Kruze Consulting on SBA Loans & Alternative Funding Sources

Scott Orn & Healy Jones of Kruze Consulting - Podcast Transcript

Scott:	Hey it’s Scott Orn of Kruze Consulting and welcome to another episode of Founders & Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely, but guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services and their computer. Which sounds like not a huge deal, but actually we did the study at Kruze. We spent $420 on average just getting a new employee’s computer up and running and their web service up and running. It’s actually a really big deal. Saves a lot of money. And the dogs are eating the dog food. Like we see a lot of startups coming in, to Kruze is now using Rippling, so please check out Rippling. Great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words. But we’re seeing them take market share so shout out to Rippling. And now to another awesome podcast at Kruze Consulting’s Founders & Friends. Thanks.
Singer:	So, when your troubles are mounting in tax or accounting, you go to Kruze, Founders and Friends. It’s Kruze Consulting, Founders & Friends with your host, Scott Orn.
Scott:	Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting and I have a very special guest today, Healy Jones, head of FP&A at Kruze Consulting. Welcome Healy.
Healy:	Thanks Scott.
Scott:	Now today we’re doing a quick hit podcast. We’re going to do a few of these because it is COVID-19 crisis time and luckily both of our families are home safe and the Kruze family is home and safe and no one has come down with it yet. But we have a ton of founders who are asking us questions. Fresno, we have 225 clients and so we’re getting just a flood of emails. And so, we thought we’d just get on the podcast, actually and talk about the stuff we’re telling our founders and more people would be able to hear it and benefit from it. So, one question we’re getting a ton of is what are some alternative funding sources for startups right now? Like everyone knows venture capital equity and it’s been flowing pontifically for many years, but what are some alternatives right now? Healy? Any ideas?
Healy:	Yeah, I mean I think it’s really important just to remember that venture backed and seed back startups are not like standard small businesses. Standard small businesses have access to banks. And now there’s a lot of talk around the SBA and Congress doing stuff to help small businesses. And those are generally geared toward traditional small businesses - mom and pop, small manufacturing companies, small services companies, et cetera. So, when you’re a startup founder and you’ve raised funding, you have to think pretty broadly, right? And so, Scott and I have been talking with our founders and we got what we’ve come up with basically like six different sources of funding for startups right now.
Scott:	Yep. And I always like the… Let’s roll through them really quick and then we’ll come back to them and cover them in detail. But the first one I always like to start off with, this is your customers and it seems like a no-brainer but your customers are your best funding source because they’re already consuming what you’re doing. They give you money already, so that’s a great funding source. It’s not traditional but they can give you money to help fund the business. The next one is bridge financing from existing investors. That’s where you go back to your VCs and ask for kind of an in between round. It’s not fun to do. The VCs don’t like it either, but it’s something that venture capitalists do. So, you as a startup should explore that. The third one is traditional venture debt. So, like I used to do this before I joined Kruze Consulting, I did it for nine years. But like SVB, Bridge bank, [Comerica 00:03:45], WTI, Triple Point, those firms do loans to startups. They’re used to lending money to companies that are losing money and so they’re a fabulous source. I know they’re getting flooded right now, but you should definitely reach out to them. And then another source that’s a debt source but a little different is what we call revenue loans. So, Ladder Capital does this where they give you an advance but they actually get paid back over time by taking a percentage of your revenue out every month. So that’s why it’s tied to revenue. Number five is a riskier one. And we suggest this with a lot of caveats, which is an SBA loan. Now the problem SBA loans is they typically have a personal guarantee and founders should be incredibly careful. I don’t recommend they give a personal guarantee on their startups. But in very select cases, like if you’re cashflow positive and you own a big portion of it, then it might make sense. Again, tons of caveats on that one but it’s something that you can think about. And finally, there’s a ton of government programs, you know R&D tax credits. You can save up to $250,000 a year on payroll taxes. There’re also some payroll taxes that have come out with COVID-19, where the government will compensate you for workers who have had the call in sick, which is fabulous. Then there’s a bunch of SBA stuff going on right now where potentially in… And we’re taping this before the Senate and House have joined up and pass the bill. But that could actually be a supplement to small businesses and startups for employee payrolls’ expenses. And they’re thinking about taking out the personal guarantee, which would be just humongous for the startup ecosystem. Now there’s a lot to be decided there. And there’s a lot of main parts. So, if you listen to this podcast for a couple of days and that’s not happening, it’s very likely it may not happen, but something for you to keep your eye on. Those are the six reasons. Anything to add on that Healey?
Healy:	No, I mean I think those are the ones that we’ve been helping our clients with recently. And I think you did a nice, pretty good overview there, Scott. That might be the whole thing. You might have wrapped this up.
Scott:	Yeah. Well let’s get into the… We’ll go really quick on the little, one on just a little bit more detail.
Healy:	Okay.
