Coyote Blog

I have liquor licenses in about six different states, and like sales taxes, the process varies a lot by state.  But one universal impression I have is that the whole liquor licensing process has long ago ceased to serve its original purpose and has instead become either become captive to rent-seekers or has become a bureaucratic jobs program or both.  Al Capone died more than half a century ago.  And while one might argue there is some government interest in making sure minors don't buy the product and similar rules are followed, the liquor licensing process is orders of magnitude more complex and onerous than, say, getting a license to sell cigarettes or to prepare foods on site, both of which have similar features.

The liquor licensing process in most states was crafted in the 1930s, with the end of prohibition.  At that time, the primary concern was to keep out organized crime interests who had run the liquor business during prohibition.  So the process includes FBI background checks, as well as minute disclosure of every single person who has ever loaned you money, so they can be checked out to make sure you are in no way beholden to anyone who is a bad guy in the FBI computers.  The licenses take months to obtain (including a fingerprinting process) and cost thousands of dollars a year, presumably to offset the bureaucracy required to review all the applications.  Here in Arizona, minuscule errors, such as abbreviating "Boulevard" in an address to "Blvd" can cause the application to be rejected and have to be resubmitted.  Believe me, I know.

Worse than the ridiculous jobs-program-and-mindless-bureaucracy-fighting-a-threat-that-no-longer-exists problem is the way liquor licenses are now used in many locales for rent-seeking.  The worst offenders are states that purposefully artificially limit the number of liquor licenses.  This is quite obviously an incumbent protection program, protecting current liquor businesses from new competition.  California is one such state.  Even after I had purchased an existing license for a ridiculous amount of money ($5000 I think), I still had to make my case to the local county planning board who had final approval as to whether they would allow me a license into the county.  I asked them why this was necessary, and they were very up front about it (the following is paraphrased but accurate):

If we issue too many licenses, then it would be hard for you to make money.  We are really just helping you.

Sorry, but I don't need help.  I am willing to take the risk.  And does anyone really think that Shasta County California is looking after me, an out-of-state business just entering the area?  Of course not.  What they are really saying is "let us decide if all our buddies here in the county who we play golf with and who donate to our campaigns are OK with you competing with them."

In fact, this is exactly what happens in Lake Havasu City, AZ.  Though Arizona is not a state that limits liquor licenses, Lake Havasu required some kind of local board meeting to approve our license in that city.  The stated reason was that they wanted to make sure the new liquor business would not bring down the image of the city.  Which is hilarious, for anyone who has been to Lake Havasu City, particularly in spring break.  In fact, I am pretty sure it was an excuse for all the local interests to decide if they could tolerate another competitor or not.

All this comes to mind after I read this article by Radley Balko.  It is a good example of what can happen to you if your business depends on a government license and the local rent-seekers decide that your business needs to go.  A very brief excerpt:

I'll get into the
harassment, entrapment, and defamation Mr. Ruttenberg has endured in a
bit. For the moment, I'd like to focus on possible reasons for the
harassment. Why has this been going on for several years? I think there
are a few minor motivating factors. For one, I think there is,
unfortunately, some antisemitism at play. There's also a strange
rivalry Mr. Ruttenberg had with a Manassas Park police officer over a
girl. And I think part of this may be driven by city officials who for
whatever reason simply began to harbor a grudge against Ruttenberg.
Remember Milton Friedman's old axiom: Hell hath no fury like a bureaucrat scorned.

But I think something else is going on, here. And Black Velvet Bruce
Li has hit it. I believe there is some very strong circumstantial
evidence suggesting that Mr. Ruttenberg's bar was targeted by the city
of Manassas Park because the city had its eye on the property as a
possible site for an off-track betting facility for the Colonial Downs
horse racing track in New Kent County, Virgina.

Update:  I guess this is the day to blog about outdated 1930's liquor legislation.

When the Legislature wrote the first alcohol laws after
Prohibition was repealed in 1933, California defined what a beer is and
what wine is. The definition was simple"”anything added to beer or wine
renders it something else. Sometime thereafter beer and wine producers
started adding things such as preservatives, flavor enhancers and other
things. So narrowly reading the law there is NO such product as either
beer or wine sold in California today. Now common sense and alcohol
regulators know that is not true and so for years have ignored this
narrow interpretation.

