CAN YOUR FINANCES HANDLE GROWTH | Episode 5 with Meny Hoffman & Simeon Friedman

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Speaker C: Good morning. We're back in the studio. Episode number five. You ready?

Speaker D: Yep.

Speaker C: So we took a pause, um, um, to get people, give people the time to, to catch up on the first, the first couple of episodes. Um, but I would like to reflect because, uh, I got a lot of feedback and honestly that, you know, when we did the sales series, um, I was expecting a lot of, a lot of feedback because I know a lot of salespeople and there's a lot of people that struggling. A lot of people are more advanced and everybody in sales wants to constantly learn a little bit more when, uh, it comes to finance. I was debating, like, is finance enough of an exciting topic? And I felt like regardless if it's exciting or not, it's important, you have to do it. And we went for it. And the amount of feedback I, uh, wasn't expecting this amount of feedback, um, from all kinds of people, from business owners themselves, from employees, of course, anybody in the finance world. Um, but you know what the number one piece of feedback I got from all the episodes so far, uh, you wouldn't believe it. I think it was the last episode or maybe two episodes ago, where you spoke about, um, a CFO working on cash flow or a bookkeeper working on cash flow. And then the business owner at the last minute comes and pulls out the money for their own use. And then leaves their team scrambling for covering the week that, like many people said, how does he know what's going on in my business? And then I found, you know, looks like it's a common theme that business owners do, which, uh, we discussed, uh, the importance of not doing it. So that was amazing. And then also interesting enough, like, you see a trend of business owners that's, you know, especially with the economy, they're trying to tighten stuff, and they found the conversation that we're having very valuable, of where the focus needs to be and how to look at the business. You know, when everything is working out well and there's a lot of money, you somehow don't pay so much attention. But when things are more tighter, um, people are more conscious of the pricing and so on and so forth. So Baruch Hashem have been able to make an impact. So thank you for your time on that. Um, we will get to a couple of questions, but I do want to dive into the topic, and then we'll see. Maybe I'll just sprinkle in some of the questions that I heard from people. Not to take the whole episode around questions. So today I want to speak about, you know, the financial infrastructure for growth. We spoke about different topics in the past. Now let's do a little bit of planning. Companies that are doing more, more like forecasting and planning for growth and on the financial side of it. So, uh, I know we touched it on multiple places, but I just want to ask you again the question, which is a business owner that wants to have a good grip on their business. What are the financial reports and numbers that a business owner should, uh, constantly be reviewing regularly?

Speaker D: Well, obviously, they have to review their, uh, performance, right, which is their financials, uh, predominantly, at least on the profit and loss standpoint, to see how they're doing. Um, either their margins are tight, their overhead is more than it should be, um, and they have to continuously monitor that. And if they're, you know, obviously people want a more than a company to grow. Uh, when you grow, you do take on additional expenses. Um, and you may project the need for those additional expenses, but you want to, at some point see that that investment is paying off. Um, so you want to basically do two things. First of all, you want to look at how you did over whatever period of time you're testing. And then let's say you set certain goals for yourself and you put a budget in place, an assumption of what sales you want to hit. Right? You set that up, and then as you progress in the Future, you want to compare that to what you planned.

Speaker C: Mhm.

Speaker D: See if you're operating within your budget, if not, why. And maybe your budget needs to be tweaked based on realities, uh, on the ground. Uh, you may see that I'm not hitting the sales target that I anticipated, which means I'm not going to make as much money as I anticipated. What can I do to get those, those uh, thresholds. Uh, so it really is the financials, uh, that you have to monitor and part of it is also bringing your team in on it. Meaning if you have certain departments, right. And you set a budget for them and you incentivize them to um, spend within that budget. Incentivize them by, if you keep it to the budget, you get an incentive. Or if you're able to spend less than your budget and get the same results, you get another incentive. Right. But people have to be aware that money is not, uh, endless and you want to make sure you're using it in the right places.

Speaker C: Mhm. Yeah. And I think that, um, business owners, especially entrepreneurs by nature, are, you know, always positive with positive attitude, looking at, you know, at the upside of things. And I think that the balance between looking what actually transpired and what, as the same way that you're projecting what next quarter will be to match it up to where the quarter was in order to make sure that, that it's achievable.

Speaker D: Right.

Speaker C: Because we've seen a lot of business owners that, uh, we call them the opportunists, always looking, okay, next quarter will be better and let's look that way and they start to expand. But that's where data comes into play, where you have actual data. So what, what exactly are you doing differently to expect different?

