Tips for Approaching Lenders
Some areas, especially espy a loans we're going to dial back to what our few more things that lenders you're looking for the must have earlier, we heard from somebody who's talking about his character's idea in itself the's of the words that lenders will use coverage means if you're asking for a million dollar loan, what security do they have in their hands? That represents more than a million dollars, especially if assets could decline in value. That's what lone coverage means? What is the risk of default? You going out of business or not being able to pay that loan? Lone security and collateral they want tto have something put up to help cover the loan. The's air their words, then they're going to be looking at practical loan purpose and your character, your persona, what's your history in business. Do they think you're capable manager of extra cash? And obviously, everybody here today is but these were the buzzwords coverage? Well, we want to you know, I want you to know when they s...
ay what's our loan coverage, going to pay no what's our source of payment, we're gonna get to him, here's, another way to look at it, what her lender is going to be asking about first to you when you're in the room. And then the documents you give, what are they really looking at? So we have your business, you describe your business and you tell them something about you and your attitude of how you manage your business. So when they say, tell us about you, that's your invitation to talk about how you manage your business that's not the time to say, well, I love dogs, and I love cats. I have three kids I have a house about. They want to know, give them some insight about how what a wonderful manager of your business you are, depending on the type of your business. Again, we've kind of hit some of the high points, but I'm going to focus on the bottom three right here, the debt inequity, days outstanding and liquidity ratios. I want you to be aware of these terms because ultimately they're empowering, and I don't want you to think that they only matter to the lenders what is buried within these numbers and metrics our ways and clues for you to read more profits from your business to make your business better, and the numbers will show you where to look so let's start of some of them liquidity issues now I think I forgot to do this earlier, but what will d'oh? In the next day or two is take some of these slides and convert them into free base so that everybody doesn't have to start scribbling like crazy on the next free slides I'm like creating the liquidity ratios so somebody asked you about a current ratio it simply means easy math, your total assets divided by your total current liabilities. What are we looking for in that easy number? We wanted to be more than one, so when you have a balance sheet what air assets, the cash in your bank account, maybe customer receivables that people owe you? It may be a certificate of deposit current assets not necessarily inventory, but basically assets that can be converted into cash in less than a year on the same thing with liabilities who are in your payables too, and it may be some of your accrued of salary obligations. What they want to see is wonder one upside down. Businesses operate the other way when they have more bill's coming in, then cash coming in that's scary what kind of healthy businesses get in that situation tends to bay companies that spend a lot of money on marketing programs that don't produce customers. I see it all the time if you want to waste money in business the best place to do it it's just throw it into marketing programs that are not proven to pull in a customer and those are usually the first expenses when I work with companies on turning around near business that we had check back quite quite, quite black. We only do marketing and advertising programs had proved pulling customers quick ratio, and that is you add cash, and they are means accounts receivable those customers that owe you money divided by current liabilities. Again, we want a ratio that is over one, so before you're heading in for big loans, you can do a quick check on your balance sheet. Say, where am I in this? And so if you're falling a little bit below here's, what I do reduce my monthly expenses for a little bit to get my numbers up, it doesn't take much so sometimes it's kind of like if you were putting your house on the market for sale when she, you know, mow the lawn in a different way, maybe paint you spruce up, you spruce up your business to before you go out to get loans, same thinking, networking capital, current assets minus current liabilities. Obviously again, we want more assets and liabilities because when you're asking for a loan, what is it? More liabilities? So we want to start from a point of strength the's air easy ratio, sometimes in some larger loan agreements remember those debt covenants? They may insist you have one or two of these metrics in place and never to fall below them that's why I want you looking for this stuff and negotiated away a little bit okay especially this seasonal business all right receivables I bet everybody's going to be so tired of hearing about customer receivables but I keep going pack to it because it's so darn important plus it pays your salary most companies will present their receivables in terms of how long it takes for customers to pay them and what I'm hearing and we heard from a couple people today they get paid up front which means they are off the grid in happy land because they're doing better than most businesses in america and if you can keep getting paid up front for your work