The Modern CPA Success Show: Episode 27
Today, we are joined by Dan Kalis. He hosts a podcast called Small Biz Matters, and he is the CEO of two companies. We are going to talk about different lending options for small businesses. We always talk about banking relationships with our clients and we stress the importance of having a relationship with your bank.
Today we talk about how you can create a lending relationship to help your business grow.
Jamie Nau: Hello and welcome to today's podcast. Excited for today's guest. So once again, it's Adam Hale from Summit and Jamie from Summit. We're joined by Dan Kalis , who has a pretty busy life. Like some of our guests, he is a podcast host. He hosts a podcast called Small Business Matters. So he's doing that, and then he is CEO of two companies, Upgraded Marketing Systems and Fully Fundable. So we brought Dan on for a couple of reasons. A lot of our clients come to us and they're like, we need funding, we need funding. And we kind of give them the same old answer. Okay, who you banking with already? Let's go talk to the big banks and let's talk to the ones you have relationships with. And oftentimes that comes up pretty dry, especially for clients that don't have a lot of capital. So we got connected with Dan because obviously he has some alternative lending options for our clients. So before we go down that road, Dan, give us a little bit of backstory on you, and your companies, and your busy life?
Dan Kalis: Sure thanks, good to hang with you guys here. Yeah, I never thought that I would actually be in financial services necessarily, but that's really been my entire career. After college, I got into the investment world, in my early twenties and that was kind of a weird time to do it because it was right around 9/11, and when you when you're a young 20 something year old and you're trying to talk to sophisticated individuals, high net worth, affluent about money, whether you're a CPA, whether you're a CFO, investment person, it's a big challenge. And so that was a little bit short lived, got into the mortgage business. So I kind of got to see lending from a consumer standpoint through the era of the big short era. I assume a lot of people have seen that movie and kind of saw the chaos of that and got out of that in 2008. Then got in then kind of morphed into commercial lending to different degree, which we'll talk a bit about today. And so I started off doing business credit. I wanted to get into real estate investing and I wanted to flip houses. I kind of got the phrase of that back in the day. I thought, you know, if I'm going to do some sort of funding and I want to get into real estate, why don't I offer funding to real estate investors? Now, I can insert myself in that world. I think there's a pretty good lesson there that you can kind of cater your services and your specialties to anything that you really want to learn. I mean, if you’re a CPA, obviously, some of the people watching or listening are have a niche in certain industries. I know obviously you guys as a firm have a couple of different niches and it makes sense to do that. So we learn a lot about that, and somewhere along the way I decided that I wanted to learn how to do marketing, and direct response marketing, digital marketing so that I could not have to be dependent on cold calling, or referrals for generating business. And so all of us that are listening here for the most part that are on here are all B2B. So having to do that, and get in touch with decision makers and targeting. A lot of B2B companies that work with smaller businesses don't really do a lot of advertising. It becomes, you have a referral based business and that's great. Sometimes that's all you can kind of handle. So some of you are in that position, some of you are not. That’s why I have this kind of combined, you know, background of financial services and commercial lending and have seen a lot of different, you know, the 2008 economic collapse and all the issues that go with that, and now what we've run up against with the coronavirus, and who knows how long that's going to pan out. So it's relevant now. It may not be relevant later, but at the end of the day, there's always going to be roadblocks. There's always going to be unforeseen things that we as B2B professionals run into for our clients. I kind of look at it like, I have the ability to play financial offense for the clients and help them really either get the capital they need to keep growing where they can't get it from other sources, and then I can help them optimize things that generate revenue. You guys are the experts at some of that, too. But a lot of financial defense, everybody knows that championship teams require both. And so, you know, to really help them find hidden money, either direction. So that's kind of been what I have ended up doing. Then we started the podcast because we wanted to just be able to reach out and get back to the small business community at large in America. And when I say small business and again, everybody targets of companies, like ten million a year in revenue or less, but we do interview people on a podcast that are bigger than that because we want to give advice to the small businesses that are trying to cross that threshold of a million per year and then 10 million per year, and so we use that as a way to just really network and bring in really great experts and contribute other content. So we're keeping busy and we've got a few different avenues to help the SMB market.
Adam Hale: Yeah it doesn't sound like you have much going on, man. What do you do with all your spare time?
