Shownotes
The 5 C’s of Credit
Overview of the 5 C’s of Credit [5:47] Cash Flow [15:16] Collateral [18:35] Credit & Character [20:41] Capitol [23:27] Conditions [27:16]Small Business Loans Insights
Why Katie chose the financial industry as a career. [4:19] Info to cover when starting a discussion with a lender. [5:14] Overview of small business loans for a new business. [6:40], [13:41] A cash flow discussion for the new business owner. [8:24] Additional value of your lender. [11:11] Two structures for a small business loan. [17:07] The importance of viewing your credit reports. [22:29] Talking with a lender. What you can expect and need to provide. [29:17] The importance of a formal accounting program. [31:50]Resources
Free Credit Reports QuickbooksRecommended Reading and Listening
Contact Links
Website LinkedInIf you found value in this podcast, make sure to subscribe and leave a review in Apple Podcasts or Google Podcasts. That helps us spread the word to more makers just like you. Thanks! Sue
Transcripts
Hi, you're listening to gift biz unwrapped episode 120.
Speaker:It's really To have your banker understand your business and understand
Speaker:what that loan is for.
Speaker:Hi, this is John Lee,
Speaker:Dumas of entrepreneur on fire,
Speaker:and you're listening to gifted biz unwrapped,
Speaker:and now it's time to light it.
Speaker:Welcome to gift bears on wrapped your source for industry specific
Speaker:insights and advice to develop and grow your business.
Speaker:And now here's your host Sue Mona height.
Speaker:Before we get into the show,
Speaker:I have a question for you.
Speaker:Do you know that you should be out networking,
Speaker:but you just can't get yourself to do it because it's
Speaker:scary. Are you afraid that you might walk into the room
Speaker:and not know anybody or that you're going to freeze?
Speaker:When you get up to do that infamous elevator speech,
Speaker:where you talk about yourself and your business,
Speaker:while I'm here to tell you that it doesn't need to
Speaker:be scary.
Speaker:If you know what to do,
Speaker:help you with this,
Speaker:I would like to offer you a coffee chat for the
Speaker:price of buying me a cup of coffee.
Speaker:We can sit down through an online video and I'll tell
Speaker:you everything that I know about networking and how I have
Speaker:personally built two multi-six figure businesses,
Speaker:primarily through networking.
Speaker:You'll walk away with a solid understanding about how networking can
Speaker:truly grow your business.
Speaker:And you're going to have new found confidence because I'm going
Speaker:to give you 10 fill in the blank templates that you
Speaker:can use for your introduction message to learn more about this
Speaker:opportunity. Just go over to Bitly forward slash network and Ninja
Speaker:that's B I T dot L Y forward slash network and
Speaker:job. And now let's move on to the show.
Speaker:Hi, there it's Sue and welcome to the gift biz on
Speaker:wrapped podcast,
Speaker:whether you own a brick and mortar shop sell online or
Speaker:are just getting started,
Speaker:you'll discover new insight to gain traction and to grow your
Speaker:business. And today I have the pleasure of introducing you to
Speaker:Katie whiz.
Speaker:Well, Katie is a commercial and consumer lender at Highland park
Speaker:bank and trust.
Speaker:For the last 15 years,
Speaker:she's been serving the needs of local businesses and its residents
Speaker:as a lender.
Speaker:She focuses on learning all she can about her customer's businesses
Speaker:and understanding their needs.
Speaker:This helps her to identify the best financing options available to
Speaker:meet their specific goals from equipment purchases,
Speaker:working capital lines to real estate loans,
Speaker:Katie enjoys helping her customers achieve their financial goals so that
Speaker:they can focus on their business and the clients that they
Speaker:serve. Welcome to the show.
Speaker:Katie, Thank you for having me,
Speaker:you know,
Speaker:I start off in a way that is so different than
Speaker:finance, right?
Speaker:Very different.
Speaker:Yeah. We're going to talk about what you're all about in
Speaker:a creative way.
Speaker:And that is by you describe a motivational candle that would
Speaker:represent you.
Speaker:So if you were to choose a specific color and some
Speaker:type of a saying,
Speaker:or a quote on your candle,
Speaker:what would that be?
