All Xero Gravity episodes
Hosted by Elizabeth Ü and Gene Marks
On episode 30, we’ll share insights on how you can bring your business idea(s) to fruition through access to capital funding.
As a business owner / entrepreneur, you’re probably aware of the traditional lending options out there. Yet there are many other ones available. What we’re going to do is help remove the tricky parts from the equation, so you can find those that best suit you and your business model.
Together with our guests, President of Xero, US, Russell Fujioka, and Head of Small Business, Restaurant & Government Banking, at TD Bank, Jay DesMarteau, we’ll talk about the multitude of ways you can get the equity you need confidently, now, along with what the future of lending looks like.
Hosts: Gene Marks (GM) and Elizabeth Ü (EÜ)
Guests: Russ Fujioka (RS) and Jay DesMarteau (JD)
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Anncr You’ve just tuned into Xero Gravity. A podcast for small business leaders and entrepreneurs across America. Now to your hosts: Gene Marks and Elizabeth Ü.
EÜ Welcome everyone, back to Xero Gravity. Today we're going to be talking again about a topic that is near and dear to my heart, and I imagine foremost on many small businesses' minds: how to access capital. We're going to be talking about many of the different ways of accessing capital. We're going to be talking about traditional debt. We're going to be talking about venture capital and other forms of equity financing and what people are looking for. Gene Marks, my co-host is also here joining me today. Gene, what do you think is the first thing that people think about when they know that they need to access capital? Where are they looking for money?
GM People immediately start thinking about, "Well, I guess I'll go to my bank and get capital." Although, I got to tell you, Elizabeth, that kind of thinking I think has changed over the years. After surviving the recession, I think we all realize that banks are kind of lending a little bit less money out to businesses than they were before, at least the requirements and restrictions have certainly gone up. The good news is that there's a lot of other alternatives for capital nowadays that are out there for a small-business owner, and I'm hoping these are some of the things we're going to touch on with our two guests.
EÜ Yes, indeed. Especially when as soon as we have more options it becomes almost harder to determine which might be the best fit. And so I hope that when people are listening today to some of these different options — and when they're listening to what some of the bankers or some of the investors might be looking for — you'll start checking off your checkboxes in your mind about which of them might be the best fit for you.
We have some great guests today on the show. We have Jay DesMarteau, who's head of Small Business, SBA, Restaurant, and Government Banking at TD Bank. He's got quite a handful on his plate. We also have Russ Fujioka who is technically my boss. He's the president of the U.S. at Xero.
GM If you have a start-up, we'll look at the plan, how much capital you have of your own going into that plan, and a lot of times we can put deals together with SBA. If that doesn't work, we have all kinds of partners we can refer you to.
EÜ When you run your business into a financial platform like Xero, the reality is that all the numbers that you need are in there to give you good insight into your business from a financial point of view.
GM I'm interested in getting Russ' perspective. This is a guy that's running a company, Xero. It's cloud accounting and there's a lot of integrations that are out there that banks and online lenders are looking to do and are doing with Xero right now, so things are changing in the landscape and I think cloud accounting applications are right in the middle of financing alternatives, so it will be interesting to hear some of his thoughts on that.
EÜ I can't wait to hear what Jay and Russ will have to share with us and Gene and I will be pitching in with our thoughts and ideas as well, so see you in just a couple seconds.
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EÜ Alright, everyone. We are so excited to be talking about how, as a small business, can you access the capital that you need to launch or grow your business. We're so excited today to be joined by Jay DesMarteau, who's head of Small Business, SBA, Restaurant, and Government Banking at TD Bank, and also Russ Fujioka, who I guess is technically my boss as president in the U.S. of Xero.
GM I think he is, Elizabeth.
EÜ Yes, well, I don't report to him on a daily basis, but very happy to be sharing the stage today with Russ.
Russ, you have quite an extensive background in the venture capital world, so maybe you can tell us a little bit about that.
RF I think it's interesting that a small business, in and of itself, ranges from where (and I'm an old-timer), you're talking about working capital and cash registers — and we still have that in the U.S.— all the way, really, to the structured start-ups that are much like Xero, that started not only with capital seed money, but really went public from the beginning. You deal with a big array. Small business lending is really not a singular point.
