Budget Your Business

The Credit Line for Your Growth Story with Paul Mehring

• Scott Geller • Season 1 • Episode 29

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In this episode, I talk with Paul Mehring about when — and when not — to use a line of credit. Paul breaks down the differences between bank and non-bank lending, term loans vs. credit lines, and why using debt to fund losses is a red flag. We dig into what lenders really want to see: solid financials, realistic forecasts, and a plan for growth. If you’re in staffing or a high-growth business, Paul explains how the right lender can be a partner — not just a bank balance. 

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Speaker 1:

What's the uses of our capital and is it to grow your business and can you make incremental profits that exceed whatever interest expense you would incur by our credit facility, and really that's the win-win situation and that should be every small business's objective. Now I'm not going to say it happens all the time, but that should be your objective.

Speaker 2:

Welcome to Budget your Business, the podcast for small business owners who want to learn how to financially plan for every aspect of their business. I'm your host, scott Geller. Today. I'm joined by Paul Merring of Access Capital to talk about finding liquidity and funding for small businesses.

Speaker 1:

Hello Paul hey Scott. How are you today?

Speaker 2:

I'm doing great. Thanks for joining me today.

Speaker 1:

Appreciate it. Thanks for having me.

Speaker 2:

Now, paul, you've been with Access Capital for well, let's just say, a few years Now. I don't believe you were there at the beginning, but pretty darn close, it seems like. Why did you join Access Capital and get into the credit business?

Speaker 1:

Yeah, no, you're right, I haven't been here since day one. Access Capital is approaching their 40th year of business. We were formed in 1986, and I had the pleasure of joining the firm in 1990. And I had come from the banking world and I just found going to a entrepreneurial non-bank lender allowed a lot more opportunities to support small businesses, whereby sometimes banks, due to their regulatory nature, are somewhat limited in supporting small businesses.

Speaker 2:

who'd like to grow. Okay, and I agree. Look, I started as a bank examiner and I really love that small, especially smaller community banks, but at the same time, they absolutely have some limitations put around them, so we'll probably get into that a little bit more. What's your role with the organization today, paul?

Speaker 1:

I am president and chief lending officer and I oversee all our new business development with our business development officers, as well as our underwriting team, who works hand in hand with our business development officers in looking at new opportunities to assist potential clients with their financing needs. Then I do maintain certain meaningful relationships with some of our clients once we've onboarded them and continue working with them.

Speaker 2:

So you mentioned funding needs, and that's really where I want to focus on today. Let's just start with what does that mean? What are, in your eyes, what are funding needs?

Speaker 1:

Our principal product is a line of credit, and I think that is, generally speaking, the type of product most businesses look for with regard to securing funding for their business. And a line of credit is a revolving line of credit that small businesses can borrow against and repay at their discretion. There typically has some maturity on it that at the end of the maturity whether that's two years, three years or longer the borrower and the lender would cut together. Two years, three years or longer, the borrower and the lender would cut together, determine if there's a renewal in place. But it gives the small business the latitude to really borrow and repay at its discretion.

Speaker 2:

Okay, and you mentioned that banks also offer a line of credits, right. So how is this different than going to a bank and getting a lot of credit?

Speaker 1:

I think the principal difference is when a non-bank might as you pointed out, being a bank examiner at one point. I mean clearly banks are going to be the cheapest source of capital and I would recommend any small business owner to first go to their bank whoever they work with on treasury and their bank accounts with to determine first if that bank can support what your needs are. If they can and the terms are, you know, attractive to you. That's typically the first source, maybe the best source of funding for a small business, but there's a lot of other alternatives depending on what a small business might be looking for.

Speaker 1:

As we said, banks might not have the most latitude and flexibility on certain terms. They might not like the high growth that some businesses are experiencing and don't like certain volatility that certain businesses might have, whether it's a seasonal business or there's certain economic implications that are impacting that small business, you'll find that that, albeit a bank might be the cheapest source, they might not have the same type of flexibility as a non-bank and us, being a non-bank, we're able to make different decisions. That we're not having regulators looking over our shoulders to ensure that we're complying with regulatory guidelines. That doesn't mean that us or any other non-bank lender is reckless in doing anything crazy. It's just a different approach to lending than in a traditional banking environment.

Speaker 2:

Okay, and you touched on lines of credit, what are some other sources that are out there that you see that could be options outside of just lines of credit?