Speaker:So I would say the color would be blue,
Speaker:a lighter Aqua ish blue,
Speaker:and the same would probably be don't watch the clock,
Speaker:do what it does.
Speaker:Just keep going,
Speaker:because at the end of the day,
Speaker:life is 10%.
Speaker:What happens to us and 90%,
Speaker:how we react to it.
Speaker:And I think for anybody with a business,
Speaker:they know that they be thrown at you from time to
Speaker:time. And the best thing to do is to just move
Speaker:through it and push through versus getting caught up with any
Speaker:one specific problem.
Speaker:Yeah. And you know,
Speaker:I think as business owners,
Speaker:too, we need to keep that mentality that we are in
Speaker:control because in the end,
Speaker:your business,
Speaker:either succeeds or fails because of the decision you as the
Speaker:owner make along the way.
Speaker:Exactly. Although I Got to tell you,
Speaker:I was thinking maybe your color would be green because of
Speaker:money. No,
Speaker:I like blue because it's calming and it keeps you cool
Speaker:as you stay the course.
Speaker:There you go.
Speaker:Perfect. So Katie,
Speaker:let's start off with talking about how you got attracted to
Speaker:the financial industry in the first place.
Speaker:So I've always been interested in numbers.
Speaker:My first job after college was actually in insurance and I
Speaker:gravitated towards a new cities where I was working with numbers
Speaker:and calculating things out.
Speaker:And then I made the switch to banking and I've been
Speaker:through all areas of the bank.
Speaker:I've started as a teller slash personal banker,
Speaker:moved up to a credit analyst and have now been a
Speaker:lender for about the last 10 years.
Speaker:And I really just,
Speaker:I like helping people with their businesses,
Speaker:you know,
Speaker:as a bank,
Speaker:you're a partner with the business and you're working together to
Speaker:help make that business successful.
Speaker:And I've really enjoyed that in my career.
Speaker:Okay. So in the intro,
Speaker:you talk about the fact that you really want to understand
Speaker:what your clients are all about.
Speaker:For example,
Speaker:we know each other,
Speaker:but let's say I was walking in and I was unknown
Speaker:to you.
Speaker:How would you start working with me?
Speaker:The first thing that I do is I ask my clients
Speaker:to explain their business to me,
Speaker:not just what it is they do,
Speaker:but how it works.
Speaker:How do you make money?
Speaker:How do your payments come in?
Speaker:How do your payments go out to your suppliers?
Speaker:And that cashflow cycle is really important to figuring out what
Speaker:is best for the business,
Speaker:from a financial and from a lending standpoint,
Speaker:a lot of people always talk about the five C's of
Speaker:credit that the bankers look at.
Speaker:And for anybody who's not familiar,
Speaker:those items are cashflow,
Speaker:collateral, credit,
Speaker:and character capital and conditions.
Speaker:So by talking to my,
Speaker:I get a feel for all of these five things and
Speaker:then can help direct them into the best product for them.
Speaker:Okay. So you really sit so you don't have an expectation,
Speaker:right? When someone walks in that you're going to send them
Speaker:down a similar path,
Speaker:or you're just,
Speaker:you know,
Speaker:you're going to present to them,
Speaker:the loans that are available,
Speaker:you really try to understand their unique situations.
Speaker:And then you go from there.
Speaker:Definitely because there are a variety of financing options and ways
Speaker:to finance your business.
Speaker:And depending on where the business is in its cycle will
Speaker:help determine the best way to provide that financing.
Speaker:For example,
Speaker:if you're starting off and you're a brand new business,
Speaker:it's going to be difficult to do a traditional bank loan
Speaker:because a bank will typically underwrite to historical financials and a
Speaker:bank likes to look back a year or two and see
Speaker:historical trends for the business.
Speaker:There's other alternatives out there though that can mitigate against that,
Speaker:that have been used.
Speaker:We have SBA loans.
Speaker:You can go to a factoring company where they will actually
Speaker:finance your receivables.
Speaker:You can go to a micro lender,
Speaker:there's a variety of them out there that will start with
Speaker:smaller loans for newer businesses.
