small business Archives - Bankers Anonymous

December 14, 2021December 14, 2021

UpCycled Entrepreneur

If food entrepreneurship were a series of races for prizes, Grain4Grain has proved itself a thoroughbred. They took third prize in the HEB Quest for Texas Best contest, winning $10,000 in 2019. In 2020 Grain4Grain won first prize and $50,000 in the Tech Fuel contest, sponsored by the City of San Antonio and Tech Block, a San Antonio-based technology advocacy group. In May of 2021 grocery-store giant Kroger’s Zero Waste Foundation selected them for funding and inclusion in a program for food innovators. This included a $100,000 grant, plus the chance for an additional $100,00 funding based on milestones achieved.

Their big idea, I have to admit, is pretty cool. The founders Yoni Medhin and Matthew Mechtly collect a waste product from local brewers – spent barley used for making beer – and apply a patent-pending drying process to produce flour and flour-based products like pancake and waffle mix.

Grain4Grain also checks off a lot boxes that are current “in the moment” consumer trends.

Medhin calls their specific form of organic recycling “upcycling,” a term I hadn’t heard before but which means turning a food waste product into a higher-end consumer food product. I’ve since learned there’s a whole upcycling mini-industry for turning waste products into highly processed foods, and it’s a big 2021 trendy food concept.

Upcycled — UpCycled Food Foundation certifies companies in the space

Following the brewing process, the spent grains are naturally high in protein and fiber and low in carbohydrates, which allows Grain4Grain to market their flour for folks who seek a “low carb” or “keto” diet, so they’ve got that diet trend covered. They also advertise donating a pound of their pancake mix to food banks for every pound sold to customers, so they do good as they do well.

That’s a lot of different ways to appeal to folks.

Ryan Salts, the director of Launch SA, a small business and entrepreneurship center, recalls being impressed with the Grain4Grain founders and pushed them to enter the Tech Fuel contest. When he heard about the contest, “The first person I thought of was Yoni,” says Salts.

“Grain4Grain fits a diet requirement that is really popular, in the last five years, there’s been an uptick in healthier brands. And having a product that does really good things, it’s helpful,” adds Salts.

More important than prizes and a cool idea, of course, is having supermarket megastores like HEB and Kroger interested in your brand and willing to put your product on their shelves. There is no higher prize than that. In January 2021, the company announced its upcycled grain flour would be featured and used in HEB’s 140 bakeries throughout the state.

Eugen Simor runs Alamo Brewery, which along with local San Antonio breweries Freetail and Real Ale, supplies Grain4Grain’s spent barley product. Simor’s company allows Grain4Grain to pick it up for free, since it’s otherwise a cost to dispose of.

As Simor told me “They’re taking what would normally be a waste product for so many breweries. It would normally be hauled off to a rancher to feed cattle, or end up in a landfill.” The majority of Alamo’s grain still goes toward a local rancher who picks it up for free. But he was happy to find Grain4Grain developing another use for it.

“We did an Earth day for sustainability at Alamo Brewery and his product was one of the ones we featured. Yoni’s a really cool guy and I wanted to be part of it,” Simor says. “I was excited about having a low carb flour, and my kids like it too.”

Salts’ particular passion is food-oriented startups, which he champions with his “Break Fast and Launch” program through Launch SA. In the food startup space, many companies struggle with trying to do both the production side and the marketing side. Many choose just one or the other.

Medhin has managed to partner with other packagers to solve most of his manufacturing problems, to get to the scale he needs to provide upcycled flour to HEB, large-scale bakeries, and hopefully someday soon, Kroger.

Like many entrepreneurs, Mehdin has already run the equivalent of many marathons to get this far. But in many ways his journey is still in its early days. The struggle to both sell a consumer-oriented retail product while at the same time building a manufacturing business to provide wholesale product at scale is really, really hard. He estimates they need another 6 months to solve their problem of getting to a large enough scale where he and his investors can start making money. His strategy in the future will depend more on providing bulk flour to the biggest food companies rather than direct-to-consumer sales. “Check back with me in June 2022,” he says.