I do think the paying points and the reasons for getting it are almost all the same whether you are opening up a beef jerky factory in Texas or you're actually inventing the next rocket ship. There are just so many different forms of access to capital today. Some, I think, are really smart ways to get at it. Some are really not-so-smart ways to get at it. Some will get you, quite frankly, into trouble. I think the paradigm that banking and lending is really changing today, but again, I think what small businesses need and the telemetry that they need on their business really doesn't change business to business.
EÜ Jay, we're so glad that you are here. Tell me exactly, what does that look like on a day-to-day basis? You're head of Small Business, SBA, Restaurant, and Government Banking. That's quite a handful.
JD It is, Elizabeth. You're right. Actually, we just kicked off a new business line here at TD that I run as well which is Health Care Lending. We target dentists, doctors, vets, podiatrists, MDs. All that kind of fun stuff.
EÜ We're definitely going to have to give you a book rather than a business card to fit in your new business title.
JD We're going to change it, I think. It can't be that long, right? People lose interest after the second one. Day-to-day, I basically work with our entire bank. We have 1,300 stores. If you're not familiar with TD Bank, up and down the East Coast, Maine to Florida, and 400-500 Relationship Managers. I run the Relationship Managers that have specialty focus, so either in Restaurant, Government Banking, or Health Care, or SBA, they partner with our regional or geographic-based folks. We work with customers to give them a multitude of products. Anywhere from make sure they're in the right deposit transaction accounts, make sure they're in the right loan structures, merchant services, treasury management, all that kind of stuff.
GM If I can jump in, Jay, I have to ask you. In November, the Wall Street Journal came out with a report that said that the ten largest banks in the country are making 38% less loans to small businesses than they did a decade ago. Are you seeing that among your market and if that's the case, why do you think that is? How has the banking environment changed?
EÜ Gene, that's funny because there was also an article that I saw today saying that Morgan Stanley is starting to do some new, smaller loans to small businesses through online lending, so I'm very curious to see your answer to this one, Jay.
JD So, you know, I think that article was based a lot on trying to triangulate CRA data, which is Community Reinvestment Act track data. It doesn't track it in all types of loans, and banks have merged and changed shape over the period they were trying to track it. If I look at our own personal experience, we have had fairly steady requests for loans, applications for loans, over my six years here. I've seen the years’ prior that it's been fairly steady. It's increasing slightly, but it's not increasing gangbusters.
I think if I think back on what's happened in 2008, a lot of markets overheated. A lot of people had access to capital and a lot of underwriting standards in general were loosened, and then immediately after 2008 they tightened up a bunch. But then I would say for the last five years, since 2009/10, they've gotten to be in a pretty good balance place where'd I'd tell you, and I think you know this was brought up a little bit before this, all kinds of different capital access points can have and debt is one form of it. Especially if you think of bank debts, it really is because we are a regulated institution and we are taking deposited money and putting it out there to work.
You have to set a certain credit profile to be able to get a loan from a bank. It has to fit, generally, a specific type of purpose. It's more for the operating entity versus a complete venture idea. It's more for someone that's got a track record of cash flow and is looking to put debt in the right capital structure for that for the right purpose. I think debt is somewhat, it's probably in better shape to be put out there in a more purposeful way and I think understanding it is key. You have to understand when you need debt versus an equity partner and we should be paying for different types of debt and different structures that are out there.
EÜ Yeah. Jay, I wanted to ask you since most of our listeners are small business themselves, I think one of the most common misperceptions that I have seen is that when you're first starting a business, the first thing that you do is go to a bank and ask for a loan. You just mentioned that one of the things that a traditional lender bank will need is a track record. When people come to you as a small business and they ask for a loan or they come to your Relationship Managers in the retail bank locations, where do you send people when they're not ready for a bank? Russ, we'll ask you to answer the same thing. For start-up businesses, venture capital may or may not be the best fit. Jay, let's start with you.
