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Hi, you're listening to gift biz unwrapped episode 120.
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It's really To have your banker understand your business and understand
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what that loan is for.
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Hi, this is John Lee,
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Dumas of entrepreneur on fire,
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and you're listening to gifted biz unwrapped,
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and now it's time to light it.
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Welcome to gift bears on wrapped your source for industry specific
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insights and advice to develop and grow your business.
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And now here's your host Sue Mona height.
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Before we get into the show,
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I have a question for you.
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Do you know that you should be out networking,
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but you just can't get yourself to do it because it's
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scary. Are you afraid that you might walk into the room
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and not know anybody or that you're going to freeze?
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When you get up to do that infamous elevator speech,
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where you talk about yourself and your business,
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while I'm here to tell you that it doesn't need to
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be scary.
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If you know what to do,
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help you with this,
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I would like to offer you a coffee chat for the
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price of buying me a cup of coffee.
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We can sit down through an online video and I'll tell
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you everything that I know about networking and how I have
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personally built two multi-six figure businesses,
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primarily through networking.
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You'll walk away with a solid understanding about how networking can
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truly grow your business.
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And you're going to have new found confidence because I'm going
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to give you 10 fill in the blank templates that you
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can use for your introduction message to learn more about this
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opportunity. Just go over to Bitly forward slash network and Ninja
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that's B I T dot L Y forward slash network and
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job. And now let's move on to the show.
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Hi, there it's Sue and welcome to the gift biz on
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wrapped podcast,
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whether you own a brick and mortar shop sell online or
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are just getting started,
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you'll discover new insight to gain traction and to grow your
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business. And today I have the pleasure of introducing you to
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Katie whiz.
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Well, Katie is a commercial and consumer lender at Highland park
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bank and trust.
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For the last 15 years,
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she's been serving the needs of local businesses and its residents
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as a lender.
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She focuses on learning all she can about her customer's businesses
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and understanding their needs.
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This helps her to identify the best financing options available to
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meet their specific goals from equipment purchases,
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working capital lines to real estate loans,
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Katie enjoys helping her customers achieve their financial goals so that
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they can focus on their business and the clients that they
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serve. Welcome to the show.
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Katie, Thank you for having me,
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you know,
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I start off in a way that is so different than
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finance, right?
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Very different.
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Yeah. We're going to talk about what you're all about in
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a creative way.
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And that is by you describe a motivational candle that would
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represent you.
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So if you were to choose a specific color and some
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type of a saying,
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or a quote on your candle,
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what would that be?
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So I would say the color would be blue,
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a lighter Aqua ish blue,
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and the same would probably be don't watch the clock,
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do what it does.
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Just keep going,
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because at the end of the day,
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life is 10%.
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What happens to us and 90%,
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how we react to it.
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And I think for anybody with a business,
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they know that they be thrown at you from time to
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time. And the best thing to do is to just move
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through it and push through versus getting caught up with any
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one specific problem.
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Yeah. And you know,
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I think as business owners,
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too, we need to keep that mentality that we are in
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control because in the end,
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your business,
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either succeeds or fails because of the decision you as the
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owner make along the way.
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Exactly. Although I Got to tell you,
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I was thinking maybe your color would be green because of
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money. No,
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I like blue because it's calming and it keeps you cool
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as you stay the course.
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There you go.
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Perfect. So Katie,
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let's start off with talking about how you got attracted to
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the financial industry in the first place.
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So I've always been interested in numbers.
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My first job after college was actually in insurance and I
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gravitated towards a new cities where I was working with numbers
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and calculating things out.
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And then I made the switch to banking and I've been
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through all areas of the bank.
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I've started as a teller slash personal banker,
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moved up to a credit analyst and have now been a
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lender for about the last 10 years.
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And I really just,
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I like helping people with their businesses,
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you know,
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as a bank,
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you're a partner with the business and you're working together to
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help make that business successful.
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And I've really enjoyed that in my career.
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Okay. So in the intro,
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you talk about the fact that you really want to understand
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what your clients are all about.
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For example,
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we know each other,
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but let's say I was walking in and I was unknown
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to you.
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How would you start working with me?
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The first thing that I do is I ask my clients
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to explain their business to me,
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not just what it is they do,
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but how it works.
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How do you make money?
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How do your payments come in?
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How do your payments go out to your suppliers?
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And that cashflow cycle is really important to figuring out what
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is best for the business,
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from a financial and from a lending standpoint,
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a lot of people always talk about the five C's of
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credit that the bankers look at.
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And for anybody who's not familiar,
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those items are cashflow,
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collateral, credit,
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and character capital and conditions.
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So by talking to my,
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I get a feel for all of these five things and
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then can help direct them into the best product for them.
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Okay. So you really sit so you don't have an expectation,
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right? When someone walks in that you're going to send them
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down a similar path,
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or you're just,
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you know,
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you're going to present to them,
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the loans that are available,
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you really try to understand their unique situations.
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And then you go from there.
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Definitely because there are a variety of financing options and ways
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to finance your business.
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And depending on where the business is in its cycle will
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help determine the best way to provide that financing.
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For example,
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if you're starting off and you're a brand new business,
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it's going to be difficult to do a traditional bank loan
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because a bank will typically underwrite to historical financials and a
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bank likes to look back a year or two and see
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historical trends for the business.
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There's other alternatives out there though that can mitigate against that,
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that have been used.
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We have SBA loans.
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You can go to a factoring company where they will actually
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finance your receivables.
