Segment 2 - Personal Debt vs. Outsider Debt
When I get letters to my comp my online columns I'm kind of like the dear abby of entrepreneurship and funding here to top ones should I use my own money? And I've heard that several of you here have use your own money to take that in versus going to banks or sources of loans or how do I know when it's right for me to use debt or equity at a specific time in my business because remember we're the mixologists when when should you have a little bit more debt? When should you have a little bit more equity so let's make those two let's address these questions that make him really easy so number one outsider dead okay if you have to personally guarantee right if you take five thousand dollars in a cash advance from a credit card here's one thing that a lot of people may not be aware of in the fine print of that application is a little sentence that says I personally guaranteed this business loan so even if you get a business credit card that has your logo on it and it looks so cool you pers...
onally own that death if you the business is not able to pay that loan back I don't think that just because your business logo is on that credit card that you're not personally responsible so that's an instance in winch outsider debt really is your debt can you negotiate that away no equipment leases any time you have to sign an application and you'll probably find it in real estate leases as well if it's boilerplate language I want you to look and read what it says if you see personally guarantee then you know you own the debt very important to know payday like loans we're going to be going deep into those kinds of things um definitely have a personal guarantee them to them end microfinance loans and I'm a big fan of microfinance loans but most of them will have a personal guarantee associated with it now there are some types of loans where you have some negotiating flexibility but you have to negotiate for it but be aware that the starting point of any lender will be that you are personally liable for that business application okay suppose you go into business as half of new companies in america are formed in partnership with best friends or family members suppose adam, you take a partner in right and you sign the application for a business credit card and for some reason that bill you're unable to pay off who owns that dad, right? Not your partner whoever signed yet you can be fifty fifty owners you could only own ten percent of the business and your partner rose ninety percent if you sign the application you owned the entire bill be aware of that right when I was researching why start ups fail and traveling and interviewing failed business owners I wish I had known better was the line I kept hearing over and over again the personal guarantees on really estate and all these things people were unaware of and it came back to haunt them this is why I bring it front and center and just as a level of awareness you can start to get negotiate out of this but you own this step ok any questions on this? Okay, how to negotiate a better deal you can first of all, if a lender comes to you and says sign this guarantee and by the way bring along your wife or your husband or your partner don't bring him along don't don't don't don't don't say no if you give a financial statement to a lender I wanted to be yours alone not with your spouse we're separating the obligations out here if a lot of money's involved of lawyer can work with you on it but let's narrow the scope of the personal guarantee here's the most important thing if you sign alone and this is very common when I can see their number product companies here where you may have assets inventory in your business right receivables in your business I want you to ask that lender to make a stipulation so if you pledge a savings account in support of that long I want you to insist that if something goes wrong the lender has to turn to the inventory first, not your savings account for does that make sense? Turn to your customers, get them to pay your bills first. I don't want the easy solution to go to your personal assets before your business assets does that make sense? You can ask for this? You can insist on this. This is all about making you smarter shoppers for cash for your business if you don't ask you don't get, they're not gonna offer it, but at that moment when your business is cooking with gas, I want you to be precision based and ask on purpose, right? Can we do this? Yeah, you can even ask from to negotiate partial partial guarantees, right? And the best way to unload a personal guarantee in lending relationships is to just move your account to another bank that wants your business. You're always shopping, always shopping for the cheapest source of cash. Now I'm going to own up to something and we just got a note from somebody of female entrepreneur. I've been in the venture finance community for over twenty years women don't ask we are too loyal to the banks where we have our personal checking accounts, we don't move, we don't ask, we don't negotiate, and yet I think women are pretty awesome shoppers shopping for cash right? Being a kn afraid to move it when there is a better deal this is empowerment and you can do it right any quant comments out there on them no, I mean caches was asking that question very very specifically about the challenges that women in the in the marketplace face because they are there are certainly any total evidence but I think you would agree that there is a discrimination against women business owners to some degree