A capital ecosystem: What business owners need to be loan-ready in KC

After starting my career in the banking and financial services industry more than 17 years ago, it was my introduction to providing basic banking services to small businesses in 2013 when I noticed my desire and passion to be an advocate for those who were under-serviced. My relationships with entrepreneurs and community partners and all the experience I brought with me to the Kauffman Foundation to shape the Kansas City Capital grant portfolio has taught me this: This work is not just about getting businesses capital. It’s about access to the support that can lead to funding.

According to the Foundation’s updated report, “Access to Capital for Entrepreneurs: Removing Barriers,” businesses in the six-county Kansas City metropolitan area face an acute capital gap estimated at more than $1.4 billion in 2020.  

And while Kansas City has more bank branches compared to the U.S., overall, it does not necessarily translate into greater access to capital. Of Kansas City metro businesses with employees, 82% don’t access capital from banks or other financial institutions at startup. Sixty-one percent of KC metro businesses rely on personal or family resources.  

Since Kauffman released its first capital report in 2019, the Foundation has undertaken a number of efforts to dismantle the barriers that many entrepreneurs face in starting and growing a business. In Kansas City, an ecosystem is growing to support entrepreneurs and increase the equitable flow of capital.

This work is just beginning, but, together, with our strategic partners, we’re working to change the funding landscape by addressing bias in lending, creating a better understanding of the barriers entrepreneurs face, and cultivating a more collaborative approach to supporting small businesses. Our capital investments have shown early promise, but there is still more work to be done. Kansas City has the opportunity to create a more equitable future for more people by improving access to capital.

For me, that starts by making sure entrepreneurs and aspiring entrepreneurs know they aren’t alone, so they can connect with the support they need and see a path to start and grow businesses in their neighborhoods.

Welcome to the ecosystem: Connect entrepreneurs with the guidance and resources needed to start or grow a business in Kansas or Missouri.

Organizations are ready to welcome established entrepreneurs – or those even with an idea – to provide support wherever it’s needed. It might even be identifying where they need support. It can be as straight forward as “I formed an idea. My idea is fully baked. Now, help me legally form my business and prepare financial documentation.” Or, it can be helping them prepare a business plan, and asking the tough questions like, “Explain your business’s profitability or lack thereof.” It could be connecting them with technical assistance or one-on-one business coaching, marketing and branding resources – even training for effective communication.

These organizations are designed to hold entrepreneurs’ hands through the difficult early stages by meeting them where they’re at. A few organizations modeling this approach are Women’s Business Center, Prospect Business Association (PBA), and KC Bizcare. They help a lot of businesses through the fundamentals of forming and establishing a business, including obtaining their business license and preparing organizational documents, such as an operating agreement or bylaws.

A lot of businesses, whether they provide a service or make a product, know that part really well – that’s what got them there. But, figuring out how to make their business sustainable, to make it profitable, to live off it, to create generational wealth with it? Completely different story.

This first step, with these organizations, will help create a strong foundation, so business owners can start to figure out what they need to thrive.

Support: Get loan-ready by understanding what banks are looking for in a loan package and how to prepare to meet with lenders.  

At this phase of support, a business owner might have their business plan, they might even have been in business for two or more years, but the bank is likely going to ask for a profit and loss statement, balance sheet, income statement and other financial and tax documents. Accessing capital through financing might be what they desire, but they might need additional education and support if they’ve been operating without these documents to manage a successful business beyond the startup phase.  

This is where resources like the two organizations mentioned above, along with the Small Business Development Center (SBDC), The Toolbox KC, The Porter House KC, G.I.F.T. (Generating Income for Tomorrow), and programs like Kauffman FastTrac® can be helpful (see below for the full list of task force members). The support needed to be loan-ready isn’t always strictly around access to the money. What type of professional services or support is needed? Before submitting a loan application, does the business owner need access to an accountant? To a bookkeeper?

If a tax preparer “helps” a business owner to pay less in taxes, and doesn’t use the appropriate tax codes, and they apply for a loan and the banker requests two years of tax returns, it will likely look like the business is not profitable. No matter how good the business is going or how great the idea is, when all the bank has to go off of is those financial documents, and it shows an unsustainable financial position, the bank has no choice but to decline when they’re presented with a negative net return or zero – a break even. 

The goal of a connected ecosystem is to ensure that entrepreneurial support isn’t simply transactional. Take tax preparation, for example. There’s a misconception that it’s important to avoid paying taxes. And while there are different tax codes and things to minimize how much a business might owe in taxes, business owners should consult with a tax preparer who knows to ask, “Do you plan on financing anything in the next two to three years?”  

If the story a business owner wants to tell is, “trust me,” that’s not the best way to ask for trust or help minimize the risk they’re presenting. An analogy I used to share with my clients was imagine a friend, relative or stranger came to you to borrow money and you asked for their previous paystub and it said “zero.” How comfortable would you feel lending them money? Based on that document, how likely are you to be paid back?  

