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The 504 and the Tin Foil Hat Postulate

11/2/2015

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It looks like Congress has put a new budget deal in place that will keep the government up and running for the next two years.  The response from experts has either been hurray or boo, depending on their leanings.  I am not going to comment on the deal in this blog.  We can sit down, have a delicious beer and get down with our nerdy selves regarding Keynesian versus Austrian economic theory and their respective places in Washington fiscal policy.  However, I will let my opinion be known on beer in this blog and my comment is … “Yes, please…may I have another.”

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Some of the terms in this little blog are often misunderstood.  For example, what a debt ceiling means to most Americans is different from what it means in Washington.  For my family, a debt ceiling means the most money I can borrow while still making all of my payments and living the life I want to live.  Coming from sturdy, Lutheran, Northern European farming stock, our comfortable debt ceiling equates to virtually zero. 

The government definition of a debt ceiling is significantly different.  A debt ceiling, in US Government terms, means a limit set by Congress on the amount of money that can be issued by the US Treasury, thus limiting how much money the federal government can borrow.  The difference is we as families, cannot print our own money (legally, the currency of the United States of Mike has very little value) whereas the government can continue raising the debt ceiling by votes of Congress  and then borrowing the required money until the next debt ceiling is reached.

The difference between deficit and debt can also be confusing.  Deficit spending is what happens when revenues (taxes) are not sufficient to cover current obligations.  Debt is borrowed money.  It is the money used to “fill the gap” between revenue and expenses.  Deficit spending has actually dropped over the past year.  Despite the drop, revenues still do not cover current obligations and our debt increases, though somewhat more slowly (what’s a few half trillion dollars among friends?).

So, what are the ramifications of this budget deal (or if they would not have passed a budget deal)?  A number of possible scenarios have been theorized, with the worst being ...duh-duh-duh… a total economic collapse.  You know, eating rock soup, runs on Spam at the store and manufacturing millions of tin foil hats.  By the way, here is my tin foil hat. 

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The common fallacy is that the foil has to be on the outside, which is totally incorrect. It has to be closer to the brain, thus on the inside of the hat. I have proven this by putting the hat on a plasma ball. Look how the plasma ball does not react when in direct contact with the foil (wait… what? …just go with it).
I am once again guilty of digressing.

This scenario, containing funny hats and canned meat, is probably unlikely.  More likely, nothing happens and life goes on as normal.  Markets might get jumpy and there might be a few freak outs.  Currently, if you look at debt as a portion of GDP, the 2015 numbers are less than or equal to government debt from the mid-1940’s to the mid-1950’s.
 
So, what does any of this have to do with the 504 loan and commercial borrowers?   At some point, the deficit and debt problems will have to be addressed.  If borrowing continues to increase (deficit spending leading to debt), interest rates will necessarily have to increase.   Being able to lock in a 20 year fixed rate loan to purchase long-term assets now, when interest rates are low, may be the wisest investment a borrower can make.  Locking in a 4.8%, 20 year fixed loan when interest rates could double over that same 20 year period makes good fiscal sense.

I think it is a great time to drink some pre-apocalyptic beer, grill some Spam, compare our tin foil hat creations and talk about buying a building for your business.  It might be the perfect time.

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Moby Speaks on the Art of Strategic Decision Making

9/30/2015

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Back in March, I introduced Moby, our brand new Goldendoodle puppie.  As a reminder, here is a picture of him when he first came home with us.  I am not really known to be a cuddly, emotional kind of guy.  But, seriously, AAAWWWEEE...Sweetie, cutie-pie...Who’s a good boy…Who’s a good boy…oh yeah... back to the blog.

Pretty cute, quiet and, after rereading the blog I wrote about him, my memory was jarred into remembering he was a lot of work.  Still….time heals all wounds and many great improvements have taken place.  First of all, he no longer conducts any of his…business, in the house.  That is a super positive result.  He also does not chew the heck out of all the wood in the house.  We have to replace baseboards, window blinds and a table leg, but that behavior is gone.  Woo-hoo, positive check number two.   All good things.  All good things.