All: Laughing [in audible]
Adam Hale: I mean, it's an interesting path you took. I mean, it's funny how kind of sales and finance have find themselves kind of intertwining in benefiting one another. I mean, even whatever you do doing the mortgage stuff, I know that's pretty heavily marketing focused as well. So, you know, just as an industry. So I can kind of see where those synergies play. And it definitely does sound like you can offer quite a suite to a small business just to kind of go into Fully Fundable just a little bit because we do run into that a lot. As VCFOs, and most of the people listening to this are either working hand in hand with clients, or are going to start with that. We always talk about banking relationships and having those relationships are really, really important. So whenever we work with a client, one of the first questions we ask is what bank are you with and who's your banker? And surprisingly, even some very large small businesses, you know, the 10 to 20 million dollar size, they'll come back and they'll say, well, we work with X, Y, Z Bank, but I don't really have anybody because they're more loyal, for whatever reason to the bank than the banker, which is a little bit different than Summit’s approach. For us, we're a little less concerned about the bank because we assume for the most part these days, they're kind of apples to apples. We're more focused on finding a lending relationship with the person. So here at Summit, we'll just chase people. So whenever they hop from bank to bank, then we'll move with them because it takes a long time to build that relationship, that trust, that understanding, knowing that you have somebody kind of inside going to bat for you. I think it's become very, I mean, that's come to surface a lot through all this COVID stuff. I mean, the clients that we don't have banking relationships with, really, we're kind of put to the back burner and pretty upset and want to move banks now and do those kind of things. So the problem, though, with that is that some of the clients, you know, traditional lending and everything we just talked about is fantastic. But it hits a cap. It hits a ceiling. Sometimes as business owners, we've got to roll the dice on things like even what you were talking about, like on the marketing side, where we need to double down on some marketing expenses. We need to do a few things and maybe we don't have the capital to do that. So talk to us a little bit about kind of who that ideal customer is. I mean, I've got quite a few, obviously, that we've been talking about, you know, between companies. But we kind of build that profile for us. Who's coming to talk you? That kind of thing.
Dan Kalis: Yeah, and let me back up a little bit on that, because to the topic of banking relationships and I think to a large degree, that whole era of having this relationship with your banker is sort of gone at least the way that it used to be, maybe prior to, you know, the new millennium. I mean, I'm not going to mention names of banks, the mega banks, like there's a lot of turnover there. And it's like if you have a relationship with a business banker or even like one of these private bankers and when these mega banks, you know, that doesn't necessarily mean that they have all this authority to do certain things for you because they still have to run it up the chain of command. There's a lot of red tape. If you're going to have a primary banking relationship that you really, really want to have, that's subjective, look at what you're doing regardless of your size. You know, the traditional local banks or regional banks sometimes can be better for that. And again, there's pros and cons to working with a mega bank versus that. But at the end of the day, you look at the small business community at large and you see some statistics that are startling, like the average small business has only twenty seven days’ worth of cash on hand. I know that's something that you guys work really hard at. And probably a lot of your CPA associated companies and clients and partners also do to really put an emphasis on, you know, cash reserves as much as possible. But that's the reality is that when you run out of cash, you run out of oxygen as a business. And I don't care if you're a half million dollar a year business or 20 million a year, the same things can apply depending on what your profit margins are. So, here's an example. You asked for kind of the profile of a company. It really depends on the industry. It depends on a lot of different things. I had a client for funding back in December who is an e-commerce business and they're doing about thirty six million dollars a year. So that's not really a small business, it is a medium sized business. But they were treated like a small business that was very high risk because their e-commerce. They house some of their own inventory. But inventory isn't really always viewed by banks as significant collateral because it's fleeting. It kind of goes away. I'll get into kind of the three C's of lending, one of which is collateral. But they were tapped out. I mean, this is a company doing three million dollars a month in revenue. You know, a six year old company, high growth, pretty, pretty great cash flow. They just had their cash tied up in other things. They needed to buy half a million dollars of inventory before the end of the year. They were tapped at two hundred fifty thousand on a line of credit, and they had a relationship with this bank. And so sometimes when you think you have those things, you really don't. Now, if somebody comes to us and you know, what does alternative bank lending really mean. To me, and to a lot of the more sophisticated people in the industry, it just means basically non-banking. So you have these different tiers. I would say retail banks formed that first traditional conventional tier where I would always tell someone that comes to me to go to them too. I would say, I'm not going to try to get you some funding if you haven't already gone to wherever you bank at Wells Fargo, Bank of America, first Bank of Tampa for whatever. It doesn't really matter because I can't compete with them on rate in terms. If I'm going to be serving them properly and have a fiduciary responsibility to give them the right thing, then I'm not going to delegate that. These banks have they different access to capital through the Federal Reserve, through different, you know, just different ways that they can fractionalized banking you. We're not to get into that. You guys kind of all know what that is. But they have access to capital and they can lend it out cheaper than anybody else and they have the best terms. So it's always go there first. If