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1M/1M: Does It Need A Bank?

Posted on Sunday, Mar 28th 2010

As I have been facilitating the discussion on incubator business models and thinking through our experience so far with 1M/1M and the roundtables, one nugget that has come through for me is that 1M/1M needs a bank of sorts attached to it … some combination of a Grameen Bank (micro finance) and American Express Bank (credit cards).

As you know, the two cornerstone tenets that we have established in 1M/1M are: (1) idea validation and (2) bootstrapping. We push these two values hard as philosophical essentials in the program, and as part of the EJ Methodology that we teach every week at the roundtables.

Even so, there are small chunks of working capital financing that are necessary during the aggressive bootstrapping phase before revenue really starts to flow. This could be $10,000, $50,000, $150,000, or $250,000. Small amounts of credit, that today, entrepreneurs largely do not have access to.

It is my assessment that if a bank would offer this sort of working capital financing only on validated business ideas to bridge the entrepreneurs to a steady cash flow state, it would add a great deal to the probability of the ventures becoming successful.

The very early stage cash crunch is significant. Today, with so many entrepreneurs who are so very young and without any savings or assets that they can offer as collateral against loans, bank loans or any substantial amount of credit card financing is impossible for them to access. This puts a huge cap on what they can take on as entrepreneurs.

WSJ had a great piece last week called When Just One Desk Will Do which provides an important statistic: “According to the 2010 Index of Silicon Valley, an annual economic study of the area, the number of nonemployer firms in the San Jose–Sunnyvale–Santa Clara region rose 24.6% between 2002 and 2007 to 124,561. Over that same period, the number of jobs in the region fell 1.5%, according to the study.”

Conceivably, this trend is more universal at the moment than just regional to Silicon Valley. And if these ~125,000 entrepreneurs harbor the ambition of becoming larger companies at some point, they may need to access some level of liquidity.

If these ~125,000 firms were to get to $1 million in revenue and 10 jobs each, we’re talking about 1.25 million jobs, and $125 billion in GDP. But I suspect, these firms are all extremely cash-strapped, which limits the pace of their growth.

Against this backdrop, my analysis is that a bank is needed that can offer a juxtaposition of micro finance and credit cards for up to $250,000 in collateral-free, non-equity, working capital financing.

Let’s discuss.

This segment is a part in the series : 1M/1M


. An Interview With Wayne Hurlbert
. Ambassador Program
. Ambassadors Finalized
. Internships
. Does It Need A Bank?
. Receivables Financing
. Entrepreneurs, What Do You Need?
. Entrepreneur Grant Harris On CNN
. Facebook Cause
. Need Twitter Help
. Rural America's Outsourcing Potential
. Local E-business Joins Global Effort To Boost Economy
. Oct 6 Video Conference
. Alternative Financing For Startups Using A Sales Channel Partner
. A Policy Suggestion To President Obama
. How We Differ From YCombinator
. VCs, Angels, Incubators, Accelerators - What Are You Doing With Your Rejects?
. VCs, Angels, Incubators, Accelerators - What WE Do With Your Rejects
. Outsourcing Module Of The Curriculum Is Ready
. Cloud Computing Module Of The Curriculum Is Ready
. Web 3.0 & E-Commerce Module Of The Curriculum Is Ready
. Vision India 2020 Module Of The Curriculum Is Ready
. Mobile and Social Apps Module Of The Curriculum Is Ready
. Healthcare IT Module Of The Curriculum Is Ready
. Online Education Module Of The Curriculum Is Ready
. The Entrepreneurship Curriculum
. How We Will Interface With AngelList
. Video Message Based On Recent Talks
. Affiliate Network For Entrepreneurship Blogs
. Corporate Sponsors, Affiliates, Incubators - Business Models for Partnerships
. OrangeScape Wins TiE50
. Message To Incubators
. Self-Assessment Tool
. Premium Member FreshDesk Wins Microsoft India Startup Challenge
. Kimbra Studios, Littleton, Colorado
. Partnership Overview
. Insane Logic, United Kingdom
. MMIS, Portsmouth, New Hampshire
. Zuznow, Israel
. Live Well! Philadelphia, Pennsylvania

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This is a hugely important area of our economic recovery that is overlooked.

I believe that an online finance platform built from ground up for Entrepreneurs and that would incorporate both micro lending and short term credit advances would be transformational.

