SMB and Outside Capital

devil in suitAll my start-ups after Orbitz were boot-strapped, so I get rather passionate about this topic.  Whenever inquiries come in from small business owners regarding the logistics of getting outside capital – valuation expectations; how much control to relinquish; what changes in operating agreement are necessary; re-classing voting rights and shares; guaranteed distributions regardless of performance (sort of like Jay Cutler’s new deal); etc. – I ask one simple question.  Why do you think you need outside capital?  Often, I’m dismayed by the answers I hear back…  They range from funds for rainy days to taking money off the table for the founders.  One thing you need to realize, it’s irrelevant why you think you need outside capital.  Investors will only invest if prospects meet their investment thesis in addition to meeting a couple of crucial criteria.

  • Management team in place – if it comes down to poorer business model with great executive team vs. great business model with poor executive team, investors will always choose the former over the latter.  There’s no such thing as great business with poor management – it won’t last.  Lesson for business owners – choose your management team wisely as your business grows.
  • Scalable business model – investors will invest if exponential return in COGS investment can be forecasted, e.g. there’s significant operating leverage.  Whether the business is technology-based or processes-based, business owners will have to demonstrate that an investor do not need to continue to spend corresponding OPEX dollars in order for it to grow.

So really think about why you need outside money and what you will use it for before approaching / accepting the capital.  Besides, there’s some truth to old saying – taking VC funds is like making a deal with the devil – do really want or need to do that?

Death of Fox & Obel

photo (63)I’ve written many “Death of” articles – death of Blackberry, death of the penny, death of the Encyclopedia Britannica. But this one really hurts…

Before Mariano’s Fresh Market, Whole Foods, Wild Oats, and Trader Joe’s (I’m still mad at them for not giving me an opportunity to interview after I submitted an application at a different point in my life out West, but that’s a story for another time), there was Fox & Obel, the Chicago-based, River East mainstay for over a decade. With rumored celebrity investors like Scottie Pippen, 5 dollar per ounce olive oil, truffle tasting stations, in-house wet and dry aged meats (initially the only grocer that carried Tall Grass Beef from Red Buffalo Ranch, owned by Bill Curtis), top-notch wine and apéritif lists, hard-to-find regional and international accoutrements, and a Zagat-rated cafe attached, people had flocked to what is arguably the first high-end grocery store in Chicagoland. And this was despite its sky-high prices (trust me, much worse than Whole Paycheck, I meant Whole Foods).

Manning the bakery was Phyllis, a lovely woman and native of South Africa who never hesitated to scold rude customers, who took it. There was Martha, the ever-smiling assistant manager greeting patrons as they walked in and out. And Juanita, café manager and a single mother (her son’s a star athlete at a local Catholic school). Juanita knew exactly how you liked your coffee. Fox & Obel managed the unlikely balance of Chicago Gold Coast uppity-up-ness with a neighborhood feel. My business partner (of Spend Matters fame) Jason Busch Ioved the bakery so much that its muffins, pastries and bread made it into our formal LLC operating agreement for our Spend Matters advisory business (i.e., written into the agreement was that one partner had to “stop at the Fox and Obel” bakery before business meetings – I kid you not, and yes we did honor the agreement!) Unfortunately, it’s now time to amend it.

For a while we’d heard rumors of additional investors, new stores in the downtown area, North American expansion. Then bam: the bottom fell out.

My wife Jenna and I walked around the closing sales event with heavy hearts. To Jenna and me, this was not just a grocery store – Tsige cooked for us, Sue babysat our kids, and on Friday afternoons I used to bring my RJSL and Spend Matters colleagues treats from the Fox & Obel bakery. So what happened? I can certainly make a few hypotheses.