with certain banks um yes on certain banks were going to be talking about micro loans that are specifically set up many of those organizations to lend to women but I will say this coming from the venture capital community less than five percent of venture capital goes toe women run businesses now is there some discrimination and that no we don't send in our business plans so if the number's kind of work against us and so that's why I am here to goose everybody to be that catalyst if you want to dream to achieve the dream you got to ask for the cash right? You've got to ask for it in order to get it now we have three lady business owners in our front today so I mean is this a challenge that you've faced or that you felt intimidated by you sir? You know what? I'm going to go out and I'm going to ask I would say intimidation completely yeah devry very very definitely you know how I'm talking to you today is this starting to make you feel like gosh, I can adopt a more confident attitude because I'm going to know more about what to ask for I have to be frank I am flabbergasted at your frankness where we're going to go with this stuff if uh uh I honestly thought we were going to be kind of like well, just go use more credit cards and herself we go deep way going this's great yeah it's the details that matter and when you are unafraid to ask what does this mean? And by the way can I have a better deal? You'd be amazed at what you can accomplish and what I will say is this the number of funding resource is on the debt and equity sides that are available today versus twenty years ago ten years ago is completely uncompromising. There is cash out there and there is a clear desire to invest in innovators creative people like you because we are the future of it the economic engine yeah um but this kind of like a chicken and egg syndrome to get the cash I need to hire someone to help me write the business plan that's not my skill set so how do I deal with that? Okay, I get this question a lot like even for men and women who have the cash to have somebody else do the business plan first of all, you don't need a twenty or thirty pages beautiful business plan that's bound and has lovely pictures no as we go through, you're not going to see a full business plan on the action steps of what you need to apply for most loans. An executive summary on the investment side is probably more which you're going to need, but you're going to be amazed and actually in one of our bonus materials is a full chapter of my upcoming book all about executive summaries and what's an executive summary, a three to five page outline of who your customers are. I know you can write a paragraph of who you want to sell to. I know you can write a paragraph on how much cash you're asking for. I know you can add a paragraph of how you're going to market your company, so it maybe twenty paragraphs can you do that? I think so, right? And in our bonus materials is absolutely the guidance for you to put together your own executive summary to present to investors they're for you. So you I don't want you thinking you have tio pay somebody else to write the business plan for you because I bet if you outline okay, this amount of money I'm going to do deployed this way uh what you're raising is something I've heard so often before I put thes is kind of like roadblocks but it's like a mental roadblock from you like oh, I can't get this because I can't get a business plan together oh, I can't apply for this because of this no, no, no, no no let's find out how much cash you want we're gonna learn about where it's best for you to present your company your idea your opportunity to and let's wait for them to say this is what we need from you you may be amazed that what is required for you to deliver this far far less than what you expect at least initially right now if you are asking for a five million dollar investment and I'm going to probably dialling back is a first round right? Um expect some questions about your industry in your marketplace it's more likely you'll have discussions with investors and they're gonna learn more about you and your opportunity from you directly then reading a business plan very often I get these frustrating letters with lots of exclamation points all caps I know they never read my business plan and I'd have to say you're right there waiting to meet you and hear about it from you because they hate saying why I put it in the business plan and then they asked me a question that was you know answered in the business plan does that help you don't let one document be the reason not for you to pursue some cash can we make that agreement ok got it. Thank you yeah, nobody is going to be everybody's going to be scared to know sweet stuff they know but this is great to talk about it right? Um I just wantto really emphasize that you don't always necessarily have to stake the deal terms first presented to you okay don't selling too fast you may be able to get a better deal I just feel so needy in that type of situation where you know I'm presented the opportunity and I'm I'm thinking jia if I negotiate you know they may throw this out or I may not be able to go somewhere else and get this I'm better just take this well we're going to be shopping so that you have several different source aces oh once we're never going to be dependent on anyone we're never settling for one but let's dial it up suppose you're asking me to invest in your business right? I am on lee going to make money when you succeed if you don't negotiate at all I'm a sank you might negotiate with your