I have a fascination with organic recycling. (My kids would call it an obsession, but what do kids know, anyway?)

Being eco friendly, low-carb friendly, and foodbank friendly are all amazing attributes. But Mehdin is more realist than idealist, when it comes to the needs of the consumer.

As Mehdin says, “customers don’t purchase altruistically. They say they do. But in reality for food products they purchase for taste, price, availability, texture, and health factors. You have to meet their immediate needs and you have to bring the product to the level of the traditional food products in the marketplace.”

This morning before writing this column I cooked up Grain4Grain pancakes based on their low-carb pancake and waffle mix. I can hereby certify: they were delicious. But it left me wondering whether pancakes slathered in butter, syrup, and blueberries still qualified as low-carb? I’m asking for a friend.

A version of this post ran in the San Antonio Express-News and Houston Chronicle.

Please see related posts

Psst … The Future is in Organic Waste, Kid

Organic Waste Program Rolls Out In My City

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March 17, 2021March 17, 2021

Pi Day Kickstarter

I’d like to wish all of you math nerds reading this on or around March 14 a “Happy Pi Day.”

Since 2010, my family has celebrated the 3.14 calendar date by hosting a neighborhood pie-eating blowout in my backyard.¹

Pi Day also reminds me of the one and only time I participated in a Kickstarter campaign. Back in 2013, via Kickstarter, I pledged $15 in advance to a complete stranger on the internet who promised to manufacture metallic baking pans in the shape of the Pi symbol. Obviously I had to have one. A few months later, he delivered. I’ve been the happiest Pi Day nerd in the world ever since.

Kickstarter, originally launched in April 2009 – in the depths of the Great Recession – offered an entirely new way to fund creative ideas. “Kickstarter” quickly became a brand that sounds less like a company and more like a whole category of how to do things, kind of like Kleenex and Zipper started as brands but then just became the word for a thing that we all need.

But the company is real, not just a word. Kate Bernyk, Senior Director of Communications, says they have been profitable since the beginning, and currently count 90 employees.

The largest category of Kickstarter projects are games, followed by art, design, film, music, fashion, and comics. The typical person who raises money on Kickstarter is an artist, a musician, a builder/designer, or an author – someone who has something new and experimental to try, but not the funding to make it happen right now.

Kickstarter specifically does not allow backers to fund traditional businesses through a loan or ownership in a business.There are other online funding platforms for that. But many businesses use Kickstarter to experiment with new project ideas and new product lines.

Austin-based camping equipment marker Kammok launches product designs on Kickstarter, with nine successfully-funded products, from a 2-person tent to a hammock tent, to sleeping bags and quilts.

Necessity as the mother of invention led to a new use for Kickstarter in the past year. Bars turned to Kickstarter to market private-venue rental events, or to fund the creation of branded swag to keep the lights on, or to provide specific musical rewards for customers. The COVID-era version of projects on Kickstarter became known at the company as “LightsOn,” because that’s what businesses needed to do by necessity this past year.

Kickstarter does not do fundraising for purely philanthropic projects. There are other online funding platforms for that as well. And yet, a clear social-mission orientation drives a huge number of projects on the platform. Bernyk pointed me proudly to the company’s corporate charter as a Public Benefit Corporation. This is a state designation that I’d never heard of before, but indicates a kind of additional bottom-line beyond profit, to include social values, support for artists, transparency, and other “Don’t Be Evil”-type company practices.

That is not to say that people and businesses can’t make money with Kickstarter. I contacted the producer of the Pi Pan from 2013, not realizing originally that he’s actually from my hometown, San Antonio. Garrett Heath says he and his partners made money from Pi Pans. And, they continue to sell Pi Pans on Amazon, which he says provides him with a small but welcome income every year. He’s very enthusiastic about Kickstarter’s role in helping them fund a manufacturing mold and original large purchase order that otherwise they could not have funded.

Kickstarter charges 5 percent of the money raised by each project. That is, according to Bernyk, their entire revenue stream. They update their daily stats on their website, which include $5.08 billion raised in total, over 197,579 projects, and a 38.5 percent success rate on projects launched.

