103: Ami Kassar - Best Ways To Fund a Business

Are you thinking about how to grow your business with near and offshore staffing, but you're also wanting to make sure that it's reliable, cost effective and really well done? I think docsa talent is the way to go. Here's why. They don't just fill your jobs. They bring integrity, top talent and a people first approach that's hard to find. I've known the people at Doxa talent for over 20 years now and I say that you can count on them. I have. Talk to Docs of Talent and you won't be disappointed. Go to docsatant.com Bill G. Again, that's doxataalent.com Bill G. One more time. Doxatalent.com Bill G. Check it out today. Well, how do you fund your business? Is it with investors? Is it with a loan from the bank? Is it with factoring? Is it something else entirely? Today's show will be all about all the different ways to skin a cat. So what's right for you will depend on a number of factors. We want to give you some questions to think about the best ways to fund your business and how to figure out what's right for you. So listen in. Hello and welcome again to the Scaling Up Business podcast. I'm your show host and growth coach, Bill Gallagher. On the show with me today is Ami Kassar. He's the best selling author, he's founder and CEO of MultiFunding. It's a Philadelphia based company that specializes in helping people develop creative, cost effective alternatives to the business debt needs. You know how to fund your company. Ami was a brief speaker at our Scaling up summit and I thought it'd be great to have him on here because this is a recurring topic to talk about how to fund the business, how to fund the growth. So we of course try to fund as much as we can internally, but when you have to go out, whether it's equity or debt, that's what our show with. So Ami, welcome to the show today.

Thanks. It's a pleasure to be with you.

Right. And you're back in New Orleans again, right?

I am. I should have. I should have asked him to do my laundry and keep it here for the week.

You should have.

Yes.

I've been thinking of some of the regular places I go where we have regular clients. I should like leave certain clothes there. Okay. My warm clothes stay in Hawaii. I should leave some other things in Southern California. Right.

It's good to be back.

Now, you're normally based in Philadelphia, right?

I am. My office is in Philadelphia. But I spend probably like you a lot of my time traveling around the country doing growth dilemma workshops for business owners and entrepreneurs.

Nice. So we're going to talk about and you're going to share some key questions that help to identify what path. And we'll send folks at the end to your website where they can get an assessment and report on approaches that'll maybe help to guide choices about funding. Before we get to that, talk to me about how do you get to be in this business? You know, when did you start borrowing money as a little kid? What's the deal?

Yeah, I think we all have our own paths and our own adventures. I think almost all my professional life has been devoted to working with entrepreneurs and trying to help entrepreneurs in different capacities. And I think that probably started for me being an immigrant. We moved from South Africa when I was 8 years old and always around our dinner table were groups of entrepreneurs who had moved and were trying to get on their feet and figure it out. And I think listening to those stories and many of those people became role models to me early on really helped mold who I am today and what I'm doing. And then about 18 years ago or so, almost by accident, I landed up working for a company that was public, that was at the time the largest issuer of credit cards to small businesses in the United States. And I worked there and we had a million customers who we were hoping in some capacity get credit, although in smaller amounts that I work in today. And I was the chief innovation officer in charge of new products and new ideas. And then the Great Recession hit and we completely decimated. And I was when they decided that they were going to liquidate the company, they certainly did not need an expensive chief innovation officer anymore. So they fired me on a Friday by the bankruptcy trustees. And I tell the story. The first thing I did on my way home is I went to the bank and deposited a check for my full home equity line of credit. And I went home and told my wife what had happened and I started multi funding on Saturday.

Interesting. So often entrepreneurial stories start and many businesses are formed right in the recession as others are going under. Right. And the companies that managed to pit of it in those times. But that's a topic for another day.

That's a whole other discussion. The reason I like to tell the story about, you know, I had a, I, you know, I had this big fat corporate job. I thought I was going to retire there. And years before this all happened, I had applied for a home equity line of credit and I stuck the checkbook in the drawer and I had never touched it. And the reason I like to tell the story about getting that line, going to the bank and depositing my. That check that day was because the best time to get a loan is when you don't need it. And I think many people forget that lesson.

Yeah, there's a time when you're moving up, you don't really need the money yet that's the time whether debt or equity, really, people want to give money to people that don't need it in the hopes that they can use it to get more. Because success gets success. Right. I, I knew a lot of South African families actually who left, and I am always surprised at the degree of entrepreneurship, but I guess in part because they were the entrepreneurial types who left who saw that they could remake their lives somewhere else. I knew a bunch when my family moved to Israel in the 70s and there were quite a few leaving South Africa at that time.

