WEBVTT

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Welcome to week eight of our GVR Masterclass and today we have a special presentation.

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Our sponsors and partners from Ally Bank are bringing us a presentation around alternative

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ways to access capital.

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As we talked about when we first kicked off with GVR about the need to discuss venture,

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but also how can we provide you all information about alternative ways of accessing capital

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as a small business owner.

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So I am truly excited about this presentation.

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Ally is an amazing partner here at the Fearless Fund and we are happy to have them join us.

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I'm going to go ahead and bring Antonio up so he can go ahead and get into the presentation

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and introduce himself.

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Welcome Antonio.

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Thank you very much Siobhan.

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It's a pleasure to be here and thank you for the invitation to participate in this

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wonderful program.

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On behalf of Ally Bank, we congratulate all the participants for being a part of this

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inaugural cohort.

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Ally is certainly very proud to be a part of this venture, no pun intended, but I also

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want to congratulate and thank the folks over at the Fearless Fund and the Fearless Foundation

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and especially you Siobhan for being so kind and allowing us to be a part of this wonderful

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program.

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And I hope that the presentation that we have for you all today is of high value to you

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all.

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We're kind of going to take it a different route than what you all have been hearing

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so far and I hope that it still provides some level of value in whatever endeavor you have

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your own in your entrepreneurship world.

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So a little bit about me, just a two second plug here.

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My name is Antonio Pisano.

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I work for the Department of the Bank called Community Reinvestment Act or CRA as it's

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better known, the acronym.

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CRA has been used for many, many years on behalf of banks as a way to give back to the

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community in different ways and I work for that side of the bank where we reinvest or

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help reinvest back into communities in which we are created by way of loans and investments

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and even grants.

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So, you know, our work with the Freelance Fund and the Freelance Foundation is just

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a small example.

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So to bring up the PowerPoint slide, I'd appreciate that.

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So as Siobhan mentioned, today we're going to take you kind of on a alternate route with

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respect to, you know, business financial management principles and access to capital.

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For purposes of this workshop for today or this class today, we're going to focus on

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the latter a little more on the access to capital piece and really more on the alternative

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piece as Siobhan mentioned.

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So far, the primary focus through this program has been, hey, how do we get my business to

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be venture ready?

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How do I be, how do I get, you know, a position or to be an attractive business that a fund

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may want to invest in, right?

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Well, we're going to take you a different path and talk about not only some other alternative

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ways of accessing capital and different forms of capital, but also how to best prepare for

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them.

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So in many ways, it's going to take you down the road map of debt, you know, and making

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the comparison, you know, to some venture capital.

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So with that, can we get the next slide or, oh, I have control.

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Look at that.

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A real quick disclaimer.

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The materials provided in this presentation and any comments or information provided by

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the presenter are for educational purposes only, and nothing conveyed or provided should

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be considered legal, accounting, or tax advice.

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Please contact your attorney, accountant, or tax professional with any specific questions

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you may have related to the information provided that are legal, accounting, or tax in nature.

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Now that we've got the boring stuff out of the way, why don't we get started?

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We're not going to cover everything in this agenda.

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This is typically about an hour and a half to two-hour presentation that we like to do,

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but we are going to focus on about two-thirds of it, which we felt was the more important

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areas that we wanted to cover.

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And some of those include some of the basic differences between debt and equity.

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By now, you've heard about equity and how to prepare for that.

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Today, we're going to focus more a little bit on the debt side.

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We're going to talk about how determining the use of funds and how that should impact

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the type of financing or capital you may need.

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And within that, we're going to talk about short-term versus long-term capital needs

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and mirror them against short-term and long-term goals.

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We're going to talk about the C's of credit.

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And in this example, we're going to talk about the five C's.

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of credit and what those mean. And then we're going to end it with a couple of things that

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we feel are also important to capture, and those are some best practices in preparing to be

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loan ready. So a lot of the theme in this program has been about getting venture ready,

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but we're going to talk about what it means to be loan ready. And you're going to find there's

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a lot of similarities in there, but there's also some real distinct parts, right, that we will

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dive into a little bit. We're going to talk a little bit about, not too much, but about

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the common types of loans and lenders out there when it comes to debt type of capital. And given

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the environment that we're coming out of with PPP loans and stuff like that, I'm sure there'll be a

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lot of questions around that as well. And then we're going to end it with going over a couple

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of the more basic or key financial ratios. I promise you we won't go too deep into the math

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on it, but I have found in my years that it's important for business owners to know what some

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of these ratios are, and more importantly, what they mean. So we're going to touch on that. And

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then we're going to end there, but in this presentation, there are some appendices that

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go deeper into the financial management side of things as well. And if there's time, I can

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certainly touch on some of those. But for now, I think we have enough of an agenda for the next

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hour. So that said, let's proceed. So high level, differences between debt or loans and equity. So

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when we say debt, we're talking about loans, right, lending, and how it compares to equity.

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So as you may have heard so far through the first seven or eight weeks of this cohort, venture debt

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or venture, I'm sorry, venture capital in the form of equity really focuses on growth, right? How

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quickly can you grow sales, you know, and how much will that cost you, right? So when folks are

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seeking to secure venture capital in the form of equity, typically it's very top line oriented,

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right? Where are my sales now? And where can an infusion of capital of equity, where can that

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take me in terms of top line sales or top line revenue, right? And when we talk about debt,

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just to compare it, it's really focused more on repayment, right? It's focused more on, hey,

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I need additional inventory, or hey, I need to hire a few more people, right? So going back to

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venture capital, the P&L more often than not, is probably the most important financial statement

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that you'll produce, right? It's that top line revenue number. Where am I in my sales now? Where

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can an infusion of capital take me, right? Venture capital is usually best used for increasing sales

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or enhancing organizational capacity. It's also, you know, a permanent sale of ownership of your

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business, and therefore it can be viewed as much more expensive than debt in the long run, right?

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It's not apples to apples, it's apples to oranges, so we can't really make a straight comparison

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on the two. However, it's two different organizational structures that yield two

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different types of returns, but that also costs us in two very different ways, right? When we give

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up ownership, you know, typically it's in perpetuity unless you buy somebody out, you know,

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and again, it's usually a function primarily of sales, right? Growing sales, you know, and at the

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same time growing your balance. Debt, on the other hand, or lending, really focuses on repayment,

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right? You know, you walk in, you know, for those of you that have the opportunity to walk into a

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lender, whether it's a bank or some other type of lender, you know, one of the initial questions

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or initial things that that lender is trying to determine is your ability to repay that debt,

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right? And usually the first thing they go to is also the P&L, the income statement, right?