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So, here is Moby now.  Obviously, he has changed significantly.  He is much larger (I am brilliant at stating the obvious, thank you very much). He is also loving and sweet.  Mr. Moby has really settled into being an integral part of the family.  That is not to say we have no issues.  Where before we just had normal puppy troubles, we now have a full throttled, critically thinking bundle of strategic energy.  Our little cutie has developed strategies to get what he wants.  He kindly summarized them in the following graphic (I actually made the graphic, he just told me what to write down).

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I am not sure his premise is correct that getting more snacks makes him a better helper, but what the heck, let’s just run with it.  He has developed strategies to ensure that he gets the necessary sustenance to be that good helper.  He sneaks food when we are not looking.  A missing plate of raw hamburger proves that.  He acts like he is interested in one food item, say a tangy, pucker-inducing yellow citrus fruit, and then drops it and runs to steal a more appetizing morsel when we reach to pick up the fruit (see  picture…that is not a ball in his mouth, it is a LEMON).
The following pictures illustrate the point even more.  He steals socks and pillows, takes them into the backyard or into other rooms of the house, and holds them for ransom until we provide a treat.  Should we treat him for stealing our stuff?  Of course not, but he is incredibly fast and impossible to catch when he gets outside.  We are trying to change the behavior, but sometimes I am running late and just want my dang socks.

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So, as business owners, what can we learn from this “dumb” dog?  Creating plans and strategies to meet objectives is smart business.  Strategic planning is an evolving, dynamic process that adapts to surroundings and the business environment to accomplish a beneficial goal.  Every business, no matter its size, should create strategic plans that contain measurable objectives with timetables and responsibilities.  These objectives should be changed and evolved as market conditions change. 

The old Soviet planning method created five-year plans that remained static and monolithic.  And, of course, the Soviet Union collapsed.  Trying different tactics to reach the goal is important and can keep an organization agile.  Be willing to move and adjust.  Learning what does not work is a critical part of planning and strategic thinking.  Think in terms of plan, evaluate and evolve and then repeat, repeat, repeat.  It has worked for my dog and I think it will work for you.  Moby is available for a consult at your earliest convenience.  Just make sure you leave your socks on.
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Kind of a Big Deal

9/9/2015

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It has been awhile since I wrote a blog.  The entire summer seemed to get away from me.  I blinked and vacations were over, the pool closed and school started up again.  So where did the time go?  I cannot use the alien abduction excuse again.  Surprisingly, it only works once or twice during a career.

So what happened?  Well... we completed the largest deal in the history of the organization.  The largest by a long ways....Seriously, nothing else has even come close.  Actually, for a small organization, it was kind of spooky big.  Why do I consider the loan scary?  Well, obviously a large deal has way more money changing hands, and in the case of a "Fall of Rome" style collapse, the risk to Enterprise is higher than a regular sized loan.  And carrying that logic to a more personal level, the risk to my job and house and reputation and... well, you get the picture.  These thoughts go through every conscientious lender's mind.  It is what makes us human.  However, dwelling on these "Eeyore meets Chicken Little" thoughts is the enemy of anyone in commercial lending.   

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First of all, making this scary risk tolerable is the very purpose of the SBA 504 Loan Program.  Enterprise Development Corporation and its banking partner worked together to understand the positives and the negatives of the deal and shared the risk.  Secondly, doing the proper due diligence by thoroughly examining the 5 C's of Credit (Collateral, Capital, Character, Cash Flow and Conditions) dials the scariness factor way down.  With this attention to detail, a lender can sleep better at night.

The loan will sit in our portfolio for up to 20 years, so obviously it needs to perform.  We feel comfortable with this loan because we sent the summer doing due diligence.  I sacrificed my TAN for the loan (honestly, I have kind of a transparent Scandinavian Lutefisk skin, so it wasn't that big of a sacrifice.

