Hit By A Truck

Don't leave your family -- or your shareholders -- with the debts of your company.

Yesterday Josh D. (an attorney) wrote in to thank me for my advice on taking out a business loan.  In particular, Josh noted that I recommend a life insurance policy be in place before taking out a business loan.  He was surprised by that, and I think its worth a bit more discussion.

In yesterday’s post “7 Secrets Your Banker Wishes You Knew”, I described life insurance as a way that banks minimize their risk.  In other words, if you borrow their money and then get hit by a truck, how will the bank get their money back?

And there are some other excellent business reasons for your business to buy a life insurance policy on you, which I’ll get to in a minute.

The entrepreneurs I work with report that banks are requiring a life policy valued at 2 to 3 times the value of the loan.  The policy names the company as the beneficiary (not the bank), but the terms of the loan make it clear that  the policy will pay back the debt on your death.  That’s only fair.

But man, that could get expensive, right?  Right. Don’t forget to add the cost of the insurance policy to your monthly expenses.  Its possible that your loan payment may be $1,000 a month and your insurance bill (depending on your age and health) could add another $300 to $500 dollars.

In fact, if you have a revolving loan like I do, in many months my life insurance payment is much larger than my loan payment!  Suddenly that loan is starting to look very expensive!

But hang on.  Here’s the thing.  Were you really going to run your business without a life insurance policy on yourself?  Would you sign a 3-year office lease or buy a new company truck without knowing that it could be paid for after your death?

No way you want to leave a stack of bills as your legacy to your spouse, your children or your stockholders.

Which brings me to the third reason to have a big juicy life policy in your business… other stockholders.

When you get into business with a partner or investor, its important to have a clear written agreement between all parties.  This is especially true if one of you kicks the bucket.  If you die, who owns the company?  If your spouse inherits your ownership, will (s)he really want to work with your other partners?  Can your spouse even do the job you are doing now?

This brings us to the concept called “Key Man Insurance”… which is a fancy way of saying a life insurance policy that pays the company on your death.  It could be used to pay back loans or leases, but more likely it is used to purchase your stock from your spouse.

That sounds tricky, right?  Let’s try again.  When you die, your spouse inherits your ownership of the company.  Then the company takes the cash from the life insurance policy and “buys” that stock back from her.

The result?  Your partners can carry on without you, and your spouse has something more valuable than stock in a floundering company. (Because without you, it will flounder for a while!)  If the policy is rich enough, there might even be enough for the company to hire your replacement.  That would be ideal.

DO THE MATH:  Every time you make an obligation for your company, be sure its backed up by a way to pay it off.  Add up all your debts and leases, and get a policy that can cover them in case of your death.

THE BOTTOM LINE:  Don’t leave your family OR your partners (shareholders, employees, etc.) out in the cold.  When you die, leave a policy made out to your company that can cover the debts and help the company carry on.

Dedicated to your profits *(before and after death!)

7 Loan Secrets Your Bank Wishes You Knew

Open the Vault with these 7 Secrets of Bank Loans

If you want to borrow money today, there are 7 things you must know before you go to the bank.

Most entrepreneurs want to use “OPM” – other people’s money – to start or grow their business.  With good personal credit, borrowing is almost always the best way to go: rates are low, community lenders are eager to create jobs, and there are a growing number of government programs like the SBA loan guarantees.
Still, actually closing a loan can be difficult.  Banks expect a business plan, financial forecasts to justify the loan amount, and even your home as collateral. The prepared entrepreneur, however, knows the 7 secrets to winning the respect of the bank, and the loan of your dreams.

These 7 lending secrets make borrowing easier and will give you an edge when negotiating with any lender: the kind of edge that can save you thousands in the long run. Here’s what you should know to keep your edge when negotiating with bankers

1. Build a Personal Relationship

It’s true that people do business with people they know.  It’s no less so in banking – bankers lend money to people they know and trust.  The best loan negotiation starts when you begin building a strong personal relationship with a banker. Long before you put in a loan application, invite a banker to lunch. Give them a look at your current business, your home, your life.  Gently let them know how serious you are about building the business of your dreams.