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And they're trying to determine, well, how much debt can this business support in terms of

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repayment ability? So it's very different versus venture equity, you know, where it's a balance

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sheet, right? You're giving up ownership and repayment is going to be a function of how much

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equity you build up over time in terms of that investor getting their money back, right?

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Going back to debt lending, the balance sheet is a financial statement that matters most.

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This is key. And sometimes as business owners, we don't realize that the balance sheet is actually

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that much more important to a lender than the P&L. And I say that because while repayment

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is a function of the P&L, being able to see, okay, you have X amount of net profit or X amount

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of EBITDA, and I'm going to use that to determine repayment. The balance sheet really tells us a

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lot more about a business. It tells us your overall health, right? It's possible that you can have a

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profitable business, but your balance sheet may not look as strong because maybe you have,

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you know, too much debt, or you have debt that may exceed your assets, for example, right? And

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therefore, net worth is not as strong. Debt is best used to match the cash cycle of the business.

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For example, inventory, accounts receivable financing, or contrary, or on the opposite side,

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fixed assets, right? That can be used as collateral or other fixed assets, which we'll

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get into when we talk about the use of proceeds. Debt is usually a pledge against your business,

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right? That can be used as repayment, right? So at the very minimum, you know, your business

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may be the collateral for whatever loan you go out and obtain or try to obtain, right? The good

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part about that is that you can either pay it off over time, right? Say, you know, it has a term

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associated to it. So if it's a three-year, a five-year, or a 10-year loan, as soon as you

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pay that off, it goes away. And whatever collateral that was attached to that

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is freed up as well, right? So that's a difference versus equity, right?

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And we leave a note here at the end saying, think about what type of capital you need

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based on what you're using it for. So what we need capital for should be one of the, if not

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the primary driver in determining what type of capital we're seeking, whether it's equity or

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whether it's a debt or a loan, right? So determining use of funds and the type of financing required.

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You know, we talk about keeping it simple, right? I come from the lending world. You know,

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I come from doing about 15, 16 years of commercial and small business lending,

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you know, and typically it wasn't uncommon for me to see throughout those 15, 16 years,

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folks walking in and saying, hey, I need a business loan. First question is, well,

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how much do you need? And the response we get pretty frequently is, well, how much can I get?

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Or what's the max, right? And that's usually a good indicator to that lender that's saying, hey,

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this person probably hasn't done their homework just yet, or this entrepreneur maybe hasn't fully

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flushed out a business plan yet to determine not only how much they need to get the business off

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the ground or to grow the business or take it to the next level, but also what they need it for,

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right? So determining the use of funds will usually help route you in the right way in

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terms of what type of capital or what type of financing you need. So keeping it simple.

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And the way I like to talk about this is determine whether your capital needs are

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short-term needs or long-term needs. So here's a couple of examples of short-term needs,

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financing, long operating or cash cycles, or funding seasonal inventory that you need to build

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up. Most common businesses that use this type of short, that have these types of short-term needs

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are typically business to business businesses or B2B businesses, right? Where you are providing

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a product or a service to another business, and maybe you're extending repayment terms

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to that business. So you might be extending net 15, net 30, net 45 days repayment terms.

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But in the meantime, you got bills to pay, right? You got to pay for the widgets, right? Or you got

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to pay to put the lights on or the rent or payroll, right? So that's an example of a short-term need.

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In this case, in a short-term need, typically the kind of debt or loan you'll need is most

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likely a line of credit, right? Something that you can access in very much the same way as a

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credit card, for example, something that you can access as you need it. And then as you get repaid

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for those invoices or whatever it might be, you pay it down or even pay it off, right?

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The second bullet point under this you'll see is that it must be used appropriately.

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Oftentimes, business lines of credit need to be not only repaid frequently, but they should be

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paid down to zero at least once annually. That's an important factor that oftentimes

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businesses may not fully understand or the banks themselves don't do a good job of articulating

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at origination, which then can lead to problems down the line, right? A line of credit is intended

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to be used as that, as a line of credit where you use it, pay it down, use it, pay it down,

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right? Short-term needs. Contrary to that are long-term capital needs. Long-term capital needs

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are typically best for one-time uses, right? So most non-recurring one-time capital expenditures

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such as the purchase of equipment or construction buildup, right? Those kind of examples are

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typically a one-time in nature and typically is something you want to finance with a term loan,

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right? You want to finance it with a term loan, right?

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When I go out and purchase a piece of equipment,

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the piece of equipment has a usable life

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of five years or 10 years, and you

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get a loan with a term that matches that lifespan.

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So that's an example of a long-term need or something

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to that effect.

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So in that example, a term loan is typically the best option.

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Or let's say you moved into your facility,

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whether you purchased it or you're renting it

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and you want to do some improvements.

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You want to do a build-out, maybe

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you want to knock down a wall or put up some walls,

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maybe paint, what have you, some minimum repairs.

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Those are examples of one-time needs,

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and a term loan is most appropriate to that.

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So again, keeping it simple and determining your use of funds,

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even before you determine how much you need,

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because your use of funds may dictate, at the end,

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how much you need in the form of a loan or debt.

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So after we've determined that, another important factor

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that we should always talk about when talking about securing

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a loan are the C's of credit.

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Depending on how long you all have had your business,

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you may have come across something similar in the past

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where somebody may have talked about the three C's

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or the five C's or even the seven C's of credit.

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Well, I met in the middle and I kept it at five, right?

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But I feel it are five that are very important

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and it's always very helpful for us as the consumer,

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or in this case, the business owner,

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to understand what these C's of credit are,

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what are, you know, how do lenders evaluate them,

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you know, and what are they really looking for, right?

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So the five C's of credit, as I've summarized them,

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are credit, capacity, collateral,

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capital, and conditions.

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And we'll dive right into them now.

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So the first C, and it's the first C,

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by no secret, is credit.

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I like to focus on this one first

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because more often than not,

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it tends to be the most popular of the five C's.

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People are always curious about

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not only how their own personal credit score

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may impact their ability to borrow money,

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but also about business credit, right?

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We hear, you know, we hear people talking

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about business credit and what does that mean

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and how does that get evaluated?

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So we'll focus on the personal credit first, real quick.

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So credit, as we know it, is the historical illustration

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of one's ability and or willingness to repay, right?

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You'll notice we have ability and or willingness to repay

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because the willingness part

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sometimes is a character feature, right?

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Lenders may evaluate credit by saying,

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man, this individual makes 180 grand a year,

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but man, their credit is always a little bit sloppy

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here and there.

