Convincing Lenders to Believe in You
How do you earn credit for your business? It's never a one day thing it happens over time your credit worthiness continues to grow as your business grows but let's put ourselves in measuring your business not from how you may size up your business that you think how many customers in my serving is the measure of progress what are my profits as a measure of progress? How many people are engaged in hitting your website as your measure of progress? We're going to put on a different hat right now and think from the lender's perspective how were they sizing up your potential and when they get more and more eager to keep giving you a better deal when you want to negotiate better deal terms? First thing you're going to notice one word on these charts steady steady steady steady they don't necessarily love high flying cos if you are a high flying company that with amazing growth rates and customers maybe don't emphasize that too much to a lender it's a fact don't overemphasize it because one o...
f their fears is you may grow very very fast for the first year and then everything tails off the second right we want to convince them that your business is never a trend or just an instant kind of flash in the pan you want to exude that you are going to be a business that's here to stay and grow in a responsible way in a risk adverse way I love it when I'm doing coaching sessions for people why don't I say in front of lenders? The word the phrase risk adverse? I'm risk averse in how I manage my business keep that as a phrase they will love that because they're sizing up you and your temperament and personality with scares investors and mexico I will go through this a little bit more is too often first time business owners embrace risk they love rhys don't we often say it's time to take some risks when we start our business that's not the attitude I wantyou publicizing to your future lenders or even necessarily investors to be honest, so steady revenue booth is a sign of success. So how are you measuring this on a monthly quarterly or annual basis emphasized it to them it's more important for them to hear that over a period of time you're growing it is steady rate than of the high variable rate like the up and down unless you're a seasonal business. All right, let's say if you sell lawn furniture in things for the summer, where then your seasonal business then the lender is going to want to hear how you maximize revenue generation during those months and scale back immediately in your expense structure when it's not that seasonal head you're managing your cash positive cash flow remember some of those first slides from earlier segments about cash flow it's different than net income and profitability caches when customers pay your bills the earlier you get it the more lenders love you steady customer payments they trust you to know who you're slow payers are what scares them is deadbeat customers and unfortunately I spent a lot of time coaching entrepreneurs that are afraid to ask for outstanding bills it's amazing to me because I love cash so much I would be beating at the doorsteps of customers that don't pay their bills because I love it that much and know how important it is to business survival but sometimes especially in service businesses we can be snookered because we care so much about the quality of the service were providing and suppose there's a dead be client out there who knows jay I might be able to get more credit from the new kid on the block thing the established business that won't be a slain ian so you may be targeted by people who want to take advantage of your own goodwill your uber desire to please your first customers so what are some of the things I hear his reasons not to accept payments these this is the crazy thinking well I don't want it to affect our relationship but it already has you're getting screwed right g I'm afraid they won't buy any more from may when the dead beat is thinking yeah I want to buy more because sheer he is not insisting on me paying the bill so what better place for a customer to go shopping at a place they don't have to pack? So what you're thinking is the opposite of what your customers thinking and thiss if your customers are not paying their bills is going to limit your ability to borrow so much is tied up in your customers and their speed of payment if you let your customers did not pay the bills who's allowing it to happen you oh andrew smiling I hope your customers pay all the time up front up front we love that too often I spent time hearing all the reasons why not to collect there's one instance where a woman high powered woman who came out of corporate america started a marketing company had one client nine months later still no payment nine months later every excuse and it started to undermine her confidence well isn't my service and you start to doubt yourself all the things that I love to empower a non paying customer can unwind unfairly there are people out there that don't want to pay the bill on time you've got to be on them and know it recognize it and deal with it and not let it keep going you show you some slides to come how this cost you cash but overall lenders are looking at the speed of customer payments there may be a time well, you have to say to a customer, you pay up front if you're never paid for anything, you've lost money don't make it worse we have a question from kimberly here because kim believes in the service business service aren't even the same so therefore it's very hard to ask for anyone to pay up from there if they're a new business getting started from ground zero they have she has no money whatsoever how could she also customers to pay upfront minister it's a service she's providing a little bit different when there's a product involved. Okay, I love to know