Final Thoughts from a Banker and an Entrepreneur

     As important as the information in this book may be, it’s only part of a much bigger picture. Success as a businessperson — regardless of field — depends on many components and learning how all the moving parts fit together can make the difference between success and failure. You won’t find many tips, traps or secrets highlighted in this chapter, as this chapter is almost completely advice which includes all of those.
     Although Ron and Greg have similar values, their backgrounds couldn’t be more dissimilar. Greg has a BBA from Southern Methodist University and holds an MBA from Texas Christian University; Ron found himself living on his own as a teenager after his father’s death and is largely self-educated. As different as these two men are, both have earned success in their fields through hard work, a laser-sharp focus on their goals and the desire to constantly improve their skills and knowledge.
Their approaches are as different as their backgrounds, but both have plenty to say about building a successful business.

Final Lesson – Get Rich Slowly

Greg: One thing that ties together everything we’ve talked about is an understanding that the prosperity of any nation depends upon the prosperity of its people. We can’t do well as a country unless we learn to do well as individuals.
If America is a great nation, it’s because of the prosperity of the people. Right now, we’re not doing so well. Unemployment is up and a lot of people are facing hard times.
     Debt can be your enemy, because it creates an illusion of wealth. You have debt so you get a loan and suddenly you don’t feel like you’re in debt any longer, because you have all this money available to you. I can tell you that banks hate to make debt consolidation loans, because after we put together a package and take care of those credit card bills, the next thing we see is that same customer is back needing a new loan, because now he or she has charged the cards all the way back up.
     As a banker, when that happens, I realize that I should have practiced tough love the first time around and not made the loan. I should have made the customer learn instead. The point is that people who want to succeed and who want this country to succeed, have to learn to be good stewards of their money. They have to practice doing well with what they have before they think about someone lending them more.
     Stewardship comes in a lot of ways. It means working harder than you’re paid to work. Your task, not the clock, should determine your quitting time. A good employee and a good businessperson, doesn’t work by the clock; he or she works to accomplish his or her goals.
Another place where I see people going wrong is that they don’t pay themselves. Every person should put 10 percent of his or her pay in some sort of savings account. If you start doing that right out of college, it’s easy to do for the rest of your life. But if you don’t do that from the time you get your first job, it’s going to be hard to turn into a habit. I’m telling you, though, that over time it’ll add up to a significant amount of money.
     Another way to practice better stewardship of your money is to take advantage of your company’s 401(k) plan. If your company has a 401(k) plan and matches your contributions and you don’t take advantage of that, you’re crazy. That’s free money! If someone is handing you money, you can’t afford not to take it. Plus, it lowers your taxable income, so it benefits you all the way around. I have employees who’ll say that they just can’t afford to put that 6 percent of their income into the account; when I give them a raise, I try to get them to dedicate their raise to their 401k or other savings.

If you’ve made it this far, you realize that there’s a lot of information that entrepreneurs need to acquire before approaching their banker. The prior text had trips and traps noted, but some require more explanation, so we’ve added them here in this chapter. These are necessarily more or less important, just presented with more information. But even with all the information you’ve been given, there are a few more things you should be aware of before you walk into the bank.
There are certain things your banker isn’t going to tell you. But that’s why you’re reading this book! Learning these tips and traps can save you time, money and headaches down the road. Most of the information in this chapter comes from Ron, from an entrepreneur’s perspective, though Greg has certainly got plenty of lessons to teach about getting everything to look its best and get good results for all parties. Most of the material is from Ron, he’s an out of the box experienced thinker, and has learned many of these the hard or expensive way. But as with tip No. 19, he hired a good tax lawyer to help with the single member LLC to save costs. Remember, you don’t know what you dont know, and it’s important to surround yourself with people that know more!

Tip No. 1 – Appraisals Aren’t Always Needed

Although appraisals are very common on real estate deals, you may not need one if the property’s value is below a certain dollar amount. The threshold varies by bank.
Banks can use tax district appraisals, depending on the loan-to-value ratio, rather than conducting a new appraisal. In the current

economic environment, the Fed is concerned that local tax districts can’t keep pace with rapidly changing property values, because tax districts look at property on only an annual basis. But if the district says a piece of property is worth $200,000, a customer could likely expect to borrow $100,000 on that property — or 50 percent of the estimated value — without a formal appraisal.