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And they may associate that with a credit issue.

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Oh, I'm sorry, a character issue, right?

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So we talk about ability and willingness

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to repay oftentimes, right?

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Lenders will assess the personal credit,

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typically of any individual or entity

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with 20% or greater ownership.

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This is not true all the time,

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but it's true more often than not,

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where if there's a business

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and there's more than one individual

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owning 20% or more of the business,

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more likely than not,

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all those individuals that have 20% or more ownership

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will be asked to provide a personal guarantee,

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as well as their credit and their financial wherewithal

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is gonna be evaluated as part of the application

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on a case-by-case basis.

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And depending on what state you're in,

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spouses may have to serve as guarantors.

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This is not too common nowadays,

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but back in the day, it was a little more common

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and it really relies upon what state you're in

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and what the lender will require.

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And if they're using household income

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as part of their evaluation, right?

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Lenders may also assess the personal credit of co-signers.

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So if you're a younger business

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who can benefit from the support of a co-signer,

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much like in the mortgage world or auto lending world,

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they may also be subject to having their credit scores checked.

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As most of us, hopefully by now know,

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credit scores are determined by a bunch of different factors.

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The three or four most common

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having to do with personal history,

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personal payment history, obviously,

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00:19:29.880 --> 00:19:32.640
percentage of revolving debt available.

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Many of you have probably heard of the 30% rule, right?

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It's kind of like an unwritten rule

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where depending on how much you have available to you

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in the form of credit cards or lines of credits,

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typically try and owe no more than 30% or less

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on a continual basis.

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That's typically a good rule of thumb to follow.

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Length of credit history is also very important.

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I always say that when it comes to credit,

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your best friend is time.

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Because, you know, the more history you have,

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much like our driving records, the better, right?

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Or if we've had some challenges in the past with our credit,

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time is also our best friend in terms of,

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in terms of, you know, getting it back together

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and reestablishing it or improving it.

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Types of credit is very important.

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In the previous slide, we talked about installment debt,

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like a term loan, versus revolving debt,

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like a landline loan, for example.

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And we focused it around the use

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and what type of loan we would need.

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But when it comes to personal credit history,

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that's also very, very important

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because the credit bureaus

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factor in the type of debt we have.

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Like if we have too much revolving debt,

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like credit card debt versus installment debt,

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that can typically impact our credit scores

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one way or the other,

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00:20:55.200 --> 00:20:57.280
typically towards the negative side

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00:20:57.320 --> 00:21:00.080
if we have too much revolving debt versus installment, right?

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00:21:00.080 --> 00:21:03.080
They typically look more favorably at installment debt,

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like term loans, like a mortgage or an auto loan

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or a student loan, stuff like that,

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or a personal loan that we got

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that has a set term and a set payment, right?

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Stuff like that.

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And then just to highlight

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the three different credit bureaus out there

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are Experian, TransUnion, and Equifax.

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That also applies to business credit as well.

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Of the three, the oldest bureau out there is Experian.

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So typically that one out of the three

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has the most of the information than the other two,

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typically more information.

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The Experian used to be the old TRW back in the day,

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25 plus years ago.

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So, and in terms of business credit,

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you'll notice I don't focus too much on it in this slide

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or really at all,

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00:21:48.880 --> 00:21:52.480
mainly because while it is something that's real,

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for example, a Dunn and Bradstreet report or DMV report,

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00:21:56.960 --> 00:22:01.680
typically, and if you have a DMV report, yes, it's helpful,

324
00:22:01.680 --> 00:22:05.840
but unfortunately, lenders don't put too much weight on that

325
00:22:05.840 --> 00:22:08.240
because they tend to be unreliable

326
00:22:08.240 --> 00:22:13.240
or not really a true indication of all the historical debt

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00:22:13.960 --> 00:22:15.680
that a business may have had.

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00:22:15.680 --> 00:22:18.440
So if you have one available,

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part of the due diligence that a bank does,

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they'll certainly pull it,

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but not a requirement

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and certainly not something that carries too much weight,

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believe it or not,

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because at the end of the day, as business owners,

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more often than not,

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00:22:30.240 --> 00:22:33.360
you will be asked to provide a personal guarantee

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on any loan you take out,

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unless you become a public entity,

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at which point, you know, it's a different ballgame.

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So anyway, C's of credit, first C being credit,

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and probably the one that, again,

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is probably the most important.

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The next C, and again,

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we're talking about debt and lending, right?

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These C's, for the most part,

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probably don't matter as much or at all

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when we talk about venture capital in the form of equity,

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00:22:58.720 --> 00:23:00.960
but when we talk about lending, they certainly matter.

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So the second C that I prioritize is capacity.

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00:23:04.760 --> 00:23:06.680
And this, very simply put,

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00:23:06.680 --> 00:23:10.320
is the ability of the business to repay the loan

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that you're looking to get.

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That's simply all it means.

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00:23:13.680 --> 00:23:17.640
And most, you know, and the most important

355
00:23:17.640 --> 00:23:21.160
or primary source of repayment is the income of a business.

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So profit on recent tax returns or interim financials,

357
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or if you're a younger business or a new business

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or a business that's looking to finance growth,

359
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like a second location,

360
00:23:32.640 --> 00:23:35.600
then the projected income of a business

361
00:23:35.600 --> 00:23:39.120
will also play a key role in determining

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your ability to repay or your capacity, right?

363
00:23:42.880 --> 00:23:45.880
Most lenders will also take into consideration

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00:23:45.880 --> 00:23:47.720
personal income,

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more specifically, personal discretionary income.

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So what that means is that they're probably gonna ask

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for your personal tax returns also.

368
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And in the event that there is income still available

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after all your personal obligations are repaid,

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00:24:03.440 --> 00:24:05.040
more often than not,

371
00:24:05.040 --> 00:24:09.720
that lender will use that personal discretionary income

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as part of what they call the global cash flow.

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So this is a plus,

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especially if there's other household income available

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to help pay for some of the personal bills.

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00:24:20.080 --> 00:24:22.920
So this more often than not can help,

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00:24:24.440 --> 00:24:28.240
can help the lender determine strong repayment ability,

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00:24:28.240 --> 00:24:31.960
but also can help the business secure debt

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00:24:31.960 --> 00:24:33.600
or secure a loan.

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And at the very bottom,

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you'll see a note that says,

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00:24:36.120 --> 00:24:39.840
most lenders require a minimum debt service ratio

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00:24:39.840 --> 00:24:42.280
of 1.25 to one.

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That's a real number.