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You can go to a micro lender,
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there's a variety of them out there that will start with
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smaller loans for newer businesses.
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One way that often is used when a business is just
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starting off is investors or incubators,
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friends, and family money.
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People who will invest for either a return on their investment
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or for equity in the business.
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A lot of times that's used from new business just because
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there's no financials for the bank to underwrite.
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Okay. So let me stop you there.
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Cause we've just covered a number of different things and I've
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got I'm furiously making notes over here because I have a
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lot of questions so that our listeners can really stay on
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the flow of this.
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Let's really back this up to the very beginning.
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Let's say somebody is considering a business and they don't really
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have any type of an investment yet.
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At what point could someone realistically be coming in and talking
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about a small business loan versus just bootstrapping that we hear
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a lot,
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you know,
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a lot of people will just use whatever money they have
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available and kind of build it as they can with money
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that's available.
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But what are your words of recommendation in terms of,
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if someone is starting out,
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do they come to you?
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Do they try to bootstrap first?
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Where is the tipping point of walking in the door?
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I always tell everybody that I meet who has a business
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or is thinking of starting a business.
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It's never too soon to come in and talk to a
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banker. The reason is even if the bank can't finance you
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initially, it's helpful to know what you're going to need to
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have at one point in time that the bank's gonna want
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to underwrite a bank loan.
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So you might just be starting off.
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But what I've seen oftentimes is people do bootstrap and they
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get their business going,
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but then they run out of money and they don't have
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enough to make it to that next level.
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And as long as they have some of those five items
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that I discussed before the C's of credit,
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Go through those in detail in a minute.
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But yeah,
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carry on with this first.
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Okay. So that can help you,
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but there's a number of things that the bank is going
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to want to see when they underwrite your loan.
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What I think is helpful is even if you're,
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you're not bank financial yet it's helpful to come in and
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see what your options are.
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For example,
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have customers who have come in looking for a loan,
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they were just starting their business.
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So I wasn't able to help them from that standpoint,
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however, with a business loan,
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I should say,
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however, we did alternate financing.
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So for example,
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you can get a home equity loan,
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use the equity in your house to help finance those costs.
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And you can either use that as your capital or your
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working capital for the business while you're getting things up and
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running. It's always helpful.
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I think for a business to understand that you might have
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the capital to get everything up and running,
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you're going to purchase the inventory.
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You're going to put the tenant improvements into your space.
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You're going to be ready to open the door on day
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one. Unfortunately though takes a while to make sales and then
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collect on those receivables that you may have for your business.
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So that's the cash flow that a business owner really needs
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to understand because there's always a timeframe between when you have
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to pay your supply heirs and when you're going to collect
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from your clients.
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So making sure that you have enough working capital to cover
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those needs is really important.
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Would there Ever be a time when someone would come in
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and I understand what you're saying,
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it's never too early because you also are then able to
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start developing a relationship with a banker.
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They know where you're going.
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Even if you're going to bootstrap for a little while and
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come back,
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I don't know,
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six months,
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a year later,
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there's been some type of a base established with somebody.
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Plus you're probably able to give them a lot of good
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recommendations and advice as they start proceeding.
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Exactly. In fact,
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a lot of times I feel like I'm more of a
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business counselor than a business banker because I've seen a lot
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of different things,
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the variety of different types of businesses and can help direct
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people to places that might be of benefit.
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Whether it's somebody that can help with marketing or somebody that
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can help with logos or whatever it is,
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whether I finance them or just come across them in the
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years that I've been in banking,
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I can help connect people,
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which is always very helpful.
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In addition,
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when you start your business,
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obviously you want to establish a bank account and,
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you know,
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depending on your bank,
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they may have some products that allow for some flexibility based
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on personal credit score that might give you some,
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for example,
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some overdraft protection while you're getting your business up and running.
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Are there any examples you can give us of someone who's
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come in early just to give us some ideas of people
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who you weren't able to help right away,
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but possibly could help in the future.
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What types of situations are those?
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I've had a few of them.
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Some of them are tech companies,
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people that wanted to create an online application or an online
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business. One of the things that the bank looks at is
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cashflow. So for a startup,
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the cashflow is never really there.
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So that's always difficult for us.
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But one of the other things that we look heavily at
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is the collateral.
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And it's hard for a bank to finance a company that
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doesn't have collateral such as heavy equipment or real estate,
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things like that.
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So Something that's really tangible versus intellectual property,
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Something tangible exactly.
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Typically when the collateral is any sort of service business tends
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to be light on collateral.
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So in cases like that,
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the bank focuses even more on the cashflow from the business.
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So if it's a newer business and they're just getting up
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and running,
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or they're just kind of breaking even,
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and not ready for that bank financing,
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you know,
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that's where I would maybe send them over to,
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for example,
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an incubator here in the Chicago land area,
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we have 1871,
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which is a tech incubator downtown.
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So it's a perfect place for them to go where you
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have investors who are interested in tech companies that are looking
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for new ideas to invest in.
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So sending them to various places like that.
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Another thing that can be done are SBA loans,
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where we can get a guarantee or a partial guarantee from
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the small business administration,
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for our loans in cases where the bank might have the
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cashflow, but not necessarily the collateral we need,
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or we don't have a full two years of financials,
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yet historical financials for that business.
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We can go through the S SBA to help get one
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of those guarantees,
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which mitigates the bank's risk on alone and makes it easier
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for us to provide financing to a newer business or a
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business that doesn't have a lot of collateral to lean back
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on. Perfect sense.