Speaker:One way that often is used when a business is just
Speaker:starting off is investors or incubators,
Speaker:friends, and family money.
Speaker:People who will invest for either a return on their investment
Speaker:or for equity in the business.
Speaker:A lot of times that's used from new business just because
Speaker:there's no financials for the bank to underwrite.
Speaker:Okay. So let me stop you there.
Speaker:Cause we've just covered a number of different things and I've
Speaker:got I'm furiously making notes over here because I have a
Speaker:lot of questions so that our listeners can really stay on
Speaker:the flow of this.
Speaker:Let's really back this up to the very beginning.
Speaker:Let's say somebody is considering a business and they don't really
Speaker:have any type of an investment yet.
Speaker:At what point could someone realistically be coming in and talking
Speaker:about a small business loan versus just bootstrapping that we hear
Speaker:a lot,
Speaker:you know,
Speaker:a lot of people will just use whatever money they have
Speaker:available and kind of build it as they can with money
Speaker:that's available.
Speaker:But what are your words of recommendation in terms of,
Speaker:if someone is starting out,
Speaker:do they come to you?
Speaker:Do they try to bootstrap first?
Speaker:Where is the tipping point of walking in the door?
Speaker:I always tell everybody that I meet who has a business
Speaker:or is thinking of starting a business.
Speaker:It's never too soon to come in and talk to a
Speaker:banker. The reason is even if the bank can't finance you
Speaker:initially, it's helpful to know what you're going to need to
Speaker:have at one point in time that the bank's gonna want
Speaker:to underwrite a bank loan.
Speaker:So you might just be starting off.
Speaker:But what I've seen oftentimes is people do bootstrap and they
Speaker:get their business going,
Speaker:but then they run out of money and they don't have
Speaker:enough to make it to that next level.
Speaker:And as long as they have some of those five items
Speaker:that I discussed before the C's of credit,
Speaker:Go through those in detail in a minute.
Speaker:But yeah,
Speaker:carry on with this first.
Speaker:Okay. So that can help you,
Speaker:but there's a number of things that the bank is going
Speaker:to want to see when they underwrite your loan.
Speaker:What I think is helpful is even if you're,
Speaker:you're not bank financial yet it's helpful to come in and
Speaker:see what your options are.
Speaker:For example,
Speaker:have customers who have come in looking for a loan,
Speaker:they were just starting their business.
Speaker:So I wasn't able to help them from that standpoint,
Speaker:however, with a business loan,
Speaker:I should say,
Speaker:however, we did alternate financing.
Speaker:So for example,
Speaker:you can get a home equity loan,
Speaker:use the equity in your house to help finance those costs.
Speaker:And you can either use that as your capital or your
Speaker:working capital for the business while you're getting things up and
Speaker:running. It's always helpful.
Speaker:I think for a business to understand that you might have
Speaker:the capital to get everything up and running,
Speaker:you're going to purchase the inventory.
Speaker:You're going to put the tenant improvements into your space.
Speaker:You're going to be ready to open the door on day
Speaker:one. Unfortunately though takes a while to make sales and then
Speaker:collect on those receivables that you may have for your business.
Speaker:So that's the cash flow that a business owner really needs
Speaker:to understand because there's always a timeframe between when you have
Speaker:to pay your supply heirs and when you're going to collect
Speaker:from your clients.
Speaker:So making sure that you have enough working capital to cover
Speaker:those needs is really important.
Speaker:Would there Ever be a time when someone would come in
Speaker:and I understand what you're saying,
Speaker:it's never too early because you also are then able to
Speaker:start developing a relationship with a banker.
Speaker:They know where you're going.
Speaker:Even if you're going to bootstrap for a little while and
Speaker:come back,
Speaker:I don't know,
Speaker:six months,
Speaker:a year later,
Speaker:there's been some type of a base established with somebody.
Speaker:Plus you're probably able to give them a lot of good
Speaker:recommendations and advice as they start proceeding.
Speaker:Exactly. In fact,
Speaker:a lot of times I feel like I'm more of a
Speaker:business counselor than a business banker because I've seen a lot
Speaker:of different things,
Speaker:the variety of different types of businesses and can help direct
Speaker:people to places that might be of benefit.