Since 2012, the company has successfully facilitated funding for between 18,000 and 22,000 projects per year. 524 projects have raised over a million dollars, including some high profile movies and documentaries.

The Hog Book: A Chef’s Guide to Hunting, Preparing and Cooking Wild Pigs got funded recently for a $45 pledge. It is scheduled for delivery in April 2021. The Hog Book is also a project coming out of Texas, because duh, obviously. I assume you’re going to want to order that book for Texas Hog Day, which happens in April every year?[2. Ok, I just made that last holiday up.[

The defining characteristic of a Kickstarter project is that it’s a time-limited “project,” with a clear beginning, middle, and end.

Kickstarter’s success supports one of my counterintuitive but strongly held beliefs about money, namely: there is always more money available than there are good ideas to fund. Wealthy philanthropists know this. Venture capitalists and angel investors know this. They always suffer from too much money and too few good ideas to fund.

Now, I will admit, regular people mostly walk around with a scarcity mindset. I mean the “I wish I had more money,” mindset. Whenever I have a brilliant idea, my next follow-up idea is “Well, but where would I get the money for that?”

But see, that should not limit creative people. Since 2009 with Kickstarter, the money part has largely been taken care of, at least for certain types of creative projects.

For Heath, he’s pleased with the realization of his brilliant idea, made possible by Kickstarter. “It was a great experience. It opened up the doors to make something cool, and something relatable that people love. Those Pi Pie pans will be around for an irrationally long time.”

I see what he did there. Heath is officially invited to my next Pi Day Party, March 14, 2022. As are all of you. Entry fee: Bring a pie for every 3.14 guests. Extra props if you bake the pie in a pi-shaped pie pan.

A version of this post ran in the San Antonio Express News.

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Sadly, no pi party was held this year. #ThanksCOVID. ↩

January 18, 2020March 25, 2020

Maverick Whiskey – Small Business as a Legacy

At first glance, sure, Maverick Whiskey – it’s a small startup. Founded by a couple of San Antonio physicians with three children under age 14. In 2017, they bought a building two blocks north of the Alamo, and invested heavily in distilling and brewing and kitchen equipment. They hired food and alcohol experts. They are busy building their business’ brand with the tagline: “Unbranded since 1836.”

That’s a clever slogan, because we remember 19^th Century land baron Sam Maverick famously didn’t brand his cattle, inspiring the word we still use today for a person unbounded by convention.

Doctors Ken and Amy Maverick celebrated their business’ official opening in July 23^rd, the 216^th birthday of Sam Maverick. Ken is the great great great grandson of Sam.

And so upon closer inspection, no, this is no small startup business. This is a family legacy project.

What is a legacy?

To quote my family’s favorite musical¹ a legacy is “planting seeds in a garden you never get to see.”

To receive a legacy from a family member who preceded you is to have your identity shaped in ways you didn’t necessarily choose, at least initially.

Ken received a collection of old diaries and letters from his grandmother and father. Long after becoming an ophthalmologist, he became immersed in the 18^th and 19^th Century stories contained there.

Says Ken, “I felt compelled to preserve and help tell some of these stories and aim to pass them on to my children. Some are filled with murder, separations, and drama (like all families). Some we will keep private (per my grandmother) and some we will tell.”

Ken and Amy Maverick transformed a largely empty bank building into a distillery, brewery, high-end restaurant, and historic tour-destination, all in the service of the legacy of Sam Maverick. The walls of Maverick Whiskey are covered with the official announcements, historic pictures, documents and maps from Ken’s family legacy, as well as his research.

Texas History

Quick refresher on 19^th Century Texas history: Sam Maverick left the siege of the Alamo in March 1836 to join the Texas independence convention, urging the convention to send reinforcements. We all know how that turned out. He later signed the Texas Declaration of Independence, served as mayor of San Antonio twice, then as a Texas legislator, and in the meantime accumulated vast land holdings in Texas. Those holdings were once estimated between 300,000 and a million acres. Ken says that Sam’s stated goal was to be able to ride from San Antonio to El Paso, all without leaving his own private property.