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And also what's becoming very clear is how important it is
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to go and really explain your unique situation because it's becoming
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more and more obvious to me that there are so many
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different avenues you can take.
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And that's why you're the professional.
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You connect them up with the appropriate things based on,
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you know,
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what's going on with them at the time.
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So the good news is Katie that most of our audience
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do have something tangible because gifters bakers,
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crafters, they're most likely selling some type of a product,
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whether it's physical product or to consumable like cupcakes or chocolate.
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So we're in a little bit of a different situation,
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but you keep talking about all these words with the CS.
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So I think this is a good place for us to
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go ahead and define those five CS.
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So let's go through each of them and then you know
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what the implications are and what's underneath all those CS.
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So the First one is cashflow and cash is always King
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cashflow for banking is King.
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And the reason is,
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is because the bank at the end of the day just
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wants to get repaid.
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So our goal is to lend dollars to help businesses grow
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and then get repaid.
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And typically the bank wants to see cashflow of 1.2
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times. And to explain that and simple numbers is we will
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look at the cashflow from the business,
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which is the net income plus interest expense plus depreciation and
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other non-cash items divided by the debt service.
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So the annual loan payments for the proposed debt.
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We want to see that that's covering at 1.2
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times times.
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So if you have 120,000
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in cashflow and your debt service is a hundred thousand a
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year, that's the number,
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that's the ratio that the bank measures it by.
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Sometimes people might be a little tighter.
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However, that's where talking to the banker and the banker understanding
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your business is key because what the new loan could be
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doing is helping you increase sales or reduce expenses.
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So there could be effects that that loan will have that
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will improve the cashflow over time.
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So that's why it's really important to have your banker understand
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your business and understand what that loan is for.
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So I see on shark tank,
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a lot of times when people are asking for money,
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they'll say,
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well, where are you going to use this money for?
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And if they say,
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well, I haven't taken a salary yet.
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You know,
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they're like,
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eh, wrong answer.
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Kind of like what you're saying is,
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you know,
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it's gotta be doing something to grow the business so that
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the bank will get its money back.
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Exactly. And two of the main structures for alone are either
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a line of credit or a term loan.
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And I always think that it's really important to pick the
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structure that's appropriate for your loan purpose.
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If you're both buying equipment that you're going to have for
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five years,
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that you need to create your product,
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then that would be a term loan.
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You want to borrow it all up front and pay it
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back over time.
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If you're looking for working capital where your receivables aren't coming
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in, as quickly as your payables need to go out and
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you need just some cashflow to help shore up some shortfalls
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from time,
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time, then a line of credit is more appropriate because what
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the bank will want to see on a line of credit
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is the bank wants to see that line go up and
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down. What I often see with smaller businesses is they'll get
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a line of credit over a term loan because they like
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the fact that the monthly payments are interest only,
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and then they borrow it,
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but then they never pay it back.
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And the issue with that,
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although it's helpful for the cashflow,
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cause they're not paying the principal back.
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The issue is the next time they do need to purchase
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an, a piece of equipment or some other long-term asset.
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Then they don't necessarily have the borrowing capacity because,
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and they're not using the line of credit in the appropriate
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manner. Yeah,
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it makes total sense to me.
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Got it.
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All right.
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Let's move on to the second C.
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So the second C is collateral And this can really be
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a variety of things for a small business.
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This could be,
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you know,
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marketable securities that you have from a previous life or that
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you've accumulated over time that you don't want to cash in
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because there would be tax liabilities.
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And so you might want to use that as your collateral.
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This is often used on a newer business that doesn't have
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historical cashflow.
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It's a liquid asset that the bank looks favorably on because
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it is a liquid dateable asset.
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Something that could be sold and liquidated to repay the debt
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in a short timeframe versus something like real estate,
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where you could use that.
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My example before of you could use a home equity loan
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to do the financing.
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If you have equity in your house,
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or if your business is in a commercial property,
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sometimes you might want to purchase that property that you're occupying
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and start paying rent to yourself.
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So real estate is often use a lot of times,
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it's just a blanket lien on business assets.
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So in a case like that,
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the bank will take a blanket lien on the business's assets.
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The bank will file a UCC uniform commercial code filing on
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the business at the state level.
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And what that allows the business to know is that they
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have the ability to capture the cash flow that's coming in
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if needed.
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So that's often used if there's a cashflow dependent loan,
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it also covers all equipment that the business owns excluding any
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specific leased equipment that the business may have.
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Cause another way to do financing for your business is instead
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of going to the bank to purchase a piece of equipment,
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you can go to a leasing company and lease the equipment.
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There's oftentimes a lease to own where there's a buyout of
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a dollar at the end of the five-year lease.
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It's another way of financing that equipment instead of going through
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the bank.
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Okay. All right,
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perfect. So we get a feel for collateral.
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Let's move on to number three.
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So three is credit and character.
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That's really what is this person Bringing to the table with
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their business?
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And with any loan,
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a bank whomever's financing,
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you is probably going to pull a credit report on the
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individual owner or owners of the business.
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And if you show a history of not paying your bills
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on time or having late payments or having charge offs on
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your credit report,
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it doesn't tell a good story Because it kind of lays
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the groundwork of how you're going to be handled and things
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moving forward.
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Exactly, Exactly.
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So what you can do,
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for example,
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at my bank,
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we have products that we can give people based on just
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credit score.
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So we'll do minimal underwriting for the business on some smaller
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loans, but as long as they have a good credit history
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where they have a history of repaying their bills on a
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regular basis with no late payments that can help you get
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a loan through the bank or whomever.