JD Sure. If you come in through one of our stores, you come to us online, or you meet one of our Relationship Managers because your accountant refers them or your attorney, we tend to look at things in a very consistent way. That is, we look for how you've established your business, how long it's been in business. We underwrite cashflow. We look at your credit scores. Cash flow is
a very important term in lending. We generally will calculate that service coverage. What that is in layman's terms is we want to make sure that your revenue minus expenses, so at some level your gross income, there's enough income there to be able to pay your debt payments. It's a fairly simple calculation and it makes sense. Then we look at — if you're buying a hard asset — the type of collateral it is, the loan relative to the value of that asset. It's a fairly standard underwrite.
Now, you know, when you, when you come in you begin that conversation. First it's, "Who are you? What's your credit like? What industry are you in or going to be in? How's your cash flow look? What's your need of the loan?" Once we understand that, you can get a conventional loan. Our bank, a lot of other banks, we have SBA products as well, which are government guaranteed. That does allow us to go further towards a start-up. Then if we look at a start-up, we're going to look at, "Well, what's your business plan? Have you done this before?"
If you were a banker like me and I'm going to run out and start a restaurant, that doesn't always guarantee success, right? So, if you have a start-up, we'll look at the plan, how much capital you have of your own going into that plan, and a lot of times we can put deals together with SBA. If that doesn't work, we have all kinds of partners we can refer you to that look at doing more start-up type of loans, things like that.
You can start with your bank (and people should, I think) to understand how credit-worthy they are, from the bank's perspective. You get free advice on how you're viewed. It's like a free check-up at a doctor. I always encourage people at least to understand how you're going to be viewed through that lens and always take advantage of it. If you walk into one of our stores, it's free advice.
GM People are always apprehensive about bringing bankers into their business. Look, banks hire MBAs and CPAs and people that do financial analysis. Their whole job is looking at financial statements all during the day. For a business owner to bring in a banker and take a look at their financials and give them some input and some recommendations and advice, like you said, I think it's an opportunity and certainly an advantage.
Russ, I have to ask you, where do you think, as an online financial service that Xero provides, how do you think bankers are going to be using the kinds of information that your customers have with Xero, in the future? How do you think they could be using it better? Where do you think that trend is going?
RF I think there's a couple things and I think in the end I want to circle back to Jay's point on what they look at in lending. You know, from our platform standpoint and being an online, small business accounting platform, the things that we provide (that Jay just went into) that they look for in an operating company are transparent, right? So, we have cases in which we have folks that are maybe in more venture-type of lending environments that will utilize our platform to be able to share the view into the general ledger in real time because that's an agreement to the funding. I won't even use the word "loan" in that case.
Venture A decides to give you $100,000 on the assumption that you will be using Xero. And Venture A will opt into looking at your ledger so they can see a real-time view into your business. What that gives them through our real-time dashboard is they get to see cashflow and all of the things that Jay regarded on a real-time basis day to day. If this is a retail type of business or an e-commerce type of business that has a front end that's latched into Xero, and the transactions are going, for example, 1,000 online transactions, let's say, a day, but they're selling $2.50 plastic Army men out of Singapore, they'll be able to see what that transaction is, what their cost of capital is, any debts, any APR — they see right into it. We have that version of it.
To circle back to Jay, the conversation about the banking, about being able to look at a customer and you know, are they, you know, do they have the cashflow? Do they have the loans? I think this is where you see an incredible, digital version of what used to be, "When the relatives are over, can you go ask the uncles and aunts for money?" Everything that we do digitally today is just an augment of some analog thing that we've all grown up with and so in that scenario, it would be, "Hey, Uncle, I have a really great idea and I want to get into this," and Uncle gives you $100 to put in your register to start.
Today, Kickstarter goes on the assumption which is, "Hey, give me a good idea of your idea and if I decide it's a good idea, I'm going to pre-buy your product," which gives you cash flow ahead of it with no promise that it will actually come out. I don't know what the percentage of Kickstarters that actually deliver the product — it's pretty high — but it is that way to get that general ledger going.
You get that Kickstarter, you raise $10,000, $15,000; your business gets going. You sit that in your Xero small business platform, your general ledger's going, you build your business to 10, 20, 30, $40,000 in revenue, and then you start to look at it and go, "Okay, I've had enough seed capital, now it's time for me to go into some formal financing areas like banking," and then you deliver the general ledger to the bank.