The Maverick family name continued to dominate the San Antonio scene long after Sam. His sons Sam Jr, Albert, William, and George were involved in real estate development, especially downtown on Houston Street. During the 20^th Century, Maury Maverick, son of Albert and grandson of Sam Sr., served two terms in Congress and one term as mayor, as a staunch Roosevelt New Deal-supporter of the 1930s.

His son, Maury Maverick Jr. in turn, was a Texas state representative, and then became Sunday newspaper columnist for the San Antonio Express-News. Many people in the best social circles believe the latter to be the most honorable of all professions. (But I digress.)

Ken and Amy built Maverick Whiskey to answer the following question: “For adults interested in 19^th Century Texas history, what’s the most fun and historic way to spend a few hours in San Antonio?”

Fun, because whiskey and beer and food. All of them very good.

I purchased and sampled bottles of their Maverick Whiskey, Maverick Light Whiskey, and Maverick Gin. I have further sampled four of their brewed beers. Plus dinner. (All of this strictly for research purposes because, you know, journalism). Rum and Tequila-style spirits are planned at the distillery as well.

Palimpsest Set In Stone

Historic, because like a palimpsest set in stone, 115 Broadway offers layer upon layer of history lessons, starting from the underground up.

The building sits in a corner of the original Sam Maverick homestead, within site of the Alamo ruins. Later 115 Broadway was the location of the Lockwood Bank, formed in 1865, which in the early 20^th Century built a massive classical Greek-Revival structure that implied the bank would last forever. It lasted just a few years.

Inside, on the walls, Maverick Whiskey has preserved the optimistic bank announcements of 1929, as well as the more sobering announcements of re-opening during the Great Depression, a few years later.

The Mavericks now store and age their newly distilled whiskey in barrels in the old Lockwood bank vault underground. Underground, below the dirt of Sam Maverick’s homestead – this is where symbolism and word play converge.

Ken and Amy have literally sunk their liquid assets into an old bank vault, in the hopes that it will, over time, compound in value. Ken told me his legacy to his children may someday be that aged whiskey and his great great great grandfather’s recipe. Alcohol is one of the few physical assets – unlike cars or jewelry or even gold – which may increase in quality over time.

For physicians to take on such a huge legacy project raised questions in my mind about expected return on assets. From the seeds they have planted underground in their garden, all in the service of Sam’s legacy, how will the Mavericks realize a return on their investment?

Whiskey takes time, after all, to age.

Some new businesses decide to do one small thing. That is not at all what Ken and Amy Maverick have taken on with Maverick Whiskey. This is a historic building telling the story of a historic family that profoundly shaped early Texas and San Antonio history. It’s also part food and drink place, part event space, part tourist destination. I bought the t-shirt too.

A version of this post ran in the San Antonio Express-News.

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Lin-Manuel Miranda’s “Hamilton.” Duh ↩

January 4, 2019

Bummer About All That Cash, Man

One of the hottest-developing industries in the US, marijuana-related businesses, is still practically shut out of the modern payment system because of an unusual patchwork regulatory situation. The result is that dealing with the cash, banking, and financing parts of this business are stunted and twisted into strange shapes.

Schedule 1 Substance

The root of the weird regulations and patchwork solutions is that federal law classifies marijuana as a “Schedule 1” substance, the same as heroin, ecstasy and LSD. Even though marijuana is legal for recreational use in 9 states and for medical use in another 31, regulated financial institutions really, really don’t like the risk of dealing with businesses making money from a Schedule 1 substance. They can’t afford to run afoul of federal laws and regulations. Even in legalized states, sometimes as few as one bank in a whole state, and never more than a handful of banks, offer traditional deposit-taking banking services to marijuana-related businesses.