The platform would not only connect funding sources but also business services that Entrepreneurs often need the capital for.

You could then see larger more established companies offering extended credit for goods and services that Entrepreneurs need to get started.

Justin Floyd Sunday, March 28, 2010 at 12:26 PM PT

When cash is involved, fun and zen follows! A big boost for 1m1m for sure.

The existence of such a bank/facility itself will simply eliminate a lot of startup mortalities. Like a placebo effect in the startup domain.

And importantly, the EDOs can play a solid role rather than just being referral/content partners.

I love the ‘non-equity, working capital financing’ part too!

+1

-Balaji S.

Balaji Sowmyanarayanan Sunday, March 28, 2010 at 12:58 PM PT

Sramana,

Yes, a microfinance partner for 1M1M would be great. I hope that ACCION that I contacted as part my 1M1M Ambassador outreach would seriously consider partnering with 1M1M.

Irina Patterson Sunday, March 28, 2010 at 7:51 PM PT

Sramana,
Entrepreneur Commons (www.entreco.org) is an organization providing peer-support to entrepreneurs with just this model to get to sustainability. We should talk about how 1M/1M and Entrepreneur Commons can work closer together to make this happen.

Marc Dangeard Monday, March 29, 2010 at 7:09 AM PT

This is exactly the gap that why we started to build a new solution for this problem, that is build around the idea “everyone funding startups” – a unique model of crowdfunding.

The whole idea with this model is that it’s build to bring more options and freedom for entrepreneurs and that is way more sustainable model for the future, than what the current funding models are.

We have been building this about 18 months or so and launched it a bit over a month ago. Here’s the techcrunch article from that: http://ow.ly/1s8bV

At the moment we only have equity based model, as we see that equity based models (both sides) should also be learned right from the beginning, but in more favorable terms and with lower capital.

Also our own global platform is focused only for web & mobile startups, but we are also looking to extend our model via local platforms with partners, who can build their own terms for the service if they want or use our models. More about that: Blog http://ow.ly/1s8hp

Here’s the full details of the model: ttp://ow.ly/1s8iv and here’s a related podcast: http://ow.ly/1s8ns

valto Monday, March 29, 2010 at 7:27 AM PT

Valto, I don’t think equity-based models work for the very early stage financing of the kind I am talking about. Most of these entrepreneurs are looking to bootstrap the early stages without losing equity control of their companies.

The right financial instrument for this stage is credit, not equity.

Sramana Mitra Monday, March 29, 2010 at 8:21 AM PT

No,I believe some people will look at our program like a way to open new accounts for banks and make money for us. In the past I dealt with AXA ASSITANCE (one of his clients American Express Card)and I used to sell the assistace to banks; it was a good way to generate income for me and AXA (the one giving the service).
I do not agree with attaching “banks” with the program. I am in a non profit program and that can be misleading. We can teach people how to present the program and they put that knowledge to go and get the loans. Sorry if you all disagree with me but I have experience in selling services and that is not what this program is about.

Leena Heiman Monday, March 29, 2010 at 7:30 AM PT

Leena, I am a bit concerned that you have labeled 1M/1M as a non-profit, when I have said all along that I am not a big fan of non-profits. I don’t want to set this expectation while we’re still largely in the research stage.

Sramana Mitra Monday, March 29, 2010 at 8:21 AM PT

Irina, I don’t believe traditional MFIs would do this kind of financing, so please limit your expectations regarding ACCION.

Sramana Mitra Monday, March 29, 2010 at 8:27 AM PT

Last time when I presented at your Roundtable Conference, you did provide a very objective feedback. However, much beyond that what me as an entrepreneur was really looking at was a hand which lends itself and assures an entrepreneur like me that provided we meet some benchmarks the Roundtable will seed the venture or probably get the project presented to right investors. If you look at the groups and forums with Linkedin, considering Linkedin is one of the credible forums, you will come across plently of groups talking about investments and funding. However, even in a refined forum like Linkedin, I am yet to come across an entrepreneur who has secured a funding thru’ linkedin, at least I did not find any one. On the other hand there are dime a dozen “agents” claiming to fund projects, god knows if they are simply collecting ideas or they are building their networks for ulterior motives. Nonetheless, I never found any of these groups useful.

