Small Business Loans (Comments and Contributions)

Dallas Pearce, owner of the Isochronic Beats website and a reader of this blog, has provided me with some additional information and insights on small business funding I would like to share with my readers.

For those of you interested in learning more about the use of Isochronic Beats for brainwave entrainment, here is the link to his website. This technology uses sound to generate measurable changes in the electrical activity in your brain, most commonly to produce the alpha waves (8-13Hz) associated with a light relaxed meditative state.

Isochronic Beats

Here are three communications from Dallas, lightly edited for readability.

Here's some stuff you might find interesting and help you understand us better. Only half of small business owners have a degree, a lot of them only because they felt they had to. The degree has no relation to what they're doing. Out of the other half, many of the ones I meet are people like me, who became disenfranchised with a rigid and inflexible education system and left. Contrary to public opinion, the ivory towers of academia are not the exclusive purveyors of knowledge.

The ways in which we are able to start businesses are as varied as we are. Crowdfunding is becoming popular these days. For us infopreneurs we can generally start with less than $100 and bootstrap our way into outsourcing labor within a couple of years so we can focus on that 20% of what we do that makes 80% of the profit.

Taking out a small business loan from the government is something I've never even considered. You're correct, it is indeed bad debt.

Well, the crowdfunding data is still coming in, since the idea is still in its infancy. So far it's actually surprising. I can't find where I put the link with the statistics right now, but businesses started with crowdfunding actually have a higher success rates than businesses started using traditional funding methods. From the investor point of view, it's a lot less risky, because I can contribute $10 to 10 businesses instead of $100 to one business, increasing the chance of receiving a return on the investment.

As far as the $100 start-up goes, I have posted on FB about starting a blog dedicated to exploring various ways of creating sustainable, even passive, income starting with just $100. I'm waiting until I have enough content to start the site, but there are literally dozens of ways I've come up with or found out about to use even amounts as low as $0 to build a business.

There are really only two ways that you can create value for a consumer, whether it is for an individual or a business. You can provide either a product or a service. When it comes to a product-based business, you have to think in terms of what's called an MVP, or minimum viable product. If you want to start a multi-million dollar microbrewery, for example, your MVP would be a single beer that you can market directly to a single local business. Once that cash flow is established, it can be used to expand that product to a larger market, and eventually to create more products.

More along the lines of what I do, the MVP for someone who wants to build a multi-million dollar training course would consist of a single piece of content, a video or text that solves a single problem of a specific demographic. Then you market that solution, that information product, to the people who have the problem. You create value for them. You get value back in the form of money. This can then be used to help create more solutions to related problems, eventually culminating in a very high-value training course which might include video, software, whatever you can think of, that addresses the needs of a broader market.

In the realm of providing services, by far the easiest and least costly is to become the intermediary in a transaction or process chain. This can be as simple as advertising something, say logo creation services, on Craigslist, or college campus bulletin boards, or wherever your target market is likely to see it. Then when you've found the consumer, you find the provider; in this case, someone who will create the logo for less than you are charging the consumer. I've had success in this exact example by advertising logo design on Craigslist for $20, then going to fiverr.com and paying someone $5 to create the logo. The total cost to me was nothing but my time.

There really are so many thousands of ways to make money while creating value in people's lives that it would be impossible to even go into a fraction of the specifics.

Here are two interesting links provided by Dallas. The first provides some general information on small businesses and small business funding. The second article discusses crowd funding.

Small Business in America

Crowdfunding Websites from Forbes

Small Business Loans

Capitalism needs good debt to survive. The money to create a new industry, like the automobile at the start of the Twentieth Century, simply does not exist. It must be created through some combination of bonds, common or preferred stock, or outright loans. However, as with mortgages, there is only one kind of debt, bad debt, especially for small startup businesses without any assets or even a credit rating.

Here is the key problem to consider before taking out a small business loan, copied directly from the Small Business Administration Website.

Collateral

“The SBA expects every 7(a) loan to be fully secured, but the SBA will not decline a request to guarantee a loan if the only unfavorable factor is insufficient collateral, provided all available collateral is offered. This means every SBA loan is to be secured by all available assets (both business and personal) until the recovery value equals the loan amount or until all assets have been pledged (to the extent that they are reasonably available). Personal guarantees are required from all owners of 20 percent or more of the equity of the business, and lenders can require personal guarantees of owners with less than 20 percent ownership. Liens on personal assets of the principals may be required.”