Speaker:Whether it's somebody that can help with marketing or somebody that
Speaker:can help with logos or whatever it is,
Speaker:whether I finance them or just come across them in the
Speaker:years that I've been in banking,
Speaker:I can help connect people,
Speaker:which is always very helpful.
Speaker:In addition,
Speaker:when you start your business,
Speaker:obviously you want to establish a bank account and,
Speaker:you know,
Speaker:depending on your bank,
Speaker:they may have some products that allow for some flexibility based
Speaker:on personal credit score that might give you some,
Speaker:for example,
Speaker:some overdraft protection while you're getting your business up and running.
Speaker:Are there any examples you can give us of someone who's
Speaker:come in early just to give us some ideas of people
Speaker:who you weren't able to help right away,
Speaker:but possibly could help in the future.
Speaker:What types of situations are those?
Speaker:I've had a few of them.
Speaker:Some of them are tech companies,
Speaker:people that wanted to create an online application or an online
Speaker:business. One of the things that the bank looks at is
Speaker:cashflow. So for a startup,
Speaker:the cashflow is never really there.
Speaker:So that's always difficult for us.
Speaker:But one of the other things that we look heavily at
Speaker:is the collateral.
Speaker:And it's hard for a bank to finance a company that
Speaker:doesn't have collateral such as heavy equipment or real estate,
Speaker:things like that.
Speaker:So Something that's really tangible versus intellectual property,
Speaker:Something tangible exactly.
Speaker:Typically when the collateral is any sort of service business tends
Speaker:to be light on collateral.
Speaker:So in cases like that,
Speaker:the bank focuses even more on the cashflow from the business.
Speaker:So if it's a newer business and they're just getting up
Speaker:and running,
Speaker:or they're just kind of breaking even,
Speaker:and not ready for that bank financing,
Speaker:you know,
Speaker:that's where I would maybe send them over to,
Speaker:for example,
Speaker:an incubator here in the Chicago land area,
Speaker:we have 1871,
Speaker:which is a tech incubator downtown.
Speaker:So it's a perfect place for them to go where you
Speaker:have investors who are interested in tech companies that are looking
Speaker:for new ideas to invest in.
Speaker:So sending them to various places like that.
Speaker:Another thing that can be done are SBA loans,
Speaker:where we can get a guarantee or a partial guarantee from
Speaker:the small business administration,
Speaker:for our loans in cases where the bank might have the
Speaker:cashflow, but not necessarily the collateral we need,
Speaker:or we don't have a full two years of financials,
Speaker:yet historical financials for that business.
Speaker:We can go through the S SBA to help get one
Speaker:of those guarantees,
Speaker:which mitigates the bank's risk on alone and makes it easier
Speaker:for us to provide financing to a newer business or a
Speaker:business that doesn't have a lot of collateral to lean back
Speaker:on. Perfect sense.
Speaker:And also what's becoming very clear is how important it is
Speaker:to go and really explain your unique situation because it's becoming
Speaker:more and more obvious to me that there are so many
Speaker:different avenues you can take.
Speaker:And that's why you're the professional.
Speaker:You connect them up with the appropriate things based on,
Speaker:you know,
Speaker:what's going on with them at the time.
Speaker:So the good news is Katie that most of our audience
Speaker:do have something tangible because gifters bakers,
Speaker:crafters, they're most likely selling some type of a product,
Speaker:whether it's physical product or to consumable like cupcakes or chocolate.
Speaker:So we're in a little bit of a different situation,
Speaker:but you keep talking about all these words with the CS.
Speaker:So I think this is a good place for us to
Speaker:go ahead and define those five CS.
Speaker:So let's go through each of them and then you know
Speaker:what the implications are and what's underneath all those CS.
Speaker:So the First one is cashflow and cash is always King
Speaker:cashflow for banking is King.
Speaker:And the reason is,
Speaker:is because the bank at the end of the day just
Speaker:wants to get repaid.
Speaker:So our goal is to lend dollars to help businesses grow
Speaker:and then get repaid.