Often, entrepreneurs are solving for the right now, and the service providers they might enlist aren’t necessarily looking to develop a relationship. Business owners need people around them who understand their business and their goals in order to advise them properly on how to manage their finances and their taxes, especially those hoping to get funding.  

Funding: Demystify the loan process.  

First and foremost, when applying for funding, business owners must be able to clearly answer what they need capital for. Business loans are so different from consumer loans. And, oftentimes, a small business owner, particularly, a sole proprietor who has had a personal loan, might assume it’s the same. Meaning, I’m going to go to the bank, apply, and whatever they give me is what I’m going to get.

That is not how business loans work. Business loans require specifics – what lenders call “use of funds.” Business owners have to source what the funds will be used for and “miscellaneous” or “general” are not acceptable line items. The requested amount must match the stated need, and it’s preferred that the net revenue can service the debt. For example, a business owner currently owns two dump trucks and has one employee. They’ve hired three new employees, and they need another dump truck.  

They will have to demonstrate through supporting documents that the sales and or services offered to their existing client base can support the new debt. And while, ideally, hiring new staff equals more revenue, in an effort to mitigate risk, the bank would like to stay away from projections as much as possible unless there’s enough historical data to support the anticipated projected revenue along with considering market and industry trends.

Another thing is to assume a “down payment” is required, regardless of the type of loan that is being requested. Typically, business loans are not financed at 100% percent – that’s very rare. Vehicle or equipment loans sometimes can be the exception, but preparing to have a minimal 10% down is reasonable for this type of loan. But if it’s a commercial real estate loan, that could be a minimum of 15% and go up from there.

We don’t know what we don’t know. For example, there’s a misconception of what loans are designed for. They’re designed to help businesses grow and scale, not necessarily to consolidate debt or to start up. There are certain banks out there that will have U.S. Small Business Administration (SBA) loans and other products favorable to business owners with insufficient collateral, but sometimes that’s not always the best route.

Knowing what financing opportunities are available is important. Folks often think of traditional financial institutions, like banks, but there’s also alternative financing options offered by Community Development Financial Institutions (CDFI). CDFIs provide credit and financial services to underserved markets and populations, as well as grant opportunities found through different nonprofit organizations that grant small businesses with funds to start or grow their business.

Folks at resource organizations within our capital ecosystem are positioned to connect entrepreneurs with institutions that are more likely to fund them. Not every bank is the right fit. It doesn’t matter if a business owner qualifies on paper or not, if the type of loan the business owner is looking for isn’t the financial institution’s specialty, or they don’t have an appetite for that particular industry, it’s possible they won’t fund it because it falls outside the perimeters of their area of interest to do business and lend money. 

The organizations in Kansas City that are working to open pathways to funding are doing their best to demystify the process. On the other hand, we’re also working to help bankers and funders better serve, and connect with, entrepreneurs. Capital Connections was created by the Greater Kansas City Chamber to bring bankers into the space with entrepreneurs and entrepreneur support organizations (ESOs). There’s a lenders forum, where bankers come to the table and ESOs introduce entrepreneurs, to more directly connect financing partnerships.  

This kind of collaboration is what a vibrant ecosystem starts to look like. We’re not there yet, but I think we have all the pieces. We just haven’t put the puzzle completely together.  

We’re trying to identify where the gaps are and close them. The bankers can’t meet all entrepreneurs’ needs, so let’s make sure that CDFIs and other alternative lenders and funders are at the table to meet the needs of entrepreneurs until they’re ready to graduate to the next lending level. The more we keep identifying and closing gaps, collaborating, and being intentional about it, I think we’ll eventually get to the kind of ecosystem we’re looking for in Kansas City.  

I want Kansas City to have this circle that provides really warm, wraparound services for entrepreneurs. If the ecosystem partners communicate and are intentional about collaboration and the work everyone is doing is complimentary of one another, no matter where an entrepreneur enters the ecosystem, we’re not letting anyone fall through the cracks.

Check out the organizations that make up the Capital Access Task Force:

AltCap
Asian American Chamber of Commerce of Kansas City
Black Chamber of Commerce of Greater Kansas City
Central Area Betterment Association   
Ches, Inc. 
DreamSpring
Economic Development Corporation of Kansas City
Enterprise Center of Johnson County
Foresight
Heartland Black Chamber of Commerce
Hispanic Chamber of Commerce of Greater Kansas City
Hispanic Economic Development Corporation
Kansas City G.I.F.T.  
Kansas SBDC Capital Access Center 
Hispanic Economic Development Corporation
Holy Rosary Credit Union    
Johnson County Community College   
KC Biz Care   
KC SourceLink    
Mid-Continent Public Library   
Missouri SBDC
NetWork Kansas
One KC for Women   
Pathway Financial Education   
Prospect Business Association   
SCORE   
The Porter House KC   
The Toolbox KC   
University of Missouri-Kansas City Innovation Center, Entrepreneurial Education   
WeDevelopment Federal Credit Union