  • Decreasing passion and sense of mission – After initial success, the original founders cashed out to private equity investors. And I could sense a gradual decline in quality over the past few years. Does that mean every buyout spells doom for those acquired? No, but it does mean that if cash flow buyers (as opposed to strategic acquirers) focus too much on the short-term bottom line, it will erode the X-factor that made the establishment special.
  • Hiccups in execution – It could be as minor as less crust on what used to be their signature almond croissant (Jenna noticed it after a new pastry chef came on board; the long-time head quit when his paycheck bounced), as major as multiple health code violations (fruit flies in food preparation stations is what I’ve heard), and everything in between, such as failure to pay electricity bills on time.
  • Poor inventory – Along with declining quality, I noticed that shelves were becoming emptier. No longer was Fox & Obel the go-to place for hard-to-find items, and even its staple trappings were sometimes missing, a cardinal sin for a grocery store. I am not a grocery industry expert by any stretch of the imagination, but even I could see tension between Fox & Obel and its suppliers.
  • Erosion of the foundation – No disrespect to technology and process (many economists claim these are the only two factors that could push the famed EFPC – efficient frontier production curve – outward), but people make up every business’s foundation, regardless of the segment. Again, towards the end, I heard grumblings from Fox & Obel’s employees. Perhaps they trusted me since I was a regular, but nonetheless, I never heard any complaints over the first few years.

I could go on and on, but it won’t bring Fox & Obel back. Furthermore, I think these causes of their failure are a good lesson for just about any business. And in case you were wondering what Jenna and I bought at the final closing sale, we stocked up on Fox & Obel water glasses and Mexican Coca Cola, made with real sugar. Coincidently, the sourcing of Mexican coke is a great personal procurement lesson – which involves having to pay significantly more for a far superior product (which also requires seeking out) albeit with the same corporate brand.

I promise to tackle more cheerful topics for the rest of 2014. Happy New Year, everyone.

We’ll also let you know what new Chicago bakery (La Fournette is highest on our current list) that Jason and I decided to amend and include in our operating agreement so that the entire Spend Matters and MetalMiner office continue to remain well-fed and sugared-up.

Are SMBs and Private Firms Better Economic Drivers than Publicly Traded Companies?

Recently, business author and Forbes.com contributor Stephen Denning  took up a topic that we found compelling — arguing from new research that suggests that privately held firms engage in greater investment than publicly-traded firms.  The short version of the argument goes that public firms invest less of their profits in new capacity or ventures to grow the company itself than do private firms.  There are a number of explicit and implied explanations of this apparent phenomenon, including claims that public firms are essentially engaged in “maximizing shareholder value” in a way that tends to be short-term in nature.

New boilers at the Yale power plant

New boilers at the Yale power plant (Photo credit: altopower)

One might paraphrase and say that public companies play to the market to maximize value via their stock price rather than long-term company value.  This case has often been made in more simplistic terms, but there is some intuitive appeal to the argument.  For years lip service has been  paid to the contributions and values of small and medium-sized businesses (SMBs) to our economy, but the research might finally be validating what many people hold in their gut — the feeling that small business contribute far more to the economy than they are given credit for, and conversely that publicly-traded companies might be getting credit for doing good for the economy when they’re really just doing good for themselves.

We might not agree with some of Denning’s praise of certain companies he deems to be creative contributors, but the observations and conclusions are certainly worth considering.  What do you think???

-SMB Matters Blog Team

 

How The ‘World’s Dumbest Idea’ Killed The US Economic Recovery

via Forbes.com
Readers of this column know that short-term shareholder value, which is still pervasive in large organizations, has a lot of accomplishments to its credit. It has led to “bad profits” that have destroyed customer loyalty. It is responsible for massive offshoring of manufacturing, thereby destroying major segments of the US economy. And it has even undermined US capacity to compete in international markets.

Now the Financial Times reports that the short-term shareholder value theory has a new feather in its cap: it is responsible for killing the economic recovery that should have occurred after the financial meltdown of 2008.

Over the last month, the Financial Times has been doing a great job in cataloguing the problems caused by the shareholder value theory. Now Robin Harding has terrific article pinpointing its role in undermining the US economic recovery.

In his article entitled “Corporate investment: A mysterious divergence” he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?

English: Construction Photograph of the Aqua T...

Construction Photograph of the Aqua Tower, designed by Studio Gang Architects in Chicago, IL (Photo credit: Wikipedia)

In standard economic theory, this makes no sense. When profits go up, companies should be seizing investment opportunities to lay the groundwork for even more profits in future. In turn, that investment should create jobs, generate more capital goods and lead to higher wages. That’s how capitalism is meant to work. So why isn’t it happening? Mr. Harding explores systematically why all the leading scapegoats for what’s gone wrong—regulations, Obamacare, tax policy, fear of another financial crisis and so on—and shows why they don’t add up.