Scott:	So, for customers…
Healy:	So, I’ve been working with one of our clients who has… It’s an enterprise client, and they’re enterprised focused sales. So, they do big sales to a small number of companies and one of their big clients is excited about their offering and is willing to prepay and pay pretty quickly for a pretty big order. And so that is actually impactful to them from a cash flow perspective. And we have been talking or helping them model out how much of a discount they feel like they can offer there based on how quickly this customer’s willing to pay. But the math is penciling to be pretty accretive for this business’ cash flow because it puts a slug of cash in that keeps their balance sheet at a not ulcer inducing level. For a period of time until the other customers who are paying on a more regular basis are expected to put their cash [crosstalk 00:07:01]-
Scott:	And if I can just jump on that one, Healy, one thing you can do is redesign your comp structure for sales teams, especially enterprise. To capture that stuff, the money upfront. Like if you give a salesperson a little bit higher commission for money paid up front, I’ve seen this done so many times in my career. It’s actually really powerful. Salespeople tend to be motivated by commission levels and so they will work very hard to get that money up front, which is again, super cheap financing for you. So, I’m a huge… This is like the number one reason I or number one way I listed is because it’s my favorite. It doesn’t cost you any equity. There’s no debt and all you’re doing is making the pie a little bit sweeter for your customers and they’re really helping you out by paying in advance.
Healy:	And so, it is your best alternative, however, for everybody who’s running a startup right now that’s selling to consumers or that’s pre-revenue or that has end customers who are impacted because they’re in industries that are really badly hurt right now, are probably shaking their heads and saying, You know what, that doesn’t help me.” So, talk about the next place where we’ve been pretty successful working with clients recently, which is going to your existing investors and getting a bridge loan. So, we’ve definitely seen this work really well recently. It tends to be our strongest clients that are able to do it. So, companies that are showing a lot of promise and had been growing well up until this crisis, but the right venture capitalists, it’s their job to step up and help companies in tough times. When I was a VC during the financial crisis in 2008 we essentially ranked our portfolio and then attempted to use that to decide where we were deploying, what capital we had left to try to help our existing clients. So, your goal as a startup needs to be at the top of that list. You want to be the most interesting, exciting company. So, you want to go to your investor with a plan to weather the storm and then get back to high growth. That’s really the best way to do it, is to make sure that they’re still… Understands that the vision is still strong. Understands the numbers behind how you might do some cost cutting, near term. And then understands how the growth’s going to kick in after we get through this crisis and that you’ll still be the massive company with a hundred plus million in revenue and so many [inaudible 00:09:16].
Scott:	Yeah. And I think you’re really asking… It’s a pretty big favor to ask of your VCs because they got to go to their partnership and present the company again and present traction and get buy off from the other people in the partnership. But they know the company, venture capitalists are used to supporting their companies, especially in tough times. They know this is expected of them. Sometimes you’re going to have to give up some warrants on the bridge loan or you’re going to have to do liquidation preference or you know. It’s not going to be an up round in between rounds but they will usually give you the money. So, they’re the number two option that you should be checking out. Number three, we covered this a little bit but traditional venture debt, and I named all the firms earlier. These are typically debt deals, three-year amortization periods, six to 12 months interest only, interest rates plus equity warrants attached to that. I think one mistake that’s been made is only doing venture debt. If your company’s doing well and you can see your milestones and you have a good ability to hit those milestones. It’s not a good instrument for companies that are really struggling because what ends up happening is the debt just compounds the problems. And lenders are pretty good at kind of smelling that stuff out and avoiding those deals. But there’s things like investor abandonment clauses, [inaudible] verse change clauses, things like that that make it so that if you’re not performing, they can claw the money back. And so, if you get them into your company and maybe did too good of a sales job on them, they have recourse. They cannot fund you. They can call loans, things like that. So just be careful. It’s an amazing tool. If your company’s doing well, and again, you’re going to hit your milestones. But I just need an extra, a little bit extra cash in this tough time. It’s not a good one if the company is not doing well. You agree, Healy?
Healy:	Yeah, I strongly agree. And I think that the sad fact is that the companies that were already struggling to hit their numbers and to get to MVP or to grow revenue prior to this crisis. I don’t think there are magical bullets out there to suddenly help them. And so, it’s difficult as a founder but you have to be pretty dispassionate and think hard about where you are in your business plan and your growth because [inaudible] not the only source you want to try to take on when you’re not doing well for fundamental business reasons, as opposed to macro pandemic [inaudible 00:11:47].