Last week [on December 13] a bare
majority of the Board of Equalization voted for the narrow
interpretation of the law, and have begun the process to tax all
alcohols with any additives as distilled spirits. This will increase
the taxes charged on beers, wines, flavored malt beverages, and
flavored beers to the level on hard liquor.

The dated California
law defines beer as having no additives whatsoever. No beer that I know
of"” except perhaps some home brews"”meets this definition.

Per the WSJ($):

The Internal Revenue Service dealt a serious blow to
organizations that provide down-payment assistance to home buyers in a
ruling that could curtail the ability of lower-income U.S. citizens to
purchase homes.

In the past eight years or so, a number of large
nonprofit organizations -- including Nehemiah Corp. of America, of
Sacramento, Calif., and AmeriDream Inc., of Gaithersburg, Md. -- have
doled out hundreds of millions of dollars of cash down-payment
assistance to mostly low- and moderate-income home buyers. According to
industry estimates, as many as 625,000 people were assisted by such
groups with their down payments between 2000-05. The programs have been
widely viewed as helping to increase the nation's homeownership rates,
which rose to 69% last year from 67% in 1999.

Why?  A lot of the tax code is skewed to promote home ownership.  So why is the IRS penalizing a program that seems to make a lot of sense?

In its ruling yesterday, the IRS said these aid groups funded largely
by home builders and other sellers no longer qualify for tax-exempt
status because the benefits of the programs are going to sellers and
profit-making entities. In its statement, the IRS said it has found
"that organizations claiming to be charities are being used to funnel
down-payment assistance from sellers to buyers through self-serving,
circular-financing arrangements."

Uh-oh.  Its those nasty profit making ventures again.  What's going on here?  Basically a home-builder gives the down payment for a home to a charity which in turn gives it to a buyer who in turn gives it back to the home-builder.  Let's say the down payment is 10%.  This arrangement acts as if the home-builder is giving the buyer a 10% discount, just circuitously.

So why is it so circuitous?  Why don't they just give the discount directly?  Is it some kind of tax dodge?  The answer to the latter is probably not.  From a corporate tax standpoint, the current circuitous charity method produces a 10% charitable donation on a 100% price sale.  The discount approach just produces a 90% price sale.  Tax wise, these are equivalent.  So why doesn't the home-builder, if it wants to be generous to low-income buyers, just give them the discount?

The answer is, because the government does not allow it! 

The majority of home buyers affected by this ruling are those who
qualify for mortgages insured by the Federal Housing Administration, a
federal agency responsible for aiding first-time and lower-income home
buyers. Under FHA guidelines, home buyers seeking mortgages must have
their own funds to use for a down payment or they can get assistance
from a relative, employer or a charity. They can't get assistance
directly from the seller.

The only argument against this practice made by the IRS is that the price of the house is increase by a fee added in the process by the charity that facilitates the transaction.  But this is one of those classic government regulatory jobs where the result that instead of getting a home with a bit of extra fee in the transaction, people will instead not be able to get a home at all.  No one points to anyone being hurt, and in fact the article points out that 35% of FHA loans depend on these charities for down payments.  (There is also some hint that this process may increase default rates, but the only evidence is that default rates for this type of transaction are up --  but default rates on mortgages are up across the board right now.)

And, by the way, what is wrong with charity by a business that, in addition to helping out a charitable cause, also helps out its business?  For example, my company gives coupons for free one-day jetski rentals at Lake Havasu all the time to charity auctions in our area.  We do it to support charity, but also because it provides us some free advertising and often people who win the certificate also show up with friends who become paying customers.  So what?  Is my charity tainted because I have created a win-win? 

Note: This post sticky through 3/16.  Look below for newest posts.

As promised, we are proud to announce the first annual Coyote Blog NCAA Bracket Challenge.  Yes, I know that many of you are bracketed out, but for those of you who are self-employed and don't have an office pool to join or who just can't get enough of turning in brackets, this pool is offered as my public service.  In particular, I invite bloggers who are experiencing post-Weblog-Award depression to reignite the spirit of online competition.  I mean, why should NZ Bear have the monopoly on ranking bloggers? 

I don't know if we will get 1 or 100 entries, but all are welcome, so send the link to friends as well.  There is no charge to join in and I have chosen a service with the absolutely least intrusive log-in (name, email, password only) and no spam.  The only thing I ask is that, since my kids are participating, try to keep the team names and board chat fairly clean.