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Perfect. So if we have any listeners right now who are
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listening to this show,
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because you're thinking about starting a business at some point,
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make sure you're paying your bills.
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I mean,
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there's a lot you can do right now to set yourself
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up in a good position,
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if ever you're going to end up going for a business
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loan. So one of those is,
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let's say you're just out of school.
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You don't really have a lot of debt yet,
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but car payments,
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you know,
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rent, you know,
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mortgage payments,
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whatever you're doing,
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just make sure you're paying on time because that can really
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help you,
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not just here,
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but this is the point we're talking about here,
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but it'll help you in the future.
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So that's something that you can do right now to take
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action, even if you're not starting your company right away.
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And I also recommend you can pull a free credit report
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from each credit Bureau once a year,
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if you go to free credit report.com
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and I recommend it to everybody I talk to because you
Speaker:
can also look to make sure everything that's on your credit
Speaker:
report is in fact yours.
Speaker:
And that there's been no fraudulent activity on it,
Speaker:
which unfortunately we see often.
Speaker:
And you probably want to get on that sooner versus later.
Speaker:
I'm sure Exactly.
Speaker:
Cause it does take time to clean things like that up.
Speaker:
Do you go to someone like you to do that?
Speaker:
Can you help in that,
Speaker:
in that manner or no Companies that can help or are
Speaker:
places businesses like LifeLock.
Speaker:
If you've had fraud with your social security number or other
Speaker:
personal information,
Speaker:
they can help protect against future fraud,
Speaker:
but there's also businesses that can help you clean up.
Speaker:
Okay. Issues so better just to know that your reports nice
Speaker:
and clean and safe and then check it from year to
Speaker:
year. Exactly.
Speaker:
Perfect. All right.
Speaker:
Anything else on credit and character or should we move on?
Speaker:
We can move on.
Speaker:
The next one is capital.
Speaker:
And this one is when we look at a business,
Speaker:
we want to make sure that a business is well capitalized.
Speaker:
As you were saying,
Speaker:
in your example,
Speaker:
before, we don't want to give a loan so that the
Speaker:
owner can take a salary.
Speaker:
We want to make sure that there's enough basic equity in
Speaker:
the business that the owner has skin in the game.
Speaker:
It's a little easier to describe for example,
Speaker:
on a real estate deal.
Speaker:
Sometimes you see somebody purchase a building for,
Speaker:
let's say a hundred thousand and then it appreciates.
Speaker:
And two years later,
Speaker:
let's say it's worth 150,000
Speaker:
and now they want to cash out a hundred thousand because
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there's 50,000
Speaker:
of equity.
Speaker:
The concern that the bank always has there is they're taking
Speaker:
all of their cash out and they have no skin in
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the game.
Speaker:
So to say,
Speaker:
so we want to make sure somebody has,
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you know,
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that they're invested,
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that they're invested in it,
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that they support it.
Speaker:
One thing that you will see on a typical bank loan
Speaker:
is that if we make a loan to the business,
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the business will be our borrower,
Speaker:
but any owner of the business,
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specifically, any owner of 20% or greater,
Speaker:
we require them to guarantee the loan because we want to
Speaker:
make sure that they're behind it.
Speaker:
If somebody wants to borrow a million dollars and they don't
Speaker:
want to put their name behind it and support the repayment
Speaker:
of it,
Speaker:
that's going to get the bank a little nervous.
Speaker:
Okay. So you're talking about somebody then I believe,
Speaker:
I just want to clarify,
Speaker:
who's coming to you for a business loan,
Speaker:
and then you're saying that you want them to underwrite from
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their personal finances.
Speaker:
Well, two things,
Speaker:
one, we're going to ask them for personal financials and I'll
Speaker:
go through the list of all of the financials that a
Speaker:
bank will typically request for a loan.
Speaker:
But one thing that we just want to make sure that
Speaker:
they're willing to guarantee it,
Speaker:
which means that if the business doesn't have the cash flow
Speaker:
to repay it,
Speaker:
then when we're going to look to the Garren tours to
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personally support any cashflow shortfalls.
Speaker:
Okay? So that could be your personal,
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that could be a friend who's going to underwrite for you.
Speaker:
Something like that.
Speaker:
It could be,
Speaker:
sometimes people will get a co-signer on loans,
Speaker:
but typically it's just any owner in the business.
Speaker:
The other reason for that is we want to make sure
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that all of the owners,
Speaker:
let's say you have a business and there's five owners of
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20% ownership.
Speaker:
We want to make sure that all of the owners are
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behind the business and supportive of the business and we'll help
Speaker:
support if there's any cashflow,
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shortfalls or hiccups that occur.
Speaker:
Got it.
Speaker:
Cause sometimes you'll have just silent investors and that's all fine
Speaker:
and well,
Speaker:
but possibly not when you're going for a loan,
Speaker:
correct Fact,
Speaker:
if you're selling an investor on 50% of the business,
Speaker:
they're probably going to need to guarantee.
Speaker:
But if it's a silent investor,
Speaker:
like I was saying before friends and family money where they've
Speaker:
put a little money in to help you get started,
Speaker:
they either don't have ownership in it or they have a
Speaker:
minority investment in it.
Speaker:
We're not going to ask for guarantees.
Speaker:
One thing that we may ask is if you do investor
Speaker:
money in your business and loans from investors or loans from
Speaker:
shareholders, so it could be your own personal business with personal
Speaker:
loans that you've made to that business.
