Banker's Guide to New Small Business Finance

Venture Deals, Crowdfunding, Private Equity, and Technology

Charles H. Green

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781118940853
• Edition: 1
• Topic: Économie
• Subtopic: Banques et services bancaires

Detailed, actionable guidance for expanding your revenue in the face of a new virtual market

Written by industry authority Charles H. Green, Banker's Guide to New Small Business Finance explains how a financial bust from one perfect storm—the real estate bubble and the liquidity collapse in capital markets—is leading to a boom in the market for innovative lenders that advance funds to small business owners for growth. In the book, Green skillfully reveals how the early lending pioneers capitalized on this emerging market, along with advancements in technology, to reshape small company funding.

Through a discussion of the developing field of crowdfunding and the cottage industry that is quickly rising around the ability to sell business equity via the Internet, Banker's Guide to New Small Business Finance covers how small businesses are funded; capital market disruptions; the paradigm shift created by Google, Amazon, and Facebook; private equity in search of ROI; lenders, funders, and places to find money; digital lenders; non-traditional funding; digital capital brokers; and much more.

• Covers distinctive ideas that are challenging bank domination of the small lending marketplace
• Provides insight into how each lender works, as well as their application grid, pricing model, and management outlook
• Offers suggestions on how to engage or compete with each entity, as well as contact information to call them directly
• Includes a companion website with online tools and supplemental materials to enhance key concepts discussed in the book

If you're a small business financing professional, Banker's Guide to New Small Business Finance gives you authoritative advice on everything you need to adapt and thrive in this rapidly growing business environment.

Part One
Survey of Funding Small Business

Chapter 1
How Small Businesses Are Funded

“Small” business is the category still used to classify more than 99 percent of the 27 million business entities in the United States (although 75 percent of them have zero employees). Representing approximately 40 percent of all commercial sales, 50 percent of the U.S. gross domestic product, and over 55 percent of the nongovernment work force, small business is really big business.

This sector is credited for having created two out of every three new jobs in the United States for the past two decades, yet obtaining capital financing continues to be a challenge for most small business owners and entrepreneurs. And opposing logic, capital funding gets more challenging as the loan size decreases, rather than increases, at least as far as commercial banks are concerned.

DEFINING SMALL BUSINESS

Part of the ongoing confusion around small business financing is that there is no clear, absolute definition of the question, what is a small business? The federal government delegated the task of defining small business to the U.S. Small Business Administration (SBA) and they have stratified the response to make it necessary for anyone seeking an answer to that question to flip through a 46-page list of industrial codes to determine the agreed upon answer.

SBA defines small only according to the agency’s determination of business size relativity. And even that size relativity gets subdivided into different determinants used according to their classification. Each distinct business category defined by the North American Industry Classification System (NAICS) is assigned a limitation by SBA, usually expressed as either the maximum annual revenues or the maximum number of employees, to determine whether they are officially deemed a small business.

As defined by the SBA’s Table of Small Business Size Standards, small to some companies can be defined as maximum annual revenues of $750,000 (dry pea and bean farming) while for other companies that limit can be as much as $35.5 million (marine cargo handling). But other companies are adjudged small by a maximum of 100 employees (tire & tube merchant wholesalers) while some others can employ as many as 1,500 (aircraft manufacturing) and still be considered small.

All distinctions in this table are not as gaping, as is illustrated by Table 1.1, which highlights the range of income difference in one single category (Subsector 541—Professional, Scientific and Technical Services). In this group of industrial sectors, maximum allowable income to be defined as small ranges from $7 million to $35.5 million. And for some reason, in the middle of this list is one business defined small as having no more than 150 employees.

TABLE 1.1 Small Business Size Standards

Source: “Table of Small Business Size Standards,” U.S. Small Business Administration, 21. www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.

NAICS Codes	NAICS Industry Description	Size Standards in Millions of Dollars	Size Standards in Number of Employees
Subsector 541—Professional, Scientific, and Technical Services
541110	Offices of Lawyers	$10.0
541191	Title Abstract and Settlement Offices	$10.0
541199	All Other Legal Services	$10.0
541211	Offices of Certified Public Accountants	$19.0
541213	Tax Preparation Services	$19.0
541214	Payroll Services	$19.0
541219	Other Accounting Services	$19.0
541310	Architectural Services	$7.0
541320	Landscape Architectural Services	$7.0
541330	Engineering Services	$14.0
Except,	Military and Aerospace Equipment and Military Weapons	$35.5
Except,	Contracts and Subcontracts for Engineering Services Awarded under the National Energy Policy Act 1992	$35.5
Except,	Marine Engineering and Naval Architecture	$35.5
541340	Drafting Services	$7.0
541350	Building Inspection Services	$7.0
541360	Geophysical Surveying and Mapping Services	$14.0
541370	Surveying and Mapping (except Geophysical) Services	$14.0
541380	Testing Laboratories	$14.0
541410	Interior Design Services	$7.0
541420	Industrial Design Services	$7.0
541430	Graphic Design Services	$7.0
541490	Other Specialized Design Services	$7.0
541511	Custom Computer Programming Services	$25.5
541512	Computer Systems Design Services	$25.5
541513	Computer Facilities Management Services	$25.5
541519	Other Computer Related Services	$25.5
Except,	Information Technology Value Added Resellers		150
541611	Administrative Management and General Management Consulting Services	$14.0
541612	Human Resources Consulting Services	$14.0
541613	Marketing Consulting Services	$14.0

And still other sectors are determined to be small by metrics such as annual megawatt hours (power generation) or assets (credit intermediation).

There are about a thousand categories broken down among 19 sectors and 90 sub-sectors in the table, which inevitably offer capital providers one more barrier to navigate on the road to deploying resources. But since there is much non-lending public policy riding on the outcome of this definition, the SBA has an impressive Size Standards Methodology¹ that is used to guide these determinations; this is published and available on their website, and makes any category subject to review at almost any time for a variety of reasons.

Not lost on many persons trying to distribute capital is the additional confusion created by simply getting a business adequately categorized. The starting point, at least for existing companies, might be to check the federal tax return of the subject company to see what they have defined themselves to be in the eyes of the IRS, which requests business filers to add the “business activity code” in forms 1120 and 1120S, and a listing of these same NAICS codes is found in the respective instructions for both forms.²

But that category, which is usually declared by either the business owner or the tax preparer, is sometimes wrong. Many business owners simply don’t want to be bogged down reading a long list of business categories and will choose the first reasonable sounding category they find. Many high-volume discount tax preparers simply speculate, based on a one-time engagement or limited history with the client and take a guess at what the business as named really does.

The confusion that surrounds the definition of what a small business is comes amid the massive communication streams in our digital society and the role public policy and advertising play in encouraging economic growth, regulating the financial sector, and trying to find a source of capital.

Megabanks are notorious for massive marketing campaigns targeting small business clients, who they seek for a myriad of banking services like checking accounts, merchant processing, and payroll services, as well as credit products. But no one ever clears these campaigns with the credit underwriters ahead of time and they often lead to a surge in loan applications that wind up declined.

Likewise, when politicians offer grandiose legislation intended to encourage stronger business growth or more capital funding, there is confusion around exactly who they are targeting. For example, nation...