To join, go to http://www.pickhoops.com/Coyote and sign up, then enter your bracket.

Scoring is as follows:

Round 1 correct picks:  2 points
Round 2:  4
Round 3:  6
Round 4:  8
Round 5:  10
Round 6:  20

In honor of the Blogfaddah, we have added the special "Army of Davids" bonus scoring:  If you correctly pick the underdog in any round (ie, the team with the higher number seed) to win, then you receive bonus points for that correct pick equal to the difference in the two team's seeds.  So don't be afraid to go for the long-shots!

OK, so what about the prizes?  Well, fame and recognition on this weblog should be enough, but, for those who enjoy recreation, my company will give the winner a choice of 3 nights free camping at one of the public campgrounds we run, or a half-day jet ski rental at Lake Havasu, or a half-day boat rental at Burney Falls State Park in California, Blue Mesa Reservoir in Colorado, or Patagonia Lake in Arizona.

Disclaimer: I sincerely hope that there is something about this purely recreational activity that violates the ridiculous gambling laws we have in this country, because I feel the need to protest them at every turn.  For example, can any politician explain to me why gambling in many Midwestern states is moral on a boat but immoral and therefore illegal on dry land next to the boat?

Update:  We already had a number of entries in the first hour this was up, so it looks like it is going to be a lot of fun.  Go ahead, sign up, it just takes a few minutes.  You don't have to know that much about basketball -- last year our family's tournament was won by an 11-year-old girl.

Note that this article is one in a series of articles on small business how-to's.  Past series have covered how to buy a business, labor audits, sales taxes, and workers comp.

I recently went through the process of obtaining an SBA (Small Business Administration) loan.  These are loans that are what I call "cash flow" loans, secured more by the companies earnings rather than collateral (though collateral may be required, see below).  SBA loans are written by private banks to standards set by the government.  If these standards are met, then bank loans under this program get a partial guarantee from the US government.

Before I go on to describe the process, I feel compelled to note that as a libertarian who does not believe the SBA should even exist and who believes that such loan guarantees are a subsidy program that should be eliminated, I was obviously conflicted by whether to seek out such a loan.  What finally made the decision for me is that this government program has crowded out all other private options.  Banks get about the same rate for an SBA loan as they would for a commercial loan without the guarantee.  Since the guarantee is out there and doesn't cost the bank anything, the bank has no reason not to insist on it?  Therefore, as a small company in the SBA size range, there just are not any banks willing to lend without the SBA guarantee.  This does not mean that in a free market without the SBA there would be no loans - it just means that when such a free subsidy program exists, banks are going to take it.

Types of Loans

The following is a gross simplification, but for a small company, there are basically two types of loans: secured loans and cash flow loans.  Secured loans are by far the most common for small businesses.  I, like nearly every entrepreneur I know, have had to pledge my house at various times as collateral for loans.  While it is fairly easy in today's market for a small company to get an equipment loan (typically lease-finance of a purchase) secured by hard assets, few lenders will provide loans for general business and working capital needs unless they are secured by something tangible -- homes, vehicles, receivables, etc. 

However, most businesses need capital for more things than just to buy hard goods.  Seasonal businesses may need loans to pay the rent in off-seasons, retail businesses need money to grow inventory and pre-pay for new leases, while opening new divisions may require paying salaries well in advance of first revenues.  Unfortunately, most businesses that claim to be business banks have no desire or talent to understand a business well enough to make a cash flow loan.  I am not talking about just Ethyl's Bank, but large banks like Bank of America and Wells Fargo who were stumped when I wanted to discuss some unique financing needs in my business.  I know people with a half million dollars a year in free cash flow out of their business who have trouble getting bankers to make unsecured cash flow loans.  And, as mentioned above, those who do make cash flow loans typically insist on having the SBA guarantee.

How an SBA Loan Works

I will not pretend to be an expert on all the intricacies and rules.  The SBA has a number of programs, offering loans of different lengths of time and for different purposes.  The SBA has programs for both revolving lines of credit as well as standard 10-15 year loans.  Each of these programs has different under-writing criteria, fees, and limitations, which your banker will have to explain to you.  Most SBA loans, including mine, fall under the section 7(a) program.  The SBA site tries to explain some of this.