vendors you might not negotiated a little bit with your largest customer I look at negotiating fair negotiations, not cree asking for crazy stuff right and again, we're going to go through how to negotiate a little bit more, but this is all about our mindset that we're talking about right now, right? The impression you give matters toe lenders and investors I want you to exude confidence and ask try and improve even if it's one step or one issue I want you to make it better and try the worst thing that happens is they say no, they're not gonna walk away and not if you vote kind of settled in this range and you ask for one more thing they're not going to walk away because you asked for one more thing people don't behave that way, not in finance, right? So when I go back to that one chart, there are a few categories you have no ability to negotiate on a credit card not we're going to do a little bit more comparison work on different types of credit cards in an upcoming segment but where you can negotiate do why not? Why great shoppers for cash say if you save one percent in interest that's one percent that you can put into something else or into your own pocket so I love that cash I want you to be just feeling that cash and grabbing onto it whenever you can and being very protective evan and maybe what we're changing here is not putting it aside in your strategic thinking right if you can get cash to build bigger or get cash more cheaply from this source than versus that source that's business success what's what great business people do that's what great shoppers dough everybody's nodding their head? What do you think? A great approach? Absolutely the right approach definitely. Okay, one of those questions that I frequently get a yahoo are in incubators is jay I do want invest my own cash in my own business. How do I do it? At the moment you put your cash into your company's checking account, I want you decide and my putting it in as equity or is debt all right? I don't want you covering business things by are you writing a personal check to cover a vendor account let's formalize it especially if you're going into business with a partner? I want you to document it. Why? Because if you put it in his equity, I want you to price what you bought. I want you to have a certain number of shares and document the price you pay. Why? Because you're going tohave ah you're investing here and then it's going to be here? The irs wants to know, so when you have that monster capital gain, you've to tell them what your profit isthe you can't decide on the day of sale what the value was here I guarantee you'll be audited and also investors like me are going to want to know what price did you put in. So then that set the stage for what price I put in your business. So all I'm asking is for you to make a decision, and my putting in is dead, and if so, I want you to do a loan agreement. It could be a one pager documented or is equity make the choice? You can convert the debt into equity? You can't convert the equity and debt very easily, okay decision time. Do it right from the start, especially if you have partners too many people don't, and it is a reason for investors down the road to assume you don't have your act together. T how do we know that you haven't? Your record keeping doesn't involve other people and made other promises, so one of the key ways to get investors in and trusting and believing in you is to just start documenting equity from the start. It is a big reason is we're going to go through an upcoming second segments. Why do investors say no ad record keeping too many promises? And they're scared if they don't feel comfortable with your records of who's invested and when and at what price makes sense, right? But you can do that. Just documented yeah, so when when I have to cover a payroll and I take it out of my personal savings um I always lose that as equity partner one equity okay, so so you made the decision yes, you put that in and I never want you paying the payroll account directly. I wanted to go you know you personal check into your company checking account and documenting that way I never want you taking a personal check and directly paying a business bill because that's way you lose track of what you've invested in right yeah, I was make it so it goes to the company first and then the company pays it a lot of first time entrepreneurs don't and that's why shout out just do it just document spend five minutes doing it if you have equity partners in a second I'll show you why it matters um but again do it right and price it if it's a dollar a share how are you valuing that equity? Yeah it is it fifty cents a share yeah, I don't have I haven't even thought that far ahead as to what it what it would be like at your print what have you bought right? I'm not so worried if you're one hundred percent owner of the business now but remember we are setting the stage for greatness right more things are going to come into your businesses from lenders and investors down the road and I want you starting thinking and putting a value on your cash because it is worth something and I'm here to make sure it grows to be worth a whole lot more and shameless plug there's information in the book start on purpose of just how to do that valuation ok without having to go into great detail here okay? You're taking personal savings and putting it into your company is debt or equity some people we'll go into their four oh one case or iras and take money out of that to put in their businesses I never ever, ever encourage it recommended I know that