Speaker D: I've seen it, I've seen it actually in another degree where people had a lot of success and they make decisions based on the fact that they had a lot of success. Mhm. I like to say that, um, the best day of the year for a person to get his motivation going is January 1st. Profit and loss is zero. There's not even a dollar a sales. But last year I did X amount of sales. Yeah. So you at least have the experience to get there. But make as if I'm starting at zero. And the fact that I was successful in the past doesn't necessarily mean I'm going to be successful in the future and I should make my decisions accordingly. So every day you wake up, act as if you're starting from scratch. Obviously you have the infrastructure so you're way ahead of starting from scratch. But from a sales standpoint and from a motivation, every day is a new day. Um, so when I'm saying is different than what you're saying is that people have had success in the past and they say, well, I'm good, just continue and you take it for granted. Um, and then when things get tough, you have a problem on your hands.

Speaker C: This episode of the let's Talk Business

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Speaker C: You're mentioning um, the um 1-1-1 this is something that I've been speaking for a while already because I get like, if you go on LinkedIn, like the first few days of the, of the new year and says, you know, these motivational quotes and this motivational, uh, everything is starting with a clean slate and stuff like that. I said, no, you're not. You had successes in the past that you could m mimic. You have failures in the past that you have to avoid. Like, nobody, it's like, like nobody's going to. Your P and L from a tax perspective is starting to scratch, but you have data behind that to actually dictate a little bit of what's going on. So your point is well taken. But for business owners in general, I always say that pay attention to what brought success in the past because mimic m that and double down on that.

Speaker D: So the way I say it is success in the past is no indication of what's going to be in the future. But your success in the past gave you the experience that gives your future a good chance.

Speaker C: Beautiful. So let's talk about, um, I know that, uh, we spoke about growth in general, but now I want to zoom in a little bit more for business owners to really understand. Um, we're not talking about very fast growth companies or companies that are in the startup mode which don't have a lot of data. Um, there's the Inc 5000 that rates companies and sometimes you see these small companies which are far out, you know, far up on the, on the, on the list because they started from nothing and they grew like crazy. Like 500 and something percent on average service or product business. From an accounting perspective, what is a healthy growth? What do you want to see year over year? Like what type of growth?

Speaker D: So you want to see, obviously you want to see growth. Um, people should not expect it. Like, uh, expect the growth to be like, you know, when I'm m stock market, when I invest in real estate and I'm getting these returns, healthy growth for a company, there is no rule as far as what the growth is, but you want to see a trend up, meaning you want to see, did I do more sales than last year? That doesn't always mean that things are good. Uh, but you want to see the trajectory that it's going up. Obviously past five years we've had clients where Covid kicked in and their sales went crazy. Uh, so I don't use the sales for the year and a half of COVID where they did well as an indication. I usually compare it to how their growth is compared to where they were before. COVID yeah, but sometimes a covet can happen where, yes, you had growth because of the environment or the reality on the ground, and your sales did go down, but you were able to retain some of that, uh, um, trajectory where although my sales went down, I'm still way more where I was before and steady continuing it. So you want to see the sales increase, uh, at the same time you want to monitor your expenses that although they may go up, but you want to make sure that, uh, the business is growing and the profits are growing. You can have sales going up where your profits are pretty much the same as the prior year.

Speaker C: Yeah.

Speaker D: Um, but on that end, people have to be careful. If you're only focusing on revenue, uh, and you're not really selling well, meaning you're reducing your prices. And you know, there's a joke where somebody was selling, uh, selling 90 cents on the dollar, somebody says, how are you gonna make your money? Says, no, I'm gonna make it up in volume. Right. You can fool yourself.

Speaker C: Yeah.

Speaker D: Uh, you don't want to spend resources and have a, have, have, have a machine running where your margins are pretty slim. It's, it's risky. But you should shoot for growth and you make your goals. Let's say over the past five years I had a 5% revenue growth. I want to at least hit the 5%. Maybe let's push it to 7 and a half percent. But don't expect that your growth is going to go 20% every year. That doesn't, that doesn't happen unless you're really at a, at a, at a point where your business is growing because of the natural growth of the industry, of the industry or whatever it is. But in general, you want to shoot for, and you look at the historical growth over the years.

