MONEY 10 - BANKING #2

THIS IS MY TENTH POST ON UNDERSTANDING MONEY TOOLS

BANKING AND FINANCING 2

Money! Money! Money!  This is a topic that you never want to touch upon when you’ve had a scotch or a couple glasses of wine! Outrage will win!

So, you want to start a new small business, retail store, manufacturing, etc.  You need money for starting the business and operating capital.  The first type of loan that pops to mind is a “line of credit”.  A line of credit is for a certain amount of money, at an interest rate that might fluctuate with a standard such as prime, discount rate, London Inter-Bank Rate, etc., for a fixed period of time.  The bank normally wants your corporation, if you have a corporation, to sign and then also wants personal guarantees to the loan.

Lines of credit are very difficult to obtain, and a bank normally doesn’t want to have the line any greater than the assets you currently hold in the bank.  So what you are doing is essentially borrowing the money from yourself.  Any risk lending from a bank is history.

How about a credit card for your store or business offered by your bank?  Banks wanting your daily cash deposits and other business will normally grant your business a card with a limit to $25-35,000, and perhaps an interest rate around 11-12%.  Credit cards are not secured by assets, so they have risk of default on any balance owed. Here are some games banks are playing.  They get your business, offer the credit card, let’s assume with $35,000 as a limit.  For business you use the card and make your monthly payments on time.  All of a sudden the bank drops the amount available to you,  let’s say to $25,000, this triggers a lowering of your personal credit score, and because of the lower credit score, they raise your interest rate to perhaps 20-30% interest.  Now, it is harder for you to pay off the balance because of high interest, and you are trapped, and it hurts your business.  You wonder why we have business problems today!

Let me give you an example where financing changes closed a successful business I helped start. The company was called Auto Source, Ltd., started in 1986 in Denver, Colorado.  Our concept was to lease vehicles to people with one flat fee, $500, and we sourced our cars and trucks directly from the major car companies and their dealers fleet departments.  Being straight forward and honest with customers about pricing we were able to hire some top managers from auto dealers.  Our financing was at a low rate from one of the large banks.  All of a sudden the major car companies started to build financing into their pricing to protect their dealers, the 1% or 2% interest.  Well, we couldn’t compete with traditional bank financing rates and finally closed our doors.

Qualifying for money has become very difficult in the past 5 to 6 years, as we have discussed.  Also, the financial analysis banks use has changed.  For my generation of people it was always build assets, when you need money you can borrow on your assets or sell some off.  Today, banks look heavily at income statements and give little regard to assets on a balance sheet. Yes, hard assets have been devalued, however what happens to the individual who thinks he has job stability with his corporation and a good income and the company decides to down size and sever many jobs? No income and can’t pay the mortgage and bills.

Private financing has always been an option.  The ground rules here have changed, too.  First, let me tell you that there is no such thing as the “trickle down” theory for money from the rich. Many individuals and private money sources are looking at returns of 25% and greater to make a loan, and/or a percentage of your business.  Most times you will lose your business under these financials conditions or be tied to miserable constraints. Venture capital firms fall into this group.

Here is another personal situation that went from success to losing the business. I am relating personal experiences to you in hopes that similar things will not happen to you.  I have written business plans and helped finance two restaurants, one in Denver and on in Durango, Colorado. The fine continental food restaurant in Durango is what I will address. I had two other partners whom I had known previously, and then we took on another partner who was a lawyer and CPA who brought in the majority of the money and had 62% of the corporation, my side retained 38% and a management agreement for operations.  I knew what could happen and discussed potential events with my partners.  To a tee, what I said could happen, did happen.  After 3 months in business we were very successful and above pro-forma.  The controlling partners abrogated our management contract, kicked us out, flipped the restaurant to a new name and corporation and continued on.  Not the smartest, but not the dumbest person in the world I did the logical and sue.  Ever try to sue a “lawyer” representing himself and being out of state?  Finally, after more thousands of dollars wasted chasing him, I wrote it off. Another story to toughen oneself, but you can’t have too many!  Lesson to be learned is best to use the services of a good lawyer and accountant, but don’t take them in as partners as they will in many cases protect themselves first.