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Tax Planning
Where has all the money gone?

With a call to action by our nation’s military, the federal government and nearly all the states for businesses and innovators to bring truly disruptive innovations to the forefront — where is the capital to support this call?

Our banks won’t even consider a business loan that in the past was simply a matter of standard banking procedure. Today, banks can’t get out of the shadows of their own fear — cash-flow lending has taken on a whole new level of excuse for saying no to traditional type loan requests.

Bankers blame the Feds for the lack of lending saying they now have such strict compliance requirements that most loans will not the meet the technical audit demands of the FDIC or other banking regulators. Yet, we hear and read in the media that the Feds are telling the banks they need to loan more money to businesses.

What happened to “relationship banking?” Those were the good ol’ days when your banker actually came to visit your business, got to know you and your partners and actually took an interest in how you operated your business. And by golly the banks made loans to Individuals based on their credibility, their business acumen, their honesty and integrity — their ability to operate their business under the toughest of circumstances, and trust existed that the loans would be repaid because the business owners gave their word.

Today, a borrower can have millions of dollars in equity in real estate, business assets such as inventory, equipment, receivables, etc., and operate a successful business. And this business — after the Great Repression that lead to the worst economic tsunami since the 1920s and ’30s — is still in business and surviving the daily challenges of this new normal. However, if it is determined that there is insufficient cash-flow to service the newly established debt… forget it, the answer to a request for that small nudge of support in the way of a business loan is a resounding no.

Before I go further, here is the conundrum. “Show us the cash,” says the banker (who has likely never run a business in his/her life) “or you can make a deposit in our bank in an amount equal to your request and we’ll loan you the funds you need back to you.” Yes, I know you have heard this one before and many who read this story will have a similar tale of the umbrella banker (referring to Mark Twain’s famous saying “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.”)

If we had the cash-flow why would we need the bank? If we had the cash why would we deposit it in the bank at a quarter-of-one-percent return on our deposit and turn around and pay 4, 5 or 6 percent or higher for lending our money back to us? What are banks for if not making loans? They sure don’t protect our money and they sure don’t pay the public a return on their deposits.

So what has happened and where is all the money? Banks are reporting millions to billions in profits, increasing and adding just about any type of fee they think than can get away with, but when it comes to supporting the business client that has been faithful for 20 years or more to a particular bank — they are asleep on the proverbial Blue Couch! They espouse false claims of serving their customers and helping businesses in the community. Really? Isn’t it about time these bankers handed back the umbrellas they put away and truly put their money where their advertising claims espouse and help support small business?

If small business — the creators of 75 percent of jobs in America — are going to answer the call for disruptive innovation, are going to create, design, invent and once again become the engine of imagination that built this great nation to what it is today and provide truly disruptive innovation — then those who can help need to quit telling the public they are helping when it is blatantly apparent they are not; oh, yes, the banks will tell us they are making loans but only to those businesses that have cash assets.

Lenders such as Craft3 and other government and state-supported institutions need to revamp their websites or come clean with the truth and facts about their lending practices. We are tired of the misrepresentations, the false advertising and the use of our tax dollars supporting these types of veiled Vulture Capitalists in Emperor’s Clothing. These nonprofit community development financial institutions (CDFI) are nothing more than glorified banks claiming to help support small businesses at what they assert are reasonable rates, low fees and lending mechanisms that differ from traditional lending. While not hard money lenders, some of these federal and state-supported institutions are not accountable for the terms of their loans nor the claims they outline on their websites and on the phone.

To bring innovations sitting in the R&D rooms and CAD development cubicles of thousands of small businesses (and small is less than 100 employees, not the 500 as defined by the Small Business Administration) our banks need to start lending. The FDIC, Federal Reserve and other regulators need to relax regulations and support other forms of collateral such as business and real estate assets, minimal cash-flows on the front end of loans, and broaden the acceptance of projected growth in cash-flows that can be generated from these loans to repay debt.

Small businesses can’t miraculously generate cash-flow without that initial spark — that match and igniter fuel called CASH — and then and only then can small business deliver on the call by our nation’s military and federal and state governments to bring to the forefront disruptive innovations.

The route of venture capital, angel investors, private equity groups or even the growing crowdfunding movement, all should be approached with caution. The ubiquitous TV show Shark Tank demonstrates just how vehement these sharks can be and how they can own you or leave you without your dream as they bargain to buy your company, pay you a small stipend of what you think your company is worth and leave you with a puny royalty; all the while glowing what a great deal you got!

These capital-raising methods have their place, but generally they are for more mature and second and tertiary funding levels where the innovations are commercialized and substantial growth and scaling the business is critical to reaching the next level of funding. This type of funding — often referred to as mezzanine funding — is definitely not for the faint of heart. Make sure you are not desperate and have good legal counsel, CPA advisors or financial consultants… they aren’t called sharks because they are nice guys!

In today’s market these alternate funding methods are hurting small innovators rather than helping them. The Sharks, PEG’s and Angels and hard money lenders know how desperate some innovators are and will take advantage of the situation. It’s easy prey as these dreamers are so anxious to see their innovations make it to market that they are willing to just about give away their firstborn to succeed and obtain funding. I personally abhor these vulture culprits as they are borne of an ugly time in our economy. In the past these alternative funders played an important if not critical role in the funding mechanism, but today many — and not the vast majority — have come out from under the proverbial rocks where they were hiding to take advantage of many budding entrepreneurs who will never see the fruits of their inventiveness and creativity.

In closing this story I will do so with a short story: Standing around a barrel filled with paper and wood are a dozen cold, hungry and desperate individuals. Most of these are our neighbors, former employees that worked alongside us, fathers and mothers, maybe one of their children, a former executive or two — maybe a CEO who lost his or her company, a small business owner or two who saw their dreams interrupted by something they even today don’t fully understand; people just like you and me. But now they are cold and hungry and are willing to part with their last dollar, quarter or dime if someone would just light that fire, ignite that barrel of paper and wood and create a sense of hope so maybe these individuals can find the solace and warmth they once knew.

Just think… if I had that match and some igniter fuel I could light that fire of hope and create jobs for many of those individuals who are out of work, out of money and clearly see little warmth ahead. That match and igniter fuel is cash and it is desperately needed to fund innovation. So Uncle Sam, it’s time to stop with the excuses, motivate the banks to loan for innovation and at loan rates and terms that allow for success. And to the military… if you want us to lay down our lives for our country, we do that each and every day in the risks we take to employ our veterans, military spouses, our neighbors and their children, but if you truly are calling for disruptive innovation then break down the barriers to funding and moving innovation to the branches of our military. To the banks, get out of your shadows and the fear of lending and once again look to your loyal customers who stood with your bank in times of inclement weather and never pulled their umbrellas… for these creative individuals their rain is in the word no; a word none of these individuals can comprehend.

It’s time to allow the sun to shine once again on innovation and inventive small businesses, and to ignite the fires of creativity that bring about true disruptive technologies. We can’t all be Apple’s or Google’s or Mr. Softy’s on the front end; but I’ll venture to bet that there are dozens of these types of entrepreneurs right next door… will you please open the door?

Rick Flaherty is president and CEO of Leader International Corp. and Differential Energy Global Ltd. He is a serial entrepreneur and innovator, and holds dozens of patents on products used around the globe.

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