In addition, major credit card companies like Visa, MasterCard, and American Express consistently refuse to process any payments from any company that touches the product. That means retail customers can’t ever pay with credit or debit cards. Even new fin-tech person-to-person payment services like Venmo, PayPal, and the Cash App regularly shut down services for marijuana-related businesses when they catch a whiff of it. Bank-based lending to the industry essentially does not exist either.

And remember, the industry is not just retail stores, but everything that touches a marijuana plant, from growers to cultivators to processors to cartridge makers to transporters to retailers. It all operates at the fringes of the traditional banking, payments, and finance sector.

Necessity Meets Invention

Morris Denton, CEO of an Austin-area medical cannabis dispensary Compassionate Cultivation, the first licensed dispensary in Texas, confirmed to me that the banking and finance side of running his business remains “a big pain in the butt.” Very few banks are willing to either take the risk or engage in the regulatory headache of working with businesses like his.

Sometimes out of necessity comes invention. For example, a Scottsdale, Arizona-based fin-tech and reg-tech company called Hypur offers a suite of products for the few banks and credit unions willing to serve the industry. As a finance nerd interested in the way traditional banking operates and evolves, the Hypur offering sounds kind of radical and awesome.

As VP of Hypur Tyler Beuerlein describes it, their data and software feed allows a bank to monitor, in real time, every single transaction of their marijuana-based business customers. According to Beuerlein, this super-intrusive data feed is what’s necessary to lower the risk that banks face when dealing with the industry. From a compliance perspective, they empower the marijuana-industry serving banks to know the source and size and timing of every single customer transaction. According to Beuerlein, if a marijuana business made exactly $23,750.22 in sales today, their bank (via Hypur’s data feed) can know that precise amount in real-time.

Cash Problems

To understand both why that’s cool and different, you have to picture some of the tremendous complications that come from a nearly all-cash industry. And also picture the fairly weak information banks typically get from their small business customers.

Cash-based transactions – far less traceable than electronic payments – create a whole series of risk for banks, already super-anxious about federal regulations. How do you prove to the feds the source of a business’ cash is legitimate? How do you comply with anti-terrorism laws? A successful marijuana business typically manages big piles of cash that can’t be easily dealt with.

Folks in the legal (and quasi-legal) marijuana industry describe strange problems that arise when you run an all-cash business. Like, vaults full of paper money that require powerful fans to keep the money from getting wet and rotting. Over time that cash literally tends to stink like marijuana. One industry veteran described a man who dug a hole for a shipping container in his backyard that he filled with currency. As every bar manager knows, cash has a nasty habit of walking out the door at the end of the night in the pockets of your employees. Big piles of cash also attract thieves who can target your cash at your business location, or when the money is in transport.

Banks in the US generally will not let you initiate large deposits of cash if you cannot account for exactly where it all comes from. Even if the bank agrees to work with you, you can’t simply show up with your previously earned $40,000 in cash and expect the bank to open up your business checking account.

We can all imagine the problems of consumer all-cash transactions, but business-to-business payments are likely even more a hassle, since they’re that much bigger.

When I listen to a description by Beuerlein of Hypur’s data-feed to banks that serve the marijuana-related businesses, it’s interesting to think about how every bank that serves small businesses would in theory want this, even outside the marijuana industry.

Typically banks that make loans to small businesses get very sketchy, partial and intermittent information. If a loan is paid on time, a bank might request a copy of annual tax filings. If a problem arises, maybe the bank demands quarterly or even monthly accounting statements from the business. Those statements are going to be voluntary, prepped by the businesses, and frankly leave a huge amount of discretion to the business owner on what gets reported. It’s interesting – ok, maybe just to finance nerds like me – to think about the banking possibilities of seeing real-time transactions of a borrower. To a banker, that’s like the holy grail of lending.

One of the ironies of heavy business regulation – like what currently weighs on the marijuana business – is that it actually spurs entrepreneurial solution-seeking. When regulation creates enough pain points for businesses, other businesses will step up to try to solve those problems.

Meanwhile, when the Schedule 1 classification gets lifted, this whole regulatory problem changes and mostly goes away. Of course I don’t know if that’s happening 1 year or 10 years from now. (hint: It’s closer to 1 year than 10 years.)

