THIS IS MY 39TH BLOG ON UNDERSTANDING MONEY TOOLS
Let’s discuss why small companies and the middle class
cannot get ahead with current banking regulations, and private investors.
As discussed in the past we went from far too loose banking
regulation to absurd tightening. I will concisely state some of these banking
problems as follows:
- Too
much paper work, too much regulation, too much bureaucracy, all taking too much
time.
- You
cannot get a loan if you need a loan! That means no money loaned for start up and
small business. Businesses need to be operating and successful for 3 years to
get a loan, and such a loan would be for expansion of the already successful
business.
- A
loan can only be obtained if the primary borrower/officers of the corporation
have high credit ratings.
- You
can only get a loan for a new company, even if you have tons of collateral, if
you have been in the same industry for years with past success.
- Banks
want all investors within a small company to submit their tax returns and be
jointly and severally liable for all debt. Permit me to explain with an
illustration. You have 10
investors in your LLC. You want to
borrow $1 million for a company. Banks want no risk, so they want each investor
to guarantee the loan. This goes down on each investor’s balance sheet as a
“contingent liability”. Therefore,
an investor’s balance sheet will show that he has an asset of $100,000, yet
under his liabilities he needs to show $1,000,000. Not a good deal.
- Banks
promissory notes many times have due upon sale, due upon changes in financials,
due upon change in valuation of asset, due upon “anything”. Partners and I got
caught on this back in 2008. Working line of credit, two appraisals
substantiating 800% equity over loan, loan not due, plenty of money remaining
on the line of credit, however the banks called the line of credit. So, I know
this happens. We lost the project. The ideas of significantly “over
collateralizing” a loan is ridiculous and impedes business growth.
- Banks
require any business needing to be in a profitable position at time of loan to
immediately pay down principal and interest.
The other option to going to a bank for money is borrowing
from private parties. Some are actually called “angel investors”, most of the
time I call them “sharks”. These are the common practices today for these
people and companies:
- You
need to put up a substantial amount of equity yourself.
- Relatively
high interest rates, above bank rates.
- Note
callable for almost any reason.
- Note
callable plus foreclosure if a payment is late or missed.
- Over
collateralizing loan amount. This is very typical as the lender is looking for
foreclosing so he can retain interest amount to date, plus the equity you have
built in the business or project.
Here are some ideas to help prevent some of these issues
with a private lender.
- Only
over collateralize the loan 20%, or what you deem
reasonable and can afford.
If the loan is over collateralized the lender may just pray for default
so they make much more money. Not a good equitable business relationship.
- Take
a certain portion of the money and immediately place it in escrow to make
payments up to a year or so in case your business pro-forma does not meet
expectations, but you can still make the necessary payments without
foreclosure.
- Know
whom you are dealing with, and what their reputation is.
- Shop
the market for rates, and also check with bank rates. You will be slightly
higher in rates with the private lender, but if it is not a good deal, better
to walk away.
- Set
a time frame for payment in full that is longer than intended to be careful
that you can pay the loan back in full when it matures.
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