As stated in the intro, an SBA 7(a) loan actually is issued by a bank, but to SBA underwriting criteria and with an SBA guarantee.  The SBA only guarantees a portion of the loan, something like 50-75% depending on the exact loan type, with the bank taking the rest of the risk.  These loans are issued at a floating rate of prime plus a percentage, and the SBA has rules that caps the rates as well as fees the bank can charge.  The SBA charges a substantial fee, in the 2-3% of total loan value, up front to the borrower for the guarantee.

Banks participate in the program in one of two ways.  Most any bank can originate an SBA loan, collecting all the (very substantial) paperwork needed by the SBA and forwarding it to the SBA for approval.  In addition to the underwriting time at the bank, the SBA can take many weeks to complete this analysis.   A smaller subset of banks have been pre-approved by the SBA to act as their underwriting agent - called a preferred lender or PLP.  This means that they can do the SBA's analysis for them.  This often greatly accelerates the process.  My total time form the bank's first data request to the final loan closing was less than a month, which is very fast.

Choosing the Bank is Critical

From the section above, it should be obvious that you should strongly consider working through a bank that has the preferred lender status with the SBA.  Note that having  or not having this status does not necessarily correlate with bank size.  The "expert" I was hooked up with at Bank of America (my main bank) was useless, and told me in so many words that it would be impossible for me to ever get an SBA loan.  I ended up working with Silver State Bank, a relatively new business bank out of Nevada.  They had the whole process automated, and when combined with a very knowledgeable banker on the front end named Jerry Woods here in Phoenix, the process was as smooth as silk and very, very fast.  In fact, I got the whole loan done in less time than it took BofA two years ago to do my line of credit.

Costs and Other Considerations

SBA loans are not cheap, and I would strongly urge you to pursue secured asset-backed loans as far as you can.  My total fees, including the cost of the guarantee, ran to about 3% of the total loan value.  In addition, I STILL had to put up collateral to back the non-guaranteed portion of the loan.  In retrospect, I think I did a bad job of negotiating with my banker on this.  No matter how good they are, bankers are still bankers and are going to attach every asset that can sit still for collateral whether they really need it or not.  I should have pushed back harder on this issue.  Overall, though, I am excited that I now have the capital to continue to grow my business.

PS-  If you want to enjoy some of this capital at work, come to Lake Havasu and rent a jet ski for a day!  All those other entrepreneurs out there are investing money in dead-end stuff like microchips and improved manufacturing --  Ha!  There is nothing like being able to tear around a big lake on 110HP to really make America competitive!

I am always amazed at our government, which piously goes after business after business for "unfair" business practices, but never seems to apply the same rules to itself.  My latest example:

Today, I was (finally) granted a liquor license for our store and PWC rental business at Lake Havasu, AZ.  Since the approval process takes so long, I am ready at this point to be happy almost no matter what terms I get the license on.  Unfortunately, the state has rigid dates for licenses - they all expire June 30 of each year.  Since it is June 6 (hey, happy D-Day!) I get a license that runs from Jan 1 to June 30, and so have to renew almost immediately.  But here is the really good part:  They will not pro rate the license cost to June 6.  In other words, I have to pay the full $1000+ for the whole 6 month period, even though I am using only a few weeks.  Sleazy.  I wrote more about the whole liquor license process here. 

PS-  many will suggest that I just wait and go pay on July 1 for my license.  Well, they thought of that too.  There are rules on the application process such that it has to be completed in a fixed number of days.  If I don't buy the license by June 18, the whole 120-day application process starts over again.

I have been a marketer for almost 20 years, and one of the classic mistakes in marketing is to rely too much on your own experience and preferences.  Its often easy to fall into the trap of saying "everyone I know would like that" or vice versa, only to find that "everyone you know" are not necessarily representative of the market as a whole.

When I was a consultant at McKinsey & Co., we often asked people we were interviewing questions like "what is the market size for window glass in Mexico".  The key to successfully completing the exercise was to break the problem down into cascading assumptions, each of which could theoretically be researched and checked.  For example, with the window glass problem, a good answer might be:

The glass market is probably made up of housing, commercial buildings, automotive, and other.  Take the housing market.  Assume 80% of the market is new construction.  Assume the population of Mexico is 50 million, and there are 5 people per home, so there are 10 million homes, and lets assume the housing stock is increased by 5 % a year and that each home has 100 square feet of glass..  etc etc.

