CAPITAL INSIGHT - Part 5 of 7
We can all agree that bad things happen to good people. I have always wished that instead of receiving a score, our credit reports said something like this: â€œJimmy has been having a hard time but now he is back on his feet.â€? Instead, most of the time, we simply hear, "NO!" Well, a major amount of the time we hear no, it is due to our ignorance surrounding the ground rules...
The Truth about Raising Capital
â€œHow to Help Your Lender Say, 'Yes!'â€?
Part 5 of 7
There is an old story about a king who commissioned a group of the brightest and most distinguished scholars in his kingdom to assemble the wisdom of ages. Their first attempt resulted in a boatload full of large clay and stone tablets. The ruler ordered that they condense and simplify the information. They came back with an encyclopedia. Again, he demanded that they condense and simplify. Finally, they returned with a single sentence: "Thereâ€™s no such thing as a free lunch."
Whenever a client contacts me regarding a loan of any type, be it a mortgage, lease, line of credit, etc, I share this tale with them. The two questions I ask them are:
1. What does this tale mean to you?
2. How is it connected to helping your lender say, "Yes?"
Their answers to this set of questions yields volumes on how I approach their particular situation. The fundamental challenge people face in attempting to obtain a loan is that they are unknowingly seeking to get a free lunch. As a former banker, I made a name for myself being the most straight forward person in the company. People can deal with a yes or no when it comes to an application for credit. But what drives most people crazy is being led on. Well, after this article, it will be completely in your power to make the best decision about not only whether or not you should seek lending, but what questions to ask.
As my father always says â€œNever make assumptions about what people know or donâ€™t know." Therefore, I would like to provide a simple overview for the benefit of anyone who is new to this type of information. For the experienced amongst the readership, please bear with me. Of all the articles I have had the opportunity to write, I would suggest you pay the greatest attention to this one, in particular. However, before we continue, letâ€™s cover some ground rules:
1. There is no conspiracy in lending, but there are improper opinions of borrowers.
2. Your education means nothing to lenders, only your financial statements.
3. The worse time to seek a loan is when you need it.
4. Credit is worth its weight in gold so protect it at all cost.
5. The strength not length of your relationship with your institution is what really matters.
6. Your tax advisor is never to blame.
7. Ask and answer the question,"Would I make this loan to myself?"
Now we can deal with the basics of lending. Lending falls primarily into two basic categories: Asset/Collateral Based Lending (ABL/CBL) and Cash Flow Lending. (CFL). Cash Flow lenders look for simply that. Cash Flow Lenders, are risk adverse, charge lower rates such as the prime rate and generally take some time to process a loan.
Cash flow is defined as "An accounting presentation showing how much of the cash generated by the business remains after both expenses (including interest) and principal repayment on financing are paid" (The amount of cash that you have left after you pay your bills).*
On the other hand, Asset Based lenders will accept pledged collateral, are less risk adverse, charge higher rates and process loans much faster. Both strongly consider the credit worthiness of an applicant. In part one of this series, I mentioned the Five Câ€™s of credit as character, capacity, capital, collateral and conditions. This set of guidelines is universally applied by both lending types, but with different weight. Additionally, the requirements for securing loans changes based on the type of borrower. Borrowers fall into consumer and commercial types. What confuses most people is whether to contact an Asset Based Lender or Cash Flow Lender.
The majority of the people, when seeking a loan for either personal or business reasons, contact their bank. Banks typically fall under what is called a cash flow lender. Cash flow and asset based lenders are also referred to as Institutional Lenders. Institutional lenders are financial institutions that give loans and can be either asset based or cash flow lenders.
Institutional lenders come in many different flavors, such as:
1. Commercial Banks
2. Saving & Loan Associations
3. Credit Unions
4. Commercial Finance Companies
5. Specialized Foundations
6. Investment Banks
7. Merchant Banks
8. Institutional Investors
With each lending type, the guardian holding the keys to your loan is called an Underwriter. An underwriter is simply a company employee who decides whether or not the company should assume a particular risk. As a trained underwriter, I have always humorously associated the profession with the character played by David Spade on the popular Capital OneÂ® commercials, where all he ever tells someone is, "No." Do underwriters want to say, "No?" Of course not, but they have the ever increasing challenge of trying to help the organization make loans while protecting it from the risk of borrowers who may default in their duty to repay as agreed, based on an organizationâ€™s particular lending policy. (My note).
This brings me to my first ground rule, "There is no conspiracy in lending, but there are improper opinions about borrowers." We can all agree that bad things happen to good people; correct? Of course we can. I have always wished that instead of receiving a score, our credit reports said something like this: â€œJimmy has been having a hard time but now he is back on his feet." Instead, most of the time we simply hear. "NO." Well, a major amount of time we hear no it is due to our ignorance surrounding the ground rules that I mentioned earlier. Without addressing them all, I will tackle #5 and #6.
#5. The strength; not length of your relationship with your institution is what really matters.
If I had a dollar for every person who was angry at being rejected for a loan by an institution that they have a lengthy relationship with, I would be a rich man. For the sake of clarity and space, please remember the following words:
â€œNo financial institution actually cares how long you have had an account. They are only concerned with the financial strength of the account holderâ€?. So, if you have had an account, say, with one of the larger banks in New York for ten years and your account balances never average more than $500, you are not considered a relationship, but an account holder. Now conversely, letâ€™s say a person deposits $25,000 in a CD and another $100,000 spread over five accounts and has pledged to move their 401k plan over to the bank, this is what they consider a relationship. This person could have switched banks over just 60 days ago. This is why I stress to all of my clients to start part time enterprises if they do not want to leave their jobs. The increase in cash flow helps strengthen their financial picture.
#6. Your tax advisor is never to blame.
On my first day as a Business Development Officer, I met a gentleman by the name of Jeremiah. He is both a Certified Public Accountant and Financial Advisor. After conducting dozens of transactions together, he invited me to lunch one day. We spoke about many things, the gist of it focusing on clients and how we could better serve them. I asked him about how we can help to better position our clients for lending from a tax perspective. He mentioned the following words to me that everyone reading should consider:
â€œI can only help an individual to the extent of their level of financial literacy. If they do not know what questions to ask me than I am handcuffed by their ignorance -- not mineâ€?.
This is why in the last article I mentioned that accounting leads to accountability. Only by becoming financially literate can we understand where we really stand.
In closing, this is a huge subject and the truth is that none of us can ever know it all, but with a little discipline and time, anyone can master their financial picture. So how do we help our lender say, "Yes?" By making a decision to take responsibility for what we know as much as what we donâ€™t know.
*PLEASE NOTE: Even though cash flow is typically associated with a business, the principle still applies to consumers who are looking for lending as well. Anyone who is interested in gaining a deeper understanding of this utterly important subject may contact me at the newspaper and purchase a special report titled: Confessions of an Ex-Banker: How to get the loan you deserve!
Join us next week and learn, â€œNo B.S. Strategies to Find Investorsâ€?
Greg Jones is CEO of GJ Presents, Inc, Business Development Advisor and author of the upcoming book The Art of Raising Capital.
He can be reached at email@example.com
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