Grow Your Business With Other Peoples Money With Leo Kanell

Welcome back to the show. I'm your host, Phil Risher. And on today's episode, we're going to be discussing ways to use funding to grow your business with Leo Cannell. Thanks so much for joining us today, Leo.

Awesome to be here talking about funding, talking about entrepreneurship and serving this community.

Yeah, growing businesses. I love it. So Leo Cannell is the founder and CEO of Seven Figures Funding, a company that's helped businesses secure over half a billion dollars in funding. He's also the author of the best selling book the Business Funding Formula and and the host of the Seven Figure Club podcast where he shares insights and entrepreneurship and financial growth strategies. Based in Utah, Leo's dedicated entrepreneur, family man, passionate about empowering businesses to scale through innovative funding strategies. So he's a wealth of knowledge when it comes to lending and funding. And it's something, to be honest, I'm not that knowledgeable about. So that's why I'm curious to pick your brain on things. So could you give us a little bit like, how did you get into the business of lending and helping business owners grow their business?

Yeah, absolutely, Phil. So my background is in finance and I started out doing home loans, helping people get home loans in the 2000s. And then the 0809 recession hit. And then I thought, oh, maybe I'll do more commercial real estate financing. And so I've done, done that as well. And then I started to realize that the quote unquote small business owner, which, you know, the government SBA, consider anybody doing less than $30 million a year as a small business owner, if you have less than, you know, 100 employees, you're a small business owner. And there's a lot of those small business owners that are doing, you know, one to $10 million a year and they just don't get a lot of support from lenders. And, and so they're, they're kind of like, well, what are my options out there? And so for me, in various stages, first when I was starting my own business, I went to the bank and thought, this will be easy though. They'll give me money. I've had my bank accounts there, I've got loans there. I've always paid them back. They'll give me money and. No, they won't. No, they won't. But don't worry, they'll give out $100,000 student loan to an 18 year old with no experience without a second thought. I thought, wow, that's kind of crazy. So maybe it's a little bit more difficult. So I Did a lot of research and trial and error and categorizing, you know, what if you're this kind of business, what if you're that kind, that I helped a few friends and family realize, well, there's a real need for this because the banks oftentimes say no. And so as a business owner, you're like, well, where do I get the best loan and can I get a line of cred credit? What is the best option for me? How do I actually qualify and what is what? How does my personal credit affect it? So I ask all these questions and then over the last decade I said, I'm going to go all in and solve this problem for small business across this country. And fast forward a few years later, we've helped tens of thousands of small businesses do just that and, and really unveil, like, what does it really take to qualify? What are your best options? And then when does it make sense? Cause it's not always a good idea to actually take out a loan, a line of credit and financing. Sometimes you need to have a few things in place before you actually do that.

Yeah, exactly. I think it's really good that you're bringing light to this because people just walk into a bank and think, hey, I'm going to get a loan. And then they either get declined or they don't get what they actually need. And it's just whatever that prepackaged thing at the bank is that they're going to receive. So what are some thinking of home service space 1 to 10 million? What are some of the most common situations where they would need to borrow money? Like, you know, get equipment, line of credit. But what are some of those basic ones that you're like? This is what comes across the table a lot.

Well, there's always the unexpected, right? You have an unexpected expense that happens, you have some work that falls through, or you have a customer who has a setback who was supposed to pay you the other half of the job. And the first half you just paid to cover your, your costs and your payroll and your materials. And now the part that actually fuels your business, surviving and you having profits and paying yourself kind of disappears for a little bit. And so it's these emergencies, these cash flow crunches where if you don't have access to revolving lines of credit, to revolving funding that you can tap and then pay down when you're done with it, then that puts you in a bind. Or sometimes it's not the emergency, sometimes it's the opportunity where you do have the opportunity to do a bigger job or more jobs, or you have an opportunity to move into a different market, or you need to do a marketing campaign and that opportunity comes with a price tag of 50 to 100 to $200,000. And again, if you don't have that capital readily accessible, then you're looking at, wow, I've only got $100,000 in the bank account. If I put it all and this takes longer, I'm going to be in a world of trouble. I don't know if I can pull the trigger on this huge, that could transform my business. So I find it's, it's in one or two buckets. It's the emergency bucket or it's the opportunity bucket. And either way you want to have access to funding to be able to make those, to get through that emergency or to take advantage of that opportunity. Sometimes of course, it's a key piece of equipment that you need, but most of the time it's just that it's the opportunity or the emergency, it's growth. Sometimes growth is the hardest thing, right? You're bringing in money, but growing and more employees and more equipment and more marketing is, you know, you're going to eventually win. But in the three to six month time frame of growth, that's where you got to have that extra money to make that happen.