It was kind of fun to see if they get to the right answer, but the whole point was to see how they could break down and analytical problem.  The reason I bring up this whole episode was sometimes we would ask our recruits, typically Ivy Leaguers, to come up with the market size for annual snow ski sales.  So they would work through the logic that there are 300 million people in the US and x% ski and these people replace their skis on average every 5 years, etc.  However, it always made me laugh that these folks would be guaranteed to miss the number way, way high.  Why?  Because in coming up with the percentage of people that ski, they would look around the room and say, well 80% of my friends ski and so lets assume 30 or 40 or even more percent of Americans snow ski.  In fact, I have not looked up the number lately, but the actual percentage of Americans that ski is something less than 5%.  Recruits intuition was fooled because, at least in terms of skiing, they were surrounded by an anomalous population.

All of this is a long, long, overly long intro into an interesting set of facts around browser share between IE and Firefox.  A while back I wrote that, from my traffic logs for this site, Firefox appears to be killing IE.  In fact, since I posted this, Firefox has gained even more share on this site:

Now, to the issue of this post, one might suspect that my traffic might not be representative of the whole market.  I would argue that blog readers probably are heavier Internet users, more Internet-savvy on average, and therefore more likely to have investigated browser alternatives beyond the one pre-loaded on their PC.  It turns out that I have a way to test this.  I have another group of sites for my business, including sites for Forest Service Campgrounds, Lake Havasu Jetski Rentals, and Campground Jobs.  The readers of these sites tend to be older on average and less computer proficient.  The browser market share at these sites looks like this:

Wow, that is a huge difference.  Take it from me, its unusual to find a market segmentation that dramatic.  It makes me wonder about all of the talk about blogs replacing the MSM.  How much are we breathing our own exhaust?

Postscript: This is an age-old problem and takes many forms in many businesses.  For example, thousands of farmers have bankrupted themselves in the commodities futures markets making bets on worldwide crop prices based on their local weather and harvest expectations.

Disclosure: Yes, I did take the opportunity to shamelessly Google bomb my own sites.  Sorry.  I don't do it very often, maintaining a pretty solid firewall between my business and blog.

The original purpose of this blog was to pass on my experiences and lessons-learned running a small business.  Over time, though, since I have the attention span of an 8-year-old boy mainlining Hershey bars, I have gone many different places with this blog, well beyond day-to-day experience of a small business.

However, today I will return to this original goal, at least for one post, by asking the question "what's on my desk this morning?"  I tackle this question for two reasons.  First, it is interesting to compare how different the issues I struggle with day-to-day are as compared to my previous life as an executive at several Fortune 50 companies.  I am sure I did more, but all I can remember from my daily activities at large companies seems to involve either working on PowerPoint presentations or traveling to give them to somebody.  The second reason for visiting the contents of my desk is to reinforce my usual libertarian political points, which I think will be made sufficiently obvious just in the description of my to-do list that I won't need to editorialize further.

So here is what's got to get done today [ed note -- while published on Sunday, this is based on my worklist on Friday morning, May 13.]

• Sales tax returns have to be completed, which I usually do myself.  We file monthly returns in six states, but one of those is Florida, where we have to file multiple returns county by county.  This month I also must complete a lodging tax return for two counties.  If it was the end of the quarter, an additional three state returns and two county returns would be due.

• We are nearly completed with a sales tax audit from Washington state.  I have written before how complicated the WA sales tax return is, but the funny part was seeing a trained tax accountant from the state of Washington sit in my office for nearly 6 hours and still not be able to figure out how much tax I owed.  She kept encountering crazy exceptions like "such-and-such county requires 2% lodging tax unless the facility has more than 63 rooms or campsites and then it owes 50 cents per room-night except if it is in the Seattle convention district where it owes an additional .25% or if it is on a metro bus line where ... etc."  When tax law is too complicated for the paid employees of the tax department to figure out, it is too complicated.  Wonder of wonders, though, we may get a refund!

• Also sitting on my desk from Washington is a notice that I did not pay my leasehold excise tax last year.  For those who don't know what that is, it is a way that states like WA and CA effectively charge property tax on the US government, evading the federal rules against such (basically, I have to pay the tax for the Feds, and then I take it out of the rent I bid to the Feds).  Actually, though, I did pay it.  Well in advance of the due date.  The state has spent the last 2 weeks trying to decipher their own records, and so I need to call them back today to see if they have figured everything out yet.