Tip No. 2 – All Appraisals Are Not Created Equal

In commercial real estate, there are two kinds of appraisals: Full scope and limited scope. In a full-scope appraisal, the property is inspected thoroughly, while a limited scope requires less information. Typically, a limited-scope appraisal is all you’ll need.

Three factors are considered when a property is appraised:

• Cost: What’s the cost to rebuild this building?
• Income: How much revenue can you generate by renting
  this space?
• Comparable sales: What would be the price if you wanted to
  sell this property?

Keep in mind that customers can’t choose their appraisers. Regulations require bankers hire the appraiser. In the interest of fairness, you can ask your bank to put the appraisal out to bid. The rules have changed dramatically in recent years, so you can’t put it out to bid yourself. The new federal guidelines require the lender to get the appraisal and because of the more cautious approach, the odds are very good that the appraised value will be much less than you expected.
There are times that a lender can ask for an updated appraisal with a limited scope or a “drive by” update or “desktop,” and any of these can save the customer money. Don’t be afraid to ask. Factors such as performance of the loan and or customer, amount of loan and how old the existing appraisal is can guide these decisions by your officer.

It’s safe to say that everyone understands the importance of credit. In today’s business environment, it’s virtually impossible to make progress without it. But even though we know how important it is, too few people know how it works.
Credit is complicated and it’s based on many things. Gaining a better understanding of how it affects you — and how a banker or lender uses your credit record to make a loan decision — is an important step toward painting a better financial picture for yourself, both personally and professionally.

Lesson No. 1 – Credit: Make It Personal

Greg: People think that their personal credit doesn’t affect their commercial credit. But if you don’t keep your personal credit clean, as a banker I’m not interested in extending you any commercial credit. I realize that there are dentists out there whose kids need braces and I know there are even bankers out there with bad credit. But from where I’m sitting, if you don’t keep your personal credit clean, there’s no reason for me to believe that you’ll keep your commercial credit clean either.
So one of the first things that I do is look at someone’s individual credit report. If it’s not any good, I won’t even look at the commercial credit application. It just isn’t worth it to me.

Ron: A lot of people don’t think about that. They think they’ll just start a corporation or maybe use an existing corporation. They probably know that the credit reporting for corporations is very thin, and isn’t nearly as reliable as it should be, especially for small businesses. As a general rule, banks don’t make loans that aren’t guaranteed. And in this case, the credit is only going to be as good as the owner’s credit. So those who think that they’ll be able to use business credit or new credit to get a good credit score aren’t going to get anywhere.

But that brings up a good question — what does a banker consider to be good credit? What’s a good credit score?

Greg: That changes all the time. It used to be that 700 was a great score; now 800 is considered great. Credit scores go from 300 to 850, and the highest score I’ve ever seen is 820. When I look at a credit report, the first thing I look at is the score. In my case, it isn’t the only thing, although as we’ve talked about, big banks do use credit scoring: If your number falls into the right category, you get the loan. If it doesn’t, you don’t get the loan. 

    But that’s a big bank. Bankers at smaller or independent banks are more flexible, because we know that there are many things that can lower your credit score.
    Let’s say you go car shopping over the weekend; they’re going to run your credit scores. Every time you run those, it lowers the person’s credit score. So, knowing that, I’m not going to base my decision just on a credit score (note that in some cases with repeated requests for the same type of product in a given number of days, the number of hits is consolidated).

    Instead, I’m going to look for a lot of the things that drive that score. I’m going to look at things like, do they have any charge-offs, or do they have any foreclosures? If I see a bankruptcy or a charge-off or repossession, that’s a deal-killer for me.
    What’s surprising, though, is that I’ve seen credit scores in the 700s that had a repossession!
Ron: I think credit scores have become a moving target in recent years. They were stable until about mid-2008 and then, because of the financial meltdown, that all changed. I think the whole landscape has changed.
I don’t necessarily agree with you about 800 being the new standard for a great score. Don’t get me wrong, I think a score of 800…