Yeah, makes sense. So the two are emergencies and expansion, basically. So with emergencies I always hear, you know, These payday lenders, 24 interest rates, you kind of run and you try to find the money quick and then they're going to take you, you know, to town. So what are some of the loan structures or best practices in that situation?

Well, and, and in the, in the small business arena, it's, it is, it's very much like a payday, but they call it a merchant cash advance, an mca. And so this merchant cash advance, it's like quote unquote, factoring. But what it really is is usually a 6 to 15 month short term business loan. Even though every loan officer will say, oh, it's not technically a business loan, it's a merchant cash advance. It's an advance of future sales based off of your business bank statements. It used to be based off of your merchant processing, like your credit card processing statements from your merchant processor. And then they really transitioned to just using your business bank account. And so if you, the real cutoff there is if you don't have good personal credit, which is why personal credit for a small business owner, you know, doing one to $10 million a year personal credit is very, very important. If you have good personal credit, that's the difference between getting a $250,000 ten year term with a low interest rate, no collateral loan versus getting a $100,000 nine month loan at 35% interest. And they'll say it's not a 35%, they'll call it a payment rate. They're like, yeah, we're going to give you 100,000 and the payment rate is 1.35. And what that means, Phil, is you're paying 135% back. Yeah, so here's 100,000, Phil. You give me $135,000 and it's going to be a daily payment Monday through Friday, every, you know, business day for the next nine months. And you're going to pay all that hundred thousand back plus $35,000 in interest. And that's a merchant cash advance. And for so many small business owners, especially in your space, especially when they get in a cash crunch, that's the option that they're given. And it's, it's attractive for one reason, because it's easy and it's quick. Right. They can get these funded in less than a week and three or four days. But it's most often the worst loan that you could be taking.

Okay, so if you don't want that merchant cash advance, this is where you might get like a line of credit to kind of flow throughout the year or, you know, all the time. So is that, is that the recommendation for a lot of people is don't do that and get a line of credit?

Yes, it is. Get a line of credit and get access to business credit cards. These business credit cards have cashback rewards. They can float for even, you know, one or two months without any interest being charged. And even if all, even if you got a, you know, the top interest rate on a business card, you just need the money for three months and I could put it on my card and for example, there are banks that we work with that will give you like a hundred thousand dollar business card. That's pretty darn convenient to have that. And guess what? If I'm paying, let's, let's say, let's say my interest rate on that business card is like, you know, 1.5% a month and I only need the money for like three or four months, that's still a much better idea than a merchant cash advance loan at 35% over nine months. It's way cheaper. And a lot of these you can get at 0% interest for the first 12 to 15 months. So I would always have that and then same thing. A business line of credit, it doesn't have the cash back awards, but it's a little easier to access the cash off of it. We actually have strategies for the business owner to be able to pull cash off of a business card, keep the 0% interest rate. You never want to do a cash advance, but you're exactly right. You need to have good personal credit, multiple business credit cards, and hopefully one decent business line of credit so that when that emergency or opportunity hits, you've got that money available. It's going to be at the most affordable rate that you that will be available to you. The other option is if you know you've got long term growth, then SBA has actually come up with a very much easier program to qualify for. And it's called the SBA Express Loan. And this is a loan that can be 150 to $350,000 with a 10 year amortization. And it's prime plus three and a quarter, which puts the rate at like 10, 11%, which is by far the cheapest money out there that's available other than a 0% interest business credit card during the 0% interest period. Obviously that's cheaper. But if you know you're going to have long term growth and you have a place for the money, you never take out a loan unless you know that by taking that money out you're going to be able to make an investment into marketing, into employees, into a job that's going to generate a good profitable return. A return on loan. Right. We all feel know about return on investment. If I'm going to invest my money in a stock and a bond and real estate, I hope to generate a 5 to 10% return on that investment each year. Hopefully more. Well, return on loan is the same thing. If I'm going to take out a loan or line of credit, let's say my cost is 15%, then I'm going to pay per year on that loan. Then I best be generating, you know, 150, 200%, which is very typical, you know, with the business. Right. You know, if you hire these two employees for this job, it's going to bring in way more money than your costs and way more money than the cost of the loan that it took to get that job. And so that's what you're looking at is making sure that you've got his name on. John of Shark Tank would say proof of concept. All right, I know If I can put a dollar in here, I'm going to get four or five out the other end. That's when you take out financing, but you never take it out just to take it out unless it's in a revolving business credit card or line of credit. And I'm not paying on it until I need it. And I'm only taking it out because I'm going to generate a return on the money.

