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Archive for November, 2007
Entrepreneurs have a lot of things: guts, knowledge, resourcefulness, but one thing that they don’t have is time. I have spoken with many entrepreneurs about how they purchase financial services and have found that the complexity of the products forces most entrepreneurs into the following categories of behavior:
1. They either sign up with the first provider that comes along
2. or they spend the many hours they need to truly understand it, sacrificing attention that is sorely needed on other parts of their business
We at TransFS aim to break that compromise and enable small business owners and entrepreneurs to make good purchasing decisions without sacrificing the time they need to grow their business.
Purchasing small business financial services, such as credit card processing, insurance and payroll processing, is a lot like buying a car. One of the best pieces of advice I have been given about buying a car is to negotiate on the “Drive it off the lot” price. Car dealers love to quote a price, have you test drive the car, fill out all the paperwork and then, when you are about to sign the loan documents or write the check, a bunch of other fees (taxes, delivery charges, etc) appear. As a shopper, if you want to get a good deal, you must make sure that you are being quoted a final price.
TransFS helps you get the “Drive it off the lot” price because it forces the financial services providers to disclose all of their fees. We also prohibit any cancellation fees in the contracts of the providers that use our system. If the provider tries to sneak a fee past one of our users we have the following recourse:
1. The business can immediately re-submit for new bids. All their information is already in the system, so there is minimal hassle.
2. We will kick the service provider off TransFS. As an aggregator we have significantly more bargaining power than any one small business on it’s own.
So far we have never had such an incident, so you can be confident that with TransFS you are getting a “Drive it off the lot” offer.
This 1998 Study by the NFIB identifies the biggest problems that small businesses have:
1. Capital – 27.9%
2 . Locating customers – 23.4%
3. Getting everything organized – 21.0%
I think that TransFS can help with #1 by helping small business owners contact and evaluate providers of business financing. However, we can’t totally solve the problem. The fact is, small business owners are always going to want more financing than is available, the ability to finance your business is part of the healthy weeding-out process that ensures only strong businesses succeed.
We can dramatically help with #3, however, getting everything organized. As I have explained elsewhere on this site, managing the process of shopping for the financial services that a small business needs to get up and running (payroll, credit card processing, etc.) is very time consuming. Our technology and processes cuts that time very significantly.
Small Business Failure Rates
There are lots of different numbers of small business failure. Intuit reports that 6M small businesses are started each year, while 5.5M go out of business. It is not clear where they got their data, or for what time period it applies.
A 1998 study by the National Federation of Independent Businesses tells a somewhat different story – 2.3M small businesses started and 1.3M stopped.
A 1998 study by the Bureau of Labor Statistics also makes the pessimistic case – that 80% of small businesses survive their first year, 65% survive their second year and 55% survive their third year.
Small Business, Big Market
Big businesses get most of the headlines in the newspaper but small business is truly the core of the economy. According to Paychex’s annual report there are “7.6 million employers…99% of which have < 100 employees”.
One way that credit card processors justify their markup over interchange (which is commonly more than 0.50% – 50 basis points) is that they require the markup to cover the cost of fraud and returns, which sounds reasonable.
In reality, the merchant bears the first responsibility for fraud and returns and the only time the processor gets stuck holding the bag is if the merchant themselves were running a scam or they went out of business before they could fulfill customers’ orders. That doesn’t happen very often. Heartland Payment Systems, a large publicly traded credit card processor, reported in their latest financial statements that their losses were about 0.0045% or 0.45 basis points.
In other words, losses are < 1/100 (0.45 / 50.00) of the cost structure of credit card processors.
Like most small business owners we are capitalists – that is, we believe that by building my company I am making the world a better place. We are making it better for my employees, for our customers and even for people who don’t shop with us because the fact that we are competing for their business gives them options and leverage.
In starting TransFS we get to indulge my capitalist spirits in two ways – 1. by starting a business which hopefully will be successful and 2. helping other small business owners by saving them a lot of money and time.
It is well-established among economics scholars that small business formation leads to economic growth. As we run across good statistics showing that relationship we will post them here.
Economists at the SBA (Small Business Administration) of the US Government published a report in Feb 2007 entitled Small Business and State Growth: An Econometric Investigation. The highlight of the report was that increasing small business births by 5% results in a 0.47% increase in economic growth.
The second reason that we started this business is that we are solving a problem that we felt firsthand. Three years ago we started my first business, which grew in fits and starts – sometimes making myus giddy with excitement from the growth and other times depressing us by convincing us that it wouldn’t survive the month. It is now stable, growing and profitable, providing good full-time employment to 7 people and exceptional customer service to around 100,000 customers.
One constant thorn in our side while running that business was buying financial services. Getting a checking account was relatively easy – I called 6 banks and found the checking account with the lowest fees (Washington Mutual free business checking). It took about 2 hours and in the end we got the best deal possible. After that, however, things began to spiral downhill when we tried to buy credit card processing, insurance, a line of credit and payroll processing.
We needed to allow our customers to shop with credit cards so we went about shopping for credit card processing services. When we filed our company with the state we had gotten a bunch (~20) of mailings from credit card processing / acquiring companies, each claiming to have the best deal. So we began calling and 4 hours later had heard a lot of slick talking but still didn’t have a clear picture of which company had the best deal. The salespeople seemed to make it as complicated as possible – talking about downgrades, transaction types, reserves, interchange categories, etc. We turned to the internet and got the same result – lots of salesmanship but no clarity. We spent about 8 hours on buying this one service, but that 8 hours was spread throughout the week, between all the other things required to launch the business. Eventually we ran out of time and randomly picked one of the processors. It turned out to be a disastrous move – the rates were terrible (we didn’t find that out until the next time we shopped around, about a year later) and at one point, during our first christmas season, they became unreliable in paying us, withholding about $30,000, which nearly sunk our business
After speaking with some other small business owners we realized that they all faced similar problems. That’s when we decided to solve the problem using a little bit of technology and came up with TransFS.
Usually when we tell people about this business they ask why. The reason they ask that is starting a new business is really tough, and usually the founder is driven by something other than just the desire to be rich and famous.
I personally have several reasons for starting this business, which I will try to articulate over the next few weeks.
The first reason is that I love small businesses and it makes me feel good to make life easier for the hundreds of thousands of small business owners. At an early age I had some very good experiences with small business owners which has probably led me to romanticize the notion of entrepreneurship.