Speaker C: Yeah, I'll just add to this, um, because I've worked with so many business owners throughout the years. Um, I believe that if you're only looking at one metric, you're going to fool yourself. So there needs to be at least two or three metrics that are combined. Gives you a good visibility in the business. Um, just to echo what you just said, if it's only growth and not looking at what it's doing to my margin, then all of a sudden you fool yourself. If it's only the margin, it's not the growth. All of a sudden you're flat. Um, so that I would say is for business owner listening to the conversation is, um, to understand which are the two or three metrics they're looking for. And that gives them A good visibility of what the company's doing. Uh, another point is, and I think, um, what, unfortunately, probably you as an accountant see it, uh, more often than I'm seeing it, which is that you could have like an outlier, outlier month, outlier client that's throwing off your books for the good of the bad. And ultimately sometimes you see that you make decisions accordingly, and then all of a sudden, a year later, you pay the price for it. And I've seen businesses, um, that really were in a certain comfort zone because they had this one big client and they didn't realize this client is not forever. So let's say in the sense of what you mentioned before about revenue, um, is there an outlier client that's buying from your wholesale? Let's say you're a retailer or you're selling online, and all of a sudden you got this big influx of one client that's buying for some reason, like wholesale, and you're excited. Oh, you grew the X amount percentage. And then all of a sudden this is not repeatable. So look at these trends to see, uh, is there anything outlying, um, what can you add on that?

Speaker D: So very good point. And you see it many times where you get a good deal or you get a contract that lasts a year or whatever it is, and it does skew the numbers and you start increasing your investment in your company. Um, if you're aware that this situation may not be something that you're going to continue, then analyze your profit and loss with this component. And without this component, meaning how would I be doing if not for, uh, many times I found where, uh, a, uh, company sales increases and their margins are slimmer. The question is why?

Speaker C: Yeah.

Speaker D: And then we find that because there was 25% of my sales was by. For this company, this customer. And you know, we gave a good deal because we wanted to get the revenue and get the relationship in and because the margins that we made for this customer, which, uh, we were able to afford to give good pricing, it's dragging the margins down from the rest of the company. So question is, let's see what your margins are without the sales to that specific customer and see if it's still a healthy margin. At least it explains why the margins came down, it explains why the revenue went up. Uh, but again, from a business sense, I'm not gonna say don't do it right, but like you say, don't let it fool you. Correct.

Speaker C: Got it. Um, before I move into the. Another part of growth, um, anything to add just in general about business owners looking at growth or, um, again, business,

Speaker D: uh, owners should look to grow. Uh, they should not. They should not. In other words, let it grow naturally. Don't do crazy things. If you have to make investment, be sure, uh, of what that investment is going to give you in return. Um, and business owners could have a sense of what's the right thing to do and what's not the right thing to do. Um, but don't let it get to your head. Um, uh, because you know, when, when you're sort of not, you know, when you're, you're, you're not really looking at the data, so to speak, and you're just jumping in and taking risk. Know that you're taking risk. Now people have been successful in taking risks. And uh, many people who don't take risks don't necessarily have that return. So you could win.

Speaker C: But it's also, this is something I think I want to pause for a second is it's also the type of person you are. There are people that if they take crazy risk, they won't be able to have a chorus adah. They won't be able to sleep well. They have the comfort level.

Speaker D: Um, but on the flip side, they say if we don't take a risk.

Speaker E: Correct.

Speaker C: So, but it still has to match up to your Persona, your personality, what are you able to stomach, so to speak. Because, um, you're building your business to support your lifestyle and support who you want to be and how you want to operate. And if you're taking risk that's out of your comfort zone, you're going to be paid the price at the end of the day. So I think every person listening to this has to, they have to know themselves, what is their risk tolerance. And yes, you want to take risk because guess what, if you want to grow, you want to be able to, um, set expert growth metrics and goals and so on and so forth. If it's, if it's in your reach, then you're not pushing in hard enough. So you want to take.

Speaker D: So if you're taking a, if you're taking a risk that's within your zone, meaning I know the risk that I'm taking. I know my business very well. It's in my lane. I know the pros and the cons.

Speaker A: Mhm.

Speaker D: And I think there's a good chance for me to, uh, be successful. Right. I've seen places where people have taken risks. Uh, as an example, someone had a company here in New York, uh, in whatever industry it is, he had an opportunity to buy a company down south. Mhm Florida. He says it's going to add revenue. Um, that's a good price. Uh, there'll be someone there, you know that has been in the old company that's running the company that's going to be there. Why not?

Speaker C: Mhm.

Speaker D: To which I say you're spending money to purchase the business. There's one key component that you don't have there which is you.

Speaker C: Yeah.

