Dodd-Frank and Me

The Magically Receding Bank Loan

Software companies usually don’t borrow money; I blogged long ago about the loan my old company couldn’t get to buy a switchboard. But in 2011 Mary and I started a new company, NG Advantage LLC, to truck compressed natural gas. Our idea was to bring the economic and environmental benefits of natural gas to companies located beyond the reach of pipelines. We were the first to do this in the US and there is a lot of demand.

But my inexperience with borrowing and then Dodd-Frank almost did us in.

One of the new technologies which make trucking natural gas viable is carbon fiber trailers. A trailer with carbon fiber tubes can haul twice as much gas per trip as the old trailers you may have seen with steel tanks that look like something a giant would use for SCUBA. These carbon fiber trailers, at the time, cost $500,000 each. Since customers use the gas directly from the trailer, there are usually two of these sitting at each customer location (active and standby) and then there are some more trailers being filled or going to and from customers. There is also very expensive equipment at each customer site and then a station full of compressors built on a pipeline to put the gas into the trailers. In other words, you need a lot of stuff to be in this business. I knew that; I’d made a spreadsheet.

My assumption was that, since I had successfully built businesses before, once I had customer contracts, I’d be able to borrow enough using the equipment as collateral to get the business started.

“No,” said the bankers. “We can’t do that. Your company has no track record; your industry doesn’t even exist!”

“But I’ll have contracts to prove that there’s a need and the equipment will be collateral. Isn’t this just like a car loan only a little bigger?” I argued.

“Now you’re talking,” they said. “If you want to personally guarantee the loans and put an amount on deposit with us to cover them in case of default, we can probably do something.”

It didn’t seem like a very good idea to lend them our money (even if we had enough) at 1% so they could lend it back to us at 7%. “How much of a track record do we need before you can finance us without a personal guarantee?” I asked.

“One year of EBITDA-positive operation,” they said without even having to think about it. [If you’re not familiar with the concept of EBITDA they meant they wanted to see us generating cash from operations.]

“OK,” I said.

We raised money from angel investors; we got an economic development loan (which we did have to personally guarantee); we got seller financing on the land we needed for the compressor station; and we got some very, very expensive loans from non-banks which, at first, we had to personally guarantee.

We built the compressor site; we bought the trucks; we signed contracts and delivered gas. We had a backlog of customers signed up. And we had been EBITDA-positive for a year. Deploying new customers meant we needed more trucks and everything else. Back to the bank I went.

“No,” they said. I reminded them of what they had said last time.

“That was then and this is now. Under Dodd-Frank, we can’t make risky loans to new companies. We need you to be EBITDA-positive for two years.” We got more very high interest loans and raised more from investors.

Dodd-Frank is a law which was passed after we bailed the banks out under TARP (see We’ve Been T*ARPED). The premise was that, if we’re going to bail out banks, we have to regulate them to make sure they won’t need more bailouts. Actually, I agree; that’s one of the reasons we shouldn’t have bailed them out. And, although only the money center banks got bailed out, even local banks, who had been more likely to lend on reputation, came under the same strictures.

After two years a very senior banker assured me we had a loan. “Just have to go to committee,” he said. “Just a formality.” He was crestfallen when he told me he’d been turned down in committee; hadn’t happened to him in fifteen years. “It’s Dodd-Frank,” he said.

The story ended well for us. Banks do now lend to us and we borrowed money at reasonable rates to repay the money on which we had to pay outrageous interest. We paid back the economic development loans. But we were only able to succeed because we’d been lucky enough to succeed before and had the ability to guarantee some loans and to raise capital from people who’d made money by funding us before.

Since the passage of Dodd-Frank, the big banks which caused the crisis have gotten bigger; the big four in the US now control 45% of total bank assets.  Dodd-Frank took away the flexibility which made local and regional banks competitive. A first step in putting capital back in the hands of job-creators should be to exempt all but the biggest banks from this law and allow more money to flow to Main Street. Second step should be to make sure that any of the huge banks which is too big to fail are also too big to continue. If a bank is a systemic risk, it should be broken up. Once it is clear that we can’t be blackmailed into bailing out banks again, the rest of Dodd-Frank can be dismantled. Then capital-intensive startups can borrow to grow after they’ve proved themselves by being EBITDA-positive for just one year. And we will have new jobs and rising wages.

More on the harm Dodd-Frank has done at How the Fed and Dodd-Frank Killed Jobs and more on how much I had to learn about capital-intensive businesses at The Difference Between Venture Capital and Private Equity. See  It Was TARP that Boiled the Tea for some of the 2010 anti-establishment fires which are clearly still burning.