Moving to a new blog… again

The problem with selecting blog titles that are city dependent is that when one is highly mobile, they soon become antiquated…

Learning from past mistakes, I have created a blog title I deem to be date-proof. I present:

Travels with Peter

Come along…

Feelin’ that Credit Crunch

I take it as a sign of “growing up” that current events affect my life now. Remember when you were a kid and the Soviet Union broke up ( or in the case of my parents’ generation, when the Weimar Republic was founded) and it had absolutely no discernable effect on your life? Well, not any more.

Now I’m no economist… oh wait, yes I am. But seriously, I can’t claim to have great insights into the financial crisis, but at the very least I do consider myself up to date and generally well informed (I read allthe periodicals just like Sarah Palin). So let me give you my take on why the current situation is bad for business.

My understanding of the financial system is: 1. Banks find customers. 2. Banks sell customer a loan. 3. Bank passes loan on to underwriter (in house? ) 4. Underwriter evaluates loan and groups it with similar loans. 5. Similar loans are packaged into various financial products and sold on down the line to people, institutions, and countries that have spare cash lying around (Warren Buffet, Harvard University, and Saudi Arabia).

Now, however, nobody is sure that these loans are such a great idea, and they’re not buying. So when my little business goes to solicit a $10,000 line of credit and the teller checks off the box “Less than two years operating experience,” my loan suddenly has no home. Nobody wants to buy a loan that now looks much riskier than it did two years ago.

This makes me frustrated. Why am I lumped into the same category as the guy who wants to borrow money to invest in some scheme to get the inheritance of a deposed Nigerian prince? Why can’t I be evaluated subjectively rather than in such a cold hearted objective way. Now granted, it’s not simply a matter of subjective vs. objective, the real issue, I think, is the cost of information. It simply costs too much time (money) to ascertain whether or not I’m a good credit risk. The loan amount doesn’t justify the expense.

So what’s the solution?

1. Pay more (higher interest rate)

2. Aquire information more cheaply

I like option 2. This is where my uncle Don would say: “You should check out Prosper.com.” Prosper is an online community where people solicit, as well as fund, loans. Say you want to borrow money. You fill out a standard loan application, but you also get to sell yourself. Why do you really need the loan? Why is fair trade so important and why did you become interested in selling products from Honduras? What’s your background in your business? What do you look like? What interests do you have? And, of course, how much are you willing to pay?

So you post this information, and along come people who have a few spare bucks and are interested in doing their own homework. They read your story, realize it’s the real deal they’re seeing, and offer an amount and an interest rate of their choosing. Since I like math, let’s do an example. You solicit $10,000 and set a maximum interest rate of 12%. The following people fall in love with your company and make offers:

Barney: $1500 – 12%
Sam:      $4000 – 11%
Sally:     $3500  - 13%
Bill:        $5000 – 9%
Earl:      $2500 – 10%

What’s your loan? First, Sally is rejected- she bid higher than your maximum. Then you take the best to worst. Bill lends 5k at 9%, Earl chips in 2500 at 10%, and Sam rounds out the remaining $2500 (even though he offered more) at a rate of 11%. The interest rate you pay is a weighted average of the three:  9.75%

How great is that? The cost of gathering the information is lower- individual investors choose to do the research themselves. The details are examined and subjectivity counts. Also, my guess is that the cost is slightly higher than a commercial loan. Not all investors want to read about my journeys through Honduras…

And so, the logical conclusion to this rambling blog entry is that we receive a loan with Prosper. Alas, it is not so. They are temporarily closed for Spring SEC cleaning… D’oh! 

—————-

Loan Amount: 10k
Max Interest: 10%
Interests: Microfinance, Fair Trade, long walks on the beach.

Now I just sit back and wait.

It’s not all business…

This post is entirely unrelated to my business venture, but I can’t contain my enthusiasm, so I thought I’d share it with you.

With a shrinking economy and capital hard to come by these days, I’ve been trying to do a little belt tightening. But how to cut costs without actually dropping down to the next notch on the belt? I’ve only just recovered to pre-Honduras weight levels, it’s not time to cut carbs yet!

Solution: Home brewing.

Home brewing is something I’ve always wanted to try but never actually done. Listening to my dad’s stories about never buying a beer all three years of law school finally sunk in and I set out to brew my own beer. A little advice from the senior Schlosser and a few handy web resources got me started and for our first batch my roomate and I decided on a simple pale ale.

Ingredients: 1 can Cooper’s malt extract, 3 cups sugar, 1/2 ounce hopps,  1 packet yeast, 4 gallons water.

We boiled the wort, added the sugar and yeast, and set it to ferment in our home made fermenting bucket. The pleasant gurgling of the one way air valve kept me company for the last 12 days and on Saturday, unable to wait longer, we opened it up and got to bottling. Safely bottled, we left our brew to carbonate and age. A pale ale reaches its peak flavor after about a week in a dark place, but this is an experiment, so we decided it was necessary to try the beer as soon as possible. The result?

 

Delicious!

Forget Fair Trade home furnishings, I’m opening a brewery.