And, and I think that, you know, it's an absolute ecosystem that we work in and I think that those areas of capture are just facilitating the need, right? Again, we're just really accelerating that aunt and uncle borrowing, by things like crowd sourcing and crowd funding like Kickstarter. And then I think we ready these companies to get into more formal lending opportunities like banks or venture capital or even angel funding's a little more formal. I think it's a whole ecosystem.
EÜ One of the things that I wanted to ask you, Russ, was whether or not there's any differences in what lender we would be looking at versus venture capitalism since you can speak more to venture capitalists.
Just to be very clear for the audience, when we're talking about debt, we're talking about money that usually an institution like a bank gives you up front and then you pay them back over time, usually with interest unless you are very lucky to get a no-interest loan from Aunt Sallie. Whereas, when we're talking about equity financing or selling stock in your company to venture capitalists or other equity investors, you're talking about selling a share of your company and they might not want money back on a monthly basis, but they're definitely going to want to see that money back at some point in the future, usually with multiple return on their investment.
Russ, as far as the requirements that equity investors or venture capitalists might want to see, are they any different than what Jay laid out earlier?
RF Well, I won't put words in Jay's mouth, but I think that as an institution, as a bank, you have to follow certain guidelines that you're comfortable with in your institution. I think when you get into venture capital, we've always referred to there's "smart money" and "dumb money," and there's a whole bunch of things that are formal venture capital. Some are pretty informal. But the ones that most people are particularly aware of is venture capital. It really comes down to understanding the business. Venture capitalists are more about pricing the growth and the future customer acquisition, for example, than looking at the exact spreadsheet. In fact, we have some of the biggest companies today. SaaS companies that have the highest valuations that have yet to show a profit. So even when they grow up and become public, it's a growth story.
So, when you look at venture capitalists, he's going to look at the team and that's one of the first things. They look at the team. Is there a history of success? Where are they coming from? What are they doing? Does that team understand their customer? Does that team understand their customer's customer? It's really just about, you know, "Show me what the market opportunity is, show me that you know what the customer is, show me what your product or service is going to do, help me believe that there is a 10x multiple at the end of this, and we will buy a share of your company." That's what they're basically doing, is buying a part of the company. And it's a very different scenario.
I think the interesting thing, and again we look at these, I guess the black magic or what used to be in the closet of what a venture capitalist did, and all of a sudden this show called Shark Tank shows up. And I think everyone has a pretty good working knowledge of what venture capitalists do. It's obviously for TV; it's a bit dramatized. But partner meetings in the end aren't a whole lot different than that. You've done your due diligence, you've taken a thousand companies you've looked at, you're down to one, and you take a vote. And you take a bet on what that company's going to do because it is an investment and perhaps go to Xero. I think as Elizabeth alluded to, in most cases it's not something you are getting paid off at.
GM That's great. Jay, I'm going to kind of switch gears a little bit on you, because you actually mentioned earlier in the conversation about the fact that TD Bank gives out loans for SBA-backed loans. I have a lot of clients that applied for SBA loans and I hear mixed reactions from some of them. Some of them say it's a very bureaucratic process. Others say that their bankers don't really understand their business, or they're not interested in doing SBA loans because it's too much paperwork involved.
When I interviewed Maria Contreras-Sweet — she's the head of the SBA — and her whole mission is to try and make this an easier process for banks to get out there. What message do you have for small business owners about SBA loans? Are they really a good thing? Is there any specific sort of myths about them that you'd like to dispel, if a business owner was looking to get an SBA-backed loan?
JD Sure. You know, I think there are banks out there that say they do SBA loans. They really don't have a ton of expertise. They're banks like ours where we've got a lot of people dedicated to the SBA product. We're also a preferred lender, so we are delegated and we have the ability to make the loan decision ourselves. We don't have to go with every loan and ask the SBA to approve it. If you go to a bank that fully understands the SBA programs, and there are different ones: Express, 504, and 7A, they're designed for different types of situations. They're looking at you conventionally, so doing a loan without SBA, and they're looking
at the way that an SBA loan can help your business.