1M/1M was a credible space I ventured into. I got more confidence to join the forum more from a perspective that your writing, your public figure would make this forum more credible. While indeed 1M/1M is a great initiative and you do add lot of value and people like the concepts and philosophy of 1M/1M. There is no denial that your thoughts reverberate the dreams of millions of entrepreneurs like myself.

However, if I was to turn around and ask you a simple question, 1M/1M project required me to become an ambassador. I am happy to become one, but I am myself incubating my projects and despite having customers in hand I lack the capital to seed and grow the projects. Especially, being in Asia is different from being in west. Yesterday, I was watching the interview of CEO of Zynga (the top game on facebook) on Bloomberg, in his words, when he started Zynga on day one he did not have money. So he went to BestBuy and picked up 15K USD worth hardware on credit with 0% interest. Can this be done in India or Vietnam? I guess you know the answer.

The cost of development of a project in US and Asia in terms of hardware is the same. Where can a entrepreneur like me get funding of 500K USD despite having customer orders? So much so I cannot even get a bank to give us a supporting letter for vendor finance. The issue is not that entrepreneurs in Asia are not doing their homework right. The issue is the investment environment in these countries has not matured to the levels of west. You are in a unique position to alter this situation. You know the pain points of entrepreneurs largely in Asia. 1M/1M is actually a very unique program and here are my suggestions to make this program successful. I had mentioned this before however let me articulate it more appropriately this time;

1. In stage one, 1M/1M should focus on the model of 1 City-1 Entrepreneur, this will limit your work to few entrepreneurs. Seed these ambassadors (subject to if they have good project).
2. These seeded entrepreneurs becomes your Prime Ambassador and also becomes the first line incubator/evaluator and he goes and generates 10 more Ambassadors. Now this is pyramid shape.
3. In this pyramid, the new 10 Ambassadors are each authorized to bring in 10 more or whatever more. These 10 second level Ambassadors will then escalate the project with an investment attractiveness approval/score to the Prime Ambassador.
4. The Prime Ambassador or the First City Entrepreneur becomes your key partner in the pyramid and along-with the seed capital support he may undertake additional conditions. This way he is motivated because he is seed supported and he is able to kick start his own project and at the same time he is supporting and incubating more entrepreneurs.
5. In fact, the Prime Ambassador can have a term agreed that he will invest 1% of his profits back to the fund. Similarly, this can be mandated to all the subsequent beneficiaries under the seed model.
6. The fund keeps getting its investment capital back from the seeded ventures.

All this is doable and you can work all the numbers. Once you have supported one entrepreneur you will be able to grow more thru’ him. Therefore, a seed bank is very much needed. By nurturing 1City-1Entrepreneur in Phase 1, you will be able to seed entrepreneurs and spread 1M/1M and also at the same time make this model more sustainable with heightened commitment of entrepreneurs.

In summary I would say that in Phase 1, 1M/1M should ;
a. Seed 1City-1Entrepreneur
b. Must have a seed bank.

Navneet Monday, March 29, 2010 at 9:26 AM PT

Navneet, one clarification: 1M/1M doesn’t require that you become an ambassador. At all.

There are only ~50 ambassadors in the program. There are thousands of entrepreneurs who’re coming to the roundtables and using the material and the resources. You DO NOT need to be an ambassador to be part of the entrepreneur pool AT ALL. Completely mistaken assumption on your part.

Also, I am pretty sure we NEVER misled anybody by saying that this is a seed financing program. So if you came to the roundtable with that expectation, it was certainly not an expectation that we have set. You came up with that one by yourself.

Also, I have quite a different vision for 1M/1M than what you are asking for. So I will have to decline your suggestion on the model you are proposing above. There are many seed funds out there who work with a limited number of startups and provide them with equity financing. I don’t want 1M/1M to be one of them.

The mission of 1M/1M is to make a million entrepreneurs cross a million dollar in revenue benchmark. Your strategy doesn’t address that. You are trying to alter our mission, which I am not interested in doing.

Instead, I am trying to understand what is it that is needed to make the 1M/1M mission successful.

This particular question is addressing a very specific piece of the working capital financing bottleneck that I see in achieving the scale we’re interested in.

Sramana Mitra Monday, March 29, 2010 at 9:41 AM PT

Three points
(1) Country-specific approach
Invested funds should originate in the same currency as used in the nascent businesses for a few reasons, including avoidance of market fluctuations, a common legal system, and a common culture (language and unstated mutual expectations). The ideal would be funds from local angel investors in the entrepreneurs’ own backyards, high net worth individuals who want to see job generation in these same cities and towns.