Then he comes up with the kind of thing that you rarely see in economics—a study that enables us to pinpoint the problem by offering “with” and “without” data.

A brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle?”compares the investment patterns of public companies and privately held firms. It turns out that the lag in investment is a phenomenon of the public companies more than the privately held firms.

“They find that, keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”

As Matthew Yglesias at Slate writes:

“On this account we are reaping the bitter fruits of the “shareholder value” revolution. Executives at publicly traded companies are paid to generate higher share prices, which is done by hitting quarterly earnings targets. This leads to underinvestment relative to the behavior of managers of privately held firms. Not because managers of private firms are indifferent to the interests of shareholders, but because there’s less need for creating the shareholder value link via a simplistic relationship between compensation, share price, and quarterly earnings.”

As Mr. Harding concludes, it is “time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.”

There is another way: the Creative Economy

There is of course another way to run organizations, as illustrated by Amazon [AMZN] and other companies that are pursuing the Creative Economy. Their objective is not short-term profits but value for customers. The financial returns from this different approach are extraordinary.

The argument offered by executives that “the stock market made us do it” has the same legitimacy as “the dog ate my homework”, when public companies like Amazon [AMZN], Whole Foods [WFM] and Costco [COST] have successfully pursued customer value, despite the pressures of Wall Street. So isn’t it about time we stop compensating corporate leaders for meeting their quarterly numbers and instead shift the focus of business to its true goal of adding value to customers?

And read also:

The origin of the world’s dumbest idea

How modern economics is built on the world’s dumbest idea

When will the world’s dumbest idea die?

Leadership in the Creative Economy

The five surprises of radical management

________________________

by Stephen Denning

 

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Going Cash Free? It’s Not Just for Consumers Anymore…

Yesterday I went to a soft opening for a new artisan bakery, Hewn Bread, in our suburban Chicago community of Evanston.  (Full disclosure: We knew of the soft opening precisely because we know the owners, but I’m a fiend for fresh-baked bread regardless, so I probably would have discovered it by smell alone if I hadn’t already known about it.)

Besides the expected shelves full of fine goods and the nostalgic “throwback” mental association I get from the growth of new businesses using good old-fashioned quality and simple, traditional methods, I was a little surprised to find myself paying for my rustic French Wheat Loaf with a debit card on the bakery’s iPad-style PDA.  I’d gotten used to seeing this at farmer’s markets and other parts of the “smaller” economy, but it was certainly new to witness such technology at a traditional retailer.

Part of the surprise was my own choice to use a debit card for a such a small purchase, which I generally disfavor as a consumer, because it’s typically unnecessary when I’ve got cash.  The other part of my surprise is really less unexpected the more I realize that modern business has changed.  I’m normally sensitive to the fact that the added costs of debit and credit transactions for the merchant are ultimately passed along to us consumers, and I always hear gripes on that subject from small business owners.  However, the social media interaction between this new business and its prospective customers seems well-served by this innovative technology.

At checkout I was given the option of having a printed or emailed receipt.  While I declined both options to avoid adding to the vaults full of paper and electronic receipts that drive my wife crazy, I suddenly got why cash-free or “cash-less” has become just as attractive for some businesses as it is for many consumers.  Small Business Matters recently posted an article on PayPal’s newest entry into the point-of-sale (POS) market that reflects this growing trend.  -Paul for SMBMatters  BTW, the bread was great!  What else would you expect to hear from a bread junkie?

PayPal encourages small retailers to ‘lose your cash register’

Summary: The mobile and digital payment company is running a competitive trade-in under which it will help retailers get outfitted with an iPad solution in exchange for old cash registers.

ipad_checkout_here

PayPal has launched a competitive trade-in-program designed to get more small retailers to use iPad point-of-sale (POS) solutions that happen to use its payment processing services.

Under the Cash for Registers initiative, companies will receive free PayPal payment processing services for the remainder of the year when they turn in their old cash registers and start using an iPad-based payment solutions, such as PayPal Here. The offer doesn’t just apply to the transaction fees for PayPal services, it covers them for credit-card, debit-card and check processing, according to the company’s information about the program.