• The department of Health in one California county is holding up my building approval because the condensate line from a refrigerator condenser coil runs out and drips fresh water on the ground (about a gallon a day).  If you have an air-conditioning system at your home, it is very very likely your air conditioning condenser does the same thing.  Unfortunately, the county wants this to run into the sewage system.  Why the county wants extra load on the sewer system, I don't know, but fortunately my builder caught this early so the change won't cost us much money.

• Speaking of inspections, the ADA inspector at another California facility ruled yesterday that our sales counter was an inch too high and our ramp a half-degree too steep to the front door, so I spent part of this morning already getting the original contractor out there to tear these improvements out and redo them.  Interestingly, we previously had the bathroom that was originally in this modular building ripped out, because it could not be made ADA compliant.  This was not a big headache for our employees, because there is a public bathroom building next door.  However, the local health inspector is now reluctant to approve the building because... it has no bathroom and hand-wash sink.  The only food we sell is packaged (think Twinkies) but some health inspectors still want you to follow the same requirements as if you were a restaurant.  I am not sure how we are going to resolve this.

• I just got a call from a customer who was mad that the county Sheriff would not respond to several complaints about drunk and disorderly conduct in the early morning hours at one of our campgrounds.  A few of our campgrounds, like this one, are too small to justify a live-on-site staff, and the rowdies seem to get the word out which campgrounds do not have on-site security.  I promised the customer a refund, and made a note to myself to talk to our manager about having one of our employees come by a few times in the night on a security sweep.

• I have a meeting at 3:00 to meet with my accountant to finish up our income taxes.  Since we have to file a federal, 9 state, and a number of county tax returns, our total company return fills two 3-inch binders.   Today we are trying to sort out the depreciation schedule, which in and of itself is hundreds of pages long given that we have so many small assets.

• We are still trying to get a liquor license approved for our store on Lake Havasu.  The whole liquor license process is one of those funny holdovers.  Coming out of prohibition, most states wrote tough procedures to make sure that the organized crime figures who control liquor during prohibition did not receive licenses.  As a result, to get a license, my wife and I and my managers have to be finger-printed and have FBI background checks.  The applications tend to be long and tedious and small errors cause the application to be returned for corrections. Worse, though, I have found that many towns use the licensing process as an anti-competitive protection for incumbents.  In California, if a County is "over its limit" (set fairly arbitrarily) in terms of licenses, it requires the county board of supervisors to meet and approve the new license.  In one California county I was told that this was really for my protection - they are protecting me from getting my business in a situation where I might fail due to too much competition.  Anyway, I suspect that the strong powers-that-be in Lake Havasu City may be holding up our license, and I need to try to figure out what is going on,though I am not sure how to go about it.

• While I have been writing this, I got a call from a county DA in Arizona.  Most states have bad check programs where, if you have a bounced check and can't collect, you turn it over to the courts and they seek collection.  In extreme cases, they will arrest and try the offender.  I have never been entirely comfortable with this situation.  Sure, bounced checks irritate the heck out of me, but arresting people for a $20 bounced check feels like sending someone to a Victorian debtors prison.  This morning, I spent about 30 minutes trying to talk the DA out of prosecuting the heck out of some guy who claims that he paid us and we lost his check.  I give his story about a 30% possibility, but whatever is the case I have no desire to prosecute the guy.  The DA's blood is up, so it takes me a while to talk him out of it.  I am adding to my worklist something I have put off for a while, which is to investigate 3rd party NSF check collection. 

• My bank just called and still needs yet more paperwork before they can complete an equipment financial loan.  AAARRRRGGGG. 

• I just finished my annual rant with Arizona Game and Fish about fishing licenses.  We sell fishing licenses at a number of locations.  We only sell fishing licenses, we don't sell hunting licenses or duck stamps or all kinds of other special licenses that the state seems to sell.  Unfortunately, if you are a Game and Fish registered license seller, you can't get just fishing license inventory from them.  You have to take their full range of licenses, which they send you piles of in January.  We take all this stuff we don't want to sell and put it in the safe, and hope that we can keep track of it for the next 12 months.  If we somehow misplace anything and don't return it the following year, we pay for it (and some of those stamps and licenses cost hundreds of dollars).  Many of you  will recognize that this practice of the state government would in many situations be illegal for a private company.  There are many laws out there that limit a manufacturers ability to force a retailer to carry their full line of inventory, or worse, their ability to send the stores a bunch of inventory they did not order.