what kind of service if you can ask him. Really, kimberly, let me know what kind of service usually especially if it's a consulting relationship marketing relationship I love it when there's a very clear definition a proposal in place describing what services will be offered and the delivery time and in that proposal or agreement for service I want youto have a listing of the terms of payment must must must must must and in that terms of service I want you to be more bullish. I want you to list and there's a reason why I want you to include a due date. It is shocking to me how many invoices and proposals do not list a specific due date for when the bill or invoices d'oh, it's shocking don't let it be you if you don't list to do date, how can somebody be a late payer? You have a question, I want to keep going on this overhead. I could throw that later, okay? Proposal outlining terms of service and what is delivered because the's air areas where I know some non pairs may quibble later. Oh, I thought you were going to do this in this or change orders, lay it out to minimize disputes. Very important for service businesses due date of when the bill is due, and I'd love to have you include an interest rate for if you don't pay by this time, interest will accrue at that, that that that that worry, and it better be higher than your calf cost of borrowing elsewhere, eight percent per annum, whatever you put it in it's up to you to not collect or enforce it, but I want it there for a raisin that's, a starting point with service businesses from that? Um, especially if the service business must employ other people to deliver the service that you have to pay by weekly, it is crucial at the time of service delivery of knowing g, I may have a project that won't be completed for six months, it's unacceptable for service, business of any kind not to receive any payment for as long as three months, six months or whatever because you're paying the cost of your salary and other people work for you when you lay out the project scope, then you break it up into milestone payments. It is acceptable to ask if you don't ask, you don't get, but in no way would I rather rhys this as a start, a business doing a heck of a lot of work for not knowing when I was going to get paid. That should be your go to understanding of this entire course. No, how and when you're going to get paid and document when you will, because if you have no agreement and no terms agreed it's unenforceable in most states, you can go and I not a fan of calling collection agencies to help you collect on any bill because they'll take thirty percent of your bill and thirty percent usually means you've now lost money on that customer. So I like to use, um, small claims court and everybody today and in today's audience should know in the county where they live, what the maximum amount they can go to claims court on in some states it maybe twenty five thousand dollars in some states and maybe five thousand, so let's say, if you were providing a service where you are going and painting somebody's home I want a downpayment obviously but if I can I want milestone payments if they miss the mont first milestone payment and they're not budging on payment soon be no dispute I'm heading to small claims court because usually for about twenty five dollars or ten dollars or whatever the application fee is if you have an agreement you will get a judgment for the lowest possible cost and they will have to pay it's not acceptable to ever say I can't ask for payment what service was she offering? Did she say? Well it's got a bit confusing action I apologize to can believe we misunderstood she's now saying her business is actually does bodywork, photography and coaching she said she would be clear she does only allow up front payment graham and she only worked the customers who pay up front so I'm sorry I can't believe we don't therefore understand the question that came with the original question wass how does this help the service or into business you pay up front I'm trying to get a business started with no cash so apologies kimberly we got a bit of a risk message here but if you can clarify perhaps we'll have time to come back to it. Well here's what I love about what you're doing um you are showing me and potential lenders did you get paid up front here the high prize of business? You're what we love so when I looked to our list of what lenders love, so if I'm hearing she with a little extra cash, I can expand my business, you are hitting the high price of life because you solve this big issue that you get paid up front from your customers. So kimberly, what you're doing I love and I courage don't move off that model it's a great way to live really great way to live no asset writedowns concern that what does that mean? Ass it right down that sounds so financial. Sometimes I put up the loan terms to help you become familiar with how lenders talk amongst themselves and may talk to you it's been a terrible where people throw out words in meetings and he really don't want to sound like you don't know what they're talking about. So what do we do? Be not ok? I agree so that's, why you see me throwing out terms like this and asset write down is quite simply, the value of your inventory is no longer worth which he used to say it wass that's an asset write down it could be a building unfortunately heading into the recession wasn't there a lot of real estate that was no longer worth even what was leant against it? That's an asset right town it could be property that's damaged unsalable has no customer base in general, lenders may force and accounts if you can't sell certain types of inventory within a year, they may write it down to his ear evaluation that's what that means is also include leans, leans property um, well, the value the underlying value