Speaker D: And you're going to rely on other people. Whenever there's absentee management. It's. It's a problem. You're biting into an apple that you may not be able to uh, to. To uh, consume. Yeah, yeah. But it's the same business. I say yes, it's the same business. But the reason why you're successful here is because you're here every day. Are you going to be every day? Yeah, but I have the right people person ended up making the acquisition and fast forward three, four years later he lost his money.

Speaker C: Yeah.

Speaker D: Because it wasn't monitored. Was so although it was in his lane. But it's not necessarily the smartest thing to do. And then you have other people that go into other things which they believe will be similar to what their business compliment existing. They don't realize that.

Speaker C: I just want to um, add a point to what you just said because it's such an important point. Um, I'll just add it from a flip side. Uh, I had a guy that had a business and he was looking to grow and he had some extra money and he actually bought another business and he was evaluating the business and he says you know what? I could bring down the cost and I have my buying power, blah blah blah. And I'm going to make some extra. You know he m. Made a Cheshire. He could make a couple of extra hundred thousand dollars from that. Ven. It's a small business. It was a side hustle. Little did he know that as soon as that owner went left to replace that owner with somebody in that business is a $250,000 position. And as soon as he had to hire the $250,000 there's zero money left.

Speaker E: Right.

Speaker C: So evaluating. So sometimes even that the owner didn't take out 250 but he put in energy as a $250,000 employee.

Speaker D: Right.

Speaker F: Right.

Speaker C: So that's, that's I also see a

Speaker D: lot of times in short. And then we could move to the, to the rest. Um, or the other topics. Um, there are situations where you can buy another business and meaning at first it's running, you know, separately. But then eventually roll it into your existing business where you already have the infrastructure and the net result is that you have another customer base, you have another product line that's complementary to your product line and you then roll it in within your organization where your cost is really not. Your, your operating costs are not going to go up significantly because of that. Mhm. Then you're buying margin and that could just add to your bottom line. So there's smart ways of doing it.

Speaker C: Yeah.

Speaker D: Um, but you have to plan ahead and try to project out what this is potentially going to bring you and then make the right decisions.

Speaker C: Got it. So I want to move to the next, to the next topic, which is a very important topic. And I know, um, business owners have these, these challenges all day long. So the first question is business is tight in cash, they need to go out for funding. So obviously, uh, the question that always comes, line of credit through a bank, find an investor conversation is friends and family type of investors or seasoned investors. What's your opinion about? Is there a rule? Again, every business is different but the general rule is if I could finance it through a bank, is that my first option? Finding a partner? What is the difference? Liability wise and so on and so forth. So uh, I know it's, I'm asking you a big question and for disclaimer. Every situation is different but we're talking about just in general. One thing that keeps on coming up on these episodes is all about cash flow and financing for businesses. Now if you're a growing business, you sometimes have a cash crunch. Why you're investing in infrastructure, inventory, or sometimes you just want to have something

Speaker E: available that's called a line of credit

Speaker C: for line of credit. I want to introduce you to my friend Moishy from Capitalize.

Speaker E: He is somebody I've known personally.

Speaker C: I've recommended him for many, many businesses. When it comes to businesses, line of credit. So if you are looking to have a line of credit available for your business or maybe you have a need immediately, um, in order to expand and grow your business, reach out to moishe. Go to ptexgroup.com loans where you're going to be directed to Moishe directly and he will actually guide you through the process, tell you your options, see what's available and ultimately help you to the finish line. Remember financing and loans, you have to be responsible how you use it. We spoke about it on the podcast and we'll continue to speak about it. But if you need it or you want to have it available for reserve. Reach out to moishi again ptexgroup.com loans where you'll speak to Moshi and when you speak to him, make sure to tell him that many have Ms. Sent you.

Speaker D: The benefit of going to a bank as opposed to an outside investor is that you're not buying yourself a partner. M and if you're in a cash crunch now, and not necessarily a crunch, but you're in need of capital, um, you have a choice. You can borrow money, pay interest, or you bring in an investor that's going to get shares of your company and then he is your partner forever.

Speaker C: Yeah.

Speaker D: Right. So by bringing in an investor, you may be giving up much more because once you get over that hurdle and the business grows, they're along for the ride. Right. So that could potentially be more, more expensive. Um, not ruling out bringing in investors, but I'm saying if you, as a business decision, let's say you're tight on cash for whatever reason and you're making a decision in your mind. If you're able to get bank financing, you're still on your own. You have a bank pay them interest and you move along.

Speaker E: Right?