My personal interest is sub-Saharan Africa where angel investor groups, which are so prevalent in the developed world (and India), are non-existant. Organizing these groups, where missing, is a worthy effort. Resultant funds that flow from these angels might be direct (investor to entrepreneur) or might be pooled and offered as collateral guarantees for funding from conventional lenders. Finance is a creative field — one could develop many approaches. Local investment pools used as guarantees might offer the leverage Sramana is seeking.

(2) Offer Equity
Guaranty pools aside, when looking at individual investor-entrepreneur relationships and whether to offer equity I come down on offering equity, esp if you are broke.

If I wished to start a business and a leading member of my local business community offered me funding in exchange for 5% equity I would jump. (If they wanted 40%-60% I’d hesitate.) On the other hand giving someone with whom you have had very little exposure, in exchange for a polished PowerPoint deck and an EDO’s blessing, a check for $10K to $100K, uncollateralized, is highly risky. It is asking A LOT and when you ask a lot you will find few takers, and thus the concept will be difficult to extend programmatically. And distance increases the risks (back to my first point). A real partner, who owns several percent of a startup’s equity and who serves as an advisor — is tremendously valuable. If this person has an organization with capacity for things like bookkeeping and government compliance – issues that bedevil many entrepreneurs — they might be more willing to offer this capacity were they
owners in a real sense. Ownership lends gravitas.

(3) Use of funds
In addition to examining sources of funds, since this discussion is around working capital, some examination of the Uses of Funds might be enlightening. Some items might be available for next-to-nothing (office space, warehouse space, server space, maybe even professional services). It is imperative that startups conserve whatever funds they might have and not “pay retail”.

These are a few initial thoughts. The internet is terrific in that it gives access so widely, but in all but the most impoverished places there ARE local resources. What is lacking is structure and adding this structure at the local levels is perhaps one place where 1M/1M might focus.

Joel Patenaude Monday, March 29, 2010 at 12:03 PM PT

Joel, I don’t think you have studied the EJ Methodology we promote in 1M/1M. No one will be recommended for funding with a powerpoint and an EDO’s blessing. Only validated “businesses” with customers engaged will even be considered for financing. We still maintain, that the philosophical premise of 1M/1M is to bootstrap the early stages of a venture, and ONLY those entrepreneurs who demonstrate substantial progress through bootstrapping would even gain an audience with any kind of financing opportunity.

Sramana Mitra Monday, March 29, 2010 at 12:16 PM PT

I can only speak for the options that are available in the US.

There are multiple financing options for companies under $1Million. Currently, it is more difficult because of the credit and liquidity issues but some of it is still available out there.

Here are some options:
1) Business lines of credit up to $100,000- essentially credit cards rates. Need to have excellent (used to be good at 740) personal credit. Offer by large banks.
2) SBA 7A – lines and loans provided by banks but 75% guaranteed by the US Government via the Small Business Administration program.
3) Equity injection – special government programs for financing growth in return for a partial equity position that you can buy out later.
4) Specialty lending programs – Government backed or guarantee. Criteria are different depending on the agencies.

This is just off the top of my head. There are more alternative sources of financing for entrepreneurs that few know exists.

Kim Luu Monday, March 29, 2010 at 2:23 PM PT

I apologize, stand corrected and redact my line about businesses seeking funding solely off a PowerPoint presentation and an EDO’s blessing.

Funding proof-of-concept as opposed to simply a written plan has become the norm – get into business, get some customers, prove your concept, get some talent on board — then grow. If this is the EJ methodology then it aligns with what I’ve seen recently.

Still believe local, local, local when it comes to funding, that giving up single digit equity is not always terrible (perhaps bought out later as Kim suggests, if growth affords it) and that there might be some learnings off examining Uses of Funds.

Joel Patenaude Monday, March 29, 2010 at 5:27 PM PT

Joel, All sophisticated investment evaluation programs require a through analysis of Uses Of Funds. This is something that is also quite predictable in the early stages … valuation building happens primarily through customers / sales and product / service delivery. So the Uses Of Funds, typically, tend to go towards those two initiatives – generating revenue and completing the product.