Something on the order of 50% of all small business will fail in the first four years. By year 10, more than 70% of all startups are gone. If you misjudge the amount of sales or cash flow required to stay afloat; if you or your family can’t stand the pressures of long hours and irregular income; if you fail to keep accurate and complete records or engage in some other common form of mismanagement; if you lack the knowledge or experience to properly deal with suppliers; if you are just plain unlucky enough to start the right business at the wrong time, odds are your company will go belly up.

If that happens, your creditors will come and take away your house.

On the other hand, I know of an instance where a young man turned a $30,000 loan to buy a used truck into more than a million dollar buyout and a full time job paying $100,000 a year. He lives in Western Pennsylvania where the oil exploration companies were paying $90 an hour for water trucks. Most of the time these trucks and their drivers would just sit; waiting at the well sites seven days a week 24 hours a day. A reliable truck owner could make a lot of money just waiting for something to happen. This young man actually did even better. He had an accountant shelter his truck in a corporation, making the expense of owning the vehicle a tax write off. Over time he bought additional equipment and hired some employees. Eventually a larger trucking firm began to buy out the independent operators. They made this young man an offer he couldn’t refuse that included a guaranteed contract paying him $100,000 a year for supervising their operations.

I don’t know how long the natural gas boom will last, but at least one young man is earning a very good living. More importantly, he has learned how to create and run a wealth producing tax paying business, lessons that will serve him well for the rest of his life.

In this case the collateral was the truck. That seems like an acceptable risk to me.

Having worked for the Government or large corporations most all of my adult life I really know very little about the small businessman other than what I have observed in my friends who have chosen to follow that path. However, I do believe teaching our children how to become entrepreneurs will become progressively more important as the number of “good jobs” has been declining for over three decades.

I remember one church dinner in particular. I was sitting at a large table with a number of other folks. I started up a conversation with a young man of early high school age sitting next to me. He was interested in all sorts of electronic contraptions, particularly microphones and sound equipment. As the conversation progressed, he expressed an interest in ultimately turning his hobby into a business. I tried to be very encouraging and supportive. I also tried to ask intelligent questions such as what kind of niche market would allow him to compete against the likes of Best Buys. I pointed out, Mapleshade as an example of a successful high end niche marketer. They make extremely high end stereo accessories, rebuild tube amps, and sell their own recordings of jazz and folk music. This conversation was obviously making his mother nervous. She started interjecting questions like, “Don’t you want to go to college?” I hope that someday he gets a college degree, runs a successful business, and lives a happy fulfilling life.

In How to Make Big Money in Your Own Small Business by Jeffery Fox, a couple of items were repeated so often they actually stuck with me.

First there are only three things any business can do for their customers.

1)make them feel good
2) solve their problem
3) some combination of numbers 1 and 2

The author also believes his 60/30/10 rule is critical to the success of any small businessman. He believes this rule applies to 1 man companies or even companies with even 10 full time employees.

60% of your time should be spent marketing and selling your product
30% of your time should be spent producing your product
10% of your time should be spent on administrative and managerial tasks

Of the 60% of the time spent in sales and marketing:

60% of the 60% should be spent in contact (personal visits, telephone, email) with existing customers. The author considers this so important that he recommends hiring a part time driver to allow the small businessman to work on his computer and telephone when going to visit customers in order to make certain they are happy.

30% of the 60% should be spent developing new, short term customers.

10% of the 60% should be spent developing new, long term relationships with short term customers.

By the way, the author considers a 60 hour work week a minimum for the successful small businessman (no exploitation like self exploitation). Now you know why I was never tempted to be a small businessman.

I guess the real secret to running a successful small business is discovering something that you love and would do for free that makes people feel good, solves their problems, and can not be done by too many other people. Now all you need to do is find a way to keep your cash flow positive as you feed your family and build your business without taking on any debt. Whew! No wonder I consider the successful small businessman the unsung hero of American capitalism.

Your country needs your courage, your work ethic, and the jobs you create.

90 Days Is Not the Same as Cash

You see the ads in the newspaper circulars that come to your mailbox and on the television, especially around Christmas, 90 Days Same As Cash! Electronic stores, furniture stores, and jewelry stores are fond of offering this “benefit” as part of the Big Sale! No payments until (fill in the date) is a common variation on this theme. Lies! Don’t bite the hook. These people know what they are doing. They are not giving away free money.

You believe that you will pay off that loan with in 90 days, effectively avoiding any interest charges on an installment loan, but that is not what usually happens. People who are that desperate to find a psychological excuse to avoid paying cash at the time of purchase are likely not to up with the necessary funds in the allotted 90 days. In fact the stores expect to collect full interest on around 80% of these “interest free” loans.