Yeah, thanks.

So let's talk about the funding that you do today. So I think the key thing is that not, not every type of funding is appropriate for every business. There's a time and a place for all of it. We're going to go through your questions in a minute, but I think it'd be good to give some examples of the companies. So you shared a few with me. A lumber company, consulting firm, and manufacturing company. Where should we start?

Well, let's start with one that maybe it's small, but I think that the point is relative to doesn't matter how big your business is. A couple years ago, I met a business owner who had a consulting business and she had $2 million of revenue and $350,000 of EBITDA, or profit. That's what she would take home every year to live, to eat, to go on vacation, pay her kids tuition, etc. Any shame in that business? No, that's pretty good. Business sounds good. And then I asked her the same question that I ask everyone to consider in my presentations, which is if all her dreams came true, what would her business look like three years from now or three years from then when I met her?

Yeah.

And her answer was that she would love nothing more than to double her top line to 4 million. And she thought by doing that, she would triple her bottom line to a million dollars. And I said to her, great, so what's holding you back?

So just. Pam, hang on one second. So this notion of looking three years or more out in the future, we talk about a great deal. What do you want three years out in the future? This growth goal drives a lot of these things. We've done at least a couple shows on it. But two that immediately come to mind are Paint a Picture Work with Brian Scudamore. You can find that old episode and three Hag with Shannon Susko, both old episodes that help you to figure out, what do you want three years out in the future. So what did she say?

So her answer was, what was holding her back was a management team. She knew what, in her case. Now everyone has different things that are holding back them back, or I like to say, different ingredients that are missing in their cake. But for her, she was still doing payroll on admin and. And running things and trying to do everything. And she knew that, well, she was adding the most value, was actually doing the consulting or leading the consulting teams, and if she didn't put some support around her, she would never grow. And then I asked her the same question that I like to ask everybody, which is, okay, well, what's that going to cost you? And how long is it going to take to start paying for itself? And her answer was around 350 grand and a year, which, funnily enough, is what she was making in a year.

Yeah.

So the question becomes, can she afford it? She wore what, another coin I phrase I like to call the new debt badge of honor.

Yeah.

She'd never taken on a loan to grow her business, and she just thought she couldn't afford it. She runs her business like many small businesses do. They kind of run it like their household budget, which means that they just don't think they can spend more than they bring in. And there's nothing wrong with running your business that way. You know, I know many people who've. Maybe it took them a little longer, but they've chosen that path. What I said to her was, do you know that you can get an SBA loan and you can get an SBA loan, in fact, $350,000 or less, they won't put a lead on your house. And she would have a monthly payment of around 43 or $4,400, which was equated to like 12 or 13% of her cash flow. And she could hire him. And I don't know if she ever did or didn't do it, but that certainly opened her eyes to thinking about there was actually a way, I think, in that business to responsibly use leverage to push up. If everything worked beautifully and to plan, she would pay the loan off in 2.2 years. And she would in fact triple her bottom line. Now, doesn't always work that way. Okay, but if it weren't half as well, it would still be a great outcome.

Yeah, you. And you go to other questions. Right. So that immediately raises what are the probability of success and what if it doesn't turn out like that? And you talk about risk tolerance and the different types of business people that you might be, what happened? How about the lumber company?

Well, that's a different story. Okay, so this is the story of the consulting business is a question of whether you should use term debt to make an investment. In this case, the investment's not in a piece of equipment, it's in people.

Right.

And that's a more subjective and a harder thing for people to get their head around. And that was a decision that she had to make. And term debt is appropriate, in my opinion, when you are making investments in whatever it is and you should not use your line to credit for that. The lumber company is a different story of if you're running a lumber business that's pretty capital intensive, you need inventory and you have ar, you have account receivable. And the question is, if a business, and it's a hypothetical if, let's say a choice you have to make at all times is if you are going to have an ABL facility, which is an asset baseline, which is secured by your AR and your inventory, or you're going to have a straight line of credit that it's sort of an open checkbook and you don't, it's not based on a percentage of your assets and the asset based line is more expensive than the line of credit. So here's a question of a borrower who could have a line of credit for $2 million and pay 5%, or if they choose to move to an ABL facility, they could have a credit facility of $5 million and pay 8%. So are you better having a $2 million facility at 5% or a $5 million facility at 8%? And intuitively, when we think about financing, we always focus on the rate and the apr. And of course, you want to get the best rate you can. However, there are other considerations. So in this case of this lumberyard, they were struggling to grow because they just didn't have enough liquidity or cash available to them. And they had the margins. And in fact, by moving to the 8% facility, they were in a much stronger position to grow and scale up. And. But it's counterintuitive sometimes because people freeze on that on the 5% or the 8%, not unlike the SBA loan for the consulting business, that would loan would be at 7.5%. And if she wanted to go get a straight bank loan, she could do it probably at 5 or 6%, but the bank would require her to pay it back much faster and her impact on her cash flow would be much higher. And these are all trade offs and decisions that entrepreneurs need to think about as they make financing choices.