The Chamber.

Tonight I went to the monthly meeting of the Oak Park Chamber of Commerce (we’re new members). It’s called “Business After Hours” and it was the first one we’ve attended since we joined the chamber a month ago. I RSVP’d today, the day of the meeting, and Jim (on the other end of the line) said it was no problem and asked me if I wanted 30 seconds on the agenda to introduce myself. I did.

Not really knowing what to expect (PTA meetings came to mind), I jumped on my bike and headed westward on North avenue, crossing the lazy Des Plaines river to find the location of the meeting. October has been unseasonably warm in Illinois (mid 70s), so the ride was very pleasant as I rolled my pant leg up so as not to brush against the gears. I pulled up to the given address at the River Drive Elderly Care Facility. Hmmm, there better at least be punch and pie.

I locked up my bike and entered the building to find a surprisingly full lobby. They gave me a cheapo name tag until they realized that I was a new member not a guest and then I was taken care of. I got the nice badge, the personal tour guide, a stack of information, and they got me to buy a $1 raffle ticket for the split-the-pot raffle (basically they collect money and the winner gets half… couldn’t I just donate 50 cents and call it even?). 

The atmosphere was not what I expected at all. This place was like a fraternity! There was beer, wine, gourmet food and business cards for everyone (Peter Schlosser, rush chair, damn glad to meet you!). I talked with a local newspaper editor, a lawyer, a restaurant owner, and a few others before the meeting started. No sitting, just about 100 people in a room listening to the VP go down the agenda. They had a few things to say, points of business, our host (the elder care facility) said a few words about their services, and then it was time for the new member introductions.

I’ve never felt entirely comfortable speaking in public. I don’t know what it is, but speaking in front a room full of people just makes me nervous, so I wasn’t really looking forward to this part. But hey, this is business, and this is free marketing. Since I was the last to RSVP, I wasalso last on the agenda. The lawyer spoke. A guy in a nice vertically striped collared shirt spoke but I didn’t catch his business. I suddenly became worried I wouldn’t be able to walk through the group of people blocking my way . I jostled to the other side to get into position.  They called my name.

I killed. The previous 5 guys didn’t even get polite applause. I started them off with a little personal and company history. Peter Schlosser. Home furnishings and Art. Developing World. Honduras. Spanish. Then I warmed them up: “Well I’m from Seattle, so this Chicago October weather isn’t so bad. I hope it stays this warm through December…” Riotous laughter at the outsider’s unfamiliarity with Chicago winters. I gave them a little more information about the business and then told them we were launching the business this week and since this was a lucky week for us I was hoping to win the split the pot raffle. A chorus of boos and chuckles ended what I considered a pretty good 30 second bit. As I walked back to my spot Jim (director of the chamber) gave me a thumbs up and mouthed “good job!”

Feeling quite pleased with myself I hardly listened to the last presenter and the agenda moved on to the raffles. In addition to the split-the-pot deal, they had a business card raffle where they gave out a gift certificate, some tickets, and some business coaching sessions. To my surprise, I saw my business card come out of the fishbowl! One business coaching session was now mine! How auspicious for our little startup.

But the real shock was yet to come. Towards the end of the raffles conversations started to pick up and I was chatting with a couple guys when they read out the number on the split-the-pot raffle tickets. I absent mindedly reached for my ticket stub and glanced down. You’ve got to be kidding me. “You’re not going to believe this, but…” I sheepishly announced to the crowd and the place blew up. Everyone kept coming up to me and either rubbing my shirt for luck (I wasn’t aware this worked) and alternatively asking me how I rigged it or telling me “they always let the new guy win.” Jim was overjoyed and kept asking me if I bent the corner of the ticket.

All in all a very successful night. I must have given out 30 business cards and we got our name out there in a big way, lots of people expressed interest. I gathered some contacts from local publications, business listing services, lawyers, accountants, and real estate agents which will be useful in the future, and we definitely got a lot of face recognition (mine), with the whole group.

And just for the record, there was nothing fishy about it- I won those 71 bucks legit.

Whaddayamean there’s no credit?

As we prepare to launch the business, there’s plenty to think about:

• What products will sell best?
• How reliable are our suppliers?
• Will our logistical planning work out as envisioned?

And, of course, in the back on my mind the whole time is: Will we have enough cash flow to keep our operations flowing smoothly?

In our situation, we have a lot of flexibility. Nobody relies on the business as their sole source of income. We are in the “spend money to make money” phase and have planned on having a negative cash flow during this initial phase. However, we also want to assure ourselves that if this goes on longer than expected, that we will have sufficient capital to withstand it. For that reason, we have been investigating how to solicit a line of credit.