A version of this post ran in the San Antonio Express News and Houston Chronicle

Please see related posts:

The business case for marijuana legalization – January 2018 – With a Beto O’Roarke Cameo!

Legal Pot in Texas – The Money Case – February 2016

Weird tax laws around marijuana businesses

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September 11, 2017March 9, 2018

Bail Bonds Part 1 – The Business

Like all of my favorite finance topics, this one was inspired by my daughter’s question, as we slowly drove in the car past the county correctional facility: “Daddy, what are bail bonds?”

Prior to her question, my knowledge of the industry came from watching Robert DeNiro in Midnight Run. Fun movie.

I tried to answer as best I could. “Well, first you need to be arrested for a crime. Then, you really don’t want to spend much time in jail waiting for your trial, so the judge says you have to pledge money to guarantee you’ll return for trial later. But then, you don’t have enough money to pledge. Worse still, you don’t know anybody who has enough money to pledge. So you walk into a bail bonds company trailer…”

Then I kind of got lost, thinking as a banker might, trying to underwrite this financial risk. I’m imagining how awfully risky this must be on the business side. Criminal defendants. With no money. Also, no collateral. That is a rough way to lend money, compared to a bank.

Oh, how I was wrong. Having sat down with bail bondsman David Fernandez of Jailbusters Bail Bonds, as well as Susan Monsalvo of Express Bail bonds, both of Bexar County, I’ve come to a few opposite conclusions.

First, I could see how bail bonds might be very profitable; even more so than a traditional bank.

Second, the underwriting of bail-bond financial risk harkens back to some old-school lending criteria that traditional banks won’t or can’t do anymore.

Let’s talk about the potential profitability first. A typical bail bond company charges a 10 percent fee to customers, meaning if a judge sets $5,000 bail, the defendant pays a $500 fee to the bail bond company, who pledges the $5,000 on his behalf. (I’m using the male pronoun for defendants because, duh, men commit most crimes.)

When the defendant shows up in person for trial, the bail bond company’s $5,000 risk is released and the bail bond business keeps the $500 fee. Now, the first thing to notice about this deal is that any finance company that can earn 10 percent on its capital for just a few weeks or even a few months of financial risk has the potential to earn an extremely high annual rate of return on its capital. This sounds potentially very profitable.

But wait, that’s not even the best part. Bail bond companies do not have to hand over the $5,000 in pledged money to the county court. In the vast majority of cases, no money ever changes hands. The bail bond company just takes the $500 fee upfront and pledges money for the future, in case the defendant skips bail. In the meantime, it keeps the money. A huge advantage.

This, you should notice, is a way better deal than what a typical bank gets. Banks have to actually give their money over to borrowers, and if all goes well they only get their money back slowly, with interest, over time. The fact that bail bond companies only virtually pledge money, but in fact don’t give any money, is pretty awesome for bail bonds businesses.

There’s even more coolness. Bail bond companies, in order to get and keep a license to do business, have to prove that they have assets, either in cash in the form of a bank CD, or in property. Their license typically allows them to underwrite bail bonds up to ten times the value of their proven cash assets. This creates what a finance nerd like me would call leverage.

One of the magic tricks that traditional banks get to do is called “fractional reserve banking,” in which a bank lends out many more times in money than it ever actually has in capital, sometimes close to 10 times its capital. Bail bonds companies get to do pretty much the same thing, because if a bail bond company has a $100,000 cash CD, its license allows the company to underwrite up to $1 million in bonds.

Finally, there’s the underwriting process, which I mistakenly assumed would be extremely difficult. Actually, according to both Fernandez and Monsalvo, they use a combination of personal judgment and reliance on the accused’s mom to take appropriate risks. That’s right, more often than not, mom (or another female significant other) is the co-signer on the bond.

Regular banks don’t do this kind of touchy-feely thing anymore. With traditional banks, it’s all algorithms, credit scores and heartless, technology-based lending.