In 7A loan, for example, we can do a 90% financing on a building versus a traditional conventional where we'd only do 80%. We can stretch out terms longer. We could go as long as 20 years sometimes on these loans. If you have someone that can advise you very well on what your options are conventionally, they've got enough scale and size that you know they're a good SBA lender, and it's all public data. You can see who's ranked in the top SBA rankings. We're 14th in the country even though we only operate in 13 states. You can tell if that lender has a full and good understanding of how to get an SBA loan done.
I never really hear, Gene, from any of our customers, that it was onerous process. I think that’s because we're very good at explaining up front what it's going to take on either side, conventional or SBA. We end up giving a lot of people loans with a better structure that fits their needs. Lot of times we can offer both and so they can pick, but I find if you go to someone who isn't really good at selling it or they have a guy who did one loan some point in time, they'll botch it and they won't be able to explain the process to you. It just takes too long. If they have to go to the SBA for approval, that adds some days to it. I think you have to go to the right source and that makes a big difference.
EÜ I wanted to ask Russ, what is your vision for the future of access to capital for small businesses? Given how many things have changed and given how much more visibility of various lenders or investors might have into the success of various small businesses or general ledgers, as you mentioned. What do you think might be possible in the future?
RF I think there are a couple things. I think, first of all, we're assuming that small businesses in general have an advanced set of financial acumen to understand when they actually need capital. And better yet, when they may need capital in the future. What I've run across, mostly in small businesses in general, these are entrepreneurs with the passion for a product or solution they're offering. And you know, I think we've found that small businesses in general don't look at a lot of the financial hygiene. And that's one of the reasons we certainly designed Xero with the recommendation to get paired with an accountant or a financial advisor.
The one thing that's good about that is that they do have a pretty good understanding of cashflow, and things you might need from a lending aspect. It also is incumbent upon us to provide telemetry so that they will understand when their business is going to need capital. That said, when you run your business into a financial platform like Xero, the reality is that all the numbers that you need are in there to give you good insight into your business from a financial point of view.
When you look forward at the things that we mention, whether that's a Kickstarter or that's TD or that's SVB or that's a Lending Club or any of these lending institutions, part of it is understanding that you may need capital, and sometimes you need capital in a really interesting way, like when is that big deal a great deal? I know more companies that have come up with cashflow problems because they took the big deal. They got popular, they took that deal from the big Fortune 50 Company, and they had to pay their suppliers in 30, and they were going to get paid in 120. It causes these real short-term debt problems that you really need to see ahead of, and be able to have your financial instruments kind of tell you where you're going in that telemetry.
I think in the long run what we're going to be able to do is we're going to be able to take all of this real-time financial data that's getting chewed up by the hour, by the minute, depending on how your financial institution feeds it, and you're going to be able to have preset associations with your trusted vendors and banking institutions. Whether, again, that's a bank or lender, they're ability to, in real time, be able to see in our dashboard that there may be a sense that they need capital and be able to write from inside the application, request that capital from their institution that they're tied into. Their institution can then automatically get real-time data to where they are, where their cash flows are, all their historicals, if they need it.
All of the things that Jay wants to see — they can do with a push of a button. There shouldn't really be the ability to print it out, put it in a custom form, print the form out, go into your bank, mail your form — have someone look at it for three days. If someone's in your books in real time, they should be able to know that when I push the button, I'll be able to give you an answer within minutes and hopefully no longer than hours to bridge that loan. I think that future is now. We have some associations in the Southern Hemisphere, for instance, with NAB that almost have this financial web closed. The ability to operate your business, grow your business, is all in real time and the ability to access that capital.
GM I've got to just say, Russ, your point, it's right on. Jay, do you agree with that? That's where sort of banking is going? We've given up so much privacy over the years with social media. So much of our information is sort of accessible by so many people and it just seems to me like the trend is just what Russ is saying. That our financial information, (me as a business owner), my information is hosted by a company like Xero in the cloud and banks are going to want to get access to that so they can do real-time monitoring of how I'm doing as a requirement to lend me money. Do you agree that that's where the future is going to go?