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00:24:43.400 --> 00:24:47.680
So industry-wide, most lenders, if not all,

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00:24:47.680 --> 00:24:52.680
typically use a minimum debt service ratio of 1.25 to one.

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00:24:53.280 --> 00:24:54.840
We're gonna talk a little bit about ratios

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towards the very end,

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00:24:56.160 --> 00:24:58.480
but don't let ratios or,

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00:25:00.000 --> 00:25:05.340
decimal points, you know, kind of steer us away because it's math. And all that really

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00:25:05.340 --> 00:25:11.900
means is that for every dollar in loan repayment, you're going to have or seeking to have a

392
00:25:11.900 --> 00:25:16.940
lender wants to see that at minimum, there's a $1.25 coming in, in the form of available

393
00:25:16.940 --> 00:25:22.300
cash flow, like net income, you know, and global cash flows. So we'll talk about more

394
00:25:22.300 --> 00:25:27.700
ratios towards the end, but that's really all that means. And again, for a lender, besides

395
00:25:27.700 --> 00:25:33.160
the credit repayment ability is key, right? We've, we've all heard of the term cash is

396
00:25:33.160 --> 00:25:39.040
King. Well, when we try and get debt or a loan, repayment ability is the key part for

397
00:25:39.040 --> 00:25:44.960
any lender. And this minimum debt service ratio requirement is, is that magic number,

398
00:25:44.960 --> 00:25:52.000
that magic minimum number that'll get us over the hump. Third C collateral, not everybody's

399
00:25:52.000 --> 00:25:56.840
favorite C, especially when we talk about loans, because you know, more often than not,

400
00:25:56.980 --> 00:26:01.180
most folks, especially younger businesses may not have that much collateral available,

401
00:26:01.180 --> 00:26:07.380
right? So collateral, what is it? Collateral, tangible assets, securing the loan that can

402
00:26:07.380 --> 00:26:11.300
be sold or liquidated by the lender in the event that the business is unable to repay

403
00:26:11.300 --> 00:26:17.020
the loan. Much in the same way as a home is collateral for a mortgage or a car is collateral

404
00:26:17.020 --> 00:26:23.220
for an auto loan. You know, typically at the bare minimum, a business and all of its assets

405
00:26:23.280 --> 00:26:30.080
will typically be the first form of collateral for any type of debt or loan for the business,

406
00:26:30.080 --> 00:26:36.640
right? So you should be prepared to pledge any and all available business assets to secure

407
00:26:36.640 --> 00:26:41.520
a business loan. I purposely skipped over the personal assets that I want to talk about

408
00:26:41.520 --> 00:26:50.320
separately. Yes. In the lending world, it is very common for folks to also pledge personal

409
00:26:50.320 --> 00:26:56.940
collateral, you know? So this can be in the form of, you know, personal assets, such as like a

410
00:26:56.940 --> 00:27:02.140
vehicle, like if you're asking for a small micro loan, for example, and you go to a lender that

411
00:27:02.140 --> 00:27:08.300
may take that type of collateral, you may be asked to supply that. Or on the larger scale,

412
00:27:08.300 --> 00:27:13.340
if you're a homeowner or have, you know, real estate assets available to you, and you go out

413
00:27:13.340 --> 00:27:19.820
and try and get, for example, an SBA loan, it's sometimes likely that a lender may come back to

414
00:27:19.880 --> 00:27:25.000
you and say, hey, you got to put up best available collateral. And they may determine that your best

415
00:27:25.000 --> 00:27:31.160
available collateral may be the equity in your home because you have a service oriented business,

416
00:27:31.160 --> 00:27:36.840
for example, that may not have sufficient or really many, you know, much in the form of assets,

417
00:27:36.840 --> 00:27:43.240
business assets to secure the loan. So it's very likely and common to do that. It's not a hardline

418
00:27:43.240 --> 00:27:50.120
requirement, but it's certainly something very common because we'll talk about SBA a little bit

419
00:27:50.120 --> 00:27:56.920
towards the end. We'll just mention it, but there's programs out there like the SBA 7A Guarantee

420
00:27:56.920 --> 00:28:02.680
Program that, for example, is made available to lenders when they come across transactions that

421
00:28:02.680 --> 00:28:07.080
may not have enough collateral. And we'll talk about that more later, but here for purposes of

422
00:28:07.080 --> 00:28:14.760
the seas of credit, collateral is that third C we talk about. Capital, very simply put, capital

423
00:28:15.720 --> 00:28:21.720
is, depending on the lender, is typically how much capital we've invested into the business

424
00:28:21.720 --> 00:28:28.040
or we will be injecting into the business. So the two most common scenarios are in a startup

425
00:28:28.040 --> 00:28:33.800
situation. If your business is still within that startup stage where you're pre-revenue or you're

426
00:28:33.800 --> 00:28:38.360
starting out right now, or let's say you've been operating, but you've been operating for less than

427
00:28:38.360 --> 00:28:43.320
two or three years, which is technically a definition of a startup still, typically the

428
00:28:43.320 --> 00:28:50.280
capital portion of the seas is how much capital you've injected into the business to help get it

429
00:28:50.280 --> 00:28:56.360
started, right? So for startups, typically most programs, especially government sponsored programs

430
00:28:56.360 --> 00:29:04.120
like the SBA, for example, will typically ask for between 10 and 30% cash injection or capital

431
00:29:04.120 --> 00:29:10.360
into the business as part of their requirement, right? To acquire a business, typically they'll

432
00:29:10.360 --> 00:29:16.360
want to see minimum 20% injection for something like that. And you see the comment there as low

433
00:29:16.360 --> 00:29:23.080
as 10% for SBA loans. So the SBA really is there to help get these types of transactions off the

434
00:29:23.080 --> 00:29:28.680
ground or funded in the event that there's either a collateral shortfall or a capital shortfall,

435
00:29:29.320 --> 00:29:36.840
okay? And the last C, which in the past I used to say is probably the least important of the Cs,

436
00:29:36.840 --> 00:29:43.720
but given our current environment with respect to COVID and the economic impact that has had

437
00:29:44.280 --> 00:29:49.080
over the last couple of years, not to mention other economic conditions like the rising interest

438
00:29:49.080 --> 00:29:53.320
rate environment that we're currently facing and stuff like that, this has probably become

439
00:29:53.320 --> 00:29:59.880
that much more important, right? So conditions, and these are just simply economic conditions that

440
00:30:00.000 --> 00:30:05.600
may or may not impact your business or the industry. So, I like mentioning this simply

441
00:30:05.600 --> 00:30:12.160
because just know that when it comes to lending or debt, and I'm sure in very much the same way

442
00:30:12.160 --> 00:30:18.080
as equity would work, conditions are very important because, you know, if your business

443
00:30:19.200 --> 00:30:26.000
is positioned, you know, and it doesn't really align with current conditions or the current

444
00:30:26.000 --> 00:30:32.080
economy or what have you, you know, then you can, you bet you that a lender is going to take that

445
00:30:32.080 --> 00:30:37.520
into consideration. So, this is the last of the five C's, and I expect to have maybe a couple

446
00:30:37.520 --> 00:30:45.200
of questions on all five. Typically, these are five areas that a lender or an average commercial

447
00:30:45.200 --> 00:30:52.560
bank will typically want to evaluate as part of any loan application, okay? And I'm sure there's

448
00:30:52.560 --> 00:30:58.240
a lot of overlap with respect to the equity side or the venture capital side as well.