Speaker:
Oftentimes the bank will ask for that loan to be subordinated
Speaker:
to the bank stat,
Speaker:
which translates to you agreeing that if there isn't enough cashflow,
Speaker:
the excess cashflow will be used to repay the banks debt
Speaker:
first, before you repay yourself or other shareholder loans.
Speaker:
Yeah, it makes sense.
Speaker:
All right,
Speaker:
let's move on to five.
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Five is just conditions.
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If you think about it a few years ago,
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we were having a real estate downturn.
Speaker:
So some of it is we're going to do a loan
Speaker:
based on how the economy is doing,
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how that specific line of business is doing.
Speaker:
If you're selling widgets and widgets are going out of style
Speaker:
and you don't need them anymore.
Speaker:
For various things,
Speaker:
look at cars.
Speaker:
For example,
Speaker:
cars are going electric.
Speaker:
If you're a company and your creating parts for electric cars,
Speaker:
we could see that there'd probably be some growth in that
Speaker:
area. But if you're making parts for diesel cars that are
Speaker:
being phased out,
Speaker:
that might not be the best condition to try to grow
Speaker:
a company.
Speaker:
Right? So if I have a part that's a cleaner for
Speaker:
a VCR,
Speaker:
it's probably not of interest.
Speaker:
It's probably not of interest because you're probably not going to
Speaker:
grow that business very much.
Speaker:
So it sounds like relevance of your product and then also
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market conditions.
Speaker:
Exactly. And competition.
Speaker:
What if your one of seven cupcake shops on the same
Speaker:
street, that's going to be a tough condition to survive in,
Speaker:
unless you can prove why your cupcakes are going to be
Speaker:
so much better and fly off the rack compared to the
Speaker:
other six cupcake shops.
Speaker:
Okay. Makes sense.
Speaker:
Makes total sense.
Speaker:
Okay. So these five CS,
Speaker:
again, our cashflow collateral credit and character capital and conditions.
Speaker:
Really good information,
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Katie, I appreciate you breaking all of this down for us.
Speaker:
Might go over some of our heads,
Speaker:
but we can always go back and relisten to this again.
Speaker:
So that's wonderful.
Speaker:
Let's say I'm coming in,
Speaker:
I've listened to this podcast.
Speaker:
I kind of understand.
Speaker:
I want to come in and talk with my local lender.
Speaker:
You're talking about the things that you're going to be requesting
Speaker:
the different types of pieces of information and just what to
Speaker:
expect when you're walking in the door,
Speaker:
let's go through all of that for everybody.
Speaker:
So once The banker is aware of your business and you
Speaker:
talked over what your business does,
Speaker:
what your business needs,
Speaker:
what the loan is for then in order to underwrite the
Speaker:
loan, the bank will typically ask for a personal financial statement
Speaker:
from each of the guarantors two to three years of personal
Speaker:
returns for each of the guarantors.
Speaker:
And again,
Speaker:
those guarantors are typically any owner of 20% or greater though.
Speaker:
They can also be key employees that are imperative to the
Speaker:
business, as well as two years of business tax returns and
Speaker:
current interim financials for the business,
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including profit and loss statement or income statement,
Speaker:
a balance sheet,
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a current accounts receivable,
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aging, if applicable,
Speaker:
and a current accounts payable aging.
Speaker:
What the bank will do is the bank will look at
Speaker:
a loan from two different ways.
Speaker:
First, we look at the business cashflow to see how the
Speaker:
business is doing,
Speaker:
and if the business can support that debt.
Speaker:
But then what we often do with small businesses is we'll
Speaker:
look at it globally because we want to make sure that
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globally between the business and the guarantors,
Speaker:
which are oftentimes one to two owners that are living off
Speaker:
of the salaries from that business,
Speaker:
we want to make sure that globally they can service all
Speaker:
of the debt.
Speaker:
So we take the cashflow from the business.
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We take the personal income that the guarantors make.
Speaker:
And then we look at the debt,
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the business and the personal debt to make sure that it's
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covering there's enough income,
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enough cash sources to service those cash needs.
Speaker:
Got it.
Speaker:
So as you're talking about all of this,
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the first thing that comes to mind for me is if
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you're already in business,
Speaker:
when we've talked about this in past podcast episodes and on
Speaker:
my blog and all of that is make sure you have
Speaker:
an accounting system like QuickBooks or other,
Speaker:
because all of these reports that Katie is talking about can
Speaker:
easily be pulled up from a system like that.
Speaker:
But if you are hand jotting down your sales,
Speaker:
you know,
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just doing like the pen and paper thing,
Speaker:
this would be a nightmare to try and get.
Speaker:
And it probably wouldn't be as credible either,
Speaker:
right? Katie,
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It won't be as credible with real estate loans.
Speaker:
We sometimes see that just because there's not daily transactions you're
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taking in rent once a month and then paying expenses once
Speaker:
or twice a month,
Speaker:
but for an operating business where you have money going in
Speaker:
and out on a daily basis,
Speaker:
not only is it important for the bank to be aware
Speaker:
of those numbers and be able to see them at any
Speaker:
point in time,
Speaker:
it's important for the business owner to understand those numbers,
Speaker:
things like accounts,
Speaker:
receivable, aging,
Speaker:
a lot of people don't focus on,
Speaker:
but it actually can tell a lot about why you may
Speaker:
have cashflow needs.
Speaker:
Sometimes I've seen a business come in and they need a
Speaker:
working capital line because they're having a cash crunch.