Plan to stay in touch with your banker(s) at least once a month.  Since most loans will have terms beyond repayment (called loan covenants), you want your banker to know what is going on in your business and how you are using (or planning to use) his money.

2. Know the Secret Code

Every banker will tell you that approving a business loan depends on how well your company compares to other similar businesses.  The bank looks primarily at your financial operating results. Be sure you check out the banker’s bible for these business metrics: Robert Morris Associates’ Annual Statement Studies, or “RMA” for short.

The RMA includes example operating results from more than 360 industries and can tell you what your banker expects to see on your financial statement or plan.

The RMA is available at your local library or bank – asking the banker to make a copy of the appropriate page is a great way to show them that you know what you’re talking about. Meeting key ratios from the RMA should be your goal as you qualify for, and keep, a business loan.

3. Give More Than You Get

If you want to get a great loan, it never hurts to offer to open several other accounts at the same bank. Bankers love to have your “depository accounts” (checking and savings) and to help you with other fee generating services like credit cards and wire transfers. If you are only interested in the bank for the money it can lend, you’re not going to impress anyone.

Shifting accounts to your new partner bank can be a great negotiating tactic, and might even clip the interest rate you’ll pay on the loan.

4. Plan for Failure

It sounds backwards, but you will gain a banker’s trust by telling him all the ways that your business could fail – and how you have planned to meet those challenges. This shows that you know your business and helps your banker defend your ideas to his loan review committee. [Remember, one banker cannot guarantee you a loan – all loan applications are reviewed by the bank’s underwriting committee.]

One key to helping the committee say yes is to discuss “key person risk”. If you die tomorrow, how would the bank get its money back? Every bank wants to know that you – and your business – have some life insurance set aside for this purpose. It’s morbid. It’s expensive. But it shows that you are thinking through all possibilities and helping the bank cut its exposure to risk.

5. Plan the Work, Work the Plan

Loans are granted based on your projections and plans.  In some cases, the lender will want to be sure you spend the money exactly as you planned.

Of course, no business plan can perfectly predict the future.  You may have to explain each variance from your original budget and show the bank why the costs were necessary.  Be prepared to present receipts for each purchase, and keep an eye on the calendar – your loan may very well have a deadline, after which it will no longer be available to pay expenses.

One key to making it work is to ask for a bit more than you think you’ll need.  A “worst case” plan is always better than a wildly optimistic one.  Bankers don’t like surprises unless they are happy ones!

6. Negotiate Smartly

Careful planning and good relationships can get you a great rate and reasonable terms that might save you thousands of dollars in the long run.  But communicating what you need – and negotiating what is most important to you – will be even more important.

If you need to protect your home and retirement savings, make it clear that those things are off-limits as collateral.  If you know that your business will need extra cash in 6 months, get those facts out in the open.
Don’t expect the bank to blindly accept your terms, but be sure you communicate all your ideas up front.   You’ll get some of what you want, and at least the bank will understand your position on the rest.
Remember, for a well-prepared borrower, everything is negotiable.

7. Keep Your Eyes Open

Most business loans have covenants that can change every quarter or year, and almost all commercial loans are reviewed annually. Getting a loan is no guarantee that you can keep the loan.  If you can’t meet the terms, be prepared to have the bank ask for their money back (“call the loan”) early.

Remember, to keep the loans you need, stay ahead of the game by using all the above strategies. Keep your banker informed. Keep the risk as low as possible.  Plan ahead.  And when all else fails, keep building relationships with other banks…just in case!

Dedicated to your Profits!

PS:  Do you have a bank loan story?  Good or bad, I want to hear it.  Add a comment below and I’ll send you a free Loan Amortization table.

The (OTHER) Colors of Money

When banks say “NO” try these 3 options for raising capital.

Your personal retirement savings can now be used to finance your company's startup or growth

Finding enough money to launch or grow a company is tough… even when you’re not in the middle of a great recession.  We all look to banks to help out when we can, but bankers are not the most imaginative bunch.

If banks are not giving it up for you these days, try these 3 other sources of capital:

1. Hidden Personal Wealth

If you really believe in your business – and you should – then it’s natural that you should try to bankroll your own business growth.