Here are some key points we looked at during our process:

1.  The Borrowers:  We reviewed the borrowers' credit and collateral.  Their credit was absolutely top notch and they had enough personal assets to guarantee the loan.  They were willing to put enough of their own capital into the start up to show how confident they are in its ultimate success.  Finally, they are known as reputable, honest people who give back to their community (character).

2.  The Existing Businesses:  The existing businesses already operating under the corporation are run professionally and successfully.  They have systems in place and keep meticulous records that are necessary to help a lender make a decision.  The businesses also have a good enough cash flow position to support the new venture if it starts more slowly than expected.

3.  The Proposed Business:  The proposed business appears like it will meet the needs of the market and the conditions seem right for success.

This process seems easy right?  In theory yes, but we look at every affiliated business within a borrower’s corporate reach, and we review any potential issues each piece of the corporate whole might have.  For a normal borrower, this process is easy.  This particularly borrower had seemingly multitudes of affiliated business (less than 100, but not a lot less….).  We make good loans and have a solid portfolio because of this due diligence process.

Summer is over and the days are shortening.  I have no tan and I have gotten a few months older.  Sorry there was not a blog for the past few months, but, obviously, a lack of visibility does not mean a lack of activity.  It is good to be back.     





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Boggle Nails

6/11/2015

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One of my 11-year-old son’s best friends was at the house the other night for dinner.  We sometimes leave the old game of Boggle out in the middle of the table to see how many words we can make.  It is fun and it really can stimulate conversations and open people up.

My son thought he had a word, but we pointed out that what he thought was a lower case “d” was actually a capital “P.”  When he started explaining his mistake, his friend aggressively yelled “EXCUSES ARE THE NAILS THAT BUILD THE HOUSE OF FAILURE!”  Everyone around the dinner table got really quiet.  The friend looked a little embarrassed and sheepishly said “Too intense?”  The rest of us looked at each other and fell out of our chairs hysterically belly laughing.  It was a great moment that I will probably remember for the rest of my life.  By the way, it is a saying his older brother heard on his high school track team.

I started thinking that, though hearing this come out of a very sweet, naïve 11 year old boy’s mouth was a little surreal, the saying itself is pretty wise.  I know I am guilty of “adding nails” to many tasks that I should do correctly the first time, but for some reason did not.  I have made excuses in my own businesses and here at Enterprise.  

I even used the saying with the girls’ 3v3 soccer team I coach, though I said in a slightly nicer and less passionate way.  After all, the intensity in a state championship 3v3 soccer game and Boggle are incomparable.  Nothing is more intense than “around the dinner table” Boggle.  Priorities, priorities…

Excuses do give us a justification for not doing what needs to be done.  These are some that I heard this week from clients.

Question:  “Why are your financial statements inaccurate?”

Answer:     “I didn’t have time to enter the data into Quickbooks.”        

Question:  “Have you made your sales calls to past customers this week?”

Answer:     “I got caught up with another project so I decided not to make the calls.

I am certainly farrrrrr from perfect and make similar excuses.  Just ask my wife about the weed eating and edging that I have not done for the past four weeks.  Let’s see, my “nails” have been, my ankle hurts, it’s too wet, it’s too dry, it’s too hot, no gas (though the edger is electric) and I have to prepare for the upcoming soccer tournament.  These all seemed reasonable at the time, but, honestly, they are pretty lame reasons to avoid doing something I hate that is actually pretty important.

It is hard to point the finger at someone else when you are equally as guilty.  So hopefully, with the help of a very intense 11-year-old Boggle maniac, we can all learn a little lesson.  “Honey, I am coming home to weed eat and edge!…. tomorrow.”   