Speaker D: But when it comes to financing, uh, you have to be aware of what that means. Uh, because once, once a bank is financing your business, then you have somebody to answer to. Um, and then you have to understand the type of deals you're getting yourself into. Because I've found many business owners that don't understand the terms of the deal they're getting themselves into and potentially they run into problems. Um, so I advocate always, whenever you're looking for financing, you got to go through, uh, the various different financial terms that are within the deal that you should be aware of before. And then if you're comparing two banks, you, uh, have to know what to compare to to know which deal is a better deal.

Speaker C: So I want to go into details and I think it's very important. Um, I want to just, uh, ask you to please elaborate when is the place to go for investor versus the bank. And then we'll come back to the bank part.

Speaker D: So I would say that if, if, let's say your business needs capital to grow into a mature business. What I mean by that is that for us to get where we want to get to, we really have to make significant investments in this business. It could be investments in equipment, it could be investments in, um, in. In the organization, investments in creating a marketing team, a sales organization, which is sort of part of building my business so that I am, um, I can build a scalable business. I have to have the infrastructure. So that's sort of an investment, which means somebody may have a great idea and there is a proof of concept where whatever idea he has works and, and there is great potential there. But for me to move to the next level, I really have to put in a lot of marketing. I have to invest in whatever it is in equipment, I have to invest in development, um, whatever the industries. And for that I need a significant amount of money there. It'll be more difficult to get it financed, uh, by a bank, um, because a bank usually uh, finances a business based on whatever assets the business already has, already has, such as inventory receivables, properties or equipment or whatever it is here. I'm not up to that point yet. But I have a choice. Do I put money in and get there or I just struggle along where it is going to take me much longer to get there. And in that case it may be uh, the right decision may be um, bringing in capital with investors. Like I like to say, you have 100% to your company and if, let's say I bring in an investor that's getting 30% of the company, 40% of the company, and then my company has the ability to grow and become whatever uh, it is 100% of a small company versus 50% or 60% of a much larger successful company. You may be better off having 60% of a larger company.

Speaker C: Yeah, we always say a piece of a watermelon is still bigger than a full grape.

Speaker D: Yeah, that's right. So that may be the right time. And you obviously, you want to make sure that you have the agreements in place and it's understood as to uh, what the investor's function is and what the operator's function is.

Speaker C: Yeah, I think on the investor side, and I don't want to go into a lot of details because that's a conversation on its own. Um, people always ask what is normal for investor to get because he's bringing capital, what percentage is to get and is there a certain dilution later on? I think it really depends on um, what you bring to the table at the time and also how desperate you are. Because if you're desperate for cash and otherwise you can't survive, that person will feel it and ultimately come in on.

Speaker D: I had a client many, many years ago that had lost his father at a young age, went into business, needed money. Mhm. He got from some rich uncles, he got a loan of, I think it was like uh, $400,000 built a very, very successful business where they were 50% partners and every year they got 50% of the profits. He's talking about in the millions. And he's saying to himself, for this $400,000, 15 years ago, I'm giving away millions. Right at the end, he made a deal and he bought them out. But you have to know that, and I can advocate on the part, on the investor's behalf, which is the risk. Wouldn't be.

Speaker C: It wouldn't be a business.

Speaker D: I took the risk. So, you know, um, I took the risk and this is just the way it works. Um, but again, you have to carefully make that decision as far as what it makes sense for an investor to get. It's a negotiation.

Speaker C: Yeah. So I want to leave the next episode about partnership in general. We'll come back to that. So let me go back to the banking side of things. So first of all, um, I want to understand the difference between a line of credit versus a term, a term loan. And I also want to understand, if you could give me a little bit of insight. Obviously you worked with clients needing loans. What is the bank looking at? And if the business owner eventually wants that loan, what is the steps they could take in order to make sure that when the bank looks at it, it makes sense?

Speaker D: So this actually is a conversation that I think is very, very important. Um, and when I say important is because of my experience where business owners that develop a relationship with a bank, uh, do not necessarily look at all the terms.

Speaker C: Mhm.