449
00:30:58.960 --> 00:31:04.160
So, now, in terms of best practices and getting, quote, unquote, loan ready,

450
00:31:05.600 --> 00:31:11.280
here are some kind of best questions. I'm sorry, not best questions, but best practice type

451
00:31:11.280 --> 00:31:17.520
questions that you can prepare for, and I teased a couple of them earlier, right? So, right off

452
00:31:17.520 --> 00:31:24.080
the bat, what loan amount are you requesting? I'm sure this is probably the same type of question,

453
00:31:24.080 --> 00:31:28.880
you know, in the venture capital world, in the equity world, right? But it's a simple one,

454
00:31:28.880 --> 00:31:35.600
but not so simple, right? Because knowing the answer to that question requires us as entrepreneurs,

455
00:31:35.600 --> 00:31:40.640
as business owners, to have done some research, have done our homework, maybe even done some

456
00:31:40.640 --> 00:31:45.840
kind of a plan, right, like a business plan or a strategic plan or something to that effect,

457
00:31:45.840 --> 00:31:54.480
to be able to answer this question in a very strategic way, right? So, what amount are you

458
00:31:54.480 --> 00:32:00.160
looking for, right? The question right after that is, what will the loan proceeds be used for? What

459
00:32:00.160 --> 00:32:06.560
do you need the money for, right? And the answer shouldn't be, I'm sure it can, but it shouldn't be,

460
00:32:06.560 --> 00:32:11.040
you know, well, you know, I'm going to apply more inventory. Okay, well, what does that mean, right?

461
00:32:11.280 --> 00:32:17.920
So, these two first questions are very key in getting a good dialogue started with any potential

462
00:32:17.920 --> 00:32:23.120
member, how much you're looking for and what will you be using the money for. These other questions,

463
00:32:23.120 --> 00:32:27.600
you know, identifying the primary source of repayment, what's an example of that? One example

464
00:32:27.600 --> 00:32:31.680
of that is, let's say I have my business and I've had it for, you know, X number of years,

465
00:32:31.680 --> 00:32:36.320
but now I'm looking to get, you know, to take it to the next level, either because I'm introducing

466
00:32:36.320 --> 00:32:41.680
a new product line, or I'm opening up a second location, or I'm pivoting to a different business

467
00:32:41.680 --> 00:32:47.520
model, whatever it may be. Well, the primary source of repayment is going to be that additional growth,

468
00:32:47.520 --> 00:32:52.480
right? Along with the historical performance of the business. So, these are very, very important

469
00:32:52.480 --> 00:32:58.240
to consider. I won't go over all of these in the interest of time, but very, very key to go,

470
00:32:58.240 --> 00:33:06.000
you know, over these, what collateral, you know, do you have available and stuff like that. So,

471
00:33:06.000 --> 00:33:11.680
I imagine that a lot of these are also very common in the venture capital as well.

472
00:33:13.040 --> 00:33:16.560
And then along the same lines, and I apologize for the formatting, I don't know what happened

473
00:33:16.560 --> 00:33:22.720
there, but along the same lines, in terms of best practices in preparing to be loan ready,

474
00:33:22.720 --> 00:33:29.120
some basic documentation that a typical lender will oftentimes require, right? So, obviously,

475
00:33:29.120 --> 00:33:33.120
you're going to need a loan application. You'll get that from whatever lender you approach,

476
00:33:33.200 --> 00:33:38.000
you know, more than likely as part of the application, any and all individuals,

477
00:33:38.000 --> 00:33:44.640
as I mentioned earlier, will have 20% typically, or more ownership, or who are identified as a key

478
00:33:44.640 --> 00:33:49.760
person to the business, will be asked to fill out a personal financial statement.

479
00:33:50.400 --> 00:33:55.360
So, that'll be part of the application, a copy of the credit report. So, obviously,

480
00:33:55.360 --> 00:33:59.200
that will be generated by the lender. And then the rest of this here is stuff that we should

481
00:33:59.200 --> 00:34:03.840
be prepared to provide, right? So, before we even get asked the question, we should make sure we

482
00:34:03.840 --> 00:34:09.120
have all this available. So, right off the bat, if you're an existing business, last two to three

483
00:34:09.120 --> 00:34:15.120
years, usually it's three years, of your business tax returns is going to be key to that. Alongside

484
00:34:15.120 --> 00:34:21.280
that, last two or three years of your personal tax returns may be required as well, if the lender is

485
00:34:21.280 --> 00:34:28.239
using a global debt service to help determine repayment ability, right? Your current year

486
00:34:28.239 --> 00:34:33.760
financials, right? So, right now, for example, we're in the middle of late June. So, if you're

487
00:34:33.760 --> 00:34:41.360
asking for a loan right now, you probably have to provide your 19, 20, and 2021 tax returns,

488
00:34:41.360 --> 00:34:47.840
and then provide at least some kind of a P&L, and if available, a balance sheet through, let's say,

489
00:34:47.840 --> 00:34:53.760
May 31st or April 30th, right? Something that tells the lender, hey, here's how I'm performing

490
00:34:53.760 --> 00:34:59.840
this year in advance of having a tax return, because you probably wouldn't have one yet, right?