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Marketing Strategy

5/27/2015

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For many years, Enterprise has described itself a Certified Development Company  that makes SBA 504 loans.  This self-identification is certainly accurate, if not inspiring.  When really considering who we are, we are far more than just a commercial lender making a very specific, niche SBA loan.  If Enterprise Development Corporation followed the old school, 4P’s of Marketing (Product, Price, Promotion and Place) we would simply be a 504 lender whose interest rate is set by the SBA.  We promote ourselves to bankers in the Mid-Missouri area.   This marketing mantra is not only dull, but also very limiting.  Any organization that looks at itself with such a narrow focus may be missing an opportunity to expand their marketing reach.

Collin Bunch, with the MO Small Business Development and Technology Center, suggested Enterprise Development undertake a great exercise to help define our marketing cycle.  It was very enlightening to force ourselves to push the normal boundaries of our “box.”  Here are the results from the exercise:

Enterprise Development Corporation’s Marketing Strategy






















So what does this mean?
  The exercise made us realize that we are so much more than a niche lender.  We offer banks and borrowers much more than a loan.  For example, we offer borrowers the opportunity to own instead of rent, which allows them to build wealth and guarantee future prosperity.  There is an emotional value to what we do.  We sell possibilities.  We offer banks the opportunity to share risk and provide them with SBA lending expertise.  A banker, hopefully, recognizes us a resource to make deals that they might not normally make. 


The other pieces of the exercise challenges you to identify key marketing partners and how to work with them.  It seems easy, but determining the motivation and message for each partner was very challenging.

The “What do you need question” was also interesting, simply because, on the surface, it appears that we have everything we need;  nice equipment, a nice office and reasonably good communication mediums.  However, what we realized is that to fully maximize our potential, we need to change the culture.  We needed to recognize that we are not an arm of the Small Business Administration (which we are not).  We are a small business that is selling much more than a non-descript, arcane loan program.  As I talked about in a previous paragraph, we provide possibilities.  The culture of the organization is already shifting to that message.  I would recommend every organization go through a similar brainstorming exercise.


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White Rabbits

5/13/2015

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And if you go chasing rabbits, and you know you're going to fall
Tell 'em a hookah-smoking caterpillar has given you the call…


Go ask Alice, I think she'll know

When logic and proportion have fallen sloppy dead
And the white knight is talking backwards
And the red queen's off with her head
Remember what the dormouse said
Feed your head, feed your head


“White Rabbit,” Surrealistic Pillow, Jefferson Airplane 1967

 In Lewis Carroll’s classic children’s story “Alice in Wonderland,” Alice follows a rabbit into its hole and ends up in a world where nothing makes sense.  The 1960’s band Jefferson Airplane (later know as Jefferson Starship, and later just as Starship, rockin’ the keytar and big moustaches) also followed the mind-blowing “Alice In Wonderland” theme in their song “White Rabbit.”  When I decided to write a blog about how interest rates are “built,” I had no idea that I would feel like I was walking around in Wonderland.  It is a complicated world that makes the Mad Hatter seem like my sensible Uncle Donald.  So, follow me down this rabbit hole of madness and pull me out if I get stuck.

A number of different factors determine the interest rate the bank charges the borrowers. There are two sources of funds for banks to relend – customer deposits and borrowing from the Fed Borrowing Window.  The cost of the customer deposit is the interest rate the bank pays on your CDs.  The cost of borrowing from the Fed is the Fed Funds Rate, which is the interest rate the Federal Reserve charges banks to borrow money.  Right now the Fed Funds Rate is hovering between 0% (not a typo, 0%) and .25%.  This means at this point in our history, banks can borrow money for free (or nearly free) from the Federal Reserve.  On top of this base cost, lenders must include a rate to reflect micro-economic variables like competition and credit worthiness of the borrower (lower credit, higher rate), to arrive at an interest rate that is then offered to the borrower.  Conventional loans are usually variable and are readjusted after 3 or 5 years.  Though most are capped at the amount they can increase, these adjustable loans move up and down and do provide a little wiggle room in case a miscalculation was made. 