gosh keep doing it because you are gold toe lenders we have two companies here your company and another company on an average basis I've run the numbers the average days receivables average accounts receivable over your credit sales your total number of sales where they haven't paid you a front divided by three hundred sixty days we'll give you an average score for how long it takes for customers to pay you lenders love it when business owners walk in and can announce to the lender without having to call the controller how fast to your customers pay you empowerment and our confidence in you is if you know that average say our average is what you know it you have gone a long way so the individual who is talking about what I say to lenders that's one that is going to give you really check marks of success of saying to somebody that you are really on top of your business both of these companies actually arithmetically have this same days outstanding but which company would you rather lend to which one what do you think, adam company your company be fear a lender uh company bathing another company that's who you would want to? Is that your final answer your right? Yes, because there's even though the metrics are the same when you finally give that actual documentation they're loving the earlier the better and certainly you don't want your biggest monster client to be in the back end so again cleaning this up if I was heading in to get a loan based on my receivables boy, I would clean this stuff up and get everybody collecting very fast. The other thing is when your customers pay you faster, you need lenders less which saves your company cash I'm a big bug on this I hate walking in the company's insane oh, you know the owner mom so busy I don't do this and I said, you know we can change your business by just getting your customers to pay you faster than you pay your bills I like it when you collect in thirty days and paying ninety days it's really say that she's but it's true, your business is better you pay bills, you know when your own vendors and sistani you don't want to take advantage of them but you don't want to be paying your vendors before your customers are really paying you then you become upside down inventory turnover! We want your company if you're selling products gosh, if the product you made in january still in your inventory in your warehouse a year later you're in trouble. I want that or your overproducing dial it back! I want that turning going on. I don't want you sitting on that useless cash for too long. It means you must dial up. You're selling too often it's too seductive to just oh, if I buy this quantity, I'll get a deal and then you sit on inventory for two years it's not helping you it's costing you cash any questions on this samore metrics that matter debt to equity? This is something that will come up from the espn they'll ask, have you invested in your business? And what I'm hearing today is most of you have or are about to what percentage of which you're asking for lenders have you already invested in your business now? Obviously I've been saying all day long you don't necessarily have to put a dime into a business might turn to other outside sources, and there are ways by starting out with slow amounts of lone toe leverage other people's money without you having to put a lot of your own money in, but you're not necessarily going to get the big dollar amount for one hundred thousand dollars loan of five hundred thousand dollars loan from the start without the hlynur saying, hey, what do you ponying up here and that's? What this slide is about if you're going from gangbusters and that is that I put in, like, one hundred percent of all my money, but it still isn't that much. So it's, like you're asking somebody for twenty five thousand, but you've only put in, like five thousand, so so I'm looking for a larger number than of, you know, they're just asking, right? Yeah, what amount of equity is in the business and how if they want the specific ratio I'm telling you. Debt divided by equity that's okay, quite frankly, for certain types of businesses, I like that leverage ratio. I don't want you to have so much capital tied up in your business when I'm saying its lenders will ask for they don't have let's say if you want to buy a building or buy a company. They may say to you you know what if you're asking us for one hundred thousand dollars we want you to have twenty thousand into this you know we don't want to be if you're buying an asset the only one in this now you can if you don't have cash may be an equity investor supplies that cash maybe a friend or family member guarantees that portion and again I'm going back tio having high for dollar larger dollar amounts loans, smaller loans what are they more likely to ask for your personal guarantee? You're on the hook for it but you may not necessarily have invested the hard cash in your business in big ways so again it's if this store is closed to you then you approach it this way there's a solution in every problem and again we go back to that cocktail it sounds to me as though you've got cash for coming in from here when I hear cash flow boy there's not that need for that added equity remember one of those first slides because there's a short window of cash coming in for customers you don't need as much equity if it was a longer horizon from you taking cash until cash comes back from your customers then I say you need a little bit more equity so you are running that perfect business and I like it is much easier I love when people invest in their businesses but the value their business grows and it's easy much