Speaker:And typically the bank wants to see cashflow of 1.2
Speaker:times. And to explain that and simple numbers is we will
Speaker:look at the cashflow from the business,
Speaker:which is the net income plus interest expense plus depreciation and
Speaker:other non-cash items divided by the debt service.
Speaker:So the annual loan payments for the proposed debt.
Speaker:We want to see that that's covering at 1.2
Speaker:times times.
Speaker:So if you have 120,000
Speaker:in cashflow and your debt service is a hundred thousand a
Speaker:year, that's the number,
Speaker:that's the ratio that the bank measures it by.
Speaker:Sometimes people might be a little tighter.
Speaker:However, that's where talking to the banker and the banker understanding
Speaker:your business is key because what the new loan could be
Speaker:doing is helping you increase sales or reduce expenses.
Speaker:So there could be effects that that loan will have that
Speaker:will improve the cashflow over time.
Speaker:So that's why it's really important to have your banker understand
Speaker:your business and understand what that loan is for.
Speaker:So I see on shark tank,
Speaker:a lot of times when people are asking for money,
Speaker:they'll say,
Speaker:well, where are you going to use this money for?
Speaker:And if they say,
Speaker:well, I haven't taken a salary yet.
Speaker:You know,
Speaker:they're like,
Speaker:eh, wrong answer.
Speaker:Kind of like what you're saying is,
Speaker:you know,
Speaker:it's gotta be doing something to grow the business so that
Speaker:the bank will get its money back.
Speaker:Exactly. And two of the main structures for alone are either
Speaker:a line of credit or a term loan.
Speaker:And I always think that it's really important to pick the
Speaker:structure that's appropriate for your loan purpose.
Speaker:If you're both buying equipment that you're going to have for
Speaker:five years,
Speaker:that you need to create your product,
Speaker:then that would be a term loan.
Speaker:You want to borrow it all up front and pay it
Speaker:back over time.
Speaker:If you're looking for working capital where your receivables aren't coming
Speaker:in, as quickly as your payables need to go out and
Speaker:you need just some cashflow to help shore up some shortfalls
Speaker:from time,
Speaker:time, then a line of credit is more appropriate because what
Speaker:the bank will want to see on a line of credit
Speaker:is the bank wants to see that line go up and
Speaker:down. What I often see with smaller businesses is they'll get
Speaker:a line of credit over a term loan because they like
Speaker:the fact that the monthly payments are interest only,
Speaker:and then they borrow it,
Speaker:but then they never pay it back.
Speaker:And the issue with that,
Speaker:although it's helpful for the cashflow,
Speaker:cause they're not paying the principal back.
Speaker:The issue is the next time they do need to purchase
Speaker:an, a piece of equipment or some other long-term asset.
Speaker:Then they don't necessarily have the borrowing capacity because,
Speaker:and they're not using the line of credit in the appropriate
Speaker:manner. Yeah,
Speaker:it makes total sense to me.
Speaker:Got it.
Speaker:All right.
Speaker:Let's move on to the second C.
Speaker:So the second C is collateral And this can really be
Speaker:a variety of things for a small business.
Speaker:This could be,
Speaker:you know,
Speaker:marketable securities that you have from a previous life or that
Speaker:you've accumulated over time that you don't want to cash in
Speaker:because there would be tax liabilities.
Speaker:And so you might want to use that as your collateral.
Speaker:This is often used on a newer business that doesn't have
Speaker:historical cashflow.
Speaker:It's a liquid asset that the bank looks favorably on because
Speaker:it is a liquid dateable asset.
Speaker:Something that could be sold and liquidated to repay the debt
Speaker:in a short timeframe versus something like real estate,
Speaker:where you could use that.
Speaker:My example before of you could use a home equity loan
Speaker:to do the financing.
Speaker:If you have equity in your house,
Speaker:or if your business is in a commercial property,
Speaker:sometimes you might want to purchase that property that you're occupying
Speaker:and start paying rent to yourself.
Speaker:So real estate is often use a lot of times,
Speaker:it's just a blanket lien on business assets.
Speaker:So in a case like that,
Speaker:the bank will take a blanket lien on the business's assets.
Speaker:The bank will file a UCC uniform commercial code filing on
Speaker:the business at the state level.