The total cost of funds, the amount of time to pay back, what your business model looks like, how you're going to use the money. Right?

Yeah. What the collateral requirements are, what the liens are, what the guarantees look like, how easy or expensive it is, Is it to get out of the loan? They're always, I like to joke, but it's not a joke. You know, if you're in a hurry and you go to McDonald's for lunch, you could have indigestion for a few hours, but then you'll likely be over it. But if you're in a hurry, when you make a financing choice, you can have indigestion for a few years or ruin your business. And it's very, I mean, it's true, I see it all the time. And it's really important to slow down and think. And there are almost invariably more than one way to skin a cat. And you should try to find two very contrasting options and then have a sleepless night about deciding which one is best for you. There's another story of early on in my practice, the guy out bayou in San Jose and he had a cleaning company and we got him a term sheet for an SBA loan, I think, and it was at that time 6% and it was over 10 years. And because it was about $800,000, it required a lien on his house. And he said because he had a low risk tolerance. How high water. He wasn't putting a lien on his house. And at that point the only other option we could get him was a one year loan at 36% interest. What do you think he chose?

The one year? 36.

And where unfortunately do you think he is today?

I don't know, cleaning somebody's house.

The business is bankrupt and because he, he just had something, whether it was him or his wife or his background or something that had happened. Again, you talk about childhood experiences. He just wasn't putting a lead on his house. He wasn't going to have it and he was adamant about it, which is his choice. But the flip side of that is he made A very, I think, fundamentally incorrect decision for his business.

Now, I frequently work with people and encourage them not to personally secure it with a lien on their house and to try to spread the risk because I think entrepreneurs tend to be too all in, especially for the closely held companies. Everything's invested, everything's riding on some future equity event or the recurring income from that business. And if things go bad, they lose their house, they lose everything. And, and I don't think a lot of them realize that there are options that don't involve a lien on your house, that don't.

But that, that, that, that comes to, in my opinion, yes, it's all in and it's crazy. That's scary, that's frightening. However, you should understand the choice and the contrast. So let's say you're going to make a $2 million acquisition. This is the third example I was going to mention to you. And you could go to the bank and the bank would give you a loan without a lien on your house and you would have five years to pay that loan back and you would have a monthly payment of approximately on $2 million, $25,000 a month. Or you could go and get a 10 year loan with the SBA and put a lien on your house and have a month without any prepayment penalties and have a monthly note of $11,000 a month.

It's a big difference.

Which is riskier?

Well.

The bank loan store is a personal guarantee and so if they really wanted to come get your house, they could. So I'm just saying that there aren't black and white rules here. And that's why contrasts are so important. And that's why understanding your options is so important. And not just looking at the rate, but looking at the cash flow and the time and the guarantees and what it takes to get out and these choices. And then if you have choices which your banker often is not going to give you, then you can understand them and think about them.

So in going through understanding which directions, you do some, and we'll point people later to their own personalized report. But why don't you share some of the questions that you ask people as they go through developing a plan for the funding of their business?

Yeah, so there's really a series of four or five questions that we ask people in the book the Growth Dilemma, which came out in January. And the first one is if you had a, if I presented you with a gift of a million dollars today, and it's a million dollars, you didn't have before and you could not use the money to go buy a vacation house or a fancy car. You had to use the money either to invest in your business or a mutual fund of your choice. Or if it wasn't a mutual fund, something you didn't control, how would you divide the chips and what return would you expect from each investment?

So if it was your money to play with, where would you put it? Would you put it in the business, in this thing, or would you invest it in some other way?