easier to triple the value of a five thousand dollar investment then a fifty thousand dollar equity investment so investing low to make more you're on target yeah just because you know don't feel well I only invested five thousand dollars but it grew to be worth this wow you're doing better than putting putting your money there then lead a stock market return with they were going to be talking about that in upcoming segments of how to compare your risk and returns that'll get some comments coming from online questions on this and we will put these slides up so everybody knows how to do the math okay we're dis profitability and european l count for what you want to achieve I'm a fan and we're going to hear this in upcoming segments of the importance of gross profit margins especially to investors companies with high gross profit margins rarely go out of business they tend to survivor sessions you always have more control over your operating expenses then the cost producing your product or service but where will lenders look they are going to look at the cash flow that pretax income and making sure that as you sell your products and services there is enough of that cash to pay them back every course. So if you do projections on a quarterly basis or monthly basis they're zoning in what's that extra cash in there can they pay our interest they that is their first look can they make five thousand dollars that five thousand dollars payment were twenty five dollars payment when you stop paying your interest that's scarce um they now have to report that to their boss the loan is now out of compliance they don't like that so doesn't it make sense g as they look at your projections especially if you're starting something new be sensitive when you prepare those projections to make sure that there's enough money for the interest and include the interest on the projections you'd be shocked at how many proposals and I see that even though they know they have to pay interest they never put in the projection to actually pay the interest that's the fastest way to get a loan turn down why you're cutting off the lender you know that's how they get paid that's how they eat so make sure that's there and that helps you finn eagle and determine am I asking for the right amount of money from the lender can you make the interest payment on it the first time it's dio if your projections say no it means to me you have to re engineer I don't want you to just throw more customers in the top just to make the numbers work just to get the loan rather have you do it right and change the amount you're asking for reduce it or adjusted but don't just come up with projections to make the numbers work because that's how you get in trouble how is this sitting with everybody? Cashflow pays off the bigger loan down the road so if it is a kind of relationship where it's not driven off of route you know you sell off your revenues, your receivables then they're looking to their sources of payment how did they get paid back? Lenders will ask this question investors will ask the very same question how do I get paid back? So when we started out today, we looked at that important question and they're two very different answers. If you can't satisfy this, then the answer is obvious then you have to head to equity or changed the dollar amount you're borrowing that's all you have to dio to put yourself in a position where a lender can say yes that's the way to not get in trouble sometimes it's asking for too much cash instead of dialing it orb, ramping it up, dial it back, gained some comfort and build from there investors, you have a lot more flexibility to take in more cash early on without that pressure of oh my gosh, I have to make interest payments and principal payments and so forth and the one individual who was scared about all this stress of that I'm sympathetic to investors maybe that individuals best business partners for really aggressive growth in the future if that's what they want what you need to succeed I can't emphasize enough even though we've been emphasizing numbers and metrics and so forth how you walk into the lenders office matters exudes confidence you are your best sales person for getting cash for your company sometimes I've been amazed at what business owners have been able to get away with from lenders all because of how they presented themselves I'm not saying false bravado or saying that you are have invented the very you know, the most unbelievable blockbuster product that's not what they want to hear, but a confident persona of somebody who is in command of their business is the way to work well with lenders and to check yourself how are you talking about your business? What's really hard is a lot of times when we need loans were in trouble or something's not going right is that the time when you need that loan the most to go in crazed and frazzled and say if I don't get this money now I could go out of business. What do you think the lender is going to say to that know that that would scare me like this is a business owner out of control so you don't have to advertise it but you could say, gee, we're getting more customer activity than we projected with a new credit facility we can accomplish this so you're turning a little bit of peril and trauma and turning around you're managing your dealing with the situation with the lender is a partner you can take the same approach with investors as well but don't go in and fear doomed disaster you will radiate that and that will repel them so you can be a part of your success they want manager steady confident managers that's perfect for lenders going didn't even