In 1976, Steve Jobs and Steve Wozniak decided to go into business assembling computers.
They had no money, but Jobs approached a local computer store, The Byte Shop, that had shown interest in their machine, but only if it came fully assembled. They would pay $500 each for 50 machines upon delivery.
Jobs then took the purchase order that he had been given from the Byte Shop to Cramer Electronics, a national electronic parts distributor, and ordered the components he needed to assemble the Apple I Computer.
The local credit manager asked Jobs how he was going to pay for the parts. Jobs replied, "I have this purchase order from The Byte Shop chain of computer stores for 50 of my computers and the payment terms are COD.”
Jobs requested that if Cramer provided the parts on Net 30 Day terms, they would build and deliver the computers in that time frame, collect the money from The Byte Shop and pay for the parts. Today, the market value of Apple is $337 billion. Apple employs 60,000 workers.
That’s a wonderful story of a credit source willing to take a risk on a couple of unproven entrepreneurs. The Byte Shop was taking a giant risk on paying cash on delivery for an unproven product. And of course, it took a couple of risk-takers — Jobs and Wozniak — to get the ball rolling.
Can you imagine this story taking place in the current economic environment?
Definitely not. We are in a state of economic paranoia paralysis.
An entrepreneur today has almost no access to working capital. Most small businesses haven't yet accumulated any bankable assets to borrow against, so traditional banks aren't lending, since these loans are based on hard assets.
This is the classic chicken-and-egg story.
You need funding to fulfill orders to create inventory and receivables, but you cannot access funding without first having inventory and receivables.
Jobs and Wozniak would have been out of business before they started.
America has been built by risk-takers — entrepreneurs willing to roll the dice in hopes of creating a business and hiring workers.
Apple is just one of these incredible risk-takers. Thousands of U.S. companies got their start because someone was willing to take a risk on an idea and a dream.
As a successful entrepreneur myself, I know first-hand how risky it is to start a business, and I can appreciate how risky it is to finance an idea.
Both are essential to job creation and building wealth for the company, community and country.
This has now become part of the class-warfare doctrine. Those demanding jobs fail to recognize that lenders and equity providers aren’t the villain — but are a big part of the solution.
It is naïve to accuse those providing financial resources to our entrepreneurs at higher rates of interest as predators and evil people. They are operating in a shaky environment that only magnifies the inherent risk of lending money.
Yet, there are groups of people who are vilifying the lending practices of Investment Bankers, Venture Capitalists and Mezzanine Banks. These secondary forms of financing are many times the only way an entrepreneurial dream has any chance at all to see the light of day. They are essential to our free enterprise system. Capitalism cannot exist without them.
While Mitt Romney is being maligned for his management at Bain & Company, people forget that one of his earliest and most notable venture investments was in Staples Inc., the office-supply retailer. The funding enabled Staples to expand from one store in 1986 to more than 2,000 stores in 2011. Today, Staples employs more than 50,000 workers. That’s what can happen when a company is willing to take a risk on a small business.
If you’re looking for a villain in this process, look to the over-regulation of the banking industry. Increasingly, lending criteria for small business is so overly restrictive that community banks can no longer make personal judgments about which companies deserve a loan. Because of liquidity requirements and government enforced underwriting rules, community banks are no longer able to compete with the large financial institutions.
Many community banks are selling out or closing their doors.
This means the deposits of a community are no longer being loaned back to their community, depriving the community of a stronger tax base and local jobs.
The losers in this mess are the entrepreneurs and small businesses that are sitting on the sidelines, unable to move forward on obtaining loans and tapping into credit to grow their business. And the ultimate losers are the American workers.
If you want to see jobs grow, let banks and entrepreneurs share the risk without restrictive government regulations and interference.
Left alone, entrepreneurs will thrive.
All they need is the chance to succeed.
More Posts by Neal Asbury
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