Why should credit card companies and banks have all the fun? When these “interest free” loans convert to a regular installment loan after 90 days, the interest rates are frequently usurious. Interest rates from 20% to 38% are typical. Oh by the way, these rates do not just kick in on the unpaid balance. They are back charged on the entire amount! Wait, it gets worse! Depending on the contract, the full amount of interest can be back charged if you miss a payment or are even late on just one payment.

If you are really certain that you can pay off that new television in 90 days, just wait for 90 days and pay cash. You can live without a new TV for 90 days, really. The same can be said for engagement rings or sofas. If your washing machine goes belly up consider the Laundromat for 90 days or perhaps a used appliance. Thankfully, I have never needed to buy used appliances, but I have certainly owned some rusty old used cars back in the day. Dealerships offer no payments until (fill in the date) deals on cars.

Life happens. If you don’t have the cash today, you might not have the cash in 90 days or even 180 days. Perhaps the transmission in your car will choose that very moment to give up the ghost. If you really want to beat the system; pay cash. While having cash in hand is not likely to get you a better deal at a big box electronic store, cash in hand can certainly allow you to negotiate a better deal at a privately owned furniture store.

Only a Few Years Ago

Only a few years ago, Asian immigrants came to this country with no money. They couldn’t even speak the language. Now they own houses in upper middle class neighborhoods. Their children are "over represented" in the finest schools in our country. Already there are more Asian millionaires in this country than could be statistically predicted by their numbers. My broker, Schwab, offers a second language. It isn’t Spanish. It is Chinese. What do these new immigrants know that I need to learn?

Yes you’re right, there are not as many opportunities for upward mobility in this country as there were 60 years ago. Roughly 20 million industrial jobs are gone, perhaps forever. That makes it harder on the average American with only a high school diploma and no particularly valuable skills.

No doubt about it.

But let me tell you a story. I know a man who came to this country from somewhere south of the border. I don’t know how he got here, but I do know that today he is a citizen of this country; just like me. Not all that many years ago he had an insecure low paying job with a maintenance contractor at a large Government facility. The primary tool of his trade was a wide push broom. He used this tool with such skill that the Government employees who worked in at this laboratory would joke that there were two levels clean; clean and then there was (name of employee) clean. When this man finished his assigned tasks, he did not hang out in his supply closet with his buddies and gossip in their native tongue or go outside to smoke cigarettes. He started sweeping the entire length of the building. He worked in a test facility that was approximately 5/8 of a mile long! So far as I know, that had never been done in the 75 years of that building’s existence. The Government supervisor who was responsible for this building was so impressed with this man that he begged, pleaded, and twisted his supervisor’s arm until a special entry level job was created for this one man. Now he has a secure full time Government job with excellent benefits. Needless to say, he brings the same spirit of excellence to his new job as an assistant mechanic that he once put behind a push broom. When given the opportunity, he is now learning the basic skills required to become a machinist.

I have examined the keys to success and multigenerational wealth in a number of posts. For new readers here are some important traits that will greatly increase the probability of prosperity in your life and the life of your children. None of these factors alone are enough to provide a high probability of employment, but in combination these factors almost guarantee full employment over most of the years of a working lifetime.

1)The Confucian/Protestant Work Ethic, The most important single factor
2) IQ, There is a correlation between salary and IQ up to 120.
3) A Respect for and Love of Education, Education guarantees nothing but this factor is common in successful subcultures.
4) A Life Sustaining Social Network, This most often begins with a stable nuclear family.
5) The Ability to Take a Calculated Risk, leaving an impoverished country or area of this country to find better opportunity elsewhere comes to mind.

Keith Cameron Smith discovered one of the significant differences between the rich and the poor is their sense of time. We all plan, but our timescales are different. Smith makes the following observations concerning different socioeconomic groups.

The very poor think day to day.
Poor people think week to week.
The middle class thinks month to month.
The rich think year to year.
The very rich think decade to decade.

Finally, learn to see the opportunities that are all around you. If there isn’t anything happening in your valley, do like the bear in the song. Go over the mountain; cross the river; if only to see what you can see. You might just find a whole new wonderful world that is just waiting for your particular skills and gifts.

There Is No Answer Book

Back when we were in school we were taught that there was both a right way of doing things and a right answer. As many have observed, the public education system was optimized for providing workers for the industrial age. We were taught how to sit in rows; how to follow a set of instructions; and most importantly how to get the right answer. We were rewarded when we answered the question correctly and punished when we were wrong.