you can't get it from there, then we'll be here for you. And what that really means is and this applies to whether you're a mortgage lender for consumers or business, which they are very different. But the things that are the same is that it's the three C's, its cash flow, credit and collateral. And so cash flow, obviously, meaning that the person lending the money, the institution lending the money, can see that there's enough cash flow coming in on a regular basis historically to cover the debt service payments. They're not going to default. That's pretty simple, right? And that's usually the one thing that every business can go off on, because if you get down the credit, you know, credit is personal and business. Now, I've worked with lots of businesses ranging from a few hundred thousand dollars in revenue to that thirty six forty million dollars. I don't know how much you guys look at this or your CPA firms that are listening really look at business credit. Most businesses in that entire range don't really do a whole lot to build their business credit profile. And it's not that you could have this amazing business credit profile with, say, Dun and Bradstreet or these other credit bureaus, and then be able to just get a bunch of money without any kind of personal guarantee. It's not really that much of a reality. But what happens is if you have really strong credit and a lot of trade lines, and you can demonstrate that your business itself is responsible in a way, then it gives you better rates and better terms. So it usually just defaults to personal credit. Well, again, your small business owner a lot of times and again, this is stuff that you guys are all going to be familiar with, all your CPA people are going to be familiar with. There's a lot of commingling of personal and business funds. Not in a way that's kind of like we're trying to pull something over. Obviously, if they're doing something like that, that's a whole other issue. But there's no differentiation between personal and business, and the credit cards are using the bank accounts. It could be a real mess. I'm sure that's a lot of the value that you guys all provide. And so the personal credit gets messed up sometimes. So if you don't have at least a 680, ideally 700 plus personal credit score, then you're viewed as a subprime candidate. So your options are limited. Retail banks are going to be less likely to look at you. And frankly, the reason why that e-commerce company was having problems is mostly because of the industry it's in. It's because they don't really understand digital based businesses. They're used to dealing with tangible brick and mortar, or manufacturing or whatever, and a little psychology principle, and it goes into marketing as well is that the confused mind kind of always says, no. It's a preservation mechanism. If you don't understand what's going on, then you don't agree to something, right? Now a lot of people don't follow that and they get themselves into trouble. But that's how the brain is supposed to work. And so the banking mind goes that way, too. And so they're really just looking for reasons to say no. And you've got to think also, what's the motivation of a banker that works for a retail bank or a big bank? And, you know, there's a lot of great things that come out of it. I don't want to badmouth them. I'm just looking at it as objectively as I can. You know, there's a reason why they say, you know, working banker's hours and doing this kind of thing. They really just want to, like, not do something to screw up their job really. You know, they're not going to too far out on a limb and risk that. Then when you get outside of the scope of retail banking, you can get in and where you're kind of working with more investor groups, private equity type fin-tech companies and the like. But let me finish the three C’s. So credit's there, and then collateral. Most of the businesses that we talk to don't really have hard collateral. So what is what's the best kind of collateral? Real estate, right? Because if they can set it up so that there's recourse, if you fail on your loan, they can repossess the real estate, whether it's a commercial piece of real estate, and most small businesses don't own the real estate, they lease. So they don't really have that in most cases. Sometimes they'll go and they'll do a line of credit against a personal residence. Well, that's a obviously a very, very risky thing to do. But they do it all the time. And again, you guys may see that when you're looking over people's financials, I wouldn't recommend it unless absolutely necessary. So usually what's left is cash flow. So then the retail banks are going to say, no because your credit score it no great. No, because you don't have substantial collateral. No, because the loan size isn't big enough to make it worth their while or, no because we just don't like your industry or we don't understand it. So there are a lot of opportunities to go outside of that realm. But then realizing that as a business that needs the capital, as a professional who is helping a business from a financial standpoint, CPAs are often and in most surveys ranked by business owners as kind of the number one go to professional out of their attorney, their CPA, their banker, even their peers, they go to the CPA first. And so there's a lot of yeah, there's a lot of responsibility with being asked what do I do in this situation? And so, yeah, you're talking about higher risk loans. And so whereas a commercial real estate loan would be maybe in the low single digits to high single digits, interest rate wise, you're talking about loans that are spread out over 10 plus years or even SBA loans. That's a form of a secured loan in that it's secured by an insurance policy by the SBA itself. So it's not secured against collateral necessarily. But you're now talking about six percent. Once you get outside of that realm, there's really no such thing as single digit interest rates. And so this is another mindset thing. I think this would be good for CPAs to know as well as the small businesses themselves. Is that not to necessarily be afraid of that either, because to think of debt as a consumer is to say, well, if I'm borrowing money to buy a house or buy a car, I certainly don't want to pay double digits because I don't have an opportunity to make money on my money. But the business, it's about leverage. And that's kind of what a free enterprise society is, very heavy in debt involved. And if you are responsible with it, then you're borrowing money at 10 percent, even 20, 30 percent in some cases. But if you're doubling or tripling the money that you're using it for, then it's just an arbitrage play.