Before you apply for a wallet full of new credit cards or a second mortgage however, look for other hidden sources of personal wealth.  Life insurance policies, 401(k) plans, IRAs and stock portfolios are among the most commonly overlooked sources of business capital.

Start with your life insurance policy.  If you have a whole life policy, you may have the option of withdrawing its cash value (before you die, I mean!).   Even better, you can pay the balance back (to yourself) at a flexible rate – or not at all if you chose.  In some cases, any unpaid balance will simply be deducted from the death benefit when you die.  You can’t take it with you anyway, so why not use it to grow your business?

Retirement accounts are the next logical place to look for hidden wealth. A 401(k) may have cash value that can be either withdrawn or used as collateral for a loan.  IRA accounts, including SEP and SIMPLE plans, typically have stricter limitations on borrowing or investing.

But wait, there’s something even better than borrowing against your retirement accounts.

Did you know you can actually invest your own retirement account into a company you own?   Doing so requires the cooperation of  your plan administrator or personal financial planner, but you can move your account to a firm that will coordinate this for you.  If you have questions on this, call your personal financial planner… or leave me a comment!  I’ll be happy to provide references.

Finally, don’t forget about your stock accounts.  Most brokerages offer “margin” loans, but your local bank or savings and loan may offer better interest rates.

2. Angel Investors

If your personal resources are tapped out, don’t despair.  The next best source of small-business capital may live right next door.

According to the University of New Hampshire’s Center for Venture Research, there are more than 400,000 active individual investors — or “angel investors” — who invest in more than 50,000 companies each year.  Many of the most active join “Angel Investor Clubs”, and there’s a great online resource to locate one near you — check out http://www.angelcapitalassociation.org/directory/.

In addition to these “active” angels, keep an eye out for more opportunistic individual investors. Casual investors – most often people you already know – pour millions of dollars into young businesses with little formality or fanfare.  Like the businesses they invest in, angels come in all shapes and sizes.

3. Commercial Lenders

The more critical your need for cash, the less useful traditional banks become. That’s where a commercial finance company can step in.

Commercial finance companies – also called commercial lenders – are not subject to the same regulations as a bank so they can look at riskier loans and different kinds of collateral. Of course, to make up for the increased risk commercial lenders may charge slightly higher rates of interest.

Collateral for a commercial loan could include things your community banker might not even understand, like accounts receivable, inventory and factory equipment.

And if you don’t have a lot of assets? Look for unsecured, mezzanine or subordinated loans. Rates for these loans are about equivalent to those of a credit card.

Subordinated and unsecured credit is widely available to businesses with solid operating profits, sometimes to the tune of two or three times annual cash flow.

The biggest commercial finance lenders include GE Finance, Textron and CIT. But there are hundreds of smaller shops that specialize in lending against particular types of collateral or to businesses within a particular industry.

So now you know.  When your banker says “NO”, the money hunt is just beginning.  Branch out to Angles, Commercial Lenders and to your own Personal Financial Planner for advice on less traditional (but maybe even more effective!) types of loans.

Got a good story about a banker saying “NO” to your business?  Share it with me in the comments below, and I’ll send you a free copy of my “Perfect Fundraising Kit”… containing everything you need to start a conversation with a bank, an angel, or a commercial lender.

Dedicated to your profits,

PS: If you haven’t already become a member of this site, please sign up today.  All members receive my free report “The Colors of Money” which details 27 other great ways to finance your business.

Lies about Loans

Are you lying to yourself about a business loan?

9.9 things you only think you know about debt

Plastic has its place -- the right amount of debt is vital for a growing company.

In today’s credit card crazy culture, why is it talking about debt the last great taboo?  OK, chatting about interest rates over dinner can spoil your appetite, but our don’t-ask-don’t-tell attitude about loans often obscures the helpful truth about how to use debt to grow your business.  Take a look at the list below, and see if you recognize any of your own imprudent attitudes about borrowing.