look like um you know, act like them talk their language they all feel more comfortable with you another key thing when you get loan applications, so if you're doing an espy a loan application again that's a different application than a just a regular bank application they look similar they asked for similar things it's just a different form some of the fees may be different I'm reminded everybody but how about this let's not make any mistakes on the forms let's add our numbers let's fill in all the blanks because if you don't they'll say no or delay and that again, what impression does that give? These are small things, but it's all things that we're capable of doing well and most of these applications have really user friendly language aa lot of the deal terms that I'm talking about don't show up in the applications but they show up in the loan agreements yeah, I like I'm certified as a woman owned business through the pc, but there's a lot of other certifying agencies how much does credibility does that type of thing count for an application in certifying let's? Clarify what that means, so I love it when you apply, even if you're applying for government contracts and stuff to certifies the women owned business of veteran on business here's where I go the lowest cost certify wr because one certification is no better than another you get a certain if you once you're certified, you're certified it's just an administrative faith and their variances on how much some of these certification services cost, so once you have it, just pay the lowest cost to get it. Compare rates so if you go online and get lists for certifying companies, find out what their phase don't pay a thousand dollars when he can get it for two hundred it doesn't really matter. I mean, once you're certified that the only difference is if for some reason I'm not aware of if you're going for some government contracts and very specialized fields where a government subcontractor you're a subcontractor toe a major corporation is asking for a little bit more documentation, but wait until you need that documentation to spend the cash really care now because their job is not to second guess their job is to move that paperwork right that's probably um if you the certification the paperwork that says you're certified is a woman known business majority owned check if there's something looks really rinky dink about the certification coming maybe but no just go lowest cost certification company they're diving in no decided put that on this checklist of something that they're going to pay a kn awful lot of attention to great question now great question fico scores there's variances on this if you're in the seven hundred range you're golden if there was an event in your family life, a medical bill or something like that explain my credit rating took a dip because of this or my spouse lost their job for a short term thing explain it, especially on sb a loans not too long ago I interviewed the top uber guy for espy a loans from wells fargo and we were talking about this very issue of people especially coming out of the recession and just explain it they're reasonable if it was a sudden dip talk about how it's been amended you know this your application put your best foot forward. Sometimes things happen in life that are completely unrelated to your success and potential as a business owner put it down extremely important to me I got totally wiped out during the downturn and that's why I started this business so I'm starting out with a low fico score and and still debt that's still out there? Is that the thing that should be explained at that point? Or is there other things to go on with that he has eyes only that is this business ongoing business. Now I know you have the factory in relationship. No, this is all personal before started this business. Okay, so now are you looking for new loans for expansion? I am now? Yes. Ok. So again, we started with were going to turn first to the factory, right? See if we can get a better deal no matter what. Because that'll save you cash, but I would not be afraid. Especially since have you been paying your bills over the last twelve months? Uh, ever since everything fell apart. Yeah. Started right that couple. I'd be surprised. Now, here's one thing about psycho even though I've mentioned fight go psycho is not the on ly credit scoring system in america. The many banks have their own credit scoring systems, so something that might look bad on fight go may be entirely different. Every bank has their own formulas. Psycho is one service that is used by a lot of banks, but not necessarily the largest banks in america. Usually, those larger banks operate on their own scoring systems s p a lenders do often look at fico scores but it doesn't have to be fi co so in no way will the f s b a say it must be a fight so you must have this because different banks again can use different scoring services the fact that that happened three or four years ago I would include that in your application and say back here, this is what happened you are not the only person in america that suffered a depth I mean, the real estate developers you name it across the country, you're with the majority, but it sounds as though you have come out of it in a very responsible way and it's long as you're demonstrating on the personal side, you know, remember we're looking at your business credit worthy first and you've got a strong story where you've generated more customers. The factor has been paid responsibly for three years you're in business, you're not quite a profitability, maybe we look a little bit about your expense structure