Tuesday, April 19, 2005

My Favorite Story

As someone who is "active" in financing small businesses, I tend to hear the same stories over and over again, typically from financial intermediaries who haven't taken the time to learn the basics of finance beyond - "I think this start up company is going to conquer the market, if it only had $1 million, so would you please give us $1 million."

Here is my favorite:

" I think there is a basis of high risk lending for companies that have the potential and the takeout in the end from the investors.... I have a couple of really keen companies right now that I would throw money into if I had the resources. Companies that are newest(sic) ( is that a word?) with no positive cash flow but good bank-able deals on the ideas and execution they have. They don't have the assets to get funding and banks don't look outside the box. Companies like yours help businesses a lot and that's the kind of thinking I agree with."

Absolute gobbly-gook but managed to hit my hot button with the phrase "IF I HAD THE RESOURCES". It is easy to talk the talk darling but try walking the walk. Mortgage your house and put your skin in the game.............You are obviously not willing to take that sort of risk, so why should my firm

And this person claimed to have worked for a bank! Bank-able Ideas? I mean come on! In the world of reality, ideas are not "bank-able". I do not want my bank looking outside that box, that is not their job.

My typical response to this sort of pitch is as follows:

"As someone who regularly writes the cheques to small business, I agree with you in theory, but not in practice. From the funder's point of view, the time required to do a proper due diligence and the fees associated with due diligence make this segment of the market almost "un-invest-able" for a profesional investor. In almost all commercial transactions, the borrower pays for all of the due diligence fees and in most situations, these small companies cannot afford the costs of doing the transaction (typically 5 to 7% of the capital raised), most of which is spend just papering the deal.

We just did a small buyout deal on which we spent about 40 to 50 hours just working on the paper work. We charged (or should I say way undercharged) about 1000.00 for this work, which included all of the credit work and registrations. Many of the companies we deal with have trouble scraping together the fees for our due diligence and I think that many companies are in this situation"


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