Speaker 1:

Another product is a term loan. So typically a line of credit is something a small business will use to operate their business day to day, whether that's making payroll, buying inventory if you're in a manufacturing business, a wholesale distribution. So it really is a tool to supplement cash flow between the time you have to pay your people or pay suppliers and when you might get paid from your customers. A term loan typically can be used for different things. Typically it would be used to maybe make an acquisition, where you're buying an asset and want to repay over a longer period of time based on cash flow. It could be to buy equipment or buy real estate. So a term loan provides you a more fixed financing for a longer period of time that you repay over time, as opposed to borrowing and repaying with regard to a line of credit or a revolver.

Speaker 2:

Gotcha and with a line of credit, and you may have kind of already just answered this, but you gave some really good examples of what you should use a line of credit for. Sometimes it's almost just as important to know what not to use something for. So could you give us a couple of examples of if I'm a business owner?

Speaker 1:

what should I not be using a line of credit for? I would not use a line of credit for, perhaps, loans to third parties or distributions. If the line of credit is creating more of a hamstrung to your business as far as debt goes, then using that line of credit is not advantageous. Some people look at debt as a bad thing. I think it really is a byproduct of what are you using that for? Is it for growth? Is it really just cash flowing, the delta between disbursements to operate your business and cash receipts? But if a lot of credit's being used, or any debt, to fund losses or things like that, then the question is is it temporary? What do you see on the horizon that's going to change losses to profits? Otherwise, that line of credit could contribute to the problems that you might be experiencing as a small business.

Speaker 2:

Very good point, Paul, and I like that approach or that statement you say is that if you're using the line of credit to kind of supplement losses and make the business look better cashflow-wise, it's not a long-term fix right. There's an underlying problem within the organization and if debt's being used in the right purpose, then it can absolutely help a business, especially a growing business.

Speaker 1:

Correct, correct. I mean. Every small business goes through certain challenging times, and if that line of credit helps support some challenging times, it's a matter of planning properly as to what do you see on the horizon that's going to make things better, whereby that line of credit is supporting positive things rather than supporting negative things.

Speaker 2:

So if I'm going through as a business owner, if I'm going through a planning process, how should I think about using debt versus cash in the business and maybe even throw in different? You talk about the different forms, but how should I think about a line of credit in the planning process for a business?

Speaker 1:

Well, look at where your business is going and does it need outside capital to execute on your plan.

Speaker 1:

If you don't need outside capital and you can execute on your plan with your own liquidity, then go that route. If, in doing your business plan and your forecast each year, or twice a year, I think once a year is at a minimum, but at a minimum, you know, resetting your forecast in the middle of the year, based on actuals for the first half of the year, is a more prudent approach. But by looking at whether or not you're going to need some outside capital to support that plan, well then go out and seek it. You know those are cases where lines of credit and debt are a good thing. Rather than look at what debt may cost, we're big advocates of looking at where can you make money on somebody else's money and if you can capitalize on certain levels of debt, then those are positive features, gotcha, and when you say capitalize on using the debt and tell me if I'm reframing this differently, but it's basically are you making more on that debt than you're paying for, right, correct?

Speaker 1:

And that's an exercise. We proactively work with our clients to say, okay, what's the uses of our capital and is it to grow your business, and can you make incremental profits that exceed whatever interest expense you would incur by our credit facility? And really that's the win-win situation and that should be every small business's objective. Now, I'm not going to say it happens all the time, but that should be your objective, okay.

Speaker 2:

Well, since you start going that path, paul, could you maybe walk us through a process of like if I'm in business, what do I do Like, what should I be thinking about? Or, you know, if I come to you, what does the process look like to get on it?

Speaker 1:

The process is an initial meeting to learn about our prospective client's business. We happen to specialize in staffing of workforce management. And going back to the process of a small business seeking out financing, I do think it's a very good idea to endeavor to find a lender, whether it be a bank or non-bank, who might have a specialty niche in your industry. To the extent you don't have to teach your lender your business, we think that's a win-win and a long-term solution. But with regard to us, it's meeting our prospect, understand as much as we can about their business and obviously look at the history. But what's their strategic goals? Where are they looking to go, what are they looking to accomplish and then see how we can structure something that will suit their objectives. And there's a process of reviewing financials and forecasts and meeting management team to ensure that it's somebody in a firm that we feel we can offer and partner with and offer a long-term solution to offer and partner with and offer a long-term solution.

Speaker 2:

You threw out a couple of pieces there that I don't know if every business has, and to me it's. Do you have financials? Do you have a forecast? What should I, if I'm looking at going down this process, how should I be as a business owner? How should I be preparing for that initial conversation? Get?

