Starting a Business Now Is Difficult at Best. Navigating the Business Through Factors Inflicted By Others Is Terrifying!

by Dean Prigelmeier, President of Proactive Technologies, Inc^®.

Entrepreneurism still holds a dream-like status for nearly everyone at one time or another. When we are young with fewer commitments and responsibilities, we are tempted to take the leap. A few do and land at the right moment with the right venture, resources, strategy and financial system balance. Many do and find they were ill-prepared for the wicked ride it can become. Some excellent ideas brought forward by brilliant people time the economic booms and crashes wrong, encounter hidden but insurmountable barriers and the inconvenient discovery that what  college textbooks preached about business financing and investors just waiting for their business plan were never there to begin with. Their desperate moves to navigate this “quicksand” leave many swallowed up and never heard from again.

The barriers to a small business’ operation and growth are increasing proportionally to deregulation and misguided economic policy, and outlined pretty well in another Proactive Technologies Report article “If They Haven’t Already, Local and State Econ Development Should Diversify Focus to Emphasize SMBs and Entrepreneurs.” Take, for example, the simple notion of an established small business financing itself to weather economic turmoil created by others. Legislation that started the movement of bigger and bigger banks to buy up local banks and move money from community banks to coasts(Silicon Valley and Wall Street) began in the early 1990’s. It has continued to the point of worsened prospects and dampened spirits for entrepreneurs and small businesses who always start local.

Evidence of this migration of lending capital started with the emergence of “invoice factoring” companies in the early 1990’s. The financing terms then were so onerous that they wouldn’t exist if traditional business banking was an option. A factorer was willing to lend up 50% of the face value of an invoice and charge interest on 100% of the face value. Worse yet was the fact that the factorer would tell you if they were willing to lend against the invoice after you completed the work and invoiced. In the 1990’s and to some degree today, the business would have to contract for the work, perform the work with their own funds and wait sometimes up to 6 months to get paid. The factorer would then contact your client to validate your invoice and to have the client agree to pay them directly. The facturer, also, wanted access to the business’ checking account to collect interest monthly, sometimes daily. If the business was having problems collecting on invoices then, they now risked having the full value of the invoice eaten by interest and fees. Plus the heavy- handed collection tactics might make sure the business no longer had that client. At a minimum, this relationship left the client with the overwhelming impression that the business was insolvent, not just suffering from lack of proper invoice lending in a world when the accounting industry was encouraging industry member’s accountants to “slow-pay” vendors to extend their own cash flow – even though they had access to capital and financing! Factoring – was and still in use today – like “pay day” loans to individuals, but on steroids and much more destructive.

Two revealing stories (probably out of millions) recently told in an NPR report illustrate the insidiousness of the mistreatment of small businesses when it comes to access to financing and capital.

Today, small businesses caught up in the tariff turmoil are finding themselves desperate to cover the costs of tariffs to get there goods off the US Customs dock or order necessary materials from out-of-country suppliers. Many turn to “merchant cash advances” which are usually processed faster. As explained in the article, “Merchant cash advances are not loans. They’re kind of their own thing. But some experts compare them to, like, payday loans, except for businesses. They offer extreme amounts of money – hundreds of thousands of dollars, tens of thousands of dollars – very fast in exchange for a cut of sales. It’s an unregulated, very shadowy world of financiers. And you could get a merchant cash advance from Amazon-affiliated or Amazon-backed provider, or it could be like a Wall Street firm. It’s a really chaotic, really large industry.”

In the story, Josua Esnard’s experience is typical and shows the true horror of the merchant cash advance process. “Many small businesses do have a line of credit with a bank. Many really small businesses run out of personal credit cards. Like, it’s just me and my credit card buying my supplies and selling stuff on Etsy or whatever. But for a lot of people, traditional banks and traditional lenders are simply not an option. I’ve talked to, at this point, close to a dozen people who ended up taking merchant cash advances, who did try to get a loan from a bank and got turned down. They went to a credit union, got turned down. A lot of it is first-time business owners, really young businesses that just don’t have kind of a history, and a lot of immigrant-started businesses end up in merchant cash advances.”

“And the wild thing about this is because merchant cash advances are not loans, lending laws mostly don’t apply to them, so they don’t have to be licensed lenders. The money that they give you comes really fast, but they take payments daily or weekly straight from your bank account. And the fees they can charge legally don’t have a cap.”

“He [Esnard] took three cash advances for a total of $950,000 because he needed that money to pay tariffs. He just didn’t have cash sitting around for that. So $950,000 is what he borrowed. With the fees, his actual debt was $1.2 million. Several hundred thousand dollars were the fees that merchant cash advances take.”

“So when you’re desperate, and Customs has your product at the dock, and you got to deliver it to Walmart, Target or whatever, and you have to clear that out, and then you’re screwed because if you don’t deliver to these retailers, they drop your product. So you got to pay it. So where do you get the money from? You get it from the mob. And that’s the MCA.” “… I’ve talked to, at this point, close to a dozen businesses who ended up in a similar boat. One woman I talked to took out $47,000. Her actual sum that was due back was $72,500. So 47 versus almost 73. And this kind of lending is exploding. It is by far the fastest growing way that small business owners are getting money”

Sadly, even if the tariffs – found unconstitutional by the U.S. Supreme Court but attempted again by Trump through a different provision of the Trade Act of 1974 – are refunded (looking highly unlikely for small businesses), the small business is out the exorbitant, but apparently legal, interest and fees for loans to help them bridge the tariff uncertainty…this time. Unable to pass these unexpected costs entirely to the consumer or client, small businesses find themselves not only pushed down but pushed back as well, since if they had to obtain this type of loan, personal credit cards, any home equity and savings have been already depleted. Many will not survive, disappearing into obscurity. They won’t be giving any interviews out of a sense of shame and failure. Their American dream turned into an American nightmare, taking their full attention to limit the damage to their lives, their family, their employees and their families’ lives if they can.

As money concentrates on fewer and fewer investment and financing deals such as AI and space exploration, local entrepreneurs and small businesses – who have always had a difficult time – are subjected to “Hail Mary” forms of financing, risking everything in the hope that economic sanity and stability will return – still illusive and getting darker. Is this what a community wants, at a time when it looks like entrepreneurs and small business may be the last hope for employment and local tax revenue?

In a story by Colorado Public Radio entitled, “Colorado’s startup businesses are struggling to raise cash,” author Sarah Mulholland states that in Colorado, “Funding for venture capital firms nationwide has become heavily concentrated between haves and have-nots, according to the report from PitchBook. Investors are increasingly pouring money into large, established fund managers. Much of that cash is aimed at AI businesses, the report found. The shift toward larger funds means less money for smaller, newer players. That dynamic could be filtering into the money available for Colorado businesses. “[The] venture market is setting records at the very top while contracting almost everywhere beneath it,” the report’s authors note.”

The U.S. needs to be careful about letting not only this AI buddle grow so large it wipes out the economy if it pops for the other 90% (like the 2008 sub-prime housing market boom crash and easy capital causing mid-size and large corporations to over-leverage their operation), but it also wipes out the remaining small businesses and destroys the dream that is truly capitalism.

Dean Prigelmeier, is founder and President of Proactive Technologies, Inc^®.– a company with over 40 years of expertise and experience is helping employers take their loose, informal practices and documents and build it into a structured, documented system of worker development. The accelerated transfer of expertise system^TM dramatically shortens the time need to train each worker to full job mastery. Find out more at Proactive Technologies Inc.’s website.