underneath that lean could be have a write down is worth less than that value and that's what it means. So why do lenders if you have a history or looking at some of your product ideas? A lot of times you have some really creative people in retail who start their own retail shops, and that may be doing web oriented stuff we're saying a craft shop and they come up with new products all the time some work, some don't work, so if they look at some of your historical records, if they see write downs where inventory has to be sold out at clearance rates were shipped off to somebody who will sell it at a heavily discounted rate that might be a warning sign to them, so they're on the looking they're looking out for assets or inventory that maintain their value. It's a buzzword granted, but I want you to be aware of what they're thinking about sometimes it makes sense to clean up our own business before we ask for a loan and cover up that get that stuff off the books so it won't be part of the relationship going forward with a lender steady loan repayment obviously if you've had a wonderful three year relationship with your factor, make the interest payment on time out of sight out of mind that's the start of growing relationships with lenders steady profitability growth again the word study they are not necessarily going to warm up you don't have over impress lenders steadiness you don't have to over sell them or presents something that's not quite there save that for when you talk to investors a little bit there more of that kind of mentality you don't need a big spiel that's what I'm saying uh what if you don't have you're not quite a profitability uh but you're kind of like steadily not making a profit if that makes any sense of like I'm just under just under the profitability level for the last five years and I mean we're slowly put your cash for was growing yes oh yes, yes so what did we say? In the very beginning? Lenders look at cash flow before net income because here's the one thing without getting too much a new county there's so many ways that you can through depreciation of assets in other ways non cash charges to your profit and loss statement that can make you have not net and you're not net income profitable right and it's an accounting issue cash is cash when you collect cash when your expensive are less than the incoming cash your cash flow positive all these other accounting tricks to reduce your profit which quite frankly helps a lot of small businesses doesn't necessarily impact cash so lenders love cash flow that's why I bet you've had that three year wonderful the relationship they value cash flow so if you want to make your business more credit worthy factors that influence cash the steady customer payments pre moments notice my list here revenue growth steady profitability growth I'm not minimizing it but it's not the first things that lenders are looking for when they size up your potential does that answer your question yes does it make sense what if you don't you're not there yet and you know have any you're just starting out so you're not steady looking well obviously we have somebody in this room who has a lending relationship and she hasn't had profitability and but yet she's had a three year lending relationship so is your question am I ready to go and apply for loans yes if you're not if you don't have a revenue growth or have the information yet if you're if you're new and you don't have anything so you're over here look over all the way to the left okay but we're going to move over to the right as time goes on right yes absolutely so they're going to probably looking a little bit more in your net worth. I personally because I never want anybody to get in trouble and take on more I'd really want to drill down and no with five thousand dollars ten thousand dollars whatever what would you do with that and remember in earlier segments what's that timeframe from when you and get that money so when you get back in terms of customer growth, how long is it? How close were you to generating more customers and that might help, you know, dead or equity and what kind of death I want to see probably dialling back and have smaller amounts so we talked about microloan entities are a little bit more forgiving they're more accustomed to working with start up entrepreneurs, then perhaps larger banks where you don't want to pledge your own personal assets to support alone so you may work your way up up a little bit different lending relationships are right for different opportunities, so I know you're starting to expand online some of your first debt relationships maybe funding your credit card receivables explain that a little bit more. Okay, so merchant loans what they dio is as customers come and pay with a credit card, they're going to advance u some percentage of your average credit card receivables it maybe over a three month period of time or a six month period of time and depending different finance companies may structure as long as a five year long based on your average credit card receivables or smaller a one year term loan two year term loan it will be structured around your business but is tied to the average amount of monthly billings that air hitting your credit your company's website so you have to really have the sales happening with you as it in a steady way in order to go the some of these finance companies are willing to fund you know some may have a limitation of one hundred thousand a month that's beyond what we're talking about, but some may go as low as five ten thousand dollars a month it's matching toe which you're doing, but it is possible to get a term loan that is based on your credit card receivables. Why that works for a lot of lenders you're lending against those receivables is because people are paying pretty quickly for that product or