Local is a very valid point, and I agree, that to do business in Africa, local investors need to be involved. However, where there are natural bridges to entrepreneurship hot spots, this is not as much of an issue. India has natural bridges with Silicon Valley, as does Israel. China, increasingly so. These are geographies where investment from non-local investors is also quite reasonable to expect. In fact, most Silicon Valley VCs have India/China/Israel strategies, which pretty much validates the point. You may need local representatives to evaluate the deals, but the funds need not be local.

I don’t think the same applies to most other geographies – Africa, Latin America, Vietman, or Indonesia doesn’t have the same level of relationships with the US hubs. Over time, this needs to be built. In fact, this is something I am interested in having 1M/1M address – really leveling the location issue, such that deals can be evaluated purely on the merit of their business potential, without location necessarily being a hindrance.

Not an easy challenge, of course.

Sramana Mitra Monday, March 29, 2010 at 5:43 PM PT

Sramana, Thank you for clarifying that we are NOT a non profit organization.
Is their anyone making profit from 1M/1M?
I believe I need to have that clear so I don’t give the wrong information.
Thank you, Leena

Leena Heiman Monday, March 29, 2010 at 7:06 PM PT

Not right now, but we’re just in the preliminary research and experimentation stage of the project. I just do not want to make any commitment to anybody that it will always be a non-profit.

My goal is to come up with a scalable, global system such that everybody in the eco-system wins. I certainly am not there yet, and haven’t really finished designing what this will look like at scale.

But as you can see, there are numerous pieces for this system to flow. And one of those pieces is cash flow. That’s what we’re trying to understand in this thread.

All I can tell you is that whatever we eventually come up with, to scale, it needs to be a fair, just, high value system that helps everyone be successful.

Sramana Mitra Monday, March 29, 2010 at 7:16 PM PT

Sramana, all;

If I may, YES, I think a funding component is essential to furthering the 1M x 1M offer. To me, however, the question is willing and able providers, timing and deal structure.

As a linguist, and in reading this thread, I’m a little confused by the use of the word “validation”, and would offer that things get simpler when actual transaction is a significant part of the validation process.

Perhaps, this is a small distinction, however, in my experience this is often a critical entrepreneurial oversight.

While good, I think you will find that micro finance and credit cards are still a bit upstream of healthy transaction based market validation, and as such, too limiting for real growth.

In my own bootstrap experience ( $0 to $50MM in 4 years ) we relied on a receivables funding partner deep into the validation process. And, even at double-digit interest rates, this was FAR LESS of a hit on shareholder equity than any other available option in our then; critical, pre-bank-able, condition.

In closing, I would offer that a receivables funding partner would be a valuable, pre-bank addition to consider within the 1M x 1M structure.

Hope that helps.

Sincerely with the best regards,
David Bookout

EFFETTI Monday, March 29, 2010 at 7:37 PM PT

David, I could not agree with you more. Receivables financing is a tremendously effective financial instrument that needs to kick in gear at scale, and would make a huge difference to the 1M/1M effort.

One point I would disagree with you on is “validation”. The best validation comes from customers, not investors. Therefore, if a startup can bring customers / receivables to the table, I see no reason why they cannot be financed with credit.

Btw, can you talk more about your own bootstrap experience? What is the company?

Sramana Mitra Monday, March 29, 2010 at 9:12 PM PT

Well,partnering with MFI’s,BANK’S and Corporates(as Part of Corporate social responsibility to help Enterprenuers) would definitely boost and energise 1M/1M initiative.This Platform will enable the enterprenuer to pitch their Venture to the above entitities.It is upto the MFI”s,Banks and Corporates to take a call on Enterprenuer Ventures.

In this whole 1M/1M Initiative,the Ambassoders can a Play vital role to bring MFI’s,Banks,Corporates for Parterning from the respective regions…

Rammohan Monday, March 29, 2010 at 8:54 PM PT

Sramana,

My apologies, I’m with you, investors should NOT be considered a validation.

Another distinction, if I may offer for your entrepreneurial audience, is that nonpaying users cannot be considered “customers”, or necessarily a validation either. To scale, as you point out, and for business level credit to be a possibility, there has to be an actual receivable that hits the books.

We used a receivables funded credit facility, despite the high interest rate ( 2% / Mo. on the unpaid balance ), as the primary bootstrapping mechanism for our initial growth years. During this time we worked to get compliant with stricter bank lending terms and the much lower interest rates such credit facilities provide. We also kept watch on blended gross margin, among other key metrics, which helped fuel continued growth.