Although there are principles, such as avoiding consumer debt, that are an important part of personal finance, there are no right answers. Sorry folks, there is no teacher and there is no answer book. As I have said on many occasions, there is no one size fits all answer to the question of your financial life.

Recently I sold a house for about $50 K less than expected. What lessons did I learn, if any from this disappointment? The big take away is, don’t try to sell a house in an extremely depressed market.

But what were my options?

Listed in order of perceived desirability.

1) After five months, sell the house at a lower price. Now I am no longer paying insurance, taxes, and utilities on a second unoccupied house in another state.

2) Winterize the house and wait. It costs a few hundred dollars to drain the pipes and put antifreeze in the toilets, but who knows, in the spring the real estate market could be worse. The stock market doesn’t look too healthy and job growth is nearly nonexistent. Although this option lowers the utility bill, insurance and taxes continue at full rate.

3) Turn the property into a rental. This might make sense if I still lived in the same area, but 500 miles away? This option provides income until the market turns, but I have seen what renters can do to houses they don’t own. Then there are the continuing maintenance costs associated with 40 year old home that is growing older by the day.

So, I took what I believed to be the best of three bad options. I feel better because I offered the buyers owner financing. I will receive 4.2% on a five year mortgage with a balloon payment. I didn’t want to invest more than $75,000 in what I perceive as an overheated stock market. Bonds and other fixed income investments don’t pay spit. 4.2% on a secured investment seems OK.

This morning I watched a nearly worthless youtube video. A group of award winning real estate agents were interviewed by a well know marketing billionaire about the keys to success. It seemed that most of them were trying to give the “right” answers to the billionaire’s questions. Needless to say, these stock answers were of little value.

One of them tried to dig a little deeper. It seemed he was motivated by fear. He came from a very impoverished background. I heard more than a little Scarlet O’Hara in his replies, “As God is my witness, as God is my witness they're not going to beat me. I'm going to live through this and when it's all over, I'll never be hungry again. No, nor any of my folk. If I have to lie, steal, cheat or kill. As God is my witness, I'll never be hungry again!”

All of these successful real estate moguls told stories of pretty impressive self reliance. If they didn’t like something that was going on in their lives, they changed it. They didn’t wait around for a Government handout or a teacher who would take them by the hand and give them the “right” answer. All of them were frighteningly competitive. I wouldn’t want to face any of these characters (even the women) in a mixed martial arts cage match. They would win or die in the effort. Like all of us, life gave them problems. They are solving these problems with a mixture of intense curiosity, independent judgment (they all had different answers to the same questions), hard work, and A LOVE OF THEIR CHOSEN GAME.

Maybe that is all I need to learn from my only attempt to sell a piece of real estate.

Dividends or Buybacks?

Ginger or Mary Ann? Dividends or Share Repurchase Programs? Just some of the great questions of life.

I am old school. I trust dividends. Stock price is not real until you sell your shares for a loss or a gain. Dividends are real. They are money you can hold in your hand. You can spend that money on something like a new car or choose to reinvest it more shares of dividend paying stocks. If a company is not willing to share its profits with the shareholders, I am usually not especially interested in owning shares in that company. I like to receive that quarterly dividend. I like to see the dividends increase proportionally to the increasing profitability of the company. There is only one problem with dividends, they are taxable income. I can’t spend or reinvest that money until after the taxman gets his cut.

I tend to be suspicious of share repurchase programs (sometimes called buybacks) because I don’t get anything real that I can hold in my hand. Company management sometimes for a variety of reasons buys back shares in their company. This can be a very good thing for the investor (or not). The company can also choose to dump these repurchased shares back into the market when management decides that is a prudent decision.

Buybacks are a pretty common way for management to give something back to the shareholders without losing control of that money. It can be a very good way to increase shareholders value without the specter of the taxman’s cold dead hand. If the share price is undervalued, buybacks will increase that price through several mechanisms. First of all when a buyer (in this case the company) is purchasing large blocks of stock, the price will increase through simple supply and demand. Even after the buyback is complete there are now fewer shares available to the general public. This should tend to hold the price at a higher level. Also the company (now the shareholder) is paying dividends to itself. This gives the company’s managers more money to invest in new projects or to increase dividends at some later date. In essence the company is doing dividend reinvestment for its shareholders without any income taxes. In this scenario, if the shareholder decides to sell then he will pay capital gain taxes. Most likely this will be at a lower rate than income taxes.

If a prudent investor believes that the share price of a company is too high, buybacks would not be in her interest, since she would not choose to reinvest her dividends back into overvalued shares.