Yeah, right. And interesting question because of entrepreneurs, if you think about it, if we have money in our pocket, we do one of three things with it. We spend it or we put it back in our business. Or that should be appropriate. To your point earlier, we should always be trying to diversify and have some investments outside of the business.

So gambling, a big, big poker game, doesn't qualify.

It's really interesting to see how people answer that and the discussion that leads to. And then the other question part of that is sometimes people will say they'll put most or all the money in the business and they're convinced they could get a 20, 30, 40% return on that if they had the money. And then the question is, well, should they consider using leverage or debt or equity to do that? And why aren't they doing that? So that's the one series of questions that triggers a discussion. And actually, in the book, we profile the stories of 13 entrepreneurs and their case studies of how they answer that question. The second question is kind of a question of and this answer depends on how you this is a point in time. How you answer this question today might be different to a year ago or a year from now, but do you think of yourself as a grower, a glider, a speed bumper, or an Exeter, someone who's pushing forward to grow their business hard? Glider is someone who's kind of pretty happy with where they are and just wants to be on cruise control for a while. An Exeter, someone who's planning on getting out, and a speed bumper, someone who's dealing with a problem and they invariably come up and it's big. And that's taking their focus right now. And how you answer that certainly impacts how you feel about debt and leverage and risk, et cetera. The next set of questions is a series of five questions. I don't think we should go into them in detail on the podcast, but what's your tolerance for risk? Are you willing to put a lead on your house? Are you willing to personally guarantee? Are you willing to do this or that. How much risk do you have? And you score on a scale of 5 to 25. And it's really fascinating to see that. And typically entrepreneurs have a higher risk tolerance earlier, and then as the business grows up, their risk tolerance decreases, and sometimes that slows down growth.

So just to clarify for folks, if you're the primary owner of the business. Right. Majority or single owner of the business, in all probability, a debt's gonna involve some personal guarantee. Not always. And certainly the smaller, the less. And that's distinct from a lien on your house. So if you've personally guaranteed a house and you have an issue with the bank and they wanna settle it up in a different way rapidly with you, then they're gonna try to go after all of your assets, your cash or whatever. They want you to make good on it. But they can't just grab the house. They have to go through a process to try to get at all of your assets. Right. Now, if you've got a lien on the house and your business or the loan encounters trouble not keeping with covenants or some other matter to do or to the extreme of failure of the business, then they can just grab it immediately so that loan becomes part of the house loan.

And.

And. And then they can force the sale of the house and go direct on it. Yes.

It's not that easy because it depends if it's a first lien, it's quite easy to do that. Oh, yeah. Second, if it's a second, third or fourth lien, that's much more difficult. Yeah. So, in fact, this issue is often more emotional for entrepreneurs than it is rational. But that's okay. Most decisions are. So. And the other caveat to that is I always say I'm not a lawyer. And sometimes these rules and laws are different state by state. For sure. In some states, Texas being one of them, and I think Florida might be another one. They can't take a lien on your house. They're not allowed to by state law. So every state has different rules and regs also, which you should understand if you're making these decisions.

Yeah. Where you take it. So your next question, I think is really interesting, and that is, I think it was, what are the ingredients? So what would you be using the money for? The ingredients of this success story that you've got your growth goal?

Well, there's two parts to that. The first question is, what do you want your business to look like in three years? Okay. And again, there are no right answers. Some people want to grow hard and fast. And some people are content with 5 or 10% growth a year or whatever it might be. And that's okay. Also, these are personal choices. But then irrespective of what your goal is, there usually are ingredients that are missing in your cake. If I want my business to grow by 20% in the next three years, I know that I'm going to run out of space. Or I need these three pieces of equipment, or I need to make an acquisition, or I need to hire a sales team, or we have a list of elements that we know we're missing and those require an investment. Now, sometimes businesses are just happily printing money and the thought of a capital infusion on the balance sheet is just not necessary. But that's not the case for a lot of businesses. And then you have to decide and do some analysis of should I make that investment and then what are my options for financing it? So I could do it from cash flow and I'm going to struggle like hell. Am I going to stretch my payables and I'm going to bust out the old ramen noodles again and hit the credit cards or whatever it might be. It's going to be really tough, but I'm going to do it that way. Or you say I need some equity or I need some debt, and then you have to make that choice. The choice between equity and debt has its own issues. And sometimes I say, don't just assume you have to do it with equity. There might be a way to do it with debt and understand what that is. And then if you're going to do it with debt, how are you going to structure it? Are you going to do it over one year or five years or 10 years? Are you going to put a lead in your house or not put a lead in your house? You have to make these choices and get some good advice about what the options are and the pros and cons.