Scott:	Yeah. And it doesn’t mean give up like figure it out. But the figure it mode is best done on equity dollars because that’s kind of risk seeking dollars. Those are people who are putting in money, expecting a big return. They know they’re taking a lot of risk. Lenders are used to taking less risks for a low return. That’s just the tradeoff they make in life and in business. So, hope that helps [inaudible 00:12:09]. The next one was revenue loans. Like Ladder Capital, and I think I explained this pretty well, but it’s just they give you $500,000, $1,000, a million, $2 million and it’s paid back over 20 to 36 months with a percentage of your revenue. And if your revenue goes down, the percentage goes up. If your revenue is growing very nicely, they’ll scale it back a little bit because they want to keep the money outstanding to a good company. So that’s an option. They don’t take equity, which is nice. So, it’s not… To me giving up equity to a lender isn’t that big of a deal because you’re giving them some upside in aligning yourselves. But the nice thing about Ladders, they’re not even asking for that. The SBA loans, I wouldn’t cover quickly, again, this is a super moving target. But there’s some, some things in the Senate and in Congress that the NVCA is lobbying very hard to get personal guarantees out of this crisis, SBA funding. The loans that are coming out in the crisis. And we’ll see if they can do it. If they can do that, that’s amazing for startups. If your startup is required to do a person… If the CEO or founders required a personal guarantee, I would shy away from that because startups lose a lot of money. The success rate isn’t super high and I just don’t want the founders to sacrifice their good health, their personal financial good health and compound a problem. So be super careful about that. But we’ll see. The SBA may get rid of the personal guarantee and the rumors are that they’re going to offer one to two months of salary supplements for people in your company. So, it could be a nice little boom. Anything to add there, Healy?
Healy:	Yeah, I mean, so again, we’re recording this in the middle of the day on March 25th so the legislation isn’t finished yet. But it seems like there may be some sort of a forgivable loan where if you keep your head count or salary, it’s not entirely clear yet. To keep that constant over a certain period of time, the loan might actually be forgiven, which means it’s more or less free money. And again, that’s the government trying to keep business in business during this crisis. That’s them injecting capital into small businesses and if the language is right into startups. So, to the extent that that is what the legislation ends up being and hopefully we’ll know for real by the end of the day today. So, by the time this podcast goes out that the ink might actually be dry. But if there is a forgivable loan that is pretty short duration, that could be a capital injection into your business with the personal guarantee, hopefully only lasting for that short period of time, that the loan is outstanding. But again, we won’t know until this legislation is actually done and we really get a chance to look at and see what they’re attempting to do with it.
Scott:	And then the final option is just, it’s basically grant money from the federal government and state governments. But the R&D tax credit, I think we did four and a half million of these dollars last year. Think we’re going to be five, five and a half million this year. This is something that’s available to every startup that’s paying payroll and is doing true R&D. It’s almost by definition almost all startups that venture back. So, check this out, you can save up $250,000 on payroll taxes. It’s a really big deal. We’ve got an online calculator. You can just type in Kruze tax calculator. Kruze already has a tax calculator, and it’ll take you right to it. And then payroll taxes, payroll tax credits for sick workers. And this is something, again, we’ve been super fortunate that our team is healthy and that’s the most important thing out of all this. But if people on your team start getting sick from COVID then you can actually get reimbursed for that sick leave. It’s up to $500 a day, but that adds up. If you have a couple of people who have to spend some time out of the office, that can be a meaningful amount of money for you. So definitely check out those programs.
Healy:	Great. Yeah. And again, those programs seem like they’re still being written as we’re recording this, so hopefully what comes out the other end is something that can help small businesses and startups. So, we’ll see. We’re going to pay very close attention there so we can help our clients.
Scott:	That’s it. Those are the six ways for alternative funding for your startup. And again, my personal favorite is customers. Go back to your customers and see if you can work out some sweetheart deals and it’ll really pay dividends. Haley, thanks so much. If people, Haley, where can they reach out to you if they want to do a P&A, or budget actuals?
Healy:	Yeah, I mean the best way is just to go to Kruze Consulting and I see all the people that fill out the form there. So, if you say you’re looking for help with your projections or understanding what your cash flow is going to be over the next few months, that gets right to me. So, please come to Kruze Consulting and I’m happy to chat with you.
Scott:	Awesome. And then before we go, quick shout out to our sponsor Rippling, which is a phenomenal payroll service benefit service. And they also have an integrated IT service where they basically are able to launch all your new employees into their web services. Set it up automatically when they first join the company. I know we spend like three hours every time we hire a new person setting that stuff up. It really adds up. It’s about 500 bucks of expense. So rippling.com is one of our favorite payroll services and certainly the most advanced technologically. Especially when you’re in a hiring mode and adding a bunch of people. So, check out Rippling, phenomenal service there. Thanks for listening to our alternative funding sources podcast. Appreciate it. Bye.
Singer:	So, when your troubles are mounting in tax or accounting, you go to Kruze, Founders and Friends. It’s Kruze Consulting, Founders & Friends with your host, Scott Orn.

Kruze Consulting discusses SBA loans and alternative funding sources for VC backed companies

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