Tips For Approaching Lenders
some areas, especially S. B. A. Loans were going to dial back to what are a few more things that lenders are looking for. That must have earlier. We heard from somebody who's talking about his character. His idea in itself. These are the words that lenders will use coverage means if you're asking for a million dollar alone, What security do they have in their hands that represents more than $1 million, especially if assets could decline in value. That's what lone coverage means. What is the risk of default? You're going out of business or not being able to pay that loan loan security and collateral. They want to have something put up to help cover the loan. These are 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 are the buzzwords coverage. Well we want to you know, I want you to know when they say...
what's our loan coverage going to be. You know what's our source of payment we're going to get to it. Here's another way to look at it, what our lenders gonna 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. 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 and equity 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. Okay, 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 some of them liquidity issues. So if 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 want it to be more than one. So when you have a balance sheet, what our assets, the cash in your bank account, maybe customer receivables the people owe you. It may be a uh, certificate of deposit current assets, not necessarily inventory, but basically assets that can be converted into cash in less than a year. And the same thing with liabilities. Who are your payables to And it may be some of your accrued of salary obligations. Quick ratio. And that is you add cash and a. R 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. See 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 number's up. It doesn't take much networking capital, current assets minus current liabilities. Obviously, again, we want more assets than liabilities because when you're asking for a loan, what is it more liabilities? So we want to start from a point of strength. These are easy ratios 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 too um, fall below them. That's why I want you looking for this stuff and negotiate it away a little bit. Okay. Especially in a seasonal business. All right receivables. I bet everybody is going to be so tired of hearing about customer receivables, but I keep going back 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 of people today, they get paid up front, which means they are off the grid in Happyland because they are doing better than most businesses in America. And if you can keep getting paid upfront for your work, gosh keep doing it because you are gold to 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 up front Divided by days will 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 do your customers pay you? Empowerment? And our confidence in you is if you know that average say are averages block, you know it. You have gone a long way. So the individual who is talking about, what do 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 the same days outstanding. But which company would you rather lend to? Which one? What do you think adam company your company be if you're a lender uh company B. Being another company, that's who you would learn to. Is that your final answer? You're 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. Some more metrics that matter debt to equity. This is something that will come up from the S. P. A. They'll ask, have you invested in your business now? What I'm hearing today is most of you have or are about to what percentage of what 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. You might turn to other outside sources. And there are ways by starting out with slow amounts of loan to 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 $100,000 loan of $500,000 loan from the start without the letters saying hey what are you ponying up here? And that's what this slide is about. If you're going for gangbusters, where does profitability and your P. And L. Account 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 survive recessions. You always have more control over your operating expenses then the cost of 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's enough of that cash to pay them back. So if you do projections on a quarterly basis or monthly basis, their zoning in, what's that extra cash in their, can they pay our interest That is their first look. Can they make $5,000, that $5,000 payment Or $25 payment when you stop paying your interest? That scares them. They now have to report that to their boss. The loan is now out of compliance. They don't like that. So it doesn't make sense gee 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 cash flow, pays off the bigger loan down the road. So if it is a kind of relationship where it's not driven off of, you know, you sell off your revenues, your receivables, then they're looking to their sources of payment. How do they get paid back lenders? We'll 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 there are two very different answers. If you can't satisfy this, then the answer is obvious. Then you have to head to equity or change the dollar amount you're borrowing. It's all you have to do to put yourself in a position where lender can say yes, 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 lender's office matters exude confidence. You are your best salesperson 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. 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. A 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. Um Fico scores, there's variances on this. If you're in the 700 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 S. B. A. Loans not too long ago. Um I interviewed the top Uber guy for S. B. 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, there's 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. So we started to talk about what happens when you do hear that now from the big banks microloans, right? It may not be in your street corner, but it's within your state, dial back that amount. Maybe there is in future segments. We're gonna 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 doughnut company that 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 alone to a certain amount of fixed amount. It 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.