service they're not this would not fly if in this kind of scenario in the same way as if you were shipping product too ah bloomingdale's or a major store where the risk is you may not be paid for six months or a year miss something but to me why would you get a alone on your credit card receivables if the credit card company is going to pay you within three days? Uh so you've got money comes in and it gets put right back into your account what the finance company is recognizing is this is an ongoing, very stable, steady relationship you've got an active business with active customers coming in all the time and so what they're saying is based on this average levels of activity, we're going to give you a term loan to help you expand your business further a strong and it's based on a percentage of what your monthly revenues are allowed out uncle thank you so it's a demonstration that this is a live business with live customers paying their bills? I can't emphasize this enough customers paying their bills unless we're talking about buildings or inventory, but it were service culture right more of our businesses today in the united states air service oriented where we may be selling online services even these are opportunities that are lenders air saying ok, how do we modernize debt relationships? And this is one way we're recognizing customer activity through online merchant relationships or payment relationships and you can demonstrate it and prove those customers air coming through. And so they're saying that ok, they proven activity steadiness for that we're going to give you a certain amount of lone alone with an agreed payment term term one maybe it's a year, maybe it's two years or whatever those structured around your business and you pay that off over time so there's so many different variables to business and lending not all products or the same they're based on different things, so there is a broader range of opportunities out there for people to get I know you're doesn't make sense. It's very close to your factoring relationship. Yes, I grieve that yeah, what's different is your factor purchases your receivables and they get paid back directly from your customers in merchant loans, and some of these revenue owns you pay back the lender directly. Now granted a lot of those that money is coming from the profitability and extra cash flow from those customer relationships. The more profitable each customer relationship, the more loose cash you have to pay off that debt. Any other questions from the students at this point totally mesmerized right? And to keep sending in what it is that's frightening you about actually going out and getting the funding what's holding you back what's what? Putting you off having that conversation with the person who might be able to provide you with the funding, the financing you need for your business don't forget the best one that we get it susan's offered to give away one of her new books that's been signed have we received any? We have got a couple, yeah let's hear some of them got too and so far what is everybody afraid of? So kimberly is saying I'm trying to get a business started from ground zero with no money whatsoever and she's worried about the customers or hardly about so what she's really scared off is how she goes about this with no no actual funds her customers pay up front that was her big takeaway I think we've kind of got a bit confused over that ones that can begin to share us up but across the waters saying their biggest fear is not being able to make the payments is what's scaring them especially of initial assets are no longer uh worth what they once were well that's that acid right down I was talking about exactly so that ok excellent points here lots for us to work with if I'm a business owner and I'm asking for a loan or an investment but especially alone to buy an asset if you're worried about that asset being worth less tomorrow than it is today not so sure I want you to borrow money so it's a good fear but that fear should be g I'm not sure that's a big good decision for my business to begin with fifty to sixty thousand dollars loan for their photography business on then if they don't have enough clients how can they pay back the loan requirements? Okay um and is this a start up business leave absolutely clear also may be and clarify that for us across the water um some options here I made depending on if he is really worried about not being able to pay back, I might consider involving an investor to help me because if the business doesn't work out, the photographer is not on the hook to repay the loan. Um, fifty thousand dollars seems like a lot. Is this a studio for just getting into business? I would check into the types of equipment that I might buy very closely, um and maybe look at other ways to leverage that equipment as well to make sure there's absolutely extra cash flow possibly even renting out some of that equipment to other people to make sure there is cash flow. Um, drill down into the customers who before you take that loan, who is your first customer and I hate to make a big plug for the book and maybe you better in that book there's a whole chapter on targeting your first customers and picking and choosing I really want this person to go to accounts that can pay their bills and you can close very quickly. The first customers in the door should not be the toughest ones to get it's so common, especially when I'm working with technologists that they want to sell their new um, enterprise software to fortune five hundred companies. Those fortune five hundred companies are probably not going to make fast decisions same thing with the u s government pick your first customers that can decide in one month, two months, three months what I call the low hanging fruit that's the mindset that will help this