491
00:35:00.000 --> 00:35:06.240
you'll be asked to provide a schedule of outstanding business debt, excuse me. So going

492
00:35:06.240 --> 00:35:11.440
back to that business credit report, that oftentimes, more often than not, is not that

493
00:35:11.440 --> 00:35:15.440
reliable, like an ambassador report, because not all things report on there, or not all

494
00:35:15.440 --> 00:35:22.480
lenders report on there. The lender will rely on the business to disclose any known outstanding

495
00:35:22.480 --> 00:35:26.800
debt, right, in the form of a spreadsheet or something equivalent to that, in order to keep

496
00:35:26.800 --> 00:35:33.680
your bookkeeping, right? If you lease or you own a facility, like a warehouse or an office space,

497
00:35:33.680 --> 00:35:39.520
something like that, oftentimes, even if you lease, oftentimes you may be asked to provide

498
00:35:39.520 --> 00:35:44.240
a copy of the lease agreement. And the only reason this is important, and it's not important in all

499
00:35:44.240 --> 00:35:49.280
cases, but if you're a manufacturer or you're a distributor or something like that, where you

500
00:35:49.920 --> 00:35:55.520
rely on having a facility, that lender is going to want to know, hey, do you have a lease

501
00:35:55.520 --> 00:36:01.200
that accommodates whatever loan term I'm going to give you? So if I'm going to give you a five-year

502
00:36:01.200 --> 00:36:06.000
loan, I want to make sure that you have a lease that would accommodate those five years, because

503
00:36:06.000 --> 00:36:11.120
what happens if, for example, you have a warehouse and you rely on your warehouse and your lease is

504
00:36:11.120 --> 00:36:16.560
up at the end of this year? I want to know that you at least have a couple of options that

505
00:36:16.560 --> 00:36:21.600
can take you through those five years, right? So it becomes a risk to a lender, right? So anyway,

506
00:36:22.240 --> 00:36:27.040
number nine, business plan or executive summary. This is really important, especially for a newer

507
00:36:27.040 --> 00:36:31.120
business. If you're a brand new business, pre-revenue, you just started, or you're within

508
00:36:31.120 --> 00:36:37.520
those first two or three years, you can expect for a lender to ask you for a full-fledged business

509
00:36:37.520 --> 00:36:45.120
plan, right? Because you don't yet have the history for the lender to rely upon to solely

510
00:36:45.120 --> 00:36:50.720
make a decision, right? So having that business plan is very, very key. I like for any business,

511
00:36:50.720 --> 00:36:55.360
regardless of how long you've been around, to have a business plan, but not required if you've

512
00:36:55.360 --> 00:37:00.320
been around for over three years, right? If you've been around for over three years, then more often

513
00:37:00.320 --> 00:37:06.640
than not, an executive summary or something equivalent to that is typically good. So anyway,

514
00:37:06.640 --> 00:37:12.400
good examples of just kind of documentation to help you get loan ready, and that's good.

515
00:37:12.400 --> 00:37:16.160
I'm going to fly through these next couple of ones, because I really want to get to the ratio

516
00:37:16.160 --> 00:37:22.160
slides, but some common types of lenders and loan options. Again, by now, depending on what stage

517
00:37:22.160 --> 00:37:28.000
of the business you're at individually, you've probably come across some of these or all these

518
00:37:28.000 --> 00:37:33.600
already, but just right off the bat, banks and credit unions, typically the most sought after

519
00:37:33.600 --> 00:37:41.680
type of loan capital, mainly because it's usually the cheapest form of capital, right? The goal

520
00:37:41.680 --> 00:37:46.960
at the end of the day is to be an attractive enough business that lenders and banks are

521
00:37:46.960 --> 00:37:51.440
finding for their business, right? That should be the goal of all entrepreneurs in terms of being

522
00:37:51.440 --> 00:37:57.520
able to access loan capital. That second tier or that next tier after banks and credit unions,

523
00:37:57.520 --> 00:38:02.640
typically are alternative lenders, but more importantly, like nonprofit, or I put in there,

524
00:38:02.640 --> 00:38:10.880
CDFI lenders. CDFI is an acronym for Community Development Financial Institutions, and these

525
00:38:10.880 --> 00:38:16.960
are typically like nonprofit, non-depository institutions that are usually mission-based

526
00:38:16.960 --> 00:38:23.600
and have a primary focus on impacting local economies. And then the way they do that is by

527
00:38:23.600 --> 00:38:33.840
being able to offer loan products and services that may not be designed or accessible to certain

528
00:38:33.840 --> 00:38:38.080
folks. Like let's say you have a small business, you go to a bank or two banks, you get denied,

529
00:38:38.080 --> 00:38:42.160
and then you go and find one of these lenders, typically that's what they're doing, or that's

530
00:38:42.160 --> 00:38:48.400
what their target market is. Factoring, factoring is an old school form of financing that is

531
00:38:48.400 --> 00:38:57.520
typically higher priced, and it basically involves securing funds in exchange for either an invoice

532
00:38:57.520 --> 00:39:03.920
or an account receivable, or even a purchase order, right? It's an old school form of financing.

533
00:39:03.920 --> 00:39:09.040
It's not so much of a loan as it is in advance. It's something that actually,

534
00:39:09.040 --> 00:39:15.600
since the last recession back in 2008, 2009, has kind of come back to life. It used to get

535
00:39:15.600 --> 00:39:21.200
kind of a bad name. It's become a little more common now because we have so much access to

536
00:39:21.200 --> 00:39:27.840
information nowadays where we understand it better, but typically it'll be a slightly more expensive

537
00:39:27.840 --> 00:39:34.720
form of financing. Then we have crowdfunding, fintech, online lenders, which in many respects

538
00:39:34.720 --> 00:39:41.360
are kind of in that same ballpark, but again, since the last recession of 2008, 2009, we've

539
00:39:41.360 --> 00:39:47.200
seen a big rise in online lenders, fintech, and a lot of that originated out of crowdfunding type

540
00:39:47.200 --> 00:39:55.040
or peer-to-peer type lending tools or vehicles. Those are some of the higher examples of loans.

541
00:39:55.040 --> 00:39:59.840
I won't go into detail on this. Just know that by now, I hope...

542
00:40:00.000 --> 00:40:02.280
that all of us would have heard about the SBA,

543
00:40:02.280 --> 00:40:04.440
the US Small Business Administration,

544
00:40:04.440 --> 00:40:07.560
if for no other reason, because of the PPP,

545
00:40:07.560 --> 00:40:10.040
that the Paycheck Protection Program loans

546
00:40:10.040 --> 00:40:12.920
that were made available in response to COVID.

547
00:40:12.920 --> 00:40:15.040
However, for those of you that maybe hadn't heard

548
00:40:15.040 --> 00:40:17.760
of the SBA prior to PPP,

549
00:40:17.760 --> 00:40:22.060
just know that it's an extension of the federal government

550
00:40:22.060 --> 00:40:25.520
that is designed to provide support

551
00:40:25.520 --> 00:40:28.480
to the small business community in different ways,

552
00:40:28.480 --> 00:40:30.960
primarily in lending programs.