Competitive factors are also reflected in interest rates.  It is not uncommon for banks in highly competitive urban areas to have lower interest rate offerings than banks in less competitive rural areas.   This is easy to explain since banks, theoretically, compete against each other for every loan.  Rural areas have less competition and less demand, so their rates can be higher.  This is especially true for conventional commercial loans where, unlike home mortgages, it is difficult to go online and search for loans for their business.   Unlike mortgages, searching online for a commercial loan while sitting on your couch in your underwear with your best friend, a green puppet, is not practical or feasible.  Most all commercial loans are made from local lenders and are, therefore, subject to competitive pressures.

Ok, whew…I am glad that’s over.  Seem complicated?  Yep… Understanding 504 interest rates has to be much easier, right?  Ummmm…. If I say “Yes” will you keep reading?

 The 504 loan is very different from other loans because of the way the capital to fund the borrower is raised.  504 loans are bundled together and sold “at market” as debentures, or bonds, to investors.  Since these bonds have are fully guaranteed by the federal government, they are attractive to mutual fund managers, insurance companies, etc.  that are looking for the next best thing to a T-bond.  Because the funds are raised through the sale of long term bonds, the interest rate for 504 loans is fixed for 20 years. 

So, let’s continue down the rabbit hole and build a 504 interest rate.      

Here is the formula… Debenture Rate = treasury rate + spread over treasury rate

The 504 is based around the Treasury Rate, which is significantly different from the Fed Funds Rate used by conventional banks.  The Treasury Rate is the interest rate on Treasury Notes that the United States Federal Government must offer to borrow money from lenders.  Treasury Notes are marketable U.S. government debt security with a fixed interest rate and a maturity between one and ten years.   The fixed interest rate mentioned in the previous sentence is the key piece to the puzzle.

The Selling Agent negotiates the spread over the treasury rate every month.  The spread is the difference between the Treasury Note Rate and the rate a debenture buyer would accept as a premium to buy the bond.  This bit of magic happens behind the curtain and we don’t need to understand any of it, happily.  Once this Debenture Rate is set, the Fiscal Agent, Underwriters and Issuing Agent begin marketing and selling the securities on the market. 

Once the debenture rate has been determined through this negotiation process, the Note Rate for the borrower is calculated by adding the debenture rate to the ongoing servicing fees (Central Servicing Agent fees for collecting and disbursing the funds and payments, SBA fees for a loss reserve and CDC fees for ongoing monitoring and servicing).  The fees allow the program to pay for itself and the fees are paid by those that benefit from the program – an aspect that is very unusual in any sort of government financing or funding. 

Because of the government fully guarantees the sales of the debentures that fund the SBA 504 loans, the spread over Treasury is the lowest of any other funding option, including FNMA, mortgages and Baa Corporate fundings.  This allows the SBA 504 loan program to offer the lowest possible 20 year fixed interest rate to small businesses. 

Done.  Understood?  The process is probably not as difficult to understand as I originally made it out to be.    Still though, I think the next blog will focus on puppies and kitties.


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Your Not a Ninja!

4/14/2015

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I was at a soccer tournament this weekend in Springfield, MO watching my daughter’s team play in the Missouri President’s Cup, a fairly prestigious tournament where the winners move on to regional and national competitions (we did not advance this year).  All of fathers sit near each other, talking strategy and probably being more involved than we need to be and more of a nuisance than we should be.  My advice from the stands has never once turned a game around. 