JD Yeah, I do. I think the power of it; I think Russ did a great job describing something before. It's basically analog going to digital. People do it today; they just do it in the form of sending us their financial statements or their tax returns. I think Russ did a good job of describing the pain associated with it. You've either got to print it, you've got to bundle it up, you've got to send it in or you've got to go to your accountant to get it. When we get it, we'll spread, we'll look at it, and we'll look at certain ratios and say, "Everything's great," or "Watch out." All that a great platform like Xero does is just make that all happen so you don't have to touch it and spend so much time with it. It's a process that's happening today and in a manual way and speeding it up and making it in a digital, leveraging the power of technology to make it faster is great.
Now, what I do see though, is the rigor a lot of times don’t change in how you look at that data. And you know, a bank, we're held to a certain standard to look at it in a certain way, which like I said, we'll calculate ratios, we'll make sure things look good. Where some people have gotten into trouble is that they don't put that rigor on it and they'll assume that by just looking at it, they're going to make it predictive, you know, a prediction of how well that company's going to do, and they're wrong. They end up going bankrupt because the loans they gave out never come back. So you know, I think the access to data is one thing, but the way you look at it, that part has to have some rigor in it that I think banks have proven that they have. I do think it's a great marriage, though, because regardless of what type of capital you need and where you are in your gestation period as a business, a platform like that will just make it better for all of us.
EÜ Thank you so much for joining us today, Russ and Jay. This has really been a fascinating conversation. We've been talking with Jay DesMarteau, head of Small Business, SBA, Restaurant, Government, et cetera, et cetera, et cetera banking at TD Bank and Russ Fujioka, who is the US president here at Xero.
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GM If you have any questions you’d like answered on the show…
EÜ …tweet us at Xero using the hashtag #XeroGravity. We’ll answer them on next week’s show!
EÜ That was great. Super exciting conversation and I think that Russ has just coined one of my favorite new terms, "financial hygiene". Did you catch that, Gene?
GM Yeah, I kind of heard that as well. I actually thought he was just giving me a greeting, but no. He was talking about something completely awesome.
EÜ That was great, yeah. I mean for all of you small businesses or small business owners, again, passion is excellent. It's obviously important for starting a small business, but make sure you're taking care of your financial hygiene. That was just great.
The other thing that Russ thought that I thought was excellent was kind of laying out the life cycle of the different types of financing and activities that might be appropriate as your business evolves. He was talking about Kickstarter and other crowd funding platforms being relevant kind of earlier on and building your case for the banker or equity investor that might come in later.
GM Yeah, I used to think that banks would look at things like crowd-funding sites, even online lenders, and private stores like Staples and Walmart are extending loans. I used to think banks would be concerned about that. These are competitors, but in all honesty, it seems to me —and I was getting that impression from Jay as well — that they almost welcome it because Russ was saying it's like there's a certain level of financing that a start-up needs to get. Whether it's crowd funding or whether it's angel investing or whether it is from some online financer. But then they prove that they can pay the money back. They grow, they get to a certain maturity level, and then a traditional bank can step in. It's funny how that ecosystem is evolving. As you're a small business and you're a start-up, you don't necessarily have to go running to the bank right away. There are a lot of other alternatives sources and the banks encourage that because you can prove your mettle.
EÜ I think that what Jay was saying, too, that with banks it's all about timing and where the company is and how much of a revenue history you've got, but there are so many other forms of financing that might come in sooner. Although, as also he was pointing out, investors are going to want a lot more both in terms of the returns, but also how they're helping you manage. They might think they're helping you manage the company, you might think they're meddling, but equity investors do often want to have a seat on the board. They could be your biggest allies, or they could be the biggest pain in your behind. All kinds of things to take into account when considering your different financing options.
GM Totally agree.
EÜ That was a really great show. So glad to hear from Russ and Jay about some of the different considerations. I loved Jay's point also, that you need to make sure that you understand the terms of any financial relationship that you're getting into. I wish that we could say the same thing about personal relationships, but yeah, such great information there.
Stay tuned for future episodes of Xero Gravity. This is a topic that we will be returning to again. It's so important how you're getting money into your small business. Thanks again to Russ and Jay and thank you, Gene, for once again being my fabulous co-host. And we'll look forward to seeing you on the next episode of Xero Gravity.
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