is the money you never ever put into your business now here's why number one when you pull it out before your age fifty five you immediately pulling money out of for one case I raise you have a ten percent penalty possibly higher to the irs that's lost cash that's like giving money to the irs we don't do that. Why give them your free cash? No here's the more important reason if something goes wrong with your business, guess what assets in bankruptcy court your creditors can never ever touch your retirement, so if you want to keep that safety net keep it there don't touch it under any circumstances I work a lot in the tech community and it's not uncommon for employees of very large corporations that have built up big for a one case and they may have a loan provision where they can borrow from there for a one case for different reasons. Now, I know some people may say a medical made, but when fact they're funding their moon, you know, a patent filing, they're using those four with a loan from their four oh one k to invest in their business and they know one of these days they're going to quit the big corporate job to pursue the startup here's what they didn't count on this second they leave the company. The loan is too it's in the documents. It's, not the company's fault. This is part of what the irs and risa require. You have to pay it off with that accumulated interest. Otherwise big penalties will hit you now. How many people will have funds at the moment? They're starting a business to pay back the four oh one k. So don't go there, keep them intact. This whole workshop is about finding other sources of cash to achieve your goals. That's a no no. Did I say it strongly enough? You will you never do it, call me first, I'll talk you out of it. Someone I know did that they barred from their retirement account not sure which one it was but as you said the irs owed them are confronted I mean put it on a penalty on that money I come from the school of thought that nothing is non negotiable and you can negotiate away and anything with the I r s though is there a way to negotiate that penalty or make them chase your business assets if your business does fail? Well, here's the one thing to know when you owe money to the irs that supersedes everything so even in circumstances where you have your business in a limited liability company or incorporated right if you owe the irs if your business owes the irs still fair game you personally is an officer director that company oh same thing with payroll taxes, local payroll taxes if you don't pay them, you're personally liable it doesn't matter if you're incorporated or a limited liability company so proprietorships which I really am not a fan of especially for older entrepreneurs you're liable for everything right? But is that penalty negotiable? Now I've never heard of anyone successfully lowering that there are some other kinds of tax obligations usually the interest and penalties on other types of virus obligations but that was too easy for them it's so black and white and I don't think they want to open that can of worms of saying ok we'll let you buy for taking money out of the ira no it's ten percent it is there and depending there are some retirement planning cos I don't want to name any names specifically where they will deduct that amount first even before you get that check but that's lost cash ten percent you know some people may have amassed a lot of money in this for one case keeping away ten percent and getting nothing in return to me is outrageous we don't do that right and we're talking about some of the really basically the dodgy deals of financing it so yeah we're gonna get it you know when you basically borrow money from a list millicent from the guy who should be on a street corner right yes and is going to be shocking thie interest rate it's all about again we're shopping we're going to mention one funding source that we'll make you think like you're getting a great deal but overall your interest rate you're a pr ends up being three, four hundred five hundred percent and on to show you how you get snookered into thinking you're not paying that much ok got you we've covered this um if you are planning um an opportunity where you definitely know you're turning to investors for capital um in future segments we're going to go through some ways to make sure you get to keep the biggest share of your company one of those actions will be I want you to set up a board of directors, so if you are investing in your business as equity, the right way to do it is once you set up your board is to simply have your board assemble your board. Are everybody get on the phone and say, I'm issuing equity. If you put five thousand dollars into your business, the board should approve it. That is the right way to do it. It's one of the action steps in the book about how several pure company and fund your company. But when you issue securities, two business partners or investors you're incorporated or even a limited liability company, I guarantee in your company organization documents that you filed with the state is a requirement that the board approves all issuances securities. So do it right, have your board approved the issuance of equity if you own one hundred percent of your company it's not as much of a big deal, but I want to see you documenting things from the start. If you're heading the way to raise money from angel investment clubs and venture capital funds, this will be a part of your future, and you can do it. It's a five minute phone call, that's all it is and then documenting it.