For any of you not familiar with the intricacies of soccer, a very important skill to have is to be able to bring a ball out of the air and control it or pass it to a teammate.  The most normal way to accomplish this is to bring it down with your chest or use your head to “bump” the ball to a teammate.  Another, more difficult skill, would be to time the ball’s flight perfectly and either trap it or deaden it with your foot.  We have one girl on the team with amazing athletic ability who refuses to use any of these conventional techniques.  Rather, she throws her leg way up in the air, near her head and tries some sort of Bruce Lee kick to control the ball.  Upon seeing this for about the tenth time in the tournament, her father yelled one of the funniest lines I have ever heard in a long time.  He screamed, “WHAT ARE YOU DOING?  PUT YOUR FOOT DOWN!  YOU’RE NOT A NINJA!

I usually don’t say much during games.  I can be pretty intense if I don’t reign Red Mike in, so I try to keep myself occupied.  The “Ninja” comment, however, nearly made me fall of the bleachers.  It was truly one of the funniest, most spontaneous, obscure pieces of advice I had ever heard.  It also made me think how important it is to do things the right way.

So many people get into bad habits regarding their business, often times out of necessity.  Business owners are so busy and so harried that it might seem necessary to skip steps or put certain processes on hold.  The processes might be hard tasks to complete or may not seem important in day-to-day operations.  In the long run, however, the tasks catch up to you and can cost a person opportunities and hard earned cash. 

For example, I have a number of people tell me they take a lot of money in cash without reporting it.  Fine.  Everyone does it.  We are grown-ups, we can talk about it openly.  However, I tell them, what are you going to do if you need to borrow money or sell your business? No lender is going to loan money based on a wink and a nod that the cash is there.  No savvy potential buyer is going to purchase a business based on “cash under the table” bookkeeping.

I know that sometimes we skip steps out of necessity (maybe that is why I end with so many leftover parts when I put anything together)and then those occasional skips become habit and then performance suffers.  When one of my clients complains that sales are slipping, I always ask him if he is following his proven selling process to the letter.  After some him hawing and name-calling, he almost always admits that he is not.  It became easier to skip the process, even though that decision meant declining sales.  If we are not careful, bad habits develop. 

I am as guilty as anyone is.  I skip steps and sometimes look for the short cut (the extra parts comments was not necessarily a joke).  From now on, I am going to yell at myself… “Mike, YOU ARE NOT A NINJA!”  Maybe we should all yell that at ourselves sometimes.  Unless you really are a ninja…then you will have to figure something else out.


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Housebreaking for Small Businesses (Meet Moby)

3/25/2015

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We just got a new Goldendoodle puppy.  His name is Moby and I have to say, he is pretty cute.  Here… say hi Moby…

Ok, I think we have established that the dog is reasonably cute.  So how can something so cute be soooooo much work?  He is a shoe eating, poop making, peeing machine.  The other day I took him for a long walk, loaded down with plastic bags to pick up his messes and filled with dreams of wearing him out.   

The walk was moderately successfully; he was very tired (success), but no business was transacted (troublesome), if you know what I mean.   We get home, and we look at each other with pride in our eyes. .. We did it, buddy…awesome walk…so well behaved…we are turning the corner!…breakthrough…!  HURRAY!  He then gazed into my eyes, showing that dog/human bond that can only be described as a gift from God…then peed and pooped right on the carpet in the living room.   Thanks for the present you mangy…count to five,  yoga breath…exhale.


Alright, so what does this have to do with my normal blog topics?  Our family keeps telling each other, as we walk on tiptoes so we do not wake up the sleeping hound or step in a little surprise he left for us, that he is young and, after training him, he will be a marvelous addition to the family.  Things will get easier and once they become habitual…

I think as business owners, we can learn from the trials and tribulations of young Moby.  Change of any sort is difficult and will be unbelievably frustrating.  Why should we make this change?  Why should we head in this new direction?  Sometimes the answers to these questions are nebulous and difficult to understand.  And, sometimes the answer is as simple as “Because I am tired of stepping in poop.”  If we gave up on Moby now, he would never learn how to integrate successfully into his new family.  He would never develop the habits to succeed.