• I have been putting off registering our 15+ trucks in Washington, but I am going to have to get to it today or this weekend.  Last year Washington passed a law that vehicles had to be registered with an in-state physical address (no PO Box).  I am not sure if this is a tax or terrorism thing, but it is obviously awkward for an out of state corporation, so they have finally relented a bit and said that you can still have to have an in-state physical address but they will mail paperwork to an out of state address.  I or my assistant will need to spend a couple of hours soon typing in two addresses each on all these vehicles before we can register them.

There are a million other things going on, but that is what is burning me up today.  In fact, since I have been spending the last hour writing this post, these tasks will probably also be occupying me this weekend.  An alien from another planet in reading this post might question whether I am really working for myself or this "government" entity.

A while back I wrote a series of posts here, here, and here on buying a small business.  One of the things I said in that post was:

Then, there are the banks. From my experience, it is very, very
difficult to get a bank to make an collateralized loan - i.e. a loan
that is secured only by the cash flow of a company rather than by
assets. In fact, I have never been successful at that. About the only
way that I have found that banks will make a loan is if it is an SBA
loan, where the SBA basically guarantees the loan for the bank. The SBA
goes through cycles of being very open to lending to being very tight.
I have not dealt with them for over two years, so I don't know what
their stance is today. Remember, though, that the SBA is not going to
approve any loan where the buyer has no experience in the industry or
where the buyer is not putting down his own money as well. The SBA has
a lot of information here.

This statement is still mostly true but I have learned a lot over the last couple of months.  The following is an update.

One of the things they tell you all the time in business school, but frankly I always found impossible to really internalize, was how much cash growth takes.  I guess I always thought of businesses with cash flow problems as being unsuccessful, slowly sliding down the drain and trying to make ends meet.  Wrong.  Growth is tremendously expensive.  And stressful.

My business is based on concession contracts.  Each winter, we are usually presented with the opportunity to bid on many contracts.  We narrow the field down to 4-6 we bid on, hoping to win about 2.  One of the things I did last year was greatly improve our standard bid materials, hoping that would help us win good projects.  Did it ever.  We bid on 6 last year and we won 6 (including Burney Falls, Pyramid Lake, and Lake Havasu).  Yea!  But then I began adding up all the investments in new inventory, new equipment, salary (you always have to hire people before the first revenues come in), licenses, building improvements, etc.  Eeek!

After a lot of work with bankers, I stand by most of my statement above.  Most bankers will not lend to businesses on cash flow, and always want some type of collateral (like my home equity).  Over time, though, I have found a few bankers who are willing to lend on cash flow and really understand business growth and why maybe I don't want to have my business's growth rate limited by how much equity I have in my personal home.  There are bankers who will put together packages of long-term loans backed by the SBA plus short term working capital loans that will now let me grow faster.  The folks at Copper Star Bank, for example, have been great. 

One of the reasons I felt the need to post this update is that I have been told that my difficulty finding a good business banker was due in part to my location here in Phoenix.  The Phoenix banking market is very real estate driven, so bankers usually come from that background rather than a business background.  I am told that those of you on the east coast or in the Midwest may have an easier time finding good business bankers.

Postscript: By the way, you might ask how I feel as a small government libertarian about accepting the government subsidy implicit in an SBA loan.  The answer is "conflicted".  Some libertarians are fine accepting government services, on the theory that they certainly have paid for them with all their taxes.  Some try to avoid government services, but that is almost impossible in today's world (such as using government roads).  I generally try to be pragmatic, operating somewhere in the middle.

As far as SBA loans go - I don't know what the commercial banking world would look like without SBA loans.  I think that the banking world would have found an alternative way to mitigate the risk (e.g. via securitization) without the government gaurantee, but we can't know.  The fact is that SBA gaurantees exist and banks would be crazy not to use the gaurantees in making business loans.  So, the reality is, if I want a cash flow based loan for a company my size, it will likely carry the SBA gaurantee.  My appologies to all those whose taxes support my loan gaurantee.