Okay, so I completely hear you on that. As far as the line of credit side of things is going to be better than the merchant cash advance for emergencies, a lot of times it will be like over your, your shoulder season or your winter months where maybe your payroll, you know, fifty hundred, two hundred thousand dollars, and you need a little float of a couple hundred, you know, $10,000 here, there to kind of get you through that period. That's a pretty common one I've heard.

For a lot of people.

But switching gears to the expansion side of things, you're saying, okay, obviously you can take out money, but you need to have a predictable strategy that's going to help you grow. So that analysis that you gave of 15% that you're going to be paying in interest, if you generate 25% profit, for example, then you would have that 10% delta and you'd be able to make your payments and still make money on top of it and. Yes, and whittle away at that. That's kind of what you're getting at.

Yes. Well, well, hopefully you're going to. Hopefully if I take out, let's say $100,000 in a loan or line of credit and my cost of capital, let's say it's even 20%, that's the best, you know, that I qualify. My business is considered high risk. I bounced a check or two on my business checking account. Okay, fine, 20% interest is what it cost me, $100,000. But I know my business, Phil, and if I can take that $100,000 and I'm going to hire two new employees, I'm going to do a marketing campaign and get a piece of equipment. Equipment over the next nine to 12 months, I should turn that hundred thousand dollars into three, four, five hundred thousand dollars more than be able to pay the hundred thousand dollars back or whatever the terms are, cover the 20% interest. So if I'm paying back 120,000 and hopefully you're getting a long term, you know, you're getting five years to pay it back so that you don't put yourself in a tough spot, you can always pay it off early, but you always want to get a longer term just in case so you're not in a tight cash flow spot. More businesses go out of business due to cash flow issues than they do that they just didn't have sales. Right. And so cash flow is what you got to pay attention to. If you have a longer term to pay that loan back, that puts you in a good spot. For example, one of the mistakes a lot of business owners make in this space that you're talking about that you serve is they'll get a piece of equipment and they'll get like a one or two year loan on it and that kills their cash flow because they have to pay the whole thing back so fast. Whereas if they got a five year term loan now, they can pay it back in five years while the equipment is depreciating, write that depreciation expense off. But now they're making profits each month because they have a much more affordable payment to pay for that equipment than trying to pay for it all at once. And those are oftentimes the mistakes that I see people make.

Yeah, I completely agree with you. When it comes to like equipment and that kind of stuff, get as long as you can because it's going to crunch so much. And then also you can't even write it off and depreciate it over the given amount of time. Yeah, what, so you mentioned about your credit score being one of the big factors. What, what are some of the other credit worthiness type of things? So credit score is collateral important, your asset, you know, what are some of those other things?

Yeah, I would say let's start with credit. Personal credit is very important. And most of the time we think, well, Phil, I pay my bills on time, I pay my mortgage on time, I pay my car loans on time, my credit should be good. And then they go and apply for business funding and they come in at a 650 FICO score. And if you're not in that 720 plus range and you've always paid your bills on time, you're kind of confused. Like how can this be? Well, the reason why is because payment history is just 35% of your credit score. 30% of it is how you use credit cards. And so what happens, One of the biggest mistakes most business owners make in, in your space that you're serving here is they use a lot of personal credit cards for short term financing needs for their business. And then that lowers their credit score because now these personal cards are maxed out and you're like, oh, well, that's business. I'm going to pay that off in five months, you know, when the money comes in on the jobs I'm working on and I get through the winter and then I'm going to be fine. Well, right now that's killing you and it's going to kill you on a, on a home purchase, it's going to kill you on a car loan. We've got to get that score up and the easiest way to do it is to pay our personal credit card balances down. So again, the answer to that question is, well, I should have those in the name of my business because they don't report to personal credit. If I have business credit cards that I'm using for the business, they don't report to personal credit. And then I can stop using my personal cards and commingling what should be business. And, and that will actually help my credit score be higher and then help me in the future when I need to qualify for that equipment loan or that SBA loan. Because what happens is when you have that lower FICO score, then the equipment lenders like, oh, you're high risk, you're getting a two year term instead of a five year term on that equipment loan. And so that's a big key is let's not use personal credit cards and let's get those paid down and let's instead use business credit cards. So that's the first thing. The second thing that you can do is how you manage your business bank account says a lot to every lender about you as a business owner. Are you keeping a good buffer of money in the checking account or is that checking account going to 500 bucks every, every day? Is it going negative because you're bouncing a few checks and, and you're not bringing in enough money and you don't know your numbers in your business. And, and that happens all the time. I saw, I've seen clients who have their bank account at negative $80,000. Their bank is charging them thousands of dollars in overcharge fees and arrear fees and that's just killing their cash flow. And so you've got to get on top of your business bank account. We can't be having negative, you know, balance days where we put the bank account in the negative. We can't be bouncing checks. And, and the higher that average daily balance is, if I can have a 10, 20, 30, 40, $50,000 average balance in my bank account, that tells every lender, wow, this guy or gal manages a Tight ship. They're going to be good to work with.