(1)       All loans have to be paid back. Believe it or not, some of the best loans never have to be paid back.  Called “convertible” loans, these allow a business to convert the borrowed amount to an equal value of stock in the company.  You may not want to give away stock, of course, but knowing that you have an alternative to paying back the loans can give you the flexibility to grow larger faster.

(2)         I can’t afford the payments. Loans that require interest only payments and “negative amortization loans” are just two examples of loans where payments are much smaller than you might expect. Be aware that each of these will be more expensive than traditional loans in the long run, but the smaller payments may be a good fit for a rapidly growing business.  Traditional loans can be made more affordable by negotiating a longer payback period or an adjustable rate that starts low and then “floats” as rates change.

(3)       As long as I make my payments, I’m ok. Don’t let the dark side of debt catch you off guard.  Larger loans from institutional lenders (like banks, or corporate finance companies) will include very specific loan terms, called covenants.  Loan covenants can require you to keep a certain amount of cash on hand, or to meet strict profitability targets. Breaking even just one covenant can cause the bank to demand immediate repayment of the entire loan amount. Negotiate carefully, and read the fine print.

(4)       Debt is dangerous. This is the most common, most unfortunate misperception about borrowing money. In fact, a reasonable amount of debt can be a vital building block for a healthy and fast-growing business.  Debt provides leverage, which not only helps you accomplish more but also improves the financial return from your business. As the saying goes, it takes money to make money, and if you don’t have the cash to start with, borrowing it can be your best alternative.

(5)       Only banks make loans. In today’s economy there are more lenders than ever.  Wealthy individuals, called angel investors, are probably the most prolific lenders for small businesses, but various institutions are also stepping up to make the kinds of loans that banks can’t or won’t.  Corporate finance companies, private investment funds, even credit card processing companies are getting into the lending business.  There are as many flavors of loans as there are reasons to borrow.

(6)       Debt is Expensive. Actually, interest rates continue to be low by historical standards, and when you factor in the tax deduction for interest, debt may seem intoxicatingly cheap.  When compared to the alternative – say taking on an equity partner who owns 20% of everything – paying even a high rate of (tax deductible) interest, starts to sound attractive.  In any event, it is always best to measure the price of a loan against the return you expect to make on the money when you put it to use.  Borrow only when the rate of interest is lower than the rate of return.

(7)       One size fits all. There are so many credit card offers in the mail these days that it’s tempting to make plastic the panacea for all our finance problems.  But the most important rule of debt is this: different kinds of credit should be used for different kinds of expenses.  Just as a house is best financed with a 30-year mortgage, most business purchases should be matched with a loan of a size and term that roughly matches the size and term of what is being purchased. The best loans are custom tailored to the business need.

(8)       All loans require collateral. Not quite. Credit cards are the most obvious exception to this rule of thumb, but there are many others.  Often called “cash flow loans” many kinds of debt rely simply on a business’ ability to make payments from profits.  Sophisticated and reputable cash flow lenders will expect you to have a solid business plan and financial projections to show how the money will be paid back.  Of course, these loans are higher risk, so they typically carry a higher interest rate.

(9)       I don’t have any collateral. Sure, the least expensive loans generally do require some hard asset as collateral. But if you are committed to building and owning a business, dig around for the hidden assets in your life.  Many lenders are able to use Certificates of Deposit, stock accounts, cars, boats, and other personal assets (including your home, of course) as collateral for a business loan.  And don’t forget that the business assets you most need to purchase often make their own collateral.  Most equipment vendors, for example, will be able to recommend leasing companies to cover the up front cost of big-ticket items.

(10)   I’d have to put my house on the line. Almost every lender will ask for your personal guarantee on a small business loan, and often that guarantee includes pledging anything of value, including your home, car, and first-born son.  Don’t despair.  Set boundaries for yourself and your lenders, then negotiate loan terms that will let you sleep at night.  Everything is negotiable.

Borrowing is never something to be taken lightly, so get the facts.  Knowing how loans work, and how they can work for you, is the first step to successful borrowing.

Committed to your profits.

 PS:  Want to discover 27 things that you can use as collateral for a loan? Join as a member and get my free 27 page report, “The Colors of Money”.  Membership is free, and so is the report.  All you have to do is click the button to join!