Speaker:
Then when I look at their accounts receivable,
Speaker:
aging, I see that they have clients that they've let not
Speaker:
pay them for over 90 days in the bank when we're
Speaker:
looking at collateral.
Speaker:
And if we're doing a working capital line that could be
Speaker:
collateralized specifically by accounts receivable,
Speaker:
the bank will finance typically 80% of eligible accounts receivable.
Speaker:
Those eligible accounts receivable are receivables that are aged 90 days
Speaker:
or less.
Speaker:
So if you're not spending the time to collect from your
Speaker:
clients in a timely manner guarantee,
Speaker:
and your suppliers are still wanting you to pay them in
Speaker:
a timely manner.
Speaker:
So if you're making your payables timely,
Speaker:
but your receivables aren't coming in timely,
Speaker:
that's where you end up with the cash crunch.
Speaker:
In addition,
Speaker:
if you let your receivables go too long,
Speaker:
the odds and the chances of collecting on them get harder
Speaker:
and harder.
Speaker:
Sure. In the end a bank is looking at you,
Speaker:
just like you would look at I'm loaning money to somebody
Speaker:
else. I mean,
Speaker:
they're wanting to make sure that they're going to get paid
Speaker:
back and they're looking at everything in your history,
Speaker:
all of this detail that Katie's sharing,
Speaker:
you know,
Speaker:
they're taking a chance on you in the end and is
Speaker:
it a good chance to be taking?
Speaker:
So you've got to prove your case.
Speaker:
Definitely. The other thing,
Speaker:
I will just point out one for any sort of tax
Speaker:
effect that any sort of expense you should always talk to
Speaker:
your accountant,
Speaker:
bankers are not accountants.
Speaker:
So we will always advise you to talk to your accountant
Speaker:
on how to report things as far as expenses and on
Speaker:
your tax returns.
Speaker:
We're always going to tell you to go to your attorney
Speaker:
to determine how your business should be structured and who should
Speaker:
be the authorized signers.
Speaker:
Those are made by those professionals.
Speaker:
One thing that we do come across though,
Speaker:
is people hire really great accountants who can help them reduce
Speaker:
their tax liabilities by having them write off a number of
Speaker:
expenses. Unfortunately,
Speaker:
sometimes that does not help when you're trying to get a
Speaker:
loan. So people will come in and we typically will underwrite
Speaker:
to tax returns.
Speaker:
And I often see where your QuickBooks say one thing and
Speaker:
then your tax return and say something else because your accountant
Speaker:
has gotten creative with what they can write off all valid
Speaker:
items that can be written off.
Speaker:
However, it affects the cashflow that the bank underwrites too.
Speaker:
So that's just always something to keep in mind and that
Speaker:
it's great to not pay the income taxes sometimes.
Speaker:
However, it can affect your ability to borrow Really good point
Speaker:
would not have thought of that.
Speaker:
So I appreciate your bringing that up.
Speaker:
What type of a timeframe do you have from when someone
Speaker:
let's say someone you've know them already,
Speaker:
you know,
Speaker:
their business,
Speaker:
you've spent some time with them now they're coming in with
Speaker:
all their information and you're going to advise them what's the
Speaker:
right direction to go.
Speaker:
How long does it take?
Speaker:
And I'm sure there's a range,
Speaker:
but what can you expect in terms of,
Speaker:
from that point to actually getting the loan approved?
Speaker:
It does vary.
Speaker:
It varies on the collateral.
Speaker:
It varies on the complexity of the business,
Speaker:
but in general,
Speaker:
it also depends on the workload and the time of year.
Speaker:
And if people are on vacation,
Speaker:
but I would say about two weeks is your typical turnaround
Speaker:
time. It can be faster for smaller loans that don't have
Speaker:
as detailed underwriting,
Speaker:
but it can be longer for more complex deals that for
Speaker:
example, might have real estate as collateral where you then have
Speaker:
to get an appraisal on the property to make sure that
Speaker:
it appraises out before you can close on that long.
Speaker:
Got it.
Speaker:
So, but two weeks,
Speaker:
maybe two,
Speaker:
what a month to two months,
Speaker:
I would say two to six weeks.
Speaker:
If you are going with an SBA loan,
Speaker:
the SBA is the government and the government does love their
Speaker:
paper. And so there's always extra paperwork and it always takes
Speaker:
a little extra time.
Speaker:
So sometimes those loans can take a little longer to get
Speaker:
processed and closed,
Speaker:
but if it's not an SBA loan and it's a traditional
Speaker:
bank loan,
Speaker:
I would say between two to six weeks.
Speaker:
Perfect. And some closing words on this for all of us
Speaker:
who get really scared about all of this,
Speaker:
cause it sounds like a lot of terms.
Speaker:
We don't know a lot of information.
Speaker:
We don't know,
Speaker:
possibly a step that we're uncomfortable with.
Speaker:
What is the value of getting a small business loan?
Speaker:
How can you put us at ease that this might be
Speaker:
something people would want to consider?
Speaker:
One thing that I would say is it's always great to
Speaker:
establish a credit history separate from your personal credit history.
Speaker:
A lot of times people will self fund.
Speaker:
They will use the home equity option for example,
Speaker:
and then make shareholder loans to the business.
Speaker:
But then it doesn't provide a history of what the business
Speaker:
can do so that when you are ready to move on
Speaker:
to that loan later on for growth,
Speaker:
you don't have any history with the bank.
Speaker:
If you have a history with the bank of always keeping
Speaker:
your account positive,
Speaker:
never having returned checks because you're keeping an eye on your
Speaker:
books and you know exactly how much you have in your
Speaker:
account that you can write checks from.