PayPal Here encompasses an iPad, card reader, iPad stand, cash drawer and printer. There are a number of pre-integrated solutions that PayPal has organized to help with the transformation.

Some of the companies that PayPal is working with include Erply, a POS and inventory management software developer; Leapset, which integrates POS information with a company’s customer relationship management systems; Leaf, which develops customer loyalty  and business intelligence solutions; NCR | Silver, which provides POS hardware;  ShopKeep POS, which sells an iPad POS system; and Vend, a POS and inventory management software application developer.

The program officially kicks off in June, according to a blog post written by David Marcus, president of PayPal.

“In addition to this great offer, we will make participating businesses known to our 55+ million U.S. (128 million worldwide) and growing customer base, and drive meaningful incremental business to them, stimulating the vibrant small-business community in America,” Marcus writes.

The rise of the tablet computer has signaled a turning point for small-business POS solutions, a trend that began accelerating in 2012 and is continuing to gain momentum.

Related stories:

Reblogged from ZDNET.

By Heather Clancy for Small Business Matters

Need Funding? There’s an app(s) for that!

SMB Tech Meet & Greet: JM Freuler of Funding Gates, Receivables Management Software (via http://www.Firmology.com)

Firmology’s SMB Tech Meet & Greet series takes an inside look at the technology available to small business owners, straight from the founders the built them. Name: JM FreulerTitle: Co-FounderCompany Name: Funding GatesCompany One Liner: Receivables management software for small businessesLocation…


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Indie Capital? It’s a Movement, Not a Place

By Bruce Nussbaum Indie Capitalism

Here’s a shocking truth: Occupy Wall Street and the Tea Party actually agree on something. They both hate crony capitalism, and they both love Steve Jobs. If this sounds freaky, let me add another weird fact: Practically all my students at the New School in New York, where I teach a course on creativity and capitalism, want to start their own companies. The New School is renown for being a bastion of lefty thought, going back to the 1930s and ’40s. My students want to be entrepreneurs. They want to be Kickstarter, kickass entrepreneurs. These students want to belong to what I call Indie Capitalism.

creative intelilgence by Bruce Nussbaum

I use the term Indie deliberately to reflect a new economy that shares many of the distributive and social structures of the independent music scene—and the value system as well. Indie bands are hyperlocal, and Indie Capitalism is a post-global, local economic phenom (think 3D printing, locavore eating, and crowdfunding new products). Indie capitalists are über-urban, too, feeding off the cultural/entrepreneurial energy of cities—New York, Portland, Chicago, Detroit, San Francisco, Los Angeles, Seattle, Austin. And they are, of course, super-participative. Indie Capitalists believe in our making of all things, with no clear boundaries between consumer and producer, investor and shopper. We are all of them.

There are many Indie Capitalists already among us. Alice Waters’s groundbreaking organic restaurant Chez Panisse has served as a model for the “source-local” food movement. Blue Marble Ice Cream, “Made in Brooklyn,” uses only local New York State cow milk and hires folks from the neighborhood. Chrysler Group tapped into the Indie culture when it hired Wieden + Kennedy to come up with the “Imported from Detroit” ad, with a song by Detroit-born Eminem.

My favorite Indie Capitalist is entrepreneur Elon Musk, the co-founder of PayPal (EBAY). He’s handcrafting Falcon rockets and Dragon capsules to take people and cargo to the International Space Station—and even to Mars. His company SpaceX integrates creativity, creation, and capitalism. So does his other company,Tesla Motors (TSLA), which is assembling and selling all-electric sports cars and four-door sedans out of an old California factory.

Indie Capitalism has three foundational principles:

• Creativity generates economic value. Creativity is the source of profit. Yes, efficiency can squeeze more out of what exists, but creativity gives us originality, which translates into a market advantage and big margins.

• Creativity drives capitalism. These past few years we have been victimized by the disastrous results of “creativity” applied to the financial sector (mortgage-backed securities, for starters). What we lost sight of is that the scaling of creativity to actually make things of value sold in the marketplace is the true heart of our economic system. It is the true generator of net new jobs, wealth, and tax revenue.