The company was Insync Systems, Inc.

Hope that helps, best,
David

EFFETTI Monday, March 29, 2010 at 11:09 PM PT

I think higher interest rates to account for the higher risk in the early stages is quite fair, David. As you point out, it allows the startup venture to build a P&L that can support credit at better terms.

Sramana Mitra Tuesday, March 30, 2010 at 8:32 AM PT

Hi Sramana,

Ideal suggestion from the entreprenur’s point of view. Allows for a perfect execution of the EJ methodology. But from the shoes of a banker, what benefit does this provide them?

Interest rates are at near-zero levels and the Fed is showing strong intent to keep it there to better benefit the economy. Small banks are getting seized by the FDIC even today, bigger banks are recovering from the jolts they faced. They are addressing high priority items like mortgage restructuring and toxic asset disposal. In this climate, who will come forward to give a “Collateral free”, “non-equity” loan? How can the bank bet on an entreprenueur’s credentials and potential in exchange for just interest? Besides, even experts can’t comment or guarantee the success of a business venture, how can banks decide?

Isn’t this another area of high risk, just like the risky mortgages they handed out, betting that these homeowners would pay? Atleast there, they had collateral, here they have nothing.

Sorry if some of these questions are rather dumb.

Regards, Ram

Ram Tuesday, March 30, 2010 at 1:04 PM PT

They’re not dumb at all.

I think we’re talking about 2 key issues:
1. working capital financing – credit-card-esque stuff
2. receivables financing

The second is not that risky, as long as the banks make some phone calls to vet the contracts with the customers.
But banks tend not to do receivables financing for newbie entrepreneurs. You need to have been in business for a while to get to this sort of financing, which is a problem. But as discussed above, even if the banks charge a higher interest rate for these early stage ventures, receivable financing can be a very powerful tool to get to the stage where regular financing can flow.

The first is a real risk issue. Working capital is one of the greatest bottlenecks of entrepreneurship, and also one of the biggest reasons for infant entrepreneur mortality. This is where small business policy needs to kick in. And we need de-risking in the CDS type financial instruments, and risk-taking in working capital financing.

Otherwise, we’re stuck, my dear Ram!

Sramana Mitra Tuesday, March 30, 2010 at 1:25 PM PT

Sramana, Ram;

I’d like to draw a distinction between banks and receivables funding as they are not necessarily synonymous terms. Banks have lending portfolio requirements, which are tied to their own access to capital and those typically keep banks from directly making receivables offers. But it never hurts to ask around at your bank because if they can’t directly source your business, they can refer you to a receivables specialist.

Also, in my experience, the fact that your a newbie entrepreneur has MUCH LESS weight in the receivables lending decision than the credit worthiness of your customers. The customers P.O. IS the asset that gets leveraged ( actually pledged ) in the deal.

So, the bright light at the end of the tunnel is still a valuable offer that customers validate by being willing to pay for.

Btw, another example of successful receivables funding use is LeapFrog, the children’s educational learning program company that ya’ll might be familiar with.

Hope that helps,
David

EFFETTI Tuesday, March 30, 2010 at 7:39 PM PT

Interesting. I will facilitate a more thorough discussion on receivable financing shortly. Btw, Justin Floyd, the first commenter in this thread, was running a receivable financing company called SmartFundIt. Justin – if you’re still hanging out here, you may want to weigh in.

Also, some banks also do receivable financing.

Sramana Mitra Tuesday, March 30, 2010 at 7:54 PM PT

For receivables financing, you do have 2 sources, banks and A/R companies. Small community banks may not be capable but all the regional banks and nationals have the programs.

Banks put borrowers on A/R financing when the funding is above the bank’s comfort level with just UCC filings. They use the same methodologies as A/R companies but stricter payout ratios.

A/R companies will give higher advances than a bank because in the riskier cases, the A/R payments are going directly to the lender who will then disburse funds out to the borrower after they take out their cuts.

You can also get financing based on P/Os as well for even more costs.

The lending programs that I mentioned in the earlier post are all for companies who would not qualify for standard bank lending because they are in the start up or growth stages. Different types of companies will have access to different government programs.

