know your obligations alone covenant loan covenant, this is the tricky stuff. These are usually where those surprises are. Gosh, I didn't know I had to do this alone covenant. Obviously you want to pay back the lender, right. And you find more and more of these loan covenants, these sneaky loan covenants in finance company deals, the non regulated lenders, they want you to do other things and if you don't do these other things, what will they do? So what are these sneaky things out there? What are some of them? Um top of the list? You are probably going to find some language that you have to supply financial statements on your company at some routine basis. And you should ask, is that a profit and loss statement cash? What is it you want as part of that financial package? Asked the question. You're responsible? Is it every month? Every quarter every this every that and who does it go to? And when might you be late? All right, suppose you're late. You know, you're going on vacation. Wha...
t do you do? My recommendation? You call the lender in advance? Say by the way, I'm even say I'm going on vacation, I cannot get those financial statements to you. Is it okay? Can I get an exception to the loan covenants When you ask before? Better chance. When we were saying, how do you get out of this stuff? There are times when you won't be able to do everything, so ask and let them know in advance. Not when you're delinquent. Keep the trust lenders trust you. The last thing a local lender wants to do especially on this stuff is have to say to his or her boss, you know, so and so is out of compliance because then things start to happen. Their workload gets bigger keeping property in good condition suppose you borrowed for equipment of factory of this or that they want to make sure that that equipment is available to them. If something goes wrong sometimes for specific types of equipment, especially if leases are involved, you may find some fine print about maintenance obligations that must be done on a structure basis. Just look for that kind of language and meet those obligations. Or if it's an unreasonable or not applicable, negotiated out, say this doesn't apply, it's not feasible, It's not practical. Don't wait until after you sign the loan documents to say to renegotiate, do it before you sign maintaining certain types of net worth. Or a little later we're gonna be going into some ratios. Some of these ratios and net worth things may be impossible for you to achieve at certain times of the year, especially if you have a seasonal business. So think through and say change those numbers right. No one knows your business better than you, especially if you're a seasonal business. It may drop down in certain periods of the year below this and all. For a good reason. It's not necessarily a sign apparel but a sign of strength. Just read it, understand it. And this is the situation where you might want to involve your accountant to think creatively. When might we fall out of compliance to make sure you are equipped with the best information. Um, you may have restrictions on taking on more debt. After this first step, you may have restrictions where you have to go out and buy an insurance policy on your own life that if something goes wrong, the business can recover and get be fully paid off all these certain things guaranteeing of other personal obligations. You may be restricted from buying a house okay of taking on more personal debt and those I would vigorously fight against. So again, these shouldn't scare you but just be aware of them. So when they come up you say, you know, it really doesn't work here because of this. Can we do this? I hate loan agreements that prevents you from selling your company. Why? I'm an old investment banker. Someone offers you an awesome price for your business. You take it, You know like 10 times would you ever thought it was worth? Take it? I don't want to go to my bank. Who's worried about now losing alone relationship especially since the debt could be paid off by you know, selling your company partnering your business. All right. I might give the way on that one help. I need funding for my website revenues. I've been getting these. This is how they come to me. I'm not kidding. Mhm. Okay. Gotcha alert. Big gotcha alert all over the web now. You might see find your receivables. Are you a website or you may get a notice through your own email addresses. Under contact you saying you can fund um fund your customers. Your credit card receivables come to us. It may be a scam. It may may be a scam. Who could be scamming? What do you do when you fill out loan applications, you give your business checking account. Some of you may even hand over your social Security number. Right. As part of a loan agreement, you may tell them how much is in your business bank account at that moment. Okay. How sophisticated or hackers these days, you may have given the keys to the kingdom. You may have told them where your bank is. There are legitimate online sources of funding through websites. But before I'm just doing a big alert here because how devastating would it be if your business bank account was wiped out tomorrow and you could not get it back. So here's what I'd like to have everybody do beforehand. Again. I'm saying, I'm sure there's going to be people who are sending me hate now I'm a legitimate, you know, you're but let's be smart shoppers. I want you to see before you put in your bank account information to a name you've never