Banks, Business Loans and Small Publishers — can they play nice together? (the dirty lowdown about startup funding)

(Originally written as a response I posted to the Publish-L email list)

> I’m putting my head up over the
> trench and risking being shot down again. We all prepare Business
> Plans which we spend a lot of time and money on.
> …snip…
> The original loan applicant can be
> turned away but the plans (or a copy) stay in the files. They are a
> valuable asset to the right person and that person is the one who
> will pay a handsome kickback for the information. This could be your
> book marketing plan and details of its unique plot and characters.
> Maybe even a complete manuscript.

First and foremost, I don’t know international law, I’m definitely not a lawyer, and you should seek legal counsel in your area for specifics. With all those disclaimers out of the way, here in the U.S. there are several ways to protect yourself from something like this although this kind of theft is pretty uncommon with banks.

  1. A Non-Disclosure Non-Circumvention Agreement (NDNCA). For anyone that is unfamiliar with this, a Non-Disclosure basically a document between two or more parties that is used to give the owner/preparer legal recourse if the other party doesn’t keep what is seen or read confidential. The Non-Circumvention addition keeps the same party from “going around you” to use this information.
  2. Although the NDNCA is usually presented as a separate document it is also possible to tie it directly into your Business Plan. At the advice of a Corporate Attorney that had retired from AT&T, we added a “Restricted Use” page right after the Title Page where we placed all the Non-Disclosure/Non-Circumvention verbiage. We then placed a disclaimer in the footer of every page basically stating that all content on that page was subject to what was set down in the Restricted Use page.

As far as banks stealing business ideas from the average Loan Applicant, I won’t say it can’t happen — but it’s a long shot. For starters, and this is going to sound pretty warped, but banks here in the U.S. generally won’t loan a small business money UNLESS IT DOESN’T NEED IT.

Yes, you read that right. According to a friend of a friend, a Loan Officer who took pity on me once upon a time, explained it best:

  • The average small business loan applicant might prepare a Business Plan that is decent (or even above average) but, more often than not, their Financial spreadsheets fall woefully short.
  • Thinking that a smaller loan is better to ask for, the average applicant will request an amount of money for a startup that would get it classified as “undercapitalized” which, from a bank’s standpoint means two things: (1) the venture stands a better chance of failure and (2) they won’t make any money off the interest. This is why many of your larger banks have shyed away from doing micro-loans.
  • Many loan applicants are coming to the bank with a business that has no financial track-record. As a result, in order to be considered for the loan the business owner would have to have adequate personal assets to put up as collateral. A house. Cars. Boats. First born children.

As far as bank managers stealing business concepts, the reality is that most business plans are just high-level descriptions of what’s going to happen and how, who is going to be involved, and some early growth milestones toward profitability. They don’t tell HOW to make a product or how to adequately manage a service’s day-to-day operations. They might discuss trends in an industry but they don’t show how to spot and navigate the business through them. Simply put, just because you give an Astronomer a set of plans that doesn’t mean s/he can become a successful Astronaut.

And last but not least, to tie it into the Publishing Game, according to that associate I mentioned earlier, many lending institutions (at least here in the U.S.) tend to have very little regard for Small Publishers. Every book is a gamble. Profit these days is just a numbers game. Because we don’t need to have our own printing presses or distribution vehicles to be successful, our liquid assets are a joke — basically some used office furniture, computers, software, books, archives of digital media, unsold inventory, and maybe a website. If the average small publisher goes out of business there’s nothing for a bank to use to recoup for losses. In many cases there isn’t even enough worth selling to pay for someone to take the remaining assets to auction.

Just some more food for thought…

–  Max Nomad