Speaker:And what that allows the business to know is that they
Speaker:have the ability to capture the cash flow that's coming in
Speaker:if needed.
Speaker:So that's often used if there's a cashflow dependent loan,
Speaker:it also covers all equipment that the business owns excluding any
Speaker:specific leased equipment that the business may have.
Speaker:Cause another way to do financing for your business is instead
Speaker:of going to the bank to purchase a piece of equipment,
Speaker:you can go to a leasing company and lease the equipment.
Speaker:There's oftentimes a lease to own where there's a buyout of
Speaker:a dollar at the end of the five-year lease.
Speaker:It's another way of financing that equipment instead of going through
Speaker:the bank.
Speaker:Okay. All right,
Speaker:perfect. So we get a feel for collateral.
Speaker:Let's move on to number three.
Speaker:So three is credit and character.
Speaker:That's really what is this person Bringing to the table with
Speaker:their business?
Speaker:And with any loan,
Speaker:a bank whomever's financing,
Speaker:you is probably going to pull a credit report on the
Speaker:individual owner or owners of the business.
Speaker:And if you show a history of not paying your bills
Speaker:on time or having late payments or having charge offs on
Speaker:your credit report,
Speaker:it doesn't tell a good story Because it kind of lays
Speaker:the groundwork of how you're going to be handled and things
Speaker:moving forward.
Speaker:Exactly, Exactly.
Speaker:So what you can do,
Speaker:for example,
Speaker:at my bank,
Speaker:we have products that we can give people based on just
Speaker:credit score.
Speaker:So we'll do minimal underwriting for the business on some smaller
Speaker:loans, but as long as they have a good credit history
Speaker:where they have a history of repaying their bills on a
Speaker:regular basis with no late payments that can help you get
Speaker:a loan through the bank or whomever.
Speaker:Perfect. So if we have any listeners right now who are
Speaker:listening to this show,
Speaker:because you're thinking about starting a business at some point,
Speaker:make sure you're paying your bills.
Speaker:I mean,
Speaker:there's a lot you can do right now to set yourself
Speaker:up in a good position,
Speaker:if ever you're going to end up going for a business
Speaker:loan. So one of those is,
Speaker:let's say you're just out of school.
Speaker:You don't really have a lot of debt yet,
Speaker:but car payments,
Speaker:you know,
Speaker:rent, you know,
Speaker:mortgage payments,
Speaker:whatever you're doing,
Speaker:just make sure you're paying on time because that can really
Speaker:help you,
Speaker:not just here,
Speaker:but this is the point we're talking about here,
Speaker:but it'll help you in the future.
Speaker:So that's something that you can do right now to take
Speaker:action, even if you're not starting your company right away.
Speaker:And I also recommend you can pull a free credit report
Speaker:from each credit Bureau once a year,
Speaker:if you go to free credit report.com
Speaker: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
Speaker: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
Speaker:the game.
Speaker:So to say,
Speaker:so we want to make sure somebody has,
Speaker:you know,
Speaker:that they're invested,
Speaker:that they're invested in it,
Speaker: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,
Speaker:the business will be our borrower,
Speaker:but any owner of the business,
Speaker: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
Speaker: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
Speaker:personally support any cashflow shortfalls.
Speaker:Okay? So that could be your personal,
Speaker: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
Speaker:that all of the owners,
Speaker:let's say you have a business and there's five owners of
Speaker:20% ownership.
Speaker:We want to make sure that all of the owners are
Speaker:behind the business and supportive of the business and we'll help
Speaker:support if there's any cashflow,
Speaker: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.
Speaker:Five is just conditions.
Speaker:If you think about it a few years ago,
Speaker: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,
Speaker: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
Speaker: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,
Speaker: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,
Speaker:including profit and loss statement or income statement,
Speaker:a balance sheet,
Speaker:a current accounts receivable,
Speaker: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
Speaker: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.
Speaker:We take the personal income that the guarantors make.
Speaker:And then we look at the debt,
Speaker:the business and the personal debt to make sure that it's
Speaker:covering there's enough income,
Speaker:enough cash sources to service those cash needs.
Speaker:Got it.