heard of before that promises to fund your credit card receivables that come from your website. I want you to go and see if there's contact information. If they do not have a phone number where somebody answers in that business name, would you really want to put your information there if they don't have an address and then you can somehow verify it? I would not put my company's bank account information, tax ID number, things that would allow them the ability to set up new credit. Maybe even end up applying for the small business credit card that I don't want to apply for. Right check them out. There are so many new resources out there and it could look so sophisticated and so easy. And those online tools that the easier it is for somebody to give you money beware, Read the application closely again for the comparison shopping, be able to print that stuff out. You can't print that agreement, suppose only half of the agreement comes out. Don't sign it, Don't click the box but could you see yourself doing this so easily? Not worth it. Monthly loans are variable loans. Again, most of these credit card receivables or quote merchant loans. I can't emphasize enough there. I don't want to say all of this is bad, but for example, you can find merchant loans, credit card financing relationships through american express through most banks, America, most finance companies, there is a big difference in rates, monster big difference in rates and fees for everybody doing the same thing financing your credit card receivables or your website sales, here's something and you brought this up. Are you going to be talking about factors factoring? It really comes from the garment industry where a lot of clothing manufacturers would turn and sell. This is a slight wrinkle and actually factors are expanding the types of businesses that they're funding today. It's not just the garment center, you know where people who are shoes, hats, purses, stuff like that. It comes out that way because they became very familiar with which retailers were paying their bills. How is factoring in the old school term different than receivable financing or credit card financing or your online website? Um customers getting financing very important thing. In one case in the farmer, whatever. If you have a million dollars of receivables from lots of different customers, the bank or finance company is going to give you the money and you pay back the bank as your customers pay you what's different about a factor and I could see if you're selling a product, this may be a place to go. What's different about factoring is you sell your million dollar package of receivables to accompany at a discount and it is their job to collect from your customers. Do you see the difference? Who has the risk of some of your customers not paying the bills? The factor not you. Now here's the pros and cons. You really have an interest in continuing to maintain a good relationship with that retailer. So you never know suppose you're doing business with Bloomingdale's or toys R us or a grocery chain, regional or national or doing business overseas. You don't want somebody pestering and upsetting the relationship to you. And the factors may insist that all you send a note to all your customers saying no no don't send your payment to us. You send it to what's called a lockbox that they control. I don't want you to eliminate this from your cash cocktail because sometimes you can find some awesome deals for cash for your receivables from factors but appreciate what they do is slightly different than what banks do and the timing and who collects because they now own your receivable. You don't how my vendor has asked me for a letter of credit. What? Yeah. Is it a letter That's usually what people get? We can read your lips, we can read your lips. No. Okay. There are different kinds of letters of credit but I'm going to mix it up in this global marketplace. There will be times when you will be selling. I'm switching it now. I'm putting on a protective hat. I can see Andrea having multimillion dollar orders overseas for her and lay brand or through lux details where they may not pay upfront all it wants. Do I want her to book that business? Yes. Do I want her to lose the value of that business by shipping goods offshore and potentially not being paid for it? No. I wanted her to ask for a letter of credit in reverse. What are letters of credit? There may be some of your customers that will not be able to pay their bills right up front. But there are different types of letters of credit and they are essentially contracts between buyers and sellers where an independent entity, sometimes it's a bank will verify if you're shipping goods overseas, if they're received, okay, payment is sitting in escrow, it will be released to you. So don't assume some of the financing tools or all where you're asking. You've got to somehow give up everything. There will be situations in your future where I want you to use some of these tools to protect yourself and to ask for them to minimize the risk of non payment. Because haven't you heard throughout and it's coming up in the next segment, what do lenders care about your customers paying their bills?
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Susan Schreter is a veteran of the venture finance community with expertise in the life cycle of financing companies from startup to sale. She is an MBA-level educator, expert on the factors that influence startup success or failure, and popular