The press and most of the public look at October 2008 as the beginning of the banking debacle and the unraveling of the health of the US Economy. Those of us in Business Acquisitions saw the difficulty some nine (9) to twelve (12) months before that. That’s when we – Business Brokers – saw our businesses slide; for us, it was either re-tool or die, from a financial perspective.
Throughout 2008, and to a large degree, to this very day, we (Business Brokers) have had no shortage of Buyers and Sellers. Our problem has been financing deals. We represented a Corporate Buyer on a $6 million acquisition, where the Buyer and Seller were both in agreement on all issues pertaining to the terms of the sale. It should have closed in August 2008; however, there never was any settlement and (believe it or not,) the deal is still pending.
Along the way, the frenzied demand for cash created a huge and sleazy industry that thrived on false hope and scams by fly-by-night loan brokers, who demanded high fees just to initiate a loan process. Many of the fakes in the group came right out of Wall Street and never produced a cent of loan money. (We used to joke that those people were in the business of selling applications, not finding loans.) And we are not talking about Small Businesses being the sole victims of these scammers; we are talking about acquisitions of $5 million to $15 million, with legal representatives and accountants that one would think would be able to uncover such con artists, before the Buyers get hurt. But just like what happened with Bernie Madoff, many of the victims were given these names with assurances from other Wall Street people…and who would question recommendations from Wall Street?
To date, it has been suggested that as many as 65% of US banks are not lending to Small Businesses. Not for lines of credit. Not for business acquisitions. Not for funding inventory.
The SBA (Small Business Administration) is beginning to loosen its stranglehold on its own activity. (For those who do not know, the SBA does not directly lend money; it guarantees funding for loans that are made to Small Businesses by banks. Banks take no risk! If the SBA programs dry up – as they have in the past two years – there would be NO lending to Small Businesses!) But for the past eighteen months or so, the vast majority of SBA activity has involved loans to current Small Business Owners for the sole purpose of purchasing Real Estate in which to house their own, current operations. The reasoning is that, whether it is a good or bad time for Real Estate, if the business goes under, the SBA has the property as a tangible asset to foreclose, and it can recapture at least some of the money it loaned. This is not possible when lending for the purchase of a Restaurant that is located in leased space. There are no assets to reclaim, unless the SBA and the Bank go after the business Owner, personally. And with so many people possessing no equity in their homes, there is not much for the lender to attach.
The key to a quick, full economic recovery, may well lie with the SBA, according to almost any economist that can be found. In the recession of the 1980s, many corporate giants laid off entire tiers of middle management, in streamlining and cost savings measures. The SBA was extremely active at the time, and loaned an incredible amount of money to these, very capable people, who then began to build or buy their own businesses, employing lots of people along the way. This, those economists insist, is the way the recession was overcome.
But now, the Bush Administration, and later the Obama Administration has concentrated on GM, AIG and the like, feeling that the survival of corporate behemoths is the way to rebuild America’s financial strength. Unfortunately, the first things companies like these do is to lay off employees. Who is going to hire these people, at this point in the economic cycle? Is it no wonder why unemployment remains horrendously high? And with the SBA seemingly paralyzed, there is no way to replicate the strategic comeback of the 1980s.
So, what is the Small Business Owner, or Buyer to do? For the most part, there are three (3) ways to go:
1. Family and friends. If they can invest in you, it is the preferable means of securing funding; but how much can you get through sources like that? Dealing with friends and family in such a fashion can lead to incredible stress, friction, arguments and long lasting hard feelings, even if you are ultimately successful. As tough as banks can be, at least they are lacking in emotionalism that family and friends have, and share with you, in abundance!
2. Private funding, “angel investors” and similar sources. But these are “needle in a haystack” ways of obtaining resources, and many times, they are extraordinarily expensive. Many businesses have started up with such mammoth debt that they can never recover, no matter how successful the business, on a day-to-day basis.
3. The best way is through the development of a relationship with a responsible Loan Brokerage system. Unlike the con artists cited earlier, there are Brokerages that have longstanding relationships with those Banks that are still lending, and have histories of success that can be tracked and referenced. They know what lenders will accept applications for which type of business, what the Buyer needs to qualify, and how to “package” the application for maximum result. It is a combination of successful networking, keen knowledge that has been gained over time, and artistry in presentation.
In some circumstances, you need to employ a combination of all three of these tactics. However, it is crucial to understand that there truly is light at the end of the tunnel, and it is not a train coming right at you! It is not as easy as it was prior to 2008. But if you have a sound business opportunity, and a well written Business Plan, you can make it happen. Don’t give up the dream!
This article was submitted by Donald M. Barrick,Founder of The BAF Group LLC. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to