With these programs, the banks have very little risks compared to regular lending. They have guarantee in some cases of up to 95% of any loan losses.

Currently, even in this environment, it is still possible to get loans from banks but it involves knowing the system intimately and holding the credit officer’s hands through the process.

I just helped someone close their building purchase at a fixed rate of just over 5% for 20 years vs. their bank’s offer of 7% fixed for 10. In addition, they got their loan fees of $50,000 paid by the US government.

They were at that bank for 20+ years and didn’t get a competitive offer because the loan officer was more concerned about getting extra commissions for selling a swap mortgage. The officer also felt safe that everyone else was at similar rates.

Remember that the people you actually see in the banks are not that well trained and turnover is high. To actually get tough deals through, you have to get to the actual lender who is making the loan decision and that’s usually about 4 layers up.

Kim Luu Tuesday, March 30, 2010 at 11:15 PM PT

Sramana,

Agreed, some banks do offer receivables funding.

They, banks, also have a history of going into and out out of this loan sector with the financial tide.

BFI Business Finance’s site here ( http://bit.ly/9ApQDa ) has a pretty clear articulation of their offers, as well as a better explanation than I gave of bank restrictions.

For 1M x 1M ~ BFI is also connected with a lower limit provider that may be more appropriate as I see they have raised their lower limit with their success over the last decade.

Hope that helps,
David

EFFETTI Wednesday, March 31, 2010 at 7:17 AM PT

I think that is the key issue, David. Once you are established and transacting in higher numbers, all financing instruments kick-in. In the micro-levels, the game is quite different, and a gaping hole, pretty much. At least that’s what I am seeing as I look through the 1M/1M lens.

Sramana Mitra Wednesday, March 31, 2010 at 8:20 AM PT

Sramana,

Hmmm, while I agree that finance is an issue, I would offer that validation thru customer transaction is the root cause.

About 6 weeks ago I received a 1M x 1M email. This prompted me to attend a number of the Strategy Roundtables (RT). Not as a presenter, but in doing due diligence for 1M x 1M Ambassadorship. In those sessions I’ve been surprised at the number of people that come literally unprepared. Worse, these people seem perfectly comfortable asking you to answer pretty high level questions. Why?

My speculation is that our societal need for instant gratification has masked the need for people to take a more active role in the rigorous design and fulfillment of their own future. But, I digress.

The point, and my own experience with most of the thousands of entrepreneurs I’ve worked with over the years, is the lack of rigorous validation. Where there is validation it is often grossly extrapolated and quickly miss-applied strategically, which becomes tactically ineffective.

Conversely, those that take the time to understand the needs of the demand chain, and design valuable offers that customers will pay for seem to find the funding they need for effective growth.

So, in effect, I think that your 2006 article “Too Much Money, Too Few Deals” ( http://bit.ly/cUq6Cr ) still applies at ALL levels.

In closing, if ya’ll haven’t already designed this in, may I offer that, perhaps, as RT popularity grows, a “filter” like the one we invented for use here ( http://bit.ly/9clhSO ) could be used to segment presenter participants. Then different RT levels could be implemented to enrich the overall experience for people depending on where they themselves are in their own educational, validation, creation process.

Thanks for reading, hope that helps,
David

EFFETTI Wednesday, March 31, 2010 at 3:41 PM PT

HI David,

Fully agreed. It is designed in. You can read my How To Check Infant Entrepreneur Mortality piece.

Sramana

Sramana Mitra Wednesday, March 31, 2010 at 4:01 PM PT

Hi Sramana,

I read this ( http://bit.ly/a7OYp1 ), and unless you’re referring to something else, I see the request ( Jan 28 ? ) for utilization of the EJ Methodology ( filter ? ), but I don’t see the effect…

What I meant to express in the post above was the utilization of a simple, automated tool / filter ( like this http://bit.ly/9clhSO ), which the presenting audience would be REQUIRED to submit prior to acceptance. This would give you a heads up as to where they are at…

Also, I don’t see mention of the audience segmentation, which may be a bit early, to enhance user experience and engagement. RT101, RT201, etc…

Maybe I’m missing something ?

Cheers,
David

EFFETTI Wednesday, March 31, 2010 at 5:04 PM PT

I mean it is designed in, but we’re very much at the early stages of implementation for 1M/1M.

I am aware of those issues is what I am trying to tell you, but don’t yet have the organization to deal with it.