With bail bonds, the owner often has to take a leap of faith, engaging in a sort of character-based lending. Often that’s Mom’s character. Or Grandma’s. See? This is just like George Bailey in “It’s a Wonderful Life,” or like “Leave It To Beaver” type lending.

An additional support for this type of old-school personal-judgment based lending is the preponderance of repeat customers in the bail bonds business. Fernandez of Jailbuster’s usually ends his discussion with customers with the admonishment: “I don’t want to see you again,” but of course he does see them again. A combination of repeat customers and personal referrals make up the majority of his business, according to Fernandez.

Monsalvo of Express Bail Bonds describes working with her father’s criminal defense attorney business and later her mother’s Express Bail Bonds business, where “as a result I know multiple generations of [her father’s] customers. In some cases the grandfather, father, and son. Or I might see a customer who I knew in diapers and think, like, I remember you as a baby.”

If that doesn’t warm your heart, I don’t know what will. Shouldn’t we all start a bail bonds business together?

Now that I’ve helped you, like me, fall in love with the business of bail bonds, I need to warn you about the bad news for the business. 2017 so far has proved to be a terrible horrible no good very bad year for bail bonds in cities like Houston, and in states like New Jersey, where they’ve practically been banned. More on that in a follow-up, on the threats to the business.

See related posts:

Bail Bonds Part II – The Threats to the industry

Pawn Shop Audio Interview Part I – The Unbanked

Pawn Shop Audio Interview Part II – Fighting the Good Fight

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February 1, 2016March 19, 2016

Non-Bank Lenders For Small Business

Note: This post has a Texas bias and a version of it ran in the San Antonio Express News. However, there is no open-carry here on this blog, so you can bring your children.

I suggested in a recent post that it’s nearly impossible to fund a new business and there’s really no good way to go about it. The best thing you can hope for is just to be born rich.[1]

However, in the interest of keeping the American Dream alive (at least until Trump wins in November) I’ll mention a few non-traditional avenues to investigate if you’re starting a new company and looking for funding.

Each of the following non-bank options are lenders, meaning you’re getting a loan rather than a direct investment in your business.

Prosper.com

Prosper is not a small business lender per se, but rather an online source of 3-year fixed interest rate personal loans of up to $35,000. You can apply with them online for a variety of needs, including for your small business. You create a profile, describe the size of the loan you need and your planned use of the funds, and what interest rate you’d be willing to pay. The ‘lender’ will be numerous individual investors[2] grouped together by Prosper. They agree to fund you at your proposed interest rate, for as little as $25 per lender, or up to the full amount of your request. Prosper handles all the online mechanics of funding and payback of the loan. Since there’s no traditional bank involved, but rather thousands of individuals making decisions, I see Prosper as a reasonable, small-size, alternative for startups to consider.

In my state, Texas, you cannot be a lender on Prosper, but you can be a borrower. In the mid-2000s – back when Prosper first came out and I lived in New York – I funded a bunch of small loans, including small business loans. As an investor, Prosper worked fine for me.

Back in 2007 I also once tried to borrow $10,000 and was ‘funded’ by the collective interwebs at a reasonable 7.7% rate, but could not ultimately get through their due diligence process, which included a credit check (that part was fine) and review of my taxes (for some reason that befuddled them.)

Prosper reports $5 billion worth of loans funded since their inception, so I assume my own problems were idiosyncratic. So check it out.

LiftFund

Non-profit microlender Liftfund lends money to small businesses in 13 states, although they are headquartered in San Antonio.

[Important disclosure: I do periodic consulting gigs for LiftFund, so anything nice I might say about them should be filtered appropriately.]

They may, in fact, be your startup business’s only hope of getting a loan.

Whereas your traditional bank will not talk with you about a loan until two years have passed – and frankly your bank isn’t in the business of coaching small businesses – LiftFund not only will talk to you but considers supporting startups with educational resources a key part of their role.

When I say banks will neither coach you nor even talk to you about a loan for your startup, I’m not judging banks. Some of this, including the coaching part in particular, is not a money-maker.