Speaker D: A. They don't look at the terms. They don't understand the reporting requirements that they're getting themselves into. In other words, what to report to the bank. Um, they, um, uh, they don't, um, there is certain aspects of an agreement that they really don't. They're not aware of and how it could affect their business. And the first thing you know. And again, I'm not focusing on the real estate market. Right there you're getting a mortgage and people that are in real estate, they sort of have pretty much an idea as to, as to what books I'm focusing completely on business owner. Uh, they have to know that although the bank is not an owner, you have to report to them as if they are an owner and you have to answer to them. Um, and they have ways making you answer to them. But you have to know that you're taking on, uh, uh, you're taking on a bank, which means you're taking on certain responsibilities. Um, and the bank has to be communicated. There has to be continuous Communication with the bank. They have to know what's going on. Banks are very scared of surprises. If you have an issue and you have a relationship with a bank, talk to them. Uh, they'll work with you. Surprise, meaning you don't tell them anything, and then suddenly you let the cat out of the back. Cat out of the bag. They get spooked.

Speaker A: Right.

Speaker D: If this is what they don't know, then could be they don't know other things. They get very scared. So there are. And we can go into a little detail as far as what somebody should look for.

Speaker C: Sure.

Speaker D: Um, and then I'll get to, um, your question with regards to the difference between a line of credit and a term loan. All that, but just in general.

Speaker C: Sure.

Speaker D: Um, people always look for the rate. What's the bank going to charge me? Oh, I have two proposals. This bank is charging me, uh, prime. This one is charging me prime plus a quarter. It's good, but run the numbers on the difference. You'll see that the difference is not so crazy. And that shouldn't be the determining fact of which way you should go. Uh, what business owners should look for. M. And I advise them to any, um, proposal they have, they should send it to their accountants to take a look at. It is, what are my reporting requirements? You may find that the bank wants you to report your. To submit to them profit and losses on a monthly basis, on a quarterly basis. And now you're suddenly working for the bank. I got to have my controller or whatever start every month giving them more, um, and more. It becomes very rough. You may find that they require you to have to upgrade, uh, your financials, uh, the level of financials from, uh, compilation to review to maybe even an audit, which costs money. Um, they have certain covenants that they put in, which are financial covenants that they analyze. Uh, they check certain calculations on your financials that if you need to meet those covenants and if you don't, you're in default. You may not know that. Um, uh, so there's a lot more that goes into a deal where if one bank charges you more, but the requirement, the banking requirements are less, uh, sorry, their financing require, their reporting requirements are less. And, or the covenants or conditions, the financial conditions they put into place are not as tight. You may be better off going with that bank, even though they're charging you more, but you'll have less headaches.

Speaker C: Have you had any stories where the person just went with a loan and just found out later, uh, like, what's in there?

Speaker D: I'VE had a situation. This is business owners listen to me very carefully and this happens. You have a business that gets a line of credit from a bank at the same time they're in their business, in their businesses in a building where they want to get a mortgage for that building owner occupied mortgage, very usual. Right. And they say hey, I have a relationship with my bank and um, I'm going to do both with them. Rate is great. Right. Uh, when you have an owner occupied business. Right. Which means you're financing your building that your business is housed in.

Speaker C: Mhm.

Speaker D: Uh, the banks usually most, most of the time almost always require your business to guarantor the mortgage. Why? Being that it's not a real estate property. That is the investment property that has rental income other than the business. Because the business is occupying it. They want to make sure that the business is going to guarantee making the mortgage payment. Fine. It's normal. They want the business to guarantee. Which means that part of your reporting requirement for the mortgage is for them to see how your business is doing because that's where the money is coming from. Then you have what's called a um, aside from being um, the guarantee on the mortgage. There are banks that would prefer getting um, the assets of the building and the assets of the business cross collateralized. What that means is, is that if you default in the mortgage they can go after they have, they have a lien on the assets in your business and if you default on your line of credit they have a lien on your building. Wow. Uh, that cross collateralization. If somebody. Yeah. Because the bank says corporate guarantees. My, my business is cross guarantee is one thing. Collateralization meaning to have an actual lien is a problem. Why is that a problem? And I've seen this. What is if for whatever reason your mortgage is a, is a 10 year mortgage and everything is running perfectly well and you have a business line of credit and then you have an opportunity to get a line of credit at another, another bank. Either they're willing to give you more money. It's an easy bank to work with. Right. You're locked. You can't take your line of credit and go to another bank because another bank is not going to finance your business. Being that your business's assets are collateralizing the mortgage. So you just tied your hands. That the only way I can leave the bank for my regular business operations is if I pay off the mortgage.

Speaker B: Wow.

Speaker D: Uh, people don't know that I've, I've had closings where when I found out and obviously I wasn't told. I found out on the day of the closing that this was going to be a close cross collateralization deal. Uh, I called my client. I say I'm calling it off until you get that out the fight or whatever, however that ended. But people have to be careful about.

