what they’re paying. It’ll take me five minutes. I’ve seen so many of these. It’ll take me five minutes to tell them what their pain.

Stacey: Excellent. All right, so a small business owner now has had a lot of lessons learned from you. Where do they start? Where if somebody is looking for, besides getting in touch with you, where do they start in looking at their business? What their cashflow situation is? Most business owners that I work with are not numbers people. They even don’t really know what they should be looking at when it comes to their financial statements.

Seth:  Yeah. So the first place I think they want to start is, they want to look at their financial statements. They want to look at their net income, they want to add back their pay. If they have any amortization or depreciation in there, they want to add that back in. If they’re paying any interest on anything, they want to add that back in as well. And that gets them to there. Earnings before income tax depreciation and amortization. Wow. Say that three times fast. And that number kinda dictates how much they can borrow. So what they want to do is they want to take that number and let’s say that number is $10,000 a month. Well, most alternative lenders will lend them up to a payment that equals close to that $10,000. So that’s the starting point.

Some lenders are going to do a term loan where they’re going to pay principal and interest and they gotta be able to have the 10,000 to pay that other lenders will lend them money. Interest only. That’s a much bigger loan if you’re paying back 10,000 and interest versus 10,000 and principal and interest. So that’s a good place to start. If they haven’t been in business for three years and they’re not going to get a commercial loan or an SBA loan, they should just immediately look towards alternative lenders. And the things that they should look at there is their business, what assets do they already have within their business? And some guys don’t realize what assets they do have. For instance, if they’re getting purchase orders from their customers and their customers are Walmart, Best Buy, you know, any reputable company,

They can borrow against those purchase orders. If they have inventory, they can borrow against that inventory. If they’ve already purchased equipment, the same thing. And you can just go down that list. If they’ve got credit cards, if they’re processing credit cards, there are lenders that will lend against their credit card receipts and usually a multiple of those. Two or three months sometimes. So those are the types of things they can look at within their own financial statements. And then like I said, just talk to one of us. We’re happy to tell them what’s available. Myself and my team have been doing this for a long time. They’re entrepreneurial driven, and they really understand what’s available to these guys. It doesn’t take us long to figure it out.

Stacey: All right, well there you go. You can go on Shark Tank. Talk to Seth. My suggestion is to talk to Seth. He knows his stuff. He’s brilliant. He can easily simplify these complicated financial and credit kind of alternatives that are out there. So Seth, how can people get in touch with you?

Seth: Sure. So you can get a hold of me seth@thermocredit.com or you can call my cell phone number (549) 758-5999. Those are the two best ways to get ahold of me.

Stacey: Great. Thank you so much. And let them know that Small Business Stacey sent you.

Seth, any parting words of advice? What do you want the small business owner out there to leave as their takeaway from today’s interview?

Seth: Well that there’s plenty of options available to them. Look at the opportunity and the cost. You know, if the opportunity outweighs the cost, it’s a good transaction. And then most importantly, I always urge business owners if you’re going to look at equity, don’t give up too much equity in your company, and certainly never give up control of your company. And that’s what I live by.

Stacey: You heard it from Seth, don’t give up control of your company. All right. So thank you so much for coming on with me today and sharing your brilliance and expertise with the small business community out there.

Seth: Well, thank you so much for having me. It was a true pleasure.

Stacey: Great. All right, everybody, this is Small Business. Stacey, your Small Biz Marketing Specialist here to help you get your marketing into ACTION so you can become a #SmallBizMarketingWiz. Bye bye.