Adam Hale: So what I was asking, what's the profile look like. It's somebody that's already been kind of turned down by their bank, because we know this is going to be nontraditional lending, which means the interest rates are going to be higher. So what are some of those things that you've seen people borrowing for to kind of double down and get that ROI on their money? Because like you said, if it's real estate, or it's a hard asset, most people probably, that's not the first reason why they come to you unless they have some other issues, like the credit or the bank just doesn't want to deal with you kind of a thing. So what are some sort of what are some unique things that I as the CFO, talking to my client, they're like, hey, I just don't have the capital to do this. What are the things that I might want to come to you for?
Dan Kalis: Yeah, that's a great question. I break that down into kind of two different categories. You have emergencies and then you have opportunities. Emergencies are obvious. We don't need to go into that because you're asking about a growth. But if you can't make payroll and you don't have a month to wait for an SBA loan or something, and you want to keep your company alive and you want to keep your goodwill, then sometimes you need to do that. And you can't get an immediate answer ROI on that. But as far as other things, if you were to look at the top uses, it's going to be what you would expect it to be. Marketing, advertising, staffing, and I don't just mean the payroll example of covering an emergency, but like bringing on somebody and having the money in the bank to pay them. Any types of expansion equipment, depending on what kind of business it is. Not all of them have that. Then within equipment, there's specific equipment, financing and leasing. That's a whole other conversation. But if you're just talking about working capital in general, me just say this, too. In the alternative lending space where the money is more expensive, you wouldn't necessarily just take a loan out just to have the cash on hand. You would really take it out for something that you knew specifically. If you had really great credit or you had really great collateral and you could go to your retail bank, maybe you get a line of credit or you get a loan, it's low interest and you can sit on it. But sometimes with these other programs the clock is ticking right away. You may even have to pay back on a daily or weekly basis instead of monthly. You may have only 6, 12, 18 months to pay it back. So the amortization is a lot shorter. The cash flow is then tighter. But again, and we do a good degree of marketing and I know you guys work with marketing agencies and stuff, if the business has a huge opportunity to either run a marketing or advertising campaign or to increase the ad spend that they're doing and they know it's working, then great. Then that's where they come back to working with the CPA or the CFO to say, yes, I got approved for this alternative loan or this advance, and they feel comfortable we can pay it back. But do you feel comfortable that if I have to pay, if I borrow one hundred thousand dollars and I got to pay ten thousand a month, can I sustain that? One of the things that's I think unique about us, the way we do it is that we also look at everything holistically. That's kind of where the marketing thing comes in to. Not like we're going to do a website, we're going to do this. We look at it like, is there money that could be found? Because everybody's doing something to generate customers and to generate profit. As CFOs and CPAs you can appreciate the idea of KPIs. So if you look at a business and you say there's three KPIs to look at, to grow a business, to find money, and that is how many leads are you generating? What's the conversion rate of leads to sales? Then what's your lifetime value of a customer? There's dozens of ways to increase each of those. If you could do that a little bit, you might be to just pull out an extra several thousand dollars per month. You meet pretty immediately of cash flow. And so sometimes we'll be able to do that, coinciding the loan to help them feel like, if you can help me free up the money to cover my debt service that I didn't have before, now I feel more comfortable that I'm not going to default. So they kind of go hand in hand because the last thing we want to do is get some funding for somebody and they are scared to death every day that they can't pay it back.
Adam Hale: So what about consolidation loans? Because that's another thing where we'll get a client that has a ton of money in AP. They have a line of credit that might be getting ready to get called. They'll have three or four debt payments. So they're just getting stretched out in six different ways. I mean again, I know it's expensive money, but if you're getting ready to get your line of credit called, vendors are coming after you. I mean, is there an opportunity there? And obviously, again, we're talking about double digit interest rates. So is that something that you'd be able to do and how far could they look to stretch that out? Like 24 months? Is that about as far as it gets?