Yeah. With the credit card thing even. Also the credit card utilization, if you're maxing them out, that's going to ding you pretty bad too on your personal side. So I think that's like a really good one to hit is if you're still using personal credit cards or personal debt, you need to switch that to the company because that doesn't affect your personal credit score. But when you go to apply for loans are going to pull your personal credit score. Sounds like amen.

Exactly right. You're exactly right. Cool.

Another question about scaling with debt. Is there a certain amount of like debt to revenue ratio or something like that that people should. If you're thinking about growing your business, maybe like a cash reserve that you should have like 5% of your revenue you could have in debt or something along those lines.

Yeah, yeah, absolutely, absolutely. When it comes to revolving credit, I mean the more available revolving credit you have, the better. But in terms of a good rule of thumb, I mean, yeah, you definitely want to have 5 to 10% of your annual revenue available in credit. That's going to help you. Right. If all of a sudden your business has a hiccup and you have an extra, you know, 5 or 10% drop, well, now you've got the capital to be able to tap into that. And you're exactly right. It needs to be in the name of the business. We can't be using personal debt for the business. Maybe the only place that, that really can make sense is if you're doing a home equity line of credit because it's such an affordable payment and then you're being disciplined and paying that back for the. But for the most part we want to be using financing in the name of the business. You, you know, to really make that work and, and, and grow that business and expand. And so that would be one. And, and then obviously I don't think you ever want to have more than than 25% of your revenue in a no collateral loan. There's nothing wrong, especially you know, if you're in a, in a service based business and you do deal with some construction and you've got some equipment, equipment is fine because that equipment will have a resale value and you're going to pay that loan down. And so it's not necessarily an issue if your equipment loans add up to your annual sales revenue because there's an asset backing up that debt and the lenders will almost always make sure that the asset is worth more than the debt. So you're not upside down with that, but it's the unsecured no collateral loans. You probably don't want to have more than 10, 20% out of your annual sales in a no collateral loan like that.

Yeah. Back to the expansion thing. You hit on one thing that I wanted to ask you about with the big projects. So if you have big projects that you have won or secured these big things, can you take those secured projects and go and say, hey, I need X amount of dollars to fund this project and it's all good. And they're going to use that as this is justifiable.

The way it will work is they won't take the contract, but they will take the accounts receivables. Right. And so let's say, and this happens oftentimes in the space, right, where you're doing a job for a government agency or a big corporation or some big builder and you're one of the sub contractors, you know, doing the jobs for this big builder. And the big builder will be like, hey, when you know, when the job's done, you know, then you get paid and so mean. Meanwhile, you're shelling out a ton of money for materials and payroll for three or four months before you actually get paid on the job. And so what you can do is as long as you're dealing with a big business or a government agency that has good corporate credit, which they almost always do, or they would be in business, then there are lenders with all over the country that will give you money based on those accounts receivables for work you've done and you're going to get paid on it. But instead of you having to wait two or three months to get paid, they'll front you the money for a small interest fee. And now you can run your business and cover payroll and move forward without having to wait three or four months. Where the cat. The lack of cash flow might kill you.

Yeah, that makes sense. I was always curious because you kind of, it's like you have this asset of paper that you're like, hey, I could. I'm going to get this, but I need to float this. So that makes sense what you're saying.

But there's a key distinction, right? If, if your clients are Joe Homeowner and Susie Homeowner and they're consumer individuals that each owe you $50,000, no one's going to give you any money based on those jobs. But they will if it's, you know, Bob the builder, if it's Dr. Horton big, huge national home builder. Oh yeah, everyone knows them, they've got great business credit. They're going to pay you, no questions asked. We'll be glad to front you the money for that job.

Okay, what about using vendor or manufacturer funding? Opposed to independent type of options like H vac? Contractors might use a specific manufacturer or is there any benefits to doing it different ways you wanna.