Speaker 1:

your house in order. Have good financial professionals like yourself, scott, whether that's an external person or an internal person, or even yourself, if you're the small business owner and you have the capabilities to do the accounting as well. Whenever you have good, solid accounting, no matter who that lender is, whether it be a bank or a non-bank, the outcome is going to be better. So maintaining accurate books and records and financial statements is the beginning of the first step, and whatever planning you can provide with regard to forecasting is another important tool for us, or any lender, in evaluating a potential borrower. So plan, plan and plan.

Speaker 2:

And could you be a little more specific around you know what does a forecast mean, Like, what are you specifically looking for in a forecast?

Speaker 1:

So, starting with a profit and loss income statement forecast. Yeah, you'd like to see a multi-year forecast, but for us the first, the next 12 months, is really the most critical. Beyond that I think forecasting starts to lose a little bit of its reliance. But doing a multi-year forecast, I think, is good for any business and any lender-barring relationship, just so both parties have a sense for where do we think this business can potentially go or is going. But the next 12 months is typically a more critical time to have a forecasting. We like to see it by month over the next 12 months. And then, in addition to just the P&L, I think the next critical item is a cash flow forecast, because that really brings into the equation how much capital does a small business need outside of its own operating purposes, leading to that credit facility or a borrowing arrangement?

Speaker 2:

Gotcha, and you're speaking my language there. I like to see all those as companies and kind of help them prepare those as well, so that's great. How complicated does this need to be? Can it be kind of somewhat loose, or does it have to be a full financial model built by an external accounting team? What do you see?

Speaker 1:

I think it can be as simple or as complicated as your business and also the size of the business. Smaller businesses, I think, are going to have less complications and less detailed forecasts. As you get into larger businesses that have longer history might have a lot more volatility, a lot of things going on. A more detailed forecast is probably more warranted, but a small, medium-sized business can keep it rather simple and not overdo it in order to tell their story Okay simple and not overdo it in order to tell their story.

Speaker 2:

Okay, and once we thank you, Paul, once we get this up and running, how often what is typically required? A lot of times there's certain protocols or requirements to maintain, to keep it open. Do you have any kind of standard requirements along those lines?

Speaker 1:

I think it's. You know I can speak to ours, but I think every lender is a little bit different. With us, our clients tend to be higher growth companies, which is why they might turn to us, as opposed to a bank who might not be as interested in scaling the credit facility as timely as other companies are looking for that are looking to grow. So our check-ins with our clients are fairly frequent. It might be monthly, but no infrequent, no less frequent than quarterly, when, with banks, where it might just be a stable line of credit that doesn't have any changes or needs over the course of a year, their check-ins might be semi-annual or even annual in some cases. So we value ourselves as a non-equity partner because we're not equity, we're financing partner and to be as available to our clients for discussions on what's going on with their business strategically, because those high growth companies will tend to change rather quickly versus others.

Speaker 2:

And if I'm reading between the lines here a little bit, paul, are you changing the amount of that line of credit over time as the business changes, are you?

Speaker 1:

Yeah, that's one of the things we proactively do and typically with growth firms, they're going to consume capital and even though their debt requirements are growing, we're hopeful it's growing for positive reasons because their revenues are growing. So those meetings and dialogues are about what is your line needs over the next three months, six months, 12 months, so that we can plan together and scale that in order to support that growth.

Speaker 2:

Got it. You mentioned one point or a few times that you focus in the staffing space specifically. So why do you see lines of credit so important in the staffing space, or why are you specific in that industry?

Speaker 1:

Well, we pivoted to focus on staffing about 25 years ago. We like the space, we like the vertical, like the vertical. We found that those businesses with good management teams, good business models, can really scale with the right capital structure and we felt they were being underserved with dependable financing because their primary need for capital is for payroll, and payroll is such an important part of a business. It's not like a supplier who's supplying you product that you can pay next week or two weeks. Payroll needs to be paid every week and we wanted to build ourselves as a committed, dependable partner in that space that staffing firms could rely on for such a critical component of their business as payroll.

Speaker 2:

Okay, and Paul, I know another very common form of liquidity in staffing is factoring, invoice factoring on that side of the house. Do you provide both or do you kind of have a reference or maybe compare how those two can benefit, correct?

