Category: Book Snippets

Many small-business owners know that they need a loan, but they might not know what type of loan they need. Like businesses, all loans are not created equal, and going after the right loan not only increases the odds that you’ll qualify for that loan; it ensures that you’ll be able to pay it back.
Loans are a lot like marriages — the right one will meet your needs and keep both parties happy. But a bad one can be costly and will most likely end very badly. So before rushing into one (a loan or a marriage), make sure that you’ve reviewed your options and understand what your responsibilities are going to be.

Lesson No. 1 – Matching Your Purpose with Your Needs

Greg: To know what kind of loan your business needs, the first thing you need to look at is the purpose. When a loan goes bad, it’s often because the purpose was bad.
For example, if a company needs to borrow to meet payroll that means it isn’t making enough money. That is a loan with a bad purpose.

Ron: You also have to look at the maturity of the loan. If the purpose is a short-term need, it should have a short-term maturity. If it’s a long-term need, it should have a long-term maturity.

Greg: Yes, you really have to marry those two things together.

Ron: People will often tie up their cash, and then they aren’t able to use it to grow their business. Maybe they have $100,000 in cash and they decide to take that money and add on to their building.

Now, the building is a long-term asset. It doesn’t make money overnight; it makes a little bit each month. So they spend their money on the building and then the next month, they don’t have any money to buy more widgets. That means they can’t sell more widgets. Now they don’t have any working capital to do what they need to do. They have a big building, but they don’t have any liquidity.
What they need to do in this case is borrow the money to build on to their building, which is a long-term asset, and because it is a long-term asset, they should finance the addition with a long-term loan, meaning a 10-year loan. Then they can keep the $100,000 to buy short-term assets and handle the cycles of their business.

Greg: Another good example I’ve seen is where a company goes out and buys a new fleet of trucks. It invests all its money in these trucks and now all of a sudden it can’t make payroll. So it has a great fleet, but it can’t pay its drivers.

Ron: The owners should have borrowed on terms that reflected the expected life of the asset. If they plan on replacing the trucks every three years, it should be a three-year loan. That’s a good way to gauge what the term of your loan should be.

Real Estate Loans: Grounds for Business

Real estate loans prove to be a tricky area for many businesses. While they can be a valuable investment for a company that needs to own its own space, the speculative real estate market has been the downfall of many an entrepreneur.
Greg cautions against real estate loans for the businessperson who is interested in building spaces such as shopping centers or warehouses. While they may seem like a cash cow, the fact is that you’ll have to find tenants to make them profitable. Ron has made most of his money over the last 10 years building and renting out such buildings. But he is experienced, and is a great marketer. Make sure you understand all that is required in skills and experience.

Every business owner (and banker) knows that money is important. But it becomes even more important when you don’t have any. That’s where the paradox comes in: The people who don’t need money can get it easily, while the ones who need it can’t get any. Or so it seems.
Your banker needs to know that you can handle the money you already have. As his customer, your job is to prove that you know how to manage your money and that you’ll be a good steward of the money the bank loans you. To do that, you’ll have to get your finances in order and make sure that the paperwork is ready for your banker’s eagle eye. You simply can’t afford to have bad nums. And there’s a lot more to doing that than simply filling out loan papers.

Lesson No. 1 – Sprucing Up Your Finances

Ron: You always want to make sure that your financial statements look their best before you go see the banker. That’s a huge mistake people make.
One way to do that is by compiling all your financial statements. People don’t realize how many different kinds of financial statements there are.

Greg: There are four kinds of corporate financial statements that people need to know about:

• Internal: This is one you keep running indefinitely.
  It’s internally prepared.
• Compilation: This is when your accountant basically puts
  your internally prepared figures on their letterhead.

 

Bad num – A bad or inaccurate number, usually in a business plan or other document. The number is either wrong or distrusted in some way.
Use: “Theresa’s model included many bad nums, so she was told to
study her data for errors.”

The relationship between a banker and a businessperson is like many others — it requires trust, teamwork and shared goals to be truly successful. As a businessperson, it’s important that you do everything possible to keep things running smoothly in the relationship for your banker. Keep in mind that your banker has a boss, too, and they both have requirements and responsibilities to meet. Helping him or her meet those duties will go a long way toward strengthening the relationship. Some of the things you can do to make your life easier include:

• Understand how the loan approval process works – if you ask,
  they will tell you. Understand what is required for a loan
  package and the timing. Never be in a hurry, but always have a
  good sense of urgency.
• Always furnish reports as required, on time.
• If your insurance lapses or you have other items that trigger
  scrutiny, cure them IMMEDIATELY (as in hours if possible,
  bankers love it when you have a sense of urgency).
• Always speak to other bank employees, make sure they know
  who you are and that you are a “good customer.”

Lesson No. 1 – Making Your Banker Look Good

Ron: Bankers have to meet certain requirements and it’s the customer’s responsibility to help them do that. Bankers have a fiduciary responsibility to the bank and they have examiners who come in, look at what they’re doing and criticize it, bless it, or whatever. So as a businessperson, it’s important not to do things that could get the banker in trouble. I’d say the first thing is that the customer has to deliver their financial statements on time. By the way, think about this requirement when you make the loan. Don’t set yourself up for a frequency or timing issue with the statements. Bankers understand that it can take some time to close the books, etc., so ask for reporting requirements that you know you can exceed. Deliver them early. Then they are never on his list of exceptions! And don’t kid yourself; they know when your loan payment is late also.

Greg: That’s huge. The No. 1 flag on accounts is when a payment is past due, so don’t ever let your payment be late. A lot of people will make their payment on the day before a late fee is due — don’t do that! If your loan payment is due on the first, make your payment on the first, not when you’re going to get hit with a late fee. Pay it on day one, every time. I have a report on my desk – as does every loan officer – showing which customers are one or more day past due. The next day it says they are two days past due. Don’t think they don’t know. The same report shows them your collected balances the same day. What do you think the banker thinks when your payment is one day late and your checking account balance is low?

Ron: And if you’re going to be overdrawn, you should never be overdrawn on the last day of the month. You can be overdrawn every day of the month, which is terrible, but if you are overdrawn (also known as “in the cuts”) on the last day of a month, you are on a report the directors and examiners see. This also applies to past due loan payments.

Greg: You should never be overdrawn, period. Being overdrawn and being past due are two big red flags.

Ron: A banker once told me that a lot of customers don’t think it’s a big deal to be overdrawn, but here’s why it is: All customers who are overdrawn don’t go bankrupt, but all customers who go bankrupt were overdrawn. So the point is, it’s a red flag that may precede a failure.