great entrepreneur pay off the loan and I'd also be looking for lenny relationships for the photography equipment that is not I want a term loan, not a variable rate loan. I want to fix loan longest lead times for repayment we have a few more scary stories here online through the chat room this one's from the barred from balleret and they say what scares me the most is having no other source of income to pay back the loan if the products don't sell, which is why I haven't borrowed yet because right now it's not worth the stress I can't disagree I can't, but I love that there's caution and people are pausing, so what do you do? You really want to get fogo going earlier today we talked about microloans starting out small five hundred thousand dollars, getting one customer in that's sometimes we start to big on the death side equity as we're going to dive into in upcoming segments has a whole different thing. It is possible with equity to go gang busters to go for the big idea at day one if lending is part of your cocktail remember the you know where the mixologists different rules apply if we're turning to debt and both of the gentlemen were right to be cautious, but the answer to that caution is customers coming in dial it back in how much you want get a first customer and and build if you're not going for equity good and good questions it's fear of not being able to pay back what I'm surprised I haven't heard is fear of getting to know haven't seen that well, eric, maybe in that because america is saying I'm afraid to get a loan because I already have poor credit and I had to end one business previously so if I get a loan and I may not be able to get a deal that would actually work well from that will bring positive growths off see their previous bad experiences what's holding them back and asking for again I'm not sure what my options are I have a web development business great number one I hope that whatever you're doing in your second business, you're not going to repeat from the mistakes and great experience you got from the first business that you're maybe it's a little smarter about who you trust who you sell your services too but instead of not pursuing the new business, why not wait until you get the deal terms in front of you? Why are you assuming you won't get a loan because you have bad credit before somebody actually says now in earlier today we said microfinance centers are some of the most forgiving sources of new credit for start up entrepreneurs in the united states for people with previous bankruptcies amazing you know background don't be afraid to try until you get a no I'll pursue it but my recommendation here is to start with absolutely microfinance where you can get loans at usually lower cost than a credit card so if you haven't awesome business idea that you're raring to go and have some bad credit it is possible to get a credit card now you were going to pay higher fees and remember I said we want to stay in the personal credit card space where as long as you're paying that credit card your interest rates are not going to rise with every month of pain the minimum payment what happens you're fi co score improves which then opens up new opportunities to continue shopping for a better deal so I like hearing the caution I like when people really perfect the precision what are they going to do with that cash what are they going to invest in is it going to bring in a customer really fast then to me it's debt worthy of small well I I know you want to keep going but cash is clear saying my most scary fear is telling a lender that I actually have nothing to go on and don't know when I can repay I have no customers and no collateral they'd be lending to me based only on my work history, my personality, my idea, it's hard to credibly know when I'd be able to pay them back and sow my projections feel like a lot of hand waving so again, it's that fear of being dismissed? I think my I think that's an equity candidate for the first round, that's an equity candidate and again just because a lender says no doesn't mean business is not right to get equity investors and even the lenders may say no equity investors khun say yes, that's a sure way have another one here from b does branding, and they say that I have excellent credit fico score over seven fifty and I haven't paid a bill late for more than ten years, and I'm afraid to get in over my head. When I was younger, I had a lot of bad debts and I'd hate to fall into that trap again, but I've been in business for four years and I want money to grow, but I don't want to overstep my abilities, I love it. This is a guy who has already shown may he approaches business with precision and purpose. Um, so let's go back again, what would he spend the money on that's different than what he's doing now and weighing out what would an extra ten thousand fifty thousand dollars one hundred thousand d'oh that might advance the business? I'm not a fan of just taking credit and spending money that doesn't enhance the value of your business, so he'll know when he is an idea that is were going after I wouldn't be afraid of evaluating different types of funding sources to advance at all. I want to encourage that guy because it sounds as though he's really reinvented himself and is a really smart, capable business owner. Well done on did you say I am a woman, but they sent to your first question they'd hire a staff to expand, they had that money, right? Okay, and I hope here's, my next challenge, uh, that the product or service line offers up higher gross profit margins and anything they've ever done before. That's my test if they can improve gross profit margin, so I've got to slide coming up. This is what I want her to pay attention to. If her new product idea offers higher growth profit margins, I'd say let's go if it's less retool.