A line of credit works as a sort of revolving wallet. Once you have been approved by the bank you may access the wallet as you wish (up to your limit), taking out money and putting it back in as you please. You pay an interest rate on the money you have out, and stop paying interest when you put it back in. A quick example:     

Date	Transaction	Math
10/1/2008	Credit Line of $25,000 approved
10/15/2008	Transfer of $5000 to checking
10/31/2008	Interest payment of $17.46 due	($5,000*8.5%*(15 days/365 days))
11/1/2008	Transfer of another $5000
11/30/2008	Interest payment of $70.83 due	($10,000*8.5%*(1mo/12mos)
12/10/2008	Repayment of $10,000
12/31/2008	Interest payment of $23.28 due	($10,000*8.5%*(10 days/365 days)

So you can see this gives a business a greater degree of flexibility than a standard loan that disperses the entire amount initially and then the borrower makes interest and principal payments for the life of the loan. The disadvantage of a line of credit is that it must be renewed and can be rescinded. In our case we would only qualify for a 1 yr line of credit.

In my head it works just like one of my favorite SNL sketches with Eddie Murphy disguised as a white man:

—————– 

[ cut to Eddie at a bank, talking to a black Loan Officer ]   

Loan Officer: Now, let me get this straight, Mr., ..uh.. Mr. White. You’d like to borrow $50,000 from our bank, but you have no collateral, you have no credit. You don’t even have any I.D. Is that correct? 

Eddie Murphy: That’s right.  

Loan Officer: Mr. White, I’m sorry. This is not a charity. This is a business.. 

White Loan Officer: Uh, Harry, why don’t you, uh, take your break now? I’ll take care of.. uh.. Mr. White.

Loan Officer: Well.. okay. Thanks, Bob. [ exits ]

White Loan Officer: [ laughs, then sits ] That was a close one, wasn’t it?

Eddie Murphy: It certainly was.

White Loan Officer: We don’t have to bother with these formalities, do we, Mr. White? Huh?

Eddie Murphy: What a silly Negro!

White Loan Officer: Just take what you want, Mr. White. Pay us back anytime. Or don’t. We don’t care.

Eddie Murphy: Tell me, do you know of any other banks like this in this area

—————–

In our case we are caught in no mans land. We are a startup business requesting a low line of credit. Big banks (Citibank, Wachovia) do not generally lend to startup businesses. Wachovia does have an SBA (Small Business Administration) loan program but it has a $250,000 minimum. Ok, not a problem, we’ll deal with a small local bank less affected by the current credit crisis. Smaller banks do lend to startup businesses, but our bank requires all owners of the company to reside in Texas. Because Brent is located in Illinois, they consider him an absent partner. They recommend a larger bank. Sorry, Yossarian, they’ve raised the number of missions again!

Wandering into the credit markets at this time and learning about the various programs that banks, states, and the federal government operate has been fascinating. I spoke to someone at the Illinois state office of the SBA who pretty much laid it out: the banks decide which programs to use to help back risky loans. Larger banks want you to take out big amounts and have operating history. Small banks want you to be from the same state so they can take advantage of in-state programs (Chicago has two in addition to SBA: the Capital Access Program and the Participation Loan Program). In state programs require the business to be registered in that state and dual ownership across state lines complicates the situation. This guy (a self-proclaimed “cynical government employee”) empathized with our situation and recommended working with the Small Business Development Center as well as SCORE (Service Corps of Retired Executives). Nice guy.

I’m not frustrated by this initial setback at all, I see it strictly as a learning experience. Of course, if we were hard pressed for cash I might have a different viewpoint.

Maybe I should have introduced myself as Mr. White.

Start Up

Welcome to the new blog! I suppose I should write a melancholy first entry about moving over from my old blog, PeterinHonduras, but I won’t. This blog is about new beginnings- a new venture.

Not only are my surroundings new (Oak Park, Chicago), but I’ve also begun an experiment with a start-up company. Now I’ll be honest, it’s not quite as entrepreneurial as it sounds. First of all, I’m not a founder of the business (it began in March of 2008), but I’m about as close to the ground floor as you can get. The real founders, Brent and Jonathan (compañeros del Cuerpo de Paz ), have hired me to launch the business. This is a new experience for all of us and I hope it makes for interesting reading.

Without giving too much background, we plan to launch the business as a web only store that sells quality home furnishings and artwork that we import from Honduras. Before I joined the business Brent and Jonathan established relationships with our current suppliers, and we’ve brought three shipments to the US so far. I’ve been spending the last couple weeks reviewing products, writing descriptions, and organizing them on our website. Not to mention contacting vendors, organizing the accounting, setting up payment processing, seeking financing, and plenty more.

In my spare moments I wander outside the comfy confines of my house on Marion St. On Sunday Brent and I took the green line into downtown and headed straight for the flea market. It was fun to be immersed in a Spanish speaking world again, complete with the obligatory merchant selling all sorts of medicines, pills, and herbs carefully displaying on a folding table. We bartered for socks and vegetables then ate a tasty meal of huraches (corn tortilla with beans, carne asada, and vegetables) under a tarp as it began to rain. 

But there’s hardly time to explore. I find myself spending pretty much every waking hour thinking about the business. What will it cost to ship a LTL shipment from Tegucigalpa to Ft. Lauderdale? How can we wire money internationally for cheap? Which credit card processor offers the best rates and the most flexibility? Why does the website crash when I do this? 

Lots of questions, not a lot of time. We launch next week.

Pictures