Speaker 1:

Yeah, no, we don't provide factoring Technically. What we're providing is asset-based lending, which we're providing a line of credit against our client's accounts receivable. A factor, similarly, is using or looking at a company's receivables as a source to give that money capital. But what they're doing is they're buying a receivable from the small business operator and giving that money up front and then they turn to the small business's customer to get repaid. So it's a difference between buying an asset and lending on an asset. Factoring tends to be more expensive than lending and they're more involved from a customer connection with regard to the small business owner, where we don't get involved or banks don't get involved in that level of detail with regard to the staffing company and its customers.

Speaker 2:

So, as a line of credit provider, you're kind of staying in the background letting the staffing company handle the clients and you're really providing the funding so they can continue growing. That's correct, okay, great. So, paul, do you have any horror stories or really huge success stories or kind of lessons learned that you'd be willing to share? So let's start with success. They're much more fun. Yes, they are.

Speaker 1:

And thankfully we have many more success stories than horror stories.

Speaker 1:

Our success stories is really it's up to the business owner and if we're able to support what their strategic plan is and what their long-term plan for the life of their business whether that's a liquidity event, selling to a private equity group, selling to another strategic operator we feel we fulfilled our portion of the business, of the relationship. And if we supported that business from the beginning to the point where they felt it was time to have some other opportunity, then that's a success story for us. I guess a horror story really is if a business just doesn't make it for whatever reason. Thankfully in my 30 years at Axis Capital I can't really think of any. But that would be a horror story that ultimately a small business operator just couldn't make the business work anymore and either shut the business down or did a distress sale to another party. So there may have been one or two of those over the last 30 years but those are not a good situation. But not every business is going to succeed. That's just the nature of small business and the data supports that.

Speaker 2:

You're right, paul, and I'm glad to hear that it's been more of the rarity. That probably says something around your credit process as well. Well, paul, thanks for walking through. It's been really interesting to hear how you approach the line of credit, how that can help businesses, and I really appreciate that. As we like to wrap up these shows, we always ask for one to three immediate takeaways that a listener could literally walk away from the podcast and put into place. It could be something you already mentioned on the show, or maybe how you run access capital, but just anything in general you might be willing to share with us.

Speaker 1:

So just from a budgeting perspective. I think it's very important we touched on this earlier cash flow, because that's really the lifeblood of any business. You know, a lot of times small businesses will do a profit and loss income statement budget but it doesn't really tell you how your cash flow is. Tell you how your cash flow is and, to the extent you know, a small business or their professionals can assist in doing a cash flow forecast. I think that's the most critical as it relates to avoiding any significant problems that could interrupt a business operations.

Speaker 1:

The next item is you know as we're doing forecasting, taking a conservative approach. Item is you know as we're doing forecasting. Taking a conservative approach, we feel is always you know the best way to handle forecasts and I would sensitize revenue. But when I say sensitize, whatever you think your revenue is going to be for the next 12 months, sensitize it down, adjust it down by some, whether it be 10% or 20%, and then whatever you think your operating expenses are going to be for the next 12 months, that's and ties them up. So this way we're taking the most conservative approach by reducing your forecasted revenue and increasing your forecasting expenses and if you still are going to be profitable under those forms of sensitization, then hopefully the outcome of actuals will outperform what you have as a forecast. So I just think the takeaway is to be as conservative as possible under forecasting and also to ensure that you forecast your cash flow over and above your income statement.

Speaker 2:

I couldn't agree more, paul. Thank you for this. Our other last question is do you have a good book or podcast, or favorite podcast, you'd like to share?

Speaker 1:

So I don't have a favorite podcast, but a recent book I read that really hit home for me and I think every small business owner should read. It is Traction by Gina Wickham and this, as you probably know, just talks about challenges that businesses have in executing their strategy, perhaps growing their business and it goes into various operating metrics as to what you can do to have your business operate more efficiently.

Speaker 2:

Yeah, Paul, that's been mentioned a couple of times and I don't think it can be mentioned enough, so that's a great, great one to include. Well, as we wrap up, Paul, this has been great. Where can people find out more about you?

Speaker 1:

Access Capital. Go on our website and reach out to us If you have any questions. We'd be happy to assist you, and we take a very, very consultative approach to our position in the lending community. Our objective is to assist small businesses without regard to our ability to work with them, but if we can offer our experiences and advice to small businesses, that's our real, that's our.

Speaker 2:

Got it Well, perfect. Thank you for joining me today, Paul.

Speaker 1:

Scott, thanks for having me Really appreciate it.

Speaker 2:

All right, folks, that's it for today. If you found something you like or found something useful, text somebody and recommend that they take a listen to the podcast. I'm Scott Geller and I hope you join me next time for Budget your Business.