You know, one of the great stories out there that I love is, is Phil Knight, the founder of Nike. And this is a guy who built relationships everywhere. He had relationships with regional banks big and small across the country. And if he didn't have those relationships and those extra lines of credit, Nike would not even exist today. And so I would say the more relationships you can make, the more vendor credit you can establish and always use responsibly. That's a good thing. You want to have those relationships, you want to build that big, that good business credit history. And that's what's always surprising too is a lot of small business owners, you know, in that one to $10 million in sales range, they don't know that they don't have business credit. They just assume, oh well, I've got this line of credit with my manufacturer, but they don't even report. And so you have to proactively set up your profile with Dun and Bradstreet, with business, with Equifax Business and get them to report and go to the vendors who report that history to build that. But yeah, the more relationships where if you get into a bind, you have, you know, that net 30, net 60, 90 days time window to pay that manufacturer back, to pay that supplier back without having to pay for it up front is a big deal. I remember when I was in college and I started my first business, one of the keys to making that happen was I build a relationship with the local paint supplier and they gave me a small like two month line of credit and I could get ladders and I could get tape and paper and plastic and all the stuff I needed to and paint for those jobs and then pay it back to them. And so yeah, the more you can have those relationships, the better.

Yeah. So if I'm hearing you right, it's like you can have access to the funds, doesn't mean you have to use them. But it's better to have the access.

Yes.

Because you never know what's going to happen or who's going to do this or that you want to have the access. You have options. So you're not scrambling to get these merchant cash Advances and get taken advantage of.

Amen.

Yeah. All right. One note I made on here that I wanted to ask you about was for tax implications. What are some of the tax advantages or considerations that people should be aware of when they borrow money or for equipment purchases, marketing. Is there anything in particular that sticks out?

Well, the one thing you want to do is oftentimes, you know, when you buy a home, when you buy a piece of real estate, there's some cool closing costs in there that are included. And the same thing can happen, Right. Even if you're getting an SBA loan or commercial equipment real estate, there can be some different expenses associated with that. And so check with your accountant, cpa, your business. But a lot of times those fees are actually tax deductible fees. And so that's one thing you want to be able to keep track of that for tax deductible stuff. Obviously, any assets you own, you're looking to depreciate those. If you do any real estate investing, there can be some big benefits on how you make improvements to properties where you can accelerate some of that depreciation. But ultimately, in terms of taxes, I'd say the biggest thing that most people are not aware of is we're very good and creative as business owners at showing no profits, at limiting and lowering our tax liability. And. And at the end of the day, if you're trying to get that big SBA loan, which is key to your expansion and growth, then you should be planning ahead for that and realizing the year before that I better show some profits on the business tax return. I better really make sure we're profitable and do my tax returns in such a way that I'm not trying to write off every single opportunity out there. Now, depreciation, they'll always add that back in. So if you were break even on paper because you had a $500,000 depreciation expense that wasn't a real cash expense, lenders will always add that depreciate depreciation back in. So even though you showed break even because of a depreciation expense, they add that back in, you're actually going to look really good on paper. But if you don't have big depreciation expenses and you're showing losses and break even, then it's going to be very difficult for SBA or your local bank to be able to give you that big expansion loan that you're counting on, because there's going to be no cash flow that they can count on to be able to service the debt. Make that payment. So you want to plan in advance. Like we're looking to expand, we're looking to get open in another city, get another location, whatever the case may be. Let's plan on that and make sure we're really focusing on showing profits on the tax return that year before.

Yeah, guzzy up your numbers so that way you have some ammo when you go in and try to get things, it looks like it's all there. Just how it looks on paper seem very important.

Very important.

Yeah. Well, this has been a great conversation. I definitely have learned a lot. Where's the best way people could reach out to you or what should, what should their first steps be if they're interested in maybe, you know, exploring what some of the options might be or just even educating further on this topic.

Yeah, yeah, great question. So we've got a lot of resources, content about funding financing@7figures.com, that's the digit 7 and then figures.com we've got to the podcast we've got, you can get a free pre approval options as low as 0% interest up to as long as 18 months. Every type of option on the marketplace is available and you can look at those options without any impact to your credit. And also just kind of strategize with an advisor like how can I improve my personal credit score? How can I do a better, you know, what, what do I, what steps? Because sometimes maybe you don't qualify for what you want right now, but we can tell you, hey, here's what you can do over the next two to three months so that you do qualify. And so that can be important. That's a great resource is 7figures.com. And then, and then I'm, I'm very active on LinkedIn. I do a lot of educational posts or podcasts on LinkedIn. So if you look at my name, Leo Kanell K A N E L L on LinkedIn that I'd love to connect with you there.

Awesome. I'm on LinkedIn too, so connect with me as well. You'll see Leo and I on LinkedIn a lot. Leo, thanks so much man. It's been great getting to know you and I appreciate all the knowledge that you dropped today.

My pleasure, Phil.

Thanks man.

Cool.