or maybe increasing the cost of what you sell your services at you may be shortchanging yourself, right? And maybe just a couple of those changes might improve your bottom line, but in no way is the personal relationships should be the reason why you don't pursue growth when a lender says no pay more attention to that than what we conjure up in our own brain I'm hearing a lot of success here two years ago now I did go to a bank and that was the reason I was I was turned down that my personal by personal um credit was so poor that they and isn't that poor I think it's like between five and six something kind of bank and again it was two years ago so it's four years away there was a small bank that was reported to be uh ah, woman friendly. Ok, so I was I I stayed away from what you're calling the uber banks and trying to go to another bank and so that's that's my story and trying to move forward so that I can put it, you know, uh, cold water on that process. So the things again, I look at it I'm a fan of community lenders now, if it may be smaller banks may not have all the resource is to lend out as much as you think, you know, we're know what their balance sheet is like for a small lending company. Try three lenders, right? And because of the s p a guarantee it may be that an espy a loan plus your whole loan application is a little bit more to encourage the local bank to give you the loan because now they're back, that loan is back by the additional guarantee of the s p a meaning the federal government their percentage levels of guarantee coverage it is based on the size of the loan I know we're talking about small loans here, but for million dollar loans five million dollar loans the rate of that guarantee changes but a guarantee is a guarantee and when the federal government is backing a portion of your loan, the risk to the lender which is the bank goes down, the motivation to lend to you goes out and that's that fine point that sometimes even the loan officers you have to ask for the espy a application and that and two team may not be an espy a partner lender some are some aren't s p a lenders have to do a lot of reporting and, uh be a partner to the bank of long term partner to the s p a and need some criteria on their own part. Great question. So do you feel better about going out there now and thinking about your business and do what's the best finding partnership for may? I feel totally empowered at this point. I don't know. Honestly I do I feel like I feel like you've given me a lot of confidence and all these other areas so that's it I don't have I don't have to feel like I'm running and I'm on the underside of that I'm just gonna warn the bags, watch out, you know what when I hear your story to me it's wonderful because look where you've come from and look what you've accomplished oh yeah, yeah and I'm thinking, gosh, what are you going to do in the next five years? It's going to be even better any more questions about this pain attention just filling in the blanks right matter it's their first impression and if you don't fill a man it's too easy to say no or delay, so we start to talk about what happens when you do hear that no from the big banks my carlos, right? It may not be in your street corner, but it's within your state dial back that amount, maybe there is an in future segments we're going to be talking about those wealthy angel investors. Angels may be incentivized to guarantee one of your loans for a teeny equity stake in your business. I know somebody quite well who there's a donut company there was expanding into new locations, they didn't really want to raise more equity and they didn't really need equity but alone just needed a little bit more firepower. And so the angel investor merely guaranteed of loan to a certain amount a fixed amount was enough to get the loan and they gave him a little slice of the business but not as much as if that investor wrote a check for that amount so for people out there who are thinking, no, I really want to always own a majority stake in my business, and I don't want investors, and this is a short term thing, relatively short term thing, there may be a way where you can use other people's great credit worthiness toe add support to alone, I recommend not a blanket guarantee, but very, you know, smart people will say I will provide up to twenty five thousand fifty that whatever that's the limit of limited guarantee that's an option? So what we're doing is opening up more possibilities to solve your cash knees, it's a very creative kind of thing, it's not black and white, and it involves a little bit of ingenuity on your part and a curiosity to explore options without fear. But every financing problem, I guarantee you has a solution, it's that recipe and adding and tweaking and changing and addressing it, and some of these best ideas will come from u utilizing a lot of these opportunities that we've talked about today, it's never black and white just because one liner says no, that that should not speak for all lenders ever because they're not all the same and what they dio how we don't have anybody timing in different comments, lots of different questions, people really at this point. Turning to each other for advice which often happens at this point and of course it's really interesting and they're asking each other child questions they've got different things we got some other different fears coming up it's been very interesting people are asking about their fighter scores and things that you know not necessarily we're going to dive into in this course but it's been very interesting the way they've reacted certainly very engaged