Dan Kalis: Well let me expand on that a little bit in a different way. So we do have access to SBA lending as well, and also in a non-bank SBA capacity. So just as a general rule, SBA loan program, the parameters that are set forth by the Small Business Administration as a government entity are what they are. Every lender can then add more strict parameters. You just can't make it less strict, right? So if you take a retail bank that's offering SBA funding, it's going to be probably the most strict version of the SBA program. SBA terms are basically the same. They're almost always six percent interest, 10 year amortization. So let's just say we're working with somebody on a short term loan, or you, or your CPAs are looking at some of these books and saying you've got all these expensive loans, you want to consolidate, you want to drop it down. If they have improved their situation a little bit since getting those to where they have, say 680 credit or more and they have these in cash flow, then it might be worth it to go a nonbank SBA route like we do because it's the most aggressive version of the SBA loan and those ones are single digits. So if they're in that position to do that, then it's spread out from a 12 year amortization to 10 year, which is and it's a different format. So then you might go from the same debt amount, but going from ten thousand a month to five, four, three, something like that. Now, not everybody is going to qualify for that, but it's worth looking at and, you know, it takes a while. It could take 30 to 45 days to do to do that. Whether it's the SBA express loans, which are twenty five to one hundred fifty thousand. And there's kind of this gap and then the seven SBA loans go from about three hundred thousand that are usually about five million. And they frankly don't have a real set in stone set of parameters and projections. They kind of look at a lot different things and they give you approval amounts based on your cash flow and everything. But so that is a great thing. So what happens when you do debt consolidation is your improving cash flow. You're just improving the overall picture. And frankly, you're also driving up the value of the business, which I know a lot of you guys and your CPAs firms that that that work with you they're doing a lot of work with that, with exit planning and helping them increase their valuation before they're going to sell. So there's a lot of benefits on that and that is a great reason to do it. But outside of SBA, really, usually there's no way to do it. Like you could have wrapped together three expensive cash advances into one and then just push out your term, which is still paying the same overall rate for the next month.
Jamie Nau: So I'm going to jump in here real quick and throw our email address out there. So I want to make sure people have a chance to reach us with questions on this topic or any other podcast we've done. Or in addition, if you have an idea for a topic or want to be a guest, you can reach us at: firstname.lastname@example.org. So Dan, I appreciate all you've walked through here. I want to just kind of summarize and then see if there's anything else that I need to think of if I'm a CPA planning on going to you, or another alternative funding. So the first tip you gave us was make sure you already go to your bank, you want to go to the bank and see if you have any funding available there. Then you talked about understanding those forces. And then I think the other key point you said is make sure it's for a reason, whether that's an emergency or an opportunity. You know, those are kind of the key reasons to come to you. Then obviously, Adam brought up consolidation being one of those reasons. But any other things that our listeners should know before they bring either a client to you, or someone they know to you for alternative funding?
Dan Kalis: Yeah, I think a lot of times, again, the first question, anybody asks whether they're being a B2B company that's working with a client, or the potential client themselves is, you know, well, what's the rate? And just know that every situation is so different. Every program is so different. If you're talking to somebody who truly takes a consultative approach to funding, then there's multiple options. One thing I didn't mention, I'll just take 10 seconds to say it, is that if, for example, if somebody has money in an IRA, maybe that they had a job and they started the business. And it's sitting in an IRA with a normal account, you could always have that converted to a self-directed IRA and then you can use the money for your own business. I won't get into the details of that. But that would be an example where it's not a loan. You're not doing it in that capacity. There's other ways, like a company that connected you guys with that does commercial collection. So if they're working with a B2B company and they need capital and they have five, six, even seven figures of outstanding money, that's due to them, sometimes you can go to a commercial collection agency that's professional and really good what they do and that's another way to find money. So it's not just about debt and loans. That's kind of one of the big takeaways I want to say. Let's start with what's the need? Have you talked to your bank? Can you get what you need there? And then we can go through all these other solutions. The end of the day, the reason we call ourselves Fully Fundable, is the goal is to help the company become fundable and bankable and stable and scalable and valuable. So there's multiple different ways to look at it. And sometimes, again, it's a matter of helping them just pull money out of getting better results from their revenue generating activities. As a CPA, you're probably getting hit up all the time by from your clients about what do I do for this? But you're also getting caught up with other B2B folks maybe to get referrals as well. So I think it's always smart to look at, are they really taking a consultative approach ? Or are they just trying to sell your clients something in a transactional capacity? There's a big difference?
Jamie Nau: Yeah, that's a great goal and that makes a lot of sense. It definitely makes your name make a lot more sense. That's great. Adam, any final thoughts from you?
Adam Hale: Yeah, my advice would just be make sure you have somebody else in your back pocket. Reach out to the lender. Make sure you know who they are. Make yourself as visible as possible, and then just always make sure you have someone like Dan, as your go to whenever things aren't available or clients need extra stuff.
Jamie Nau: I appreciate you joining the show today, Dan. Really great information. I'm sure people were rapidly taking notes as you were talking. So appreciate you joining us.
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