Speaker:So as you're talking about all of this,
Speaker:the first thing that comes to mind for me is if
Speaker: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,
Speaker: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,
Speaker:It won't be as credible with real estate loans.
Speaker:We sometimes see that just because there's not daily transactions you're
Speaker: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,
Speaker:I'm going to circle into something a little bit different again,
Speaker:we're going back to the candle mentality here.
Speaker:Are you ready?
Speaker:Yes. I'm going to invite you to dare to dream game.
Speaker:I'd like to present you with a virtual gift.
Speaker:It's a magical box containing unlimited possibilities for your future.
Speaker:This is your dream or your goal of almost unreachable Heights
Speaker:that you would wish to obtain.
Speaker:Please accept this gift and open it in our presence.
Speaker:What is inside your box?
Speaker:This is a tough one for me.
Speaker:And I can think of a variety of things,
Speaker:but I'm actually going to say,
Speaker:because I think your listeners will appreciate this.
Speaker:I wish I had artistic ability as a banker.
Speaker:I am very right brained and I love arts and Craftsy
Speaker:things and making things,
Speaker:but I need to follow.
Speaker:I can paint,
Speaker:but it needs to be a paint by number I can
Speaker:bake, but I have to have a recipe.
Speaker:I would love to have an artistic bone in my body
Speaker:that I could pass on and enjoy The good thing about
Speaker:being an artist is whatever you create is beautiful because everything
Speaker:is unique,
Speaker:right? So you can think of it that way too.
Speaker:Definitely. It's easier for you to go from numbers to artists
Speaker:street, then creatives to go from that to numbers.
Speaker:Because when you were talking about how you got into the
Speaker:finance thing and how you like numbers and all of that.
Speaker:Oh, scary.
Speaker:That's why we have you to count on Katie.
Speaker:I will rely on you and your listeners for my artistic
Speaker:decor because it won't come from me.
Speaker:All right.
Speaker:So if any of our listeners are right in the area
Speaker:and listening and would like to come in and talk with
Speaker:you specifically,
Speaker:how could they get in touch with you?
Speaker:So I can be reached at my email address,
Speaker:which is K wizard world.
Speaker:K w I S as in Sam,
Speaker:w a L D as in dog,
Speaker:at Highland park bank.com.
Speaker:We are a Wintrust community bank.
Speaker:I'm also out on LinkedIn,
Speaker:under Catherine Winslow,
Speaker:And we're going to have a show notes page as we
Speaker:always do.
Speaker:So you can always click over there and get more information.
Speaker:You'll see a little bit more of a complete bio on
Speaker:Katie and then all of her contact information as well.
Speaker:Definitely. Thank you so so much.
Speaker:I think you've taken what,
Speaker:for many of us,
Speaker:just by nature of what we do,
Speaker:we've taken a very confusing and scary topic of all the
Speaker:financing and broken it down for us.
Speaker:So we understand it much better.
Speaker:And I think the biggest takeaway for all of us is
Speaker:there is nothing wrong with going in and just having a
Speaker:conversation with your local lender,
Speaker:you might really recognize some new opportunities that you never knew
Speaker:existed. So thank you for enlightening us with all of that.
Speaker:And I really like when you talk about back to your
Speaker:candle quote,
Speaker:taking action,
Speaker:you know,
Speaker:not just watching,
Speaker:but going ahead and doing,
Speaker:and there's lots of things that we can do on this
Speaker:financial end that I think we just don't think about because
Speaker:we don't want to be thinking about them.
Speaker:So you've helped us with that so much as well.
Speaker:So thank you very,
Speaker:very much for joining me on the show,
Speaker:sharing your wisdom with our listeners and may your candle always
Speaker:burn bright?
Speaker:Where are you in your business building journey,
Speaker:whether you're just starting out or already running a business,
Speaker:and you want to know your setup for success.
Speaker:Find out by taking the gift biz quiz,
Speaker:access the quiz from your computer at
gift biz quiz or from your phone by texting gift biz
Speaker:quiz to four four two,
Speaker:two, two.
Speaker:Thanks for listening and be sure to join us for the
Speaker:next episode.
Speaker:Today's show is sponsored by the ribbon print company,
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