And is that really covering then and going to your last. Your capital needs and capital structure for the business?

Yeah, it does. You also, if you're thinking about new debt, you also have to look at your current debt to see how, how they will be interrelated. Does it make sense to refinance or restructure or add or what does. I mean, every situation is different and you have to check in on this stuff. Almost like going to the dentist, I think every at least once a year and how you feel and what your answers are. This year could be very different than last year. The other thing about these exercises that I think are really helpful is I think it's helpful for either prospective partners or current partners to go through these exercises or the exercises in the book and see how you compare. Sometimes we have businesses where they're 25050 partners and one has an extremely low tolerance for risk and one has a very high tolerance for risk and they want a loan and one's willing to put a lien on his house and the other is it and that creates conflict. So sometimes it's really good to understand those things before you get in bed and start a partnership then later on because sometimes it busts up businesses.

Well, for sure I've dealt with this both as a business owner working with a partner on our comfort level with different types of debt. But I've also dealt with it as a coach helping people who were at a crossroads. Partners who one wanted to grow and wanted to seek all avenues to fund the growth and saw great opportunity in growth and the other was like it's good enough. Any growth you do is adding risk and debt service or equity partners that we don't really want to be in bed with. So either way, this is something that's going to come up frequently as you grow your business. Right?

Right. So sometimes going through the entrepreneur profile report on the site and seeing how you compare with your partner could bring up an interesting and helpful discussion for partners.

So great places to go. Not only do you want to figure out for yourself and settle the questions and get clear, but then of course get clear with any partners in the business that you're dealing with so that you can find your common ground. You inevitably won't have the same perspective on things, but you'll figure out enough of where you agree so that you.

Can move forward or potential partners, right?

Oh yeah.

If you're going to taking on an investor or a partner or bringing someone to the business. Someone wants to grow a business 5% a year, someone else is interested in 50% growth. That's going to create some interesting discussions.

Yeah, well it totally the case and definitely true as we look at coaching companies. Whether it's the ones I coach directly or the companies that are coached by associates in my world, we want to know what are your growth plans. Why even bother working with a group like ours who's going to help you tap all the big decisions around growth. The four big decisions at least. So Ami Kassar is author of the Growth Dilemma and if you'd like to take that assessment, get your personalized Growth Dilemma report. Learn more about it, get the book you could of course find the book online Growth Dilemma. Or you can go to growthdilema.com and we'll put the link, of course in the show notes and you can go ahead and take that and kind of see where you knit out and you and a partner could take it and then compare your answers as you go through the report collectively and use that as a process to begin to figure out your debt. Amit, thank you so much for coming on the show with us today and talking a little bit about the different approaches to funding the business.

That's been great, a lot of fun. Thank you.

Yeah, I want to remind all of our listeners that we're back here every week with a new topic, a new aspect of scaling up and growing your business. So we'll be here every week. You can subscribe to us online and listen to us. You can go to our website@scalingupbusiness.com where you'll find not only these podcasts and blog posts every week, but you will also find a free set of worksheets and tools and instructions of how to get your company using the Scaling up framework beginning to grow their businesses. So you can go find that online@scalingupbusiness.com thanks again AMI. Thanks to everyone. We'll talk to you next week. I want to give special thanks again to our original growth guru, Vern Harnish. Our show is produced by Nio Bade with audio production by Podfly Productions. Audio editing is done by Albert Burge and our show notes are compiled by Ein Kodina with proofreading by Tim McGowan. If you got some value out of our show today, please share it with somebody else and let us know the parts that you love by dropping us a line, email, carrier pigeon, what have you. Thanks again for listening and keep scaling up. Are you ready to turn your goals into daily wins? You should check out our Scoreboard software. Powered by Align, it's the official software for scaling up. With Scoreboard, you'll get an AI driven coach for priorities and KPIs and it'll help keep your team focused on what matters most. With Align, you can track your goals in real time and you'll even see results on the go. With their mobile app, you can rest easy knowing that Align has world class onboarding and support to set your team up for success. This is really more than just software. It's what I actually use to manage growth in our scaling up client teams. Unlock clarity and results with Scoreboard by Aligned. To try it now, go to aligntoday.com Bill G. One more time. Aligntoday.com Bill G. That's aligntoday.com Bill G. Check it out and try it now.