553
00:40:30.960 --> 00:40:32.400
They don't lend money directly,

554
00:40:32.400 --> 00:40:34.400
unless it's a disaster loan,

555
00:40:34.400 --> 00:40:36.200
but through lending programs

556
00:40:36.200 --> 00:40:41.080
or through technical assistance programs as well.

557
00:40:41.080 --> 00:40:45.280
But some of the more common types of SBA loans out there

558
00:40:45.280 --> 00:40:49.400
are a microloan, which typically loans under $50,000.

559
00:40:49.400 --> 00:40:54.400
The SBA 7A loan is probably the most common SBA loan program

560
00:40:55.080 --> 00:40:56.000
out there.

561
00:40:56.000 --> 00:40:59.400
So for those of you that may have already walked into a bank

562
00:40:59.400 --> 00:41:01.520
or will be, more often than not,

563
00:41:01.520 --> 00:41:03.040
if somebody talks to you about an SBA loan,

564
00:41:03.040 --> 00:41:06.560
it's probably going to be an SBA 7A loan

565
00:41:06.560 --> 00:41:08.080
that they offer you first.

566
00:41:08.080 --> 00:41:09.720
And in that scenario,

567
00:41:09.720 --> 00:41:13.920
all the SBA is doing is providing that bank or that lender

568
00:41:13.920 --> 00:41:18.920
a federal guarantee on that loan of up to 85%,

569
00:41:18.960 --> 00:41:23.080
but usually, on average, 75%.

570
00:41:23.080 --> 00:41:26.240
So it hopefully helps, or it should help,

571
00:41:26.240 --> 00:41:28.520
incentivize lenders to do more loans

572
00:41:28.520 --> 00:41:31.520
and to do loans that they otherwise may not have done

573
00:41:31.520 --> 00:41:33.960
because there's either a lack of collateral

574
00:41:33.960 --> 00:41:37.600
or a lack of capital or a combination thereof.

575
00:41:37.600 --> 00:41:39.520
So there's some other examples there

576
00:41:39.520 --> 00:41:43.160
that I won't go too deep into in the interest of time,

577
00:41:43.160 --> 00:41:45.120
but happy to answer any questions after that.

578
00:41:45.120 --> 00:41:48.440
And this is the last piece I wanted to get to,

579
00:41:48.440 --> 00:41:50.000
key financial ratios.

580
00:41:50.000 --> 00:41:53.400
So the idea behind sharing a few of these

581
00:41:53.400 --> 00:41:57.600
with entrepreneurs that are at various stages

582
00:41:57.600 --> 00:42:02.080
is to just kind of help, I guess, demystify what ratios are.

583
00:42:02.080 --> 00:42:04.080
And sometimes, depending on your level

584
00:42:04.080 --> 00:42:07.080
of how long you've been in business,

585
00:42:07.080 --> 00:42:09.280
these may or may not apply to you as much,

586
00:42:09.280 --> 00:42:12.560
but I feel as having been a lender,

587
00:42:12.560 --> 00:42:15.360
a commercial lender for about 15 years,

588
00:42:15.360 --> 00:42:17.120
I can tell you that as lenders,

589
00:42:17.120 --> 00:42:21.520
we look at most or all of these ratios behind the scenes.

590
00:42:21.520 --> 00:42:23.400
So if we're looking at them as a lender,

591
00:42:23.400 --> 00:42:25.840
I always feel it's important for, as an entrepreneur,

592
00:42:25.840 --> 00:42:28.880
to at least understand what these mean, right?

593
00:42:28.880 --> 00:42:33.760
And typically, these ratios are typically a function

594
00:42:33.760 --> 00:42:35.600
of your balance sheet, right?

595
00:42:35.600 --> 00:42:38.720
So if you recall earlier in the presentation,

596
00:42:38.720 --> 00:42:41.640
I said that to me as a lender,

597
00:42:41.640 --> 00:42:45.000
yes, P&L is important because it tells me your sales,

598
00:42:45.000 --> 00:42:47.000
it tells me if you're profitable or not,

599
00:42:47.880 --> 00:42:48.800
and it helps me determine whether or not

600
00:42:48.800 --> 00:42:51.240
you're gonna be able to repay a loan, right,

601
00:42:51.240 --> 00:42:52.600
because of the ratio.

602
00:42:52.600 --> 00:42:55.480
But I also said that in spite of that,

603
00:42:55.480 --> 00:42:57.160
a balance sheet, in my opinion,

604
00:42:57.160 --> 00:43:00.800
is the most important financial statement for a business

605
00:43:00.800 --> 00:43:03.360
because it tells you the health of the business.

606
00:43:03.360 --> 00:43:06.920
It tells me your assets, it tells me your liabilities,

607
00:43:06.920 --> 00:43:08.160
and with that data,

608
00:43:08.160 --> 00:43:11.000
I'm able to calculate some of these ratios.

609
00:43:11.000 --> 00:43:14.120
Very high level, the four ratios I picked out,

610
00:43:14.120 --> 00:43:17.160
the first debt-to-net-worth ratio.

611
00:43:17.160 --> 00:43:18.000
Let's see.

612
00:43:18.000 --> 00:43:20.040
And I'll, yeah, and I'll just skip to this,

613
00:43:20.040 --> 00:43:22.600
but this one gives me real examples.

614
00:43:22.600 --> 00:43:25.120
So the first one, top left-hand corner,

615
00:43:25.120 --> 00:43:27.520
debt-to-net-worth ratio.

616
00:43:27.520 --> 00:43:31.000
Sounds intimidating, especially when we start seeing division

617
00:43:31.000 --> 00:43:33.080
and we start seeing decimal points,

618
00:43:33.080 --> 00:43:35.880
but let me demystify it for you, right?

619
00:43:35.880 --> 00:43:39.440
So all debt-to-net-worth ratio is telling us,

620
00:43:40.280 --> 00:43:45.280
how much debt do we have for every dollar of net worth?

621
00:43:45.720 --> 00:43:47.360
That's all it's telling us, right?

622
00:43:47.360 --> 00:43:48.680
So in this example,

623
00:43:48.680 --> 00:43:52.360
where there's total debt of $100,000

624
00:43:52.360 --> 00:43:56.800
and there's total net worth of $65,000, okay?

625
00:43:56.800 --> 00:43:59.280
When you do that math, $100,000 divided by 65,

626
00:43:59.280 --> 00:44:03.440
it spits out a ratio of 1.54.

627
00:44:03.440 --> 00:44:07.880
So I tell you your debt-to-net-worth ratio is 1.54.

628
00:44:07.880 --> 00:44:08.920
What does that mean?