Speaker C: What else. What else would you say on the caveat side? Like, like what's.

Speaker D: So one thing people should be aware of is, um, the way a bank puts in certain controls in the business, which, you know, we were talking about business owners taking money out of the company. Once, once a bank is le you money, they don't want to see that that money is being used for your. For your, um, other. Other. Other.

Speaker C: Other expenses.

Speaker D: Other. Other expenses. You're, uh, going into investments in real estate. They don't want you to leverage your business's line of credit and use it for a purpose other than your business. They don't want it. How do they protect themselves? Uh, because they require certain amount of cash to be retained in the company. And they, they measure that via financial covenants. Which is as an example, let's say, uh, for you to make payments or your interest and principal payments for the loan is, uh, uh, $200,000 a year. They want to make sure that your business generated enough profit, operating profit, you know, before depreciation, all that. To cover that, at least they'll put in 1.25 times or 1.5 times, which means if you have to make $200,000 in payments and your covenant is 1.5, that means that you have to have a profit of at least $300,000. Now what the kicker is is that they count distributions that you take out of the company as if it's an expense to the company. Uh, which means that even if you made the profit but you took out too much money, where after what you took out doesn't meet the covenant, you're in default. And by default that means they can call the loan or you have default interest rates and all that. So you have to be careful on, um, what those covenants are. And when you have a bank, yes, you're limited as far as what you can take out of the company.

Speaker C: So your message for business owners are twofold. One is make sure that if this is not the level of your expertise, make sure that your accountant or somebody that knows what these the fine print, so to speak.

Speaker D: And I also encourage brokers who do a great job, um, looking for deals. And the focus is on the rates. I got you a great rate. And this and that they have to, um, advise the client that here is the term sheets. There are certain things that I want your accountant to review and let them comment on. I have attorneys who are doing this for 30, 40 years. There's not one deal that they do before they send us the term sheet detailing the terms and asking us to review the financial part of, not the legalities, but the financial part. Not only that, they then send it to me. When they actually have this is the term sheet, which is what the bank is offering, then they want to compare the actual note, the actual, um, agreements to what the term sheet was. If it's a line or they threw in something that we didn't notice. So you want to give your accountant the opportunity to review it. Because if you're just going to go into it without the accountant knowing, uh, you can potentially have a huge problem.

Speaker C: So number one is making sure that it's properly reviewed. And number two is, um, as much as rate is important, sometimes, you know, half a point up or down will not make it or break it, but some of those things in the fine print will.

Speaker D: Correct. Correct.

Speaker C: Got it. Now, speaking about, you know, you mentioned before about, you know, sometimes you want to leverage the same bank, the relationship. Are you a believer of trying to, if you do go for a loan, try to negotiate a deal with your existing bank that you have a relationship or moving from bank to bank? We've seen a lot of that.

Speaker D: So we know the saying. A banker lends you his umbrella when the sun is out. Once it starts raining, he wants it back. Right. Um, you know, once you hit the bumps, if everything is going great, banks are just going to be knocking on your door and want to give you, you know, the world. So obviously you're in control. Um, I always advise my clients, and even successful clients that don't need a banking relationship, meaning, yeah, they have a bank for their operations, but they don't need financing. Develop a relationship with a bank, get a line of credit, have it, you may not need it, Develop that relationship because there may be a time when you're going to need it. And if there is a bank that you have a relationship with that knows your business already for years, and you come into an issue where you either need to, uh, borrow money for growth or what, or maybe hit a bump in the road. A bank that knows your business and has your trust, uh, will most likely work with you to get you, uh, the help you need, uh, when, if you don't have a relationship with a bank and now you're Desperate for a bank.

Speaker A: Right.

Speaker D: It makes it much harder to get because you're obviously desperate for a reason and it could be a bad reason. But if you develop a relationship with a bank, even if you don't need, get a line of credit, borrow once in a while, pay it back, the bank sees that you can borrow and you can pay back, you develop a track record. Then chances are, in the future, if you're going to want to borrow, um, a significant amount of money and get financing, you'll have a much easier time. But at the same time, you can argue not to have your eggs all in one basket. Um, I don't say go to the same bank for everything. For instance, I usually say that if you have a business relationship with a bank on your business, and you're able to get your, uh, mortgage on your property, on your business property with another lender, it may be a good idea to do that. Not always, but it could be a good idea to do that. So you're not, you don't have your eggs in one basket, but you definitely should have a relationship with a bank so that when you really need them, they can help you.