• Creative destruction is crucial to economic growth. Crony capitalism, which relies on monopoly and political power, is antithetical to entrepreneurial capitalism. A faster cycle of birth, growth, and death of companies boosts creativity, economic value, and growth.

The contours of Indie Capitalism are only just coming into view. They will change over time, as my students and millions of others build this new economic system. But in the reconnecting of creativity to capitalism, we have something to look forward to.

Nussbaum, a former assistant managing editor of Businessweek, is a Professor of Innovation and Design at Parsons The New School of Design and author of the forthcoming book, Creative Intelligence (HarperBusiness, March 2013). Follow him on Twitter or visit his Tumblr.
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The 10 Rules of Successful Entrepreneurship (Part 3 of 3 part series)

EntrepreneurContinued from the previous post…

8.  Learn to sell – this is a must-have skillset, whether you have someone in charge of sales or not…  The good news, even if you’re not born with the gift of gap, you can become better by continually getting in front of prospects and practicing your pitch.  While I do not believe in entrepreneurs pitching vaporware but if you don’t believe in your products and services, it’s impossible to convince others to believe in them (you can read between the lines)…

9.  Redefine failure – when you have your own business, often the highs are so high and the lows are so low.  But even on their gloomiest days, successful entrepreneurs feel a compulsion to make sure that failure isn’t the end of their story.  It’s OK to fall down nine times, just make sure that you get back up the 10th time.

10.  Don’t be in it just for the money – a tricky statement¸ since most entrepreneurs I know are red-blooded capitalists like me.  But as an old saying goes, money is a great motivator, not an end-all be-all.  Successful entrepreneurs are driven by desire to accomplish meaningful things while embracing it as a way of life.  Jobs once asked Sculley (back then a senior exec at Pepsi) when trying to convince him to join Apple, “do you want to spend the rest of your life selling sugar water or change the world?”  Sculley came on board as the CEO of Apple (only to get fired later but that’s for another post).

While writing this 3-part post, I found myself reflecting on my own current endeavors.  Am I following the rules myself and doing everything I can to ensure their success?  What’s your answer?

The 10 Rules of Successful Entrepreneurship (Part 1 of 3 part series)

EntrepreneurMany household names in the corporate world got their start during economic downturn.  In 2009 at the depth of the worst business climate in decades, Americans started nearly 7MM new businesses.  Most of them will fail, but some will succeed.  Bill Murphy Jr., author of The Intelligent Entrepreneur, wrote about the 10 rules of entrepreneur success.  As simple as they sound, there’s lots of wisdom in these rules…

  1. Commit to entrepreneurship, rather than a specific business – being an entrepreneur is a lifelong decision.  And such commitment helps entrepreneurs stay flexible and react nimbly to market feedback.  My first company, RJSL Group, started out as a shipping container import business for automotive industry but turned into a CFO staffing shop.
  2. Look for market opportunities before creating business solutions – don’t decide on products and services first then set out to convince the market to buy what you are selling.  You will be left out wondering why sales are flat.  Rather, use your expertise to first understand potential customers’ needs.
  3. Focus on innovation and scale – most businesses are launched in unattractive, static fields and offer no competitive advantage.  The founders only employ themselves, cannot articulate growth plans and generate subpar topline.  The successful ones combine deep knowledge of customer needs with a commitment to achieve outsized goals.

Reasons Why Many Small and Medium-Sized Businesses Fail to Survive

SMB Small business failure trendIt’s a known fact that small and medium sized business failures have continued to increase over the past three years. Some businesses are failing in the first three to five years. It can’t just be bad luck that causes so many companies to lose ground permanently. Below are some of the biggest reasons small and medium businesses don’t survive.


Poor Planning

To have a successful business, planning and innovation is required. The amount of pre-planning that must be done before a business starts up can be exhausting but necessary. A good business ownerwill have a good methodical and systematic approach to ensure business goals are implemented and met. Smaller companies often fail at this step. They tend to start right off without a future plan and end up far from where they expected.

