Ep 38: Freddy Lansky on SBA vs Investment Funds for Business

  
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In this episode, Avi talks to Freddy Lansky, owner of Points Panda, about the pros and cons of SBA loans, and why he’s currently thinking of starting a fund instead of taking out an SBA loan. 


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📝 Show Summary & Insights

Starting Out

  • In 2010, Freddy started a business called iChess with his business partner. The business focused on selling chess courses and videos online.

  • Together, they scaled the business to just over 7 figures. In 2019, Freddy's business partner bought him out.

  • After taking a few months off, Freddy started a new business called Points Panda, which began as a product tie service. 

  • At the same time, Freddy used his funds for an affiliate blog in the credit card and travel hacking space. Due to travel restrictions resulting from COVID, the business model tanked.

  • Later, Freddy thought about buying a business. He ended up thinking about putting up a fund of his own, after getting offers for SBA loans.

SBA Loans

  • SBA loans are usually between $300,000 to $5 million. Typically they are provided by  banks, and supported and backed by the government through the Small Business Administration. Their terms are usually very good, considering that they are government-backed. These days, the interest rate is generally at 6%-7% over terms of 10 years. 

  • These days, it's easier than ever to get a loan for an online business through these SBA loans. The market is at an all time high, but Freddy says that there are pros and cons. Around 95% of businesses on the major brokerages are either not SBA eligible, or the sellers don’t want to deal with SBA. This is often due to the huge amount of paperwork and due diligence required from banks. It can take months to close. 

  • Banks also don’t like extending loans for Amazon FBA businesses because they regard them as too risky. Also, despite having low interest rates, you can have high multiples and debt service payments. 

  • You usually sign a personal guarantee, which means that banks can go after your property if you default on your loan.

  • Freddy says that good SBA loans are hard to find unless it's an off-market deal.

Fund Thoughts

  • To address these issues, and after talking to investors, Freddy is thinking of putting up a fund for online businesses as an alternative to SBA loans. 

  • With funds, you might have less risk and you can source deals faster when compared to SBAs. However, Freddy says that the cons of going this investor route is that you may not keep the majority of equity. There would be a need to ensure that more passive investors won’t gang up on you and remove you as the operator. 

  • Right now, Freddy is stuck choosing between whether he wants to go majority debt and a little equity to investors, or the other way around. He is more in favor of setting up as a fund or as an operator for someone else's fund. 

  • Sourcing good investors who understand the business and have your back is very important. Finding them can be tricky. Interestingly, Freddy usually finds good investors in online forums and Facebook groups. These people are generally realistic investors who are looking to diversify.

  • EF Capital is a good model for a fund. In terms of payments, it gives 30% to the operator, with the brokerage taking 10%.

  • Freddy is currently preparing and figuring out the best way to go about this. If it fails, he can always go the SBA loan route.


Guest Info


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Cheers,

Juliet