Speaker C: Um, question is like, I'm, uh, not going to name names, but, you know, this is just too good. Not to mention, I remember Chase years ago, their tagline was with the right relationship is everything. And then they took it away. That once a joke with a banker. He said they restructured the bank from the back end. It took away these relationships. So now they're just, uh, um, um, compiling data and sending it to backend. And that backend offer has zero relationship with you and they'll approve it or not. So the question is, are we still living in a world where there's real relationships or these people can make those decisions?

Speaker D: There is, yeah, you're still living in a world where they could be again, a banker, um, advocates on behalf of their customer.

Speaker F: Right?

Speaker D: They have their book of business. They want to retain their book of business. If they're an experienced banker, then they know what could work and what could not work. Their job is to get an understanding of what your needs are and advocate that on your behalf. Right? So it is important to have a relationship with a banker that knows you for some time and understands your business where they can fight for you. And I've seen many times where bankers did fight for their customer. Obviously it's, you know, if something is just not doable, it's not doable. Uh, but when, when they can push the envelope and get something done, they'll they'll fight with you, but that's only because they obtain the trust and you have the relationship with them all the, you know, all these years. So that is, that is very important. Now I have a client saying, I got, now I have a chance to go to a different bank, and I want to see which one is better, which one is not. I ran the numbers. I say from a financial standpoint, the other bank is a little, slightly better. And I told him how much he's going to be saving by moving to another bank. I said, when you're giving up 12 years of a relationship, and that should really, that should really count for something because you go to a new bank, you know, they don't know your business as much, and if you're going to hit a hiccup, they'll react differently than when you have a bank that's been with you for many years.

Speaker C: Let's go back to the question about lines of credit versus term, right?

Speaker D: So lines of credit is, um, uh, it basically gives you the ability to borrow because your business model calls for a need of cash for a certain period of time. Simple, right? You're buying product and you have to pay for the product. Then you have to, uh, either manufacture or just sell, right?

Speaker C: Wait 90 days.

Speaker D: Which means that by the time you're. When, by the time you're gonna get from when you, from when you spend money on the product, either an inventory, whatever it is, until you're gonna get paid by the customer, there is a gap where it can create a cash crunch. So you borrow from a line of credit, which they look at your receivables, they look at your inventory level, and then as you collect, you pay the line down. So that's cycling the line the right way, which is you're not just maxing out the line and leaving it as max. It's not a, uh, it shouldn't be used where you max out and you stay maxed out for a year and then you say, okay, now I need more money. You're obviously not using the line properly. Um, and then what banks may want to do, if you're maxed out for lengthy period of time, the banks may come and say, I want to term it out. Which getting to your question is what's the difference between a line of credit and a term loan? Term loan is where a bank basically gives you a chunk of money, right? Say, let's say you have to buy a piece of equipment and you get a half a million dollars, a million dollars, and they give you upfront the whole thing, and then they say pay it over three years, five years, seven years. So you're making principal and interest payments every month to pay it down. So over there you have the money up front. You can't access that money anymore. You're spending it for whatever it is that you needed money for, and then you have to make the payments. So there the banks want to see if the business has the ability to make the monthly payments. A line of credit gives you access to cash for when you need it. And then be smart. As your cash comes in, bring the line down so now you have access again. Obviously, at some point when your business grows to a certain level where your line is not enough to help you, then you go to a bank to get an increase.

Speaker C: Got it. Um, so final thoughts on the topic of loans?

Speaker D: Uh, final thoughts on the topic of loans. Remember that, uh, if you have liabilities on the books, don't consider yourself the only owner in your company. The bank is in there and you have to treat them accordingly where they get what they need. You're reporting, uh, you're reporting to them based on what your requirement is to report. But if you're going to be reckless and say, just going to take our money and do your thing, then chances are the bank is going to get into an issue and call the loan. And then you run into other problems. But it's a smart business decision to make so that your business can grow. But know that there is accountability.

Speaker C: That's it for today. Remember, clarity leads to control. Control leads to better decisions. Um, today we spoke about growth understanding as a business owner that you want to plan for growth. And one of the parts is understanding when you need an investment, when you need some outside capital to help you grow. We are left with one more, uh, episode where we'll talk about partnership, a little bit about the structure of a financial team in house. When do you need to grow your team on the finance side outside of what you, as a business owner, um, needs to do and your final thoughts. So, thank you so much if you enjoyed this episode. Make sure to subscribe. And another episode is right around the corner. See you next week.

Speaker D: Thank you.

Speaker C: This episode of the let's Talk Business

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