Speaker:
If you have an overdraft line or even a small line
Speaker:
of credit,
Speaker:
it could be five to $10,000.
Speaker:
If the bank has a history with you,
Speaker:
that shows that you have been responsible and always,
Speaker:
you know,
Speaker:
talk to the bank,
Speaker:
always are on top of everything so that the bank has
Speaker:
that history that will help in the bank wanting to grow
Speaker:
with, Grow with you.
Speaker:
And I'm also thinking if you ever are building a company
Speaker:
to sell later,
Speaker:
that probably strengthened the sale opportunity to having solid credit and
Speaker:
something separate from your personal yes.
Speaker:
And talking about what your ultimate goal for your business is,
Speaker:
is one of those steps.
Speaker:
Are you in business?
Speaker:
You just love what you do,
Speaker:
which my guess is most of your listeners do that.
Speaker:
They love what they do.
Speaker:
And they just want to,
Speaker:
you know,
Speaker:
being able to do a job that you love is great.
Speaker:
Sometimes people are growing a business because they want to pass
Speaker:
it on to their next generation or because they want to
Speaker:
sell it and then retire to the Caribbean.
Speaker:
Whatever the reason is to know what those ultimate goals are,
Speaker:
is helpful because it'll help you figure out the best way
Speaker:
to finance and structure things.
Speaker:
A question Occurred to me,
Speaker:
Katie, I'd like your comment on,
Speaker:
I think,
Speaker:
and I've heard in the past of a lot of people
Speaker:
who they don't need a ton of money,
Speaker:
but they find it really easy just to go ahead and
Speaker:
finance any purchases that they want to make or costs that
Speaker:
they've incurred just through their credit cards.
Speaker:
What would you say to that?
Speaker:
So I've seen a number of businesses use that model.
Speaker:
And if you use your credit card for the purchases and
Speaker:
you're paying it off every month,
Speaker:
so you don't have any interest expense tied to it.
Speaker:
It's not a horrible idea because people do use it to
Speaker:
get miles and things that they can use later on for
Speaker:
their business,
Speaker:
for travel,
Speaker:
things like that.
Speaker:
However, what I've often seen is businesses who get in the
Speaker:
habit of putting things on their credit card,
Speaker:
because they don't have a working capital line for the business.
Speaker:
They use their credit card for that,
Speaker:
but if they don't pay it off every month,
Speaker:
the interest rates that they're paying are really affecting their business
Speaker:
cashflow because they have to start paying so much in interest.
Speaker:
You know,
Speaker:
a credit card could be in 17,
Speaker:
20% interest versus if they start with a bank loan or
Speaker:
try to use a bank working capital line,
Speaker:
instead interest rates are below 10%.
Speaker:
You have a lot more capacity to make those payments because
Speaker:
your interest rate isn't as high.
Speaker:
And then sometimes if you get in the cycle,
Speaker:
you start increasing those balances.
Speaker:
And then when it comes time to go to the bank,
Speaker:
to look for financing,
Speaker:
the bank has to take all of those credit card payments
Speaker:
into account,
Speaker:
and it could be affecting your credit score because if you
Speaker:
have very high balances on your credit cards and even on
Speaker:
a business card it'll show,
Speaker:
even if you're an authorized signer,
Speaker:
it'll often show on your personal credit report,
Speaker:
it can affect your credit score,
Speaker:
which can affect your ability to borrow.
Speaker:
So it sounds like a major caution,
Speaker:
you know,
Speaker:
it's so much easier just to pull out that credit card.
Speaker:
And maybe if you have just one month,
Speaker:
you have some extra expenses that,
Speaker:
you know,
Speaker:
you're gonna be able to pay off pretty quickly.
Speaker:
You may use that as a fallback option,
Speaker:
but in terms of actually using that as the base of
Speaker:
any extended costs that you have,
Speaker:
that would not be a good idea,
Speaker:
Correct? It's helpful to use it from an ease standpoint where
Speaker:
you're making purchases online.
Speaker:
So it's just easier to put in a credit card number
Speaker:
if you're using it for that purpose and then planning on
Speaker:
repaying, it that's fine,
Speaker:
but if you use it and then when you get that
Speaker:
receivable in from your client,
Speaker:
if you use that receivable to pay other expenses and to
Speaker:
not pay down your credit card,
Speaker:
then you can end up with those high balances that will
Speaker:
affect. And I would say credit cards are good for miles
Speaker:
or whatever other reward program you're on.
Speaker:
So that's not bad.
Speaker:
They do have benefits and they actually will Died some protection
Speaker:
from a fraud standpoint.
Speaker:
So if you,
Speaker:
if somebody gets a hold of your credit card,
Speaker:
you could argue it with a credit card company.
Speaker:
And they're usually pretty good about helping you out with that.
Speaker:
One more thing that I will say,
Speaker:
and this is not from a lending perspective,
Speaker:
but just from a banking perspective,
Speaker:
that a lot of businesses don't know,
Speaker:
especially in today's times when a lot of payments are auto
Speaker:
debited or auto credited to an account,
Speaker:
a business account only has 24,
Speaker:
technically only has 24 hours to dispute a fraudulent debit from
Speaker:
their account.
Speaker:
So one parting word that I would leave your listeners with
Speaker:
is to always look at your accounts,
Speaker:
get online banking and look at your accounts every day to
Speaker:
make sure that the items that are coming through your account
Speaker:
are valid items,
Speaker:
because there's a lot of fraud that's out there.