I guess LiftFund can do this because of their not-for-profit mission. Like other non-profit business lenders they can do things which don’t maximize their bottom line. Loans range from as small as $500 to as large as $250,000. A bunch of friends of mine in business for less for than two years have gotten loans from LiftFund and their predecessor Accion, so I know this is a legit source.

Able Lending

File this one under “This is a really cool theory but it’s too new for me to have experience with it yet.”

Able Lending relies on a classic microcredit lending theory – that we won’t fail to pay back friends and family – to lend to startups less than two years old.

I recently met up with Mario Cardona – the one-man San Antonio branch office for 2-year-old Austin-based startup Able Lending.

Cardona explained that business owners seeking a loan from Able must first tap their own personal networks (Uncle Bob, your college roommate Janet, and your hair stylist Sam) and get a commitment from at least three different ‘backers’ for your loan. Step two, Able funds up to three times that committed amount, at a rate between 8 and 16%, for between $25,000 and $500,000. So after Bob, Janet and Sam together agree to lend you $25,000, Able funds $75,000. If you do a 3-year business loan, Able gets its portion of the loan paid back faster than your backers do, which is kind of a neat mechanism for ensuring that your backers are taking some risk on you. I think Able Lending depends on the feeling that you really, really, don’t want to let your personal backers down, so they feel more secure with your business loan.

Does it work? I don’t know yet, but would somebody please let me know if they have experience with Able Lending? I like the idea.

NextSeed

Like Able Lending, Next Seed is a total startup, so it’ll take some time to see how it goes. Also, like Able Lending and LiftFund, it’s based in Texas. Unlike those two, it is only registered right now to do business in Texas. Finally, like Prosper, it’s a crowd-sourced platform for borrowing money.

NextSeed is taking advantage of newly liberalized national and state laws to allow companies to raise debt and equity from non-accredited (meaning, non-wealthy) investors. Small businesses can sign up with NextSeed to raise between $25K and $1 million at a set interest rate. Investors/lenders – that could be you and me – lend in increments as small as $100 via this platform. NextSeed handles the funding and regular monthly payments.

I spoke with the founders, who believe they offer a more personal, fun mechanism for investing on the one hand, and an alternative source of capital for entrepreneurs on the other. They are currently doing deal number four, so it’s early days yet. I’m thinking about signing up and sending in a small amount of money to be a lender, partly to figure out the mechanisms and partly because Texans right now are shut out of participating in Prosper.

Crowd-funding thoughts

I’ve been reading and learning lately about the liberalization of crowd-funding rules to allow for non-wealthy people to participate. I remain concerned that

a) This is a not very-efficient way for business owners to access capital and
b) Some non-wealthy people, at some point, will lose their shirts. There will be tears.

Right now I’m of the mind that liberalizing laws to make more types of investments available for non-accredited investors is probably a net gain for society and the economy – principally that entrepreneurs get more opportunities to access capital. But given the nature of things like this, some people will bear the brunt of the “costs” of this liberalizing – via catastrophic, unexpected, losses. We’ll have generalized, socialized gains and concentrated, private losses. Sort of the exact opposite of the 2008 crisis and bailouts of TBTF banks.

Please see related posts:

Funding for Small Business – All The Terrible Ways

Entrepreneurship – Getting started is the hardest part

[1] If I wrote the bible for small business owners I’d say that it’s easier for a camel to fit through the eye of a needle than it is to convince an affluent person or institution to back your startup company. I feel your pain. To take a more 21^st Century analogy, raising money can be heavier lifting than you’ll find at 5:30am Crossfit gym. Traditional banks just don’t want to talk to small businesses until they’ve been in business for two years, with the tax returns and profit to show for it.

[2] Although I kind of assume that by now individual investors have been replaced, somewhat, by Prosper bots. Meaning, institutions or high-net individuals have profit-optimized the algorithm for funding X amount at Y credit rating and Z interest rate on Prosper, so things are pretty automated. An amateur individual lender like me – without an algorithm – is going to end up accepting a non-optimized interest rate for any given risk. Which is still probably fine.

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