The same holds true for businesses.  Making small steps toward improvement are exciting and necessary.  Things get easier once they become habit, and they cannot become ingrained without repetition.  Doing things repeatedly, tweaking along the way, and then celebrating the victories is the key to change.  It sounds simple, but we all will undoubtedly “step in it” (gross pun intended) in the beginning, but after repetition and tweaking, improvement will start happening.  Slowly and steadily you will see the change happening.  To follow the dog training theme, all business owners have accidents, but we have to clean them up and move forward, knowing that it is worth it and will get better.  Just be sure to carry plenty of plastic bags along the way. 


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Getting to "Yes"

2/16/2015

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Business owners often ask me, “What do I need to do to get a loan?”  The standard response from most people is “Well, you need a business plan and blah, blah, blah…”  Sure a business plan might be required, but many loans are made without one (unless the business is a start-up, then fill up with gas, press the starter and fire up the word processor).  

Unlike many of my other blogs, I honestly can say that this one is not particularly funny (or weird and stupid, depending on the readers’ sensibilities), but it informative e and accurate.  So, here is my list of things a borrower needs to do to get a lender to say yes.  These are in no particular order.  They are more of a crazy stream of consciousness, randomly dripped on the page like a Jackson Pollock painting.

Number 1:   Be realistic

Theoretically, every idea is worth a million dollars.  Exhibit one; I give you the Chia Pet, the Member’s Only jacket and anything pitched by the creepy guy Vince on the infomercials.  All of these ideas and products sold well, but I would not have loaned the inventors anything.  Because for every Chia Pet, there is a borrower who comes to the office with a riding mower and a rake, stating, “By mowing counter-clockwise I will differentiate myself from the competition and take 90% of the coveted lawn mowing market.”  C’mon Man…! When a potential borrower comes with seemingly unrealistic expectations, I can’t hear anything but counter-clockwise mowing and the rest sounds like Charlie Brown’s teacher’s voice.

Number 2:  Be Prepared

A borrower should always be prepared.  I am not necessarily talking about being Boy Scouts prepared; ready for a blizzard, a heat wave or a dinosaur attack.  Come ready to answer questions in the most clear and concise ways possible.  Do not hard sell the deal.  The best way to convince a lender is to know the business, the competitors and the market served.  It is also okay to bring personal and business tax returns, financial projections and any other documentation that helps the lender understand the deal.

Number 3: Understand Financing Needs

Borrowers should never go into a meeting with a lender without understanding their financing needs.  Whenever a potential borrower asks “How much money can I get?” I immediately think, “I don’t know and this person does not either.”  Red flags are popping out of every drawer in the office and alarms are ringing the klaxon of danger, Will Robinson…danger.  It is so critical for the borrower to understand where every penny (give or take) of the loan will be used.  Remember, getting a business loan is not at all like getting a home loan.  A borrower is not “pre-qualified” for an amount based solely on financial condition (credit, income etc).  Each deal is unique and underwritten on a case-by-case basis.  This is where a projection can be so helpful to both the borrower and the lender.

Number 4:  Understand Personal Finances

A borrower’s personal finances are so critical when making a lending decision.  Bankers look closely at personal credit scores and current financial conditions.                 Lenders review the personal balance sheet (assets= ownership, liabilities= debts, the difference= net worth) and financial condition of applicants to help determine business credit worthiness.

Personal credit is reviewed very closely since it can be an indication of responsibility and reliability.  However, this is also reviewed on a case-by-case basis.  Sometimes seemingly low credit scores are not indicative of poor credit, but are based on a period in a borrowers life that may have presented some challenges that are no longer valid.  That is why it is important for borrowers to know their credit scores before that initial meeting with the lender and bring up the issue for discussion early in the process.  If the lender feels at all mislead regarding the borrower’s credit (applicant not talking about the issues early in the process, preferably during the first meeting), the deal will most likely be dead, with no hope of a work around option.                     