Speaker:
It's rampant among businesses.
Speaker:
And if you don't catch it in time as a business,
Speaker:
you may not be able to recoup those losses.
Speaker:
I did not know that that is a huge heads-up for
Speaker:
all of us.
Speaker:
Yes. I was not aware of that.
Speaker:
So Online banking and get in the habit of sending on
Speaker:
every day,
Speaker:
just to keep an eye on your accounts.
Speaker:
Lots of things you've given us to think about.
Speaker:
Hopefully I haven't overwhelmed.
Speaker:
Well, like I said,
Speaker:
we can always go back and listen again.
Speaker:
Right? Correct.
Speaker:
All right.
Speaker:
Perfect. Any other closing comments,
Speaker:
anything that you think we haven't touched on that we should?
Speaker:
I think that's it.
Speaker:
I think we really covered everything.
Speaker:
I would just say,
Speaker:
don't be scared to go into the bank,
Speaker:
talk to a banker,
Speaker:
talk through things.
Speaker:
Even if you're having problems in a specific area,
Speaker:
you can always talk to your banker about how they would
Speaker:
possibly address it.
Speaker:
Or if they have other resources that you can go to
Speaker:
in our area,
Speaker:
we have something called score that I refer people to all
Speaker:
the time,
Speaker:
because sometimes to get to that next step,
Speaker:
isn't necessarily a financing thing.
Speaker:
Sometimes it could be something like marketing or management,
Speaker:
and there's a number of other resources out there that can
Speaker:
help you address those issues that will help you get ready
Speaker:
to be financial.
Speaker:
That's perfect.
Speaker:
I never would have thought of it that way either.
Speaker:
And what you're saying is true.
Speaker:
I mean,
Speaker:
it doesn't cost anything to go in and sit down and
Speaker:
talk with somebody,
Speaker:
just share the position where you're at and see what your
Speaker:
options are at that point.
Speaker:
Definitely. I would say half my time is spent on just
Speaker:
talking to my clients and coming up with ideas of how
Speaker:
they can progress in their business.
Speaker:
Right. All right.
Speaker:
Now, Katie,
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I'm going to circle into something a little bit different again,
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we're going back to the candle mentality here.
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Are you ready?
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Yes. I'm going to invite you to dare to dream game.
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I'd like to present you with a virtual gift.
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It's a magical box containing unlimited possibilities for your future.
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This is your dream or your goal of almost unreachable Heights
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that you would wish to obtain.
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Please accept this gift and open it in our presence.
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What is inside your box?
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This is a tough one for me.
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And I can think of a variety of things,
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but I'm actually going to say,
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because I think your listeners will appreciate this.
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I wish I had artistic ability as a banker.
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I am very right brained and I love arts and Craftsy
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things and making things,
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but I need to follow.
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I can paint,
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but it needs to be a paint by number I can
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bake, but I have to have a recipe.
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I would love to have an artistic bone in my body
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that I could pass on and enjoy The good thing about
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being an artist is whatever you create is beautiful because everything
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is unique,
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right? So you can think of it that way too.
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Definitely. It's easier for you to go from numbers to artists
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street, then creatives to go from that to numbers.
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Because when you were talking about how you got into the
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finance thing and how you like numbers and all of that.
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Oh, scary.
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That's why we have you to count on Katie.
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I will rely on you and your listeners for my artistic
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decor because it won't come from me.
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All right.
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So if any of our listeners are right in the area
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and listening and would like to come in and talk with
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you specifically,
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how could they get in touch with you?
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So I can be reached at my email address,
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which is K wizard world.
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K w I S as in Sam,
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w a L D as in dog,
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at Highland park bank.com.
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We are a Wintrust community bank.
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I'm also out on LinkedIn,
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under Catherine Winslow,
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And we're going to have a show notes page as we
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always do.
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So you can always click over there and get more information.
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You'll see a little bit more of a complete bio on
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Katie and then all of her contact information as well.
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Definitely. Thank you so so much.
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I think you've taken what,
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for many of us,
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just by nature of what we do,
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we've taken a very confusing and scary topic of all the
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financing and broken it down for us.
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So we understand it much better.
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And I think the biggest takeaway for all of us is
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there is nothing wrong with going in and just having a
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conversation with your local lender,
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you might really recognize some new opportunities that you never knew
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existed. So thank you for enlightening us with all of that.
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And I really like when you talk about back to your
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candle quote,
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taking action,
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you know,
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not just watching,
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but going ahead and doing,
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and there's lots of things that we can do on this
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financial end that I think we just don't think about because
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we don't want to be thinking about them.
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So you've helped us with that so much as well.
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So thank you very,
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very much for joining me on the show,
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sharing your wisdom with our listeners and may your candle always
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burn bright?
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Where are you in your business building journey,
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whether you're just starting out or already running a business,
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and you want to know your setup for success.
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Find out by taking the gift biz quiz,
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access the quiz from your computer at<inaudible> dot L Y slash
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gift biz quiz or from your phone by texting gift biz
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quiz to four four two,
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two, two.
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Thanks for listening and be sure to join us for the
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next episode.
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Today's show is sponsored by the ribbon print company,
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looking for a new income source for your gift business.
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for more information after you listened to the show,
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if you like what you're hearing,
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make sure to jump over and subscribe to the show on
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iTunes. That way you'll automatically get the newest episodes when they
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go live.
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And thank you to those who have already left the rating
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by subscribing rating and reviewing help to increase the visibility round.
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It's a great way to pay it forward,