Sramana Mitra Wednesday, March 31, 2010 at 5:12 PM PT

Ah, then maybe we could talk !? I’ve been looking at how to contribute and have yet to figured out how…

EFFETTI Wednesday, March 31, 2010 at 5:25 PM PT

Best way to contribute is by being an ambassador focused on a geo or an internal ambassador focused on an EDO. If you want to do that, please send a request to join to the LinekdIn group for ambassadors, as discussed in the 1M/1M page.

Sramana Mitra Wednesday, March 31, 2010 at 5:34 PM PT

Sramana,

You are right in pointing out that investment related was an wrong expectation, however let me correctly word it, I am battling receivable financing. It is this issue which I did see going forward in the discussion you recognized.

Also I would like to correct that I am not trying to change the core focus on 1M/1M, when I bring up the local strategy it is purely to bring under the umbrella of 1M/1M countries which I could call peripheral at this stage. Technology has reached all corners of the globe be it US, India, China, Vietnam or Bangladesh. The issue is supporting capital systems such as those which are available to entrepreneurs in US are not available in countries like Vietnam. I am just bringing this need to your attention. How to address this within the scope of 1M/1M you know it best.

Navneet Wednesday, March 31, 2010 at 5:38 PM PT

Yes, I assure you, that the “global” vision is very much part of my thinking. This is why, the program is entirely virtual, and will remain so.

Sramana Mitra Wednesday, March 31, 2010 at 5:40 PM PT

[…] 1M/1M: Does It Need A Bank? […]

Welcome to my new web page « Willena Kavin Saturday, April 3, 2010 at 3:03 AM PT

Something to remember and for many “new” entrepreneurs out there, your business has many assets to use as collateral when seeking financing, such as physical items, maybe your building, equipment, items you stock, key employees, your customers and your credit functions. Many business owners don’t look at their credit functions as an asset, but your credit functions are one of the most important assets your business has. Assets are economic resources owned by a business. Anything tangible or intangible that your business owns is an asset, assets are things of value that can be easily converted into cash and cash is considered an asset.
To seek financing from a bank using your receivables be sure to have documentation to back it up. Signed contracts or agreements from the client, existing PO’s and/or payments on past orders. Having customers that have agreed to monthly orders that will add stability to your receivables or business helps the bank with their decision and shows you will have incoming orders and payments available to pay them back.

Michelle Dunn Monday, April 5, 2010 at 6:35 AM PT

Sramana, I disagree on your point about equity/loan. There’s only one basic divider between these in business and that is risk. If it’s low risk and it’s loan worthy, then there are plenty of banks etc. that can give loan.

But if the risk is too high for normal loans or entrepreneur don’t want to risk what they have or can not guarantee the needed amount themselves, then its should always be equity based, period. Anything other than those is either stupidity or charity (or the worst of all, government grants).

No entrepreneur/business should ever use any other money than from owners or from customers.

Owners include own money (inc. loans that are personally co signed etc.), equity investors etc.

“Customers” include all revenue sources.

Valto Monday, April 5, 2010 at 11:08 AM PT

Have you studied the evolution of micro-finance? SKS, one of largest MFIs in India, is going public. Do you call that charity? It is a hugely effective way to get small entrepreneurs off the ground.

Sramana Mitra Monday, April 5, 2010 at 11:19 AM PT

Sramana, yes I have and very closely, it’s true it may work in the very micro level and where the loaner can think it partly as charity, in the meaning that the amount is small and it’s ok if the money is never coming back. Also when it’s targeted for very small businesses that is not planning to grow big.

But when the numbers get any bigger or the growth aim is bigger, then the risk gets bigger, and that can and should only be compensated with either very high interest rate or equity, so that in overall, loaned money can never be lost.

The whole point of entrepreneurship is that owners should be the ones taking the risk and be rewarded. If that risk is carried by anyone else, how is that fair to loaner or could be called entrepreneurship by the “entrepreneur”?

Valto Tuesday, April 6, 2010 at 9:27 AM PT

I agree with you that the interest rates will be higher to account for the higher risk. What I don’t agree with you on is that equity is the only kind of financing appropriate. As you see in the various discussions this week, there are many ways to finance working capital, and most of them are A/R and debt oriented. Not equity.

Sramana Mitra Tuesday, April 6, 2010 at 9:45 AM PT