audience love it so do we want to address any of those fears now yes I mean we got another one that came in this is an interesting one because it's so it's very hard to explain but their credit is low due to a health situation how do you explain that to a lender will they potentially think their health could impact their future performance again? That's the fear it's holding back that's a very tricky questions normally it's not uncommon for a family member's health uh wow that is a tricky one and I don't want to be black and white or it all flipping about that you know I'm very sensitive to how I give advice um if it is saying they don't think it will have a negative impact you clearly I mean also you have more experience of this but I don't know what the nature of you know the medical problem is in an ongoing thing that we don't know the first impression b that it could impact how the business owner makes decisions clearly I've worked with veterans with severe disabilities who are now coming out and starting businesses and building businesses and that is not the reason not to for them to engage lenders and investors um so is it a disability a chronic illness but in general if it was a medical problem within the family or the business owner that has passed I would probably opt it is you know, to disclosing it as a reason why this is part of the history and explaining why there was a dip I may have incurred aa lot of medical expenses for a surgery or an operation or something that now has been taken care of here's my business going forward and changing the focus it to everybody of the future and why I'm creditworthy uh depending on the nature of the medical expense um and the medical need and really what they're looking at is the presumption is you were unable to work for some period of time or the medical bills were so big that it swallowed up my credit those are the two things that are most common and easiest to explain because they're very realists you know we are when you asked for loans or investment capital you're asking human beings who live in the world you know and if you've got a good story yes pony it up if it's highly confidential and I'd want to know more before I gave a definitive answer if I was disclosing something that was ongoing details what is the fear that's again holding them back so thank you for sharing that we appreciate that we have like a two part question from curios so do want to take that one yes this one is a little bit complicated and they want to know if this scenario is a good or bad idea in your opinion so they want to know if it's good to go without upfront payment for marketing relevant services so the idea here is to help new businesses get started and get paid from the money that they earn. What are the terms to agree to before you get started with that? Is this something where you should leave that helping to financial institutions or is it may be a good idea to structure this contract to help these people as they grow? Okay I have some many comments on this all right a very similar kind of service is out there today where people go into well established businesses and say, hey, we're going to cut your vendor costs he's aaron big businesses and you don't pay us anything today but I want tio after we prove all the savings for you to give me a percentage of the savings which could be massive right? What when you are a green and so confident in your services of money coming back to you the certainty of money coming back to you the kinds of services where they come in and re negotiate all your expenses to produce savings they know it's there and they have a contract to get that savings amount back from the company they feel very comfortable that they will get paid and by the way some of that may come very soon right? If I was offering a service on the com based on somebody else's business success the variables suppose they don't implement her marketing advice in the same way that you would and they screw up who loses you d'oh right? The dependency of performance is to random for my comfort level what is success in terms I wanted to find? Is it revenue growth customers suppose that company said well I was going to get that account anyway wasn't because of your work I wouldn't want to get into a little duke out of who did what when the contrast must be very specific my guess is if this a person is so awesome and I betty is where she is and does great marketing work I'd want to spend time with you to reinvent your thinking about the value of your service is that you are worth payment of front or within thirty days you're not worth less in that when you discount your own value of your services you lose more so I'd probably say no let's go a better room where you get paid and make money and is less prone to conflicts, or I'd really want to make sure the definition of customer business coming in here's one other due diligence request. If that business was hugely profitable, the business be not those served marketing company here's my one variable. If you are bringing in customers with eighty percent gross profit margins, that was really, really lucrative. I might play ball because there's going to be cash available to pay you, but suppose you're doing marketing services that produces a customer relationship. That's just not that profitable low margins you likely to get paid now. Ask if that helps him, but I don't want to discount the value of his services. You know what, wait for a customer to negotiate with you. You don't start from the lowest common denominator area, saying, I'm gonna pay, get paid. Maybe you're worth more that's what you're worth more.