Number 5:  The Down Payment

Some sort of owner injection is required in almost every deal.  For some deals, especially the 504 loans made by Enterprise Development, land equity (land+building) is enough.  If the borrower can demonstrate 15% equity in the property, then the borrower might not need to invest any actual cash.  Other loan types are not quite as open to equity only projects.  Small business loans that do not involve land often require the borrower to inject up to 20%.  It is the whole “skin in the game thing” that I have mentioned in other blogs.  In case things go badly, it is much harder to walk away if the borrower is in as deep as the lender.

These are only a few steps to get a lender to say yes.  It really is so important to understand the items listed above and to act on them before seeking a loan.  By going in to the meeting prepared, the borrower can create a relationship with the lender, and in return, the lender will be excited to help the borrower through the process.

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Sympathy for the Lender

2/11/2015

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One of my favorite songs of all time is “Sympathy for Devil” by the Rolling Stones.  It is so brilliant how the song creates empathy for, obviously, a very unlikable protagonist (antagonist, really).  I was listening to the song the other day right after I was listening to a talk radio station where a caller was complaining about how he could not get a loan from his local bank.  This exchange made me think about writing this blog.  Lenders are often unjustly maligned.  No banker will pass up a good deal for without a reason.  No lender passes on deals just to be mean.  This column is not really asking for sympathy, just understanding.  So…(cue the bongos and the backup singers, get Keith Richards some coffee and …) please allow me to introduce myself, I am a man….

Lenders are not very hard to understand.  Like other business people, we hate losing money.  We are not in the risk capital game.  If a borrower is interested in risk capital, they should ask rich Aunt Edna for an investment, or Mark Cuban, if they can get on “Shark Tank.”  Is it any wonder that investors expect big returns on investment while most lenders expect modest returns?  The smaller the risk involved, the smaller the return. 

Let me get all nerdy here for a minute to explain the basics of risk management and credit underwriting.  Since many banks are now offering interest rates between 4% and 5%, they obviously want deals that are relatively safe.   Saying “no” to a deal is not at all personal, it is about where that deal fits into the risk-reward continuum.  For example, if someone walks into the office with a great idea, but maybe lacks experience, I might get nervous at the lack of actual operational history.  I feel confident they have a good chance of succeeding.  Let’s say this imaginary business has a 75% chance of success.  However, my 5% return does not give me a big enough reward to compensate for the 25% chance of a major crash and burn.  A 15% return on the loan might make me more comfortable, but I am prohibited to charge what might be considered usury interest rates.  So, even if this deal has a 75% chance of success, I would still decline the loan.

Based on the sure thing policy, how do lenders help ensure they get there investment back?  Two words that every borrower hates to hear (ominous background music (maybe “Paint it Black” by the Stones)…lighting flashes and thunder crashes)…the “personal guarantee.”  Almost every deal requires a personal guarantee.  Refusing to give a personal guarantee is like refusing to acknowledge a basket in basketball behind the arc counts as three points.  You can say it counts as ten, but it counts as three.   These are the rules.  As a lender, I am not going to shoulder all of the risk.  Great gamblers are not the ones who win when there is no real money changing hands.  I am a great poker player when I am not playing with my own money.  When I have to pop out my own wallet, I stink.  The same theory goes with lending.  Lenders never want the borrower only playing with the house’s money.

Policies can also get in the way of lending.  Most lenders like to keep balanced portfolios.  No one wants a portfolio top heavy in real estate or restaurants or potato farms.  A portfolio too heavy in any sector can bring down a lender if that sector crashes.  For example, I might turn down a perfect deal…one that smells like honeysuckle on a dewy spring morning, if I have too many similar businesses already in my portfolio.  Though that portfolio sector might smell like honeysuckle now, it can smell, well, like a field of cow patties on a 105-degree day in a few years.  Portfolio management and diversification is critical from a lending perspective.

Pleased to meet you
Hope you guess my name
What's puzzling you
Is the nature of my game


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