Avoid Technology

Technology can enhance a business in so many ways. Small and medium sized businesses can take advantage of automated accounting, internet, e-purchasing and sending e-catalogs to their current and potential customers. When a business fails to see how important technology is in their day to day business, they won’t be able to keep up with the market demands or business goals. Businesses that don’t take advantage of things such as SEOand PPC won’t be able to stay up to date with their competition. This can lead to little or no sales.

Lack of Funds

Many small and medium sized businesses underestimate the funds they need to help the business survive. Unrealistic expectations can add to the risk of bankruptcy. All businesses need to have a very good idea of how much funding is needed for starting up a business and staying in business. Business owners have to be prepared to make an investment into the business for years before it can make good profits.
Quality
Many businesses fail because they neglect quality. Providing quality can cost the business more up front, but it will produce better results in the long run. When businesses neglect having quality, they usually experience a downfall. Doing things below quality can significantly affect your customers. Customer service is always critical for a business to survive. If customers are not given the proper attention, if they are not treated with professionalism and respect, it can be the downfall of your business. Customers who receive good customer service can be the ones who stabilize your business.
Product Range 
When businesses offer a wide variety of products, they have more chances for success. Businesses have to consistently be proactive when it comes to modifying, endorsing or even eliminating products. When a business isn’t open to new ideas, or when they are not flexible with their products, they may not be able to keep up with their competition which can lead to failure. When a customer changes what they need, the business must be ready to change the product.
Small and medium sized businesses can do well when their owners have a good bit of knowledge about systems, processes and technology. It also benefits a business owner to be skills-associated with production, distribution, cash flow and employees. Following certain practices and rules can help small and medium businesses survive.
Max Boddicker writes about business, economics & more at www.homeequityloan.net.

Funding Tips for SMBs

Tips for Funding Medium-Sized Businesses in Today’s Environment

When running a business, one of the biggest problems many have right now, is obtaining funding. In the past, money has been much easier to borrow, but with current economic conditions, easy funding is gone. Businesses borrow money for any number of reasons including to hire employees or open up new locations. In reality, a lot of businesses of any size falter because of the lack of adequate funding. Here, are 5 tips for obtaining funding for medium-sized businesses in today’s environment.

Venture Capital
When running a medium sized business, one needs to determine how much they are willing to give up in regards to control. Venture capital money is usually obtained for higher risk, higher reward companies. This is an excellent way to get a serious amount of money to take a business to the next level. The downside with venture capital is; they end up owning a portion of the business. Oftentimes, they even want to control aspects of the day to day operations. Venture capital money can be used to start up a company, or to expand operations or ideas.

Traditional Banks
By the time a business is medium-sized, they will no doubt, have a banking relationship. Even though, receiving funding is difficult, an established business can still get money. Banks are exceedingly strict when giving out loans, so be prepared to have financial statements on hand. A business that over the long term has made money will have no problem qualifying for a loan. Establishing a banking relationship with a local bank is a terrific idea for a business owner.

SBA-Guaranteed Loan

Image representing U.S. Small Business Adminis...

Image via CrunchBase

If a bank will not loan money, there are other options. One is through the SBA guaranteed loan program. There are SBA district offices all over the country where one can fill out a loan application. The people at the SBA will be able to assist one in filling out the application. Many medium sized businesses can get more consideration if they are hiring new workers or in a certain industry. The small business association can help one qualify for the maximum amount of money.

Angel Investor
If a business is viable and profitable, an angel investor may be able to assist. Like borrowing from a bank, one needs a solid plan for what they plan to do with the money. One would need to have financial statements and proof of profits to have a serious chance of receiving funding. Angel investors are different from venture capitalists in that an angel investor does not seek to run the operations of a company.

Sell Stock
A company that is seeking funding, can also sell a portion of their company. This is a way to gain funding, while still controlling the company. This is a way a business can get a large amount of money, to really fund operations needed for growth. Stock can even be sold to employees who are confident in the companies operations.

Anyone looking to obtain funding for their business needs to be prepared. Financial statements and a serious business plan are needed. This is because anyone giving out a loan wants to be sure they are dealing with a legitimate business. When obtaining funding, a business has an excellent opportunity to take expand exponentially.

Skylar Rickman writes about business, finance & more at www.creditreport.org.

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