629
00:44:09.360 --> 00:44:12.800
All that means is that for every dollar in net worth

630
00:44:12.800 --> 00:44:17.800
we have in our business, we have $1.54 in debt, okay?

631
00:44:19.160 --> 00:44:20.120
When we think about that,

632
00:44:20.120 --> 00:44:22.720
we might think it's a bad thing, right?

633
00:44:22.720 --> 00:44:24.200
We might think it's a bad thing

634
00:44:24.200 --> 00:44:26.640
because we're thinking, hey, we have net worth of this,

635
00:44:26.640 --> 00:44:30.360
but man, we have $1.50 for every dollar net worth.

636
00:44:30.360 --> 00:44:32.520
Yeah, it's not the healthiest thing,

637
00:44:32.520 --> 00:44:33.960
but all that really means is that

638
00:44:33.960 --> 00:44:36.640
you're probably at a growth stage in your business

639
00:44:36.680 --> 00:44:39.680
where you're financing your business with debt

640
00:44:39.680 --> 00:44:41.760
to be able to eventually get over the hump

641
00:44:41.760 --> 00:44:43.080
and increase sales, right?

642
00:44:43.080 --> 00:44:45.840
So as you're repaying back that debt,

643
00:44:45.840 --> 00:44:48.600
hopefully your sales are growing, right?

644
00:44:48.600 --> 00:44:50.440
And that ratio is gonna get smaller and smaller

645
00:44:50.440 --> 00:44:52.040
because as your sales are growing,

646
00:44:52.040 --> 00:44:54.120
so is your profitability, hopefully,

647
00:44:54.120 --> 00:44:56.640
and so is your net worth, right?

648
00:44:56.640 --> 00:45:01.640
So yes, it's not great in this scenario.

649
00:45:00.000 --> 00:45:06.440
scenario. However, it tells us basically that you're financing with debt. And there's a

650
00:45:06.440 --> 00:45:11.960
couple of other examples, but I at least wanted to get in the weeds in that one just because

651
00:45:11.960 --> 00:45:17.600
I felt putting it in plain English sometimes helps, right? I'll do one more, and I know

652
00:45:17.600 --> 00:45:21.720
those questions are coming in, but I'll do just one more. Let's see. The current ratio

653
00:45:21.720 --> 00:45:26.840
on the top right is probably the most common ratio. So using these numbers that I took

654
00:45:26.840 --> 00:45:35.080
from a real balance sheet, current assets of $72,000, current liabilities of $18,000,

655
00:45:35.080 --> 00:45:43.680
and it spits out a ratio of 3.97. So current ratio is a liquidity ratio that estimates

656
00:45:43.680 --> 00:45:49.840
the ability of a company to pay back short term obligations. So our ability to repay

657
00:45:49.840 --> 00:45:56.760
back short term obligations using just our assets. So in this example of 3.97, all that

658
00:45:56.760 --> 00:46:02.480
tells us is that for every dollar in short term liability that I have, like debt, for

659
00:46:02.480 --> 00:46:10.760
example, or any liability, I have $3.97 of assets. So just hearing it in English and

660
00:46:10.760 --> 00:46:15.040
in plain words, we can tell, hey, that's a pretty good ratio, right? That means that

661
00:46:15.080 --> 00:46:21.680
for every dollar in liability that I have, I have almost $4 in assets. That's all that means. So

662
00:46:21.680 --> 00:46:26.800
anyway, I felt it was important to at least cover that, and I want to be mindful of our time and

663
00:46:26.800 --> 00:46:36.640
questions. So with that, let's enter into our Q&A portion, and Trevon, do I simply go in order and

664
00:46:36.640 --> 00:46:46.480
start answering each one, or is there something else I got to do? I will assume that I will just

665
00:46:46.480 --> 00:46:53.080
go in and answer these questions. So question number one, I've heard a lot of people recommend

666
00:46:53.080 --> 00:46:56.720
this, but I haven't done it as I'm still doing my research. Would you recommend using your

667
00:46:56.720 --> 00:47:01.600
business EIN number to open up credit cards on behalf of your business? What tools can we use

668
00:47:01.600 --> 00:47:06.000
to build credit for our business? How do we start if we haven't established business credit, but

669
00:47:06.080 --> 00:47:12.080
want to? Okay. Whoever question number one is, you cheated because you asked three questions in

670
00:47:12.080 --> 00:47:17.840
one. So I'll do my best to answer all three. So for the first question, would I recommend using

671
00:47:17.840 --> 00:47:23.520
your business EIN to open up a credit card or any kind of loan for your business? Absolutely.

672
00:47:23.520 --> 00:47:29.680
In the same way that hopefully somebody has encouraged you to, and if not, I would encourage

673
00:47:29.680 --> 00:47:34.240
you to, but in the same manner that you would go open up a bank account for your business,

674
00:47:34.240 --> 00:47:39.680
hopefully using an EIN number, I would also encourage you to open up any kind of loan for

675
00:47:39.680 --> 00:47:47.920
the business using that same EIN number. Okay. But still expect to be asked to provide your own

676
00:47:47.920 --> 00:47:53.840
social since you will be a guarantor. So what happens when you go out and obtain a business

677
00:47:53.840 --> 00:47:59.200
loan or a line of credit, the borrower will technically be the business and you're going

678
00:47:59.200 --> 00:48:06.320
to use the business EIN or tax ID number for those purposes. But we, as the individual owner

679
00:48:06.320 --> 00:48:11.760
or owners, we're going to be the guarantors on that loan. Nine times out of 10, you're not going

680
00:48:11.760 --> 00:48:16.400
to be able to get around it, especially at the stage of the business that most of us on this

681
00:48:16.400 --> 00:48:22.240
call, it's not all of us are in right now. So you're still going to be using your social,

682
00:48:22.240 --> 00:48:26.640
but that's going to be for your purposes as the guarantor on the loan after the business.

683
00:48:27.360 --> 00:48:32.240
What tools can we use to build credit for our business? So I mentioned Dunn and Bradstreet.

684
00:48:32.240 --> 00:48:36.720
There's probably a couple more out there that are less known, but Dunn and Bradstreet or DNB

685
00:48:36.720 --> 00:48:43.520
is the agency or the credit bureau that is most commonly used for businesses. Okay. It doesn't

686
00:48:43.520 --> 00:48:48.960
work in the same form as our personal credit. So for all of us, none of us had to subscribe to

687
00:48:48.960 --> 00:48:55.040
Experian or TransUnion or Equifax for our personal credit, right? Why? Because most or all lenders

688
00:48:55.840 --> 00:49