It comes down to a question of control. Dividends give the shareholder more control. He controls what happens to that dividend check. In addition, while it is easy for a company to increase its dividend, it is very difficult for management to cut the dividend. This action frequently results in bloodshed along executive row. Through buybacks management maintains better control of expenses (like dividend payouts). Dividends can grow too large. If a dividend is not sustainable, it will ultimately bleed a company white. Sometimes, companies choose to bleed themselves to death on purpose. For example, if faced with the possibility of an enormous lawsuit management may choose to sell off their assets, pass the proceeds onto the shareholder, leaving the plaintive and their attorneys holding an empty bag. However, that is very unusual.

Generally speaking, both increasing dividends and share repurchase programs are a good thing for the investor. In either case it is wise to ask, “Why are they doing that?” Dig into the news story. If something smells fishy, you might want to sell before it is time to pay the piper. What I really like to see is a company that has both a steadily increasing dividend and steadily increasing profits. For example, Dividend Aristocrats are companies that have increased their payouts for 25 consecutive years! This list is a very good place for the novice investor to begin buying shares in individual companies, after building a solid foundation of low cost index funds.

But remember a Dividend Aristocrat is a Dividend Aristocrat until it isn’t. I could tell you a story about GE. I took a beat down on that former Dividend Aristocrat.

What You Can't Do Doesn't Matter!

Over the last few years, I have discovered one of the secrets that will help overcome any difficulty in your life. In trying to help people improve their financial situation, I discovered that they wanted to argue with me. They wanted to tell me all the reasons they could not improve their situation. They didn’t have the right education. They couldn’t find a job. They just had to keep spending money on cigarettes. Sometimes powers beyond our control seemed to be targeting them as individuals. It was the fault of evil rich people or the Government. Blaming everything on the banks is very popular. There is no more point in blaming the banks for being banks than there is in blaming a raccoon for making a mess of your yard because you left the lid loose on the garbage can. Bankers and raccoons will both act in consistency with their nature.

Sometimes I have wanted to grab people by their ears and shake their heads until their brains rattled. Then when I had their attention, I wanted to tell them, “What you can’t do doesn’t matter. Tell me what you can do.”

I’m no better. While, primarily as a result of my upbringing, I have been blessed with a reasonable measure of financial discipline my approach to diet and exercise has been pretty bad over the two decade period preceding my retirement. I told myself I couldn’t jog because I had bad knees. I told myself I couldn’t swim because I wasn’t anywhere near a pool. I couldn’t ride a bicycle because I had a bad back. I couldn’t change my diet because it would require time and skills I just didn’t possess. Besides that, I needed that beer when I came home from work.

A little over a year ago, I quit listening to my self talk. I told myself just what I am telling you, “What you can’t do doesn’t matter. Tell me what you can do.”

I told myself, “Well, I can walk?” I started with two turns around my block, a distance approximately 1.1 miles. I could have walked further than that, but I choose that distance because that was all I could do it on a regular basis. In approximately 14 months, I have worked that number up to 4.5 miles on most days. I have even done 5 miles a few times. Have there been problems and missteps? Of course. I attempted to take a yoga class, bad idea. My diet is still nothing to brag about although it is not as bad as it was a year ago. I have lost 30 pounds. You still don’t want to take diet and exercise advice from me, but most days I tell myself what I can do and then I do at least some part of it.

As I mentioned yesterday, I have been listening to Ramit Sethi, author of I Will Teach You to Be Rich, interviewing Tim Ferris, a best selling non-fiction author. In the course of their discussions, Ramit tells his sister’s weight loss story. After the birth of her child, she lost a lot of weigh with a changed diet. Now she weighs 20 pounds less than her pre-pregnancy weight. Ramit says she looks great. All her friends want to know the secret. She started by explaining her entire dietary program. Her friends would then latch on to one aspect of the plan saying, “Oh! I could never do that.” Then they would do nothing.

Her friends would say, “Just give me the recipe,” for whatever low fat Indian connection she was feeding them on that particular day. She would give them the recipe. Later she discovered that none of her friends ever actually tried out the recipes.

Finally she decided not to give them the recipe when asked. Instead she would give them some words of encouragement with a simple tip, like scramble your eggs in coconut oil instead of butter. They would actually implement these simple tips. Then when they discovered what they could do, they would return asking for more information.

So—If you are looking at any immovable mountain in your life tell yourself, “What you can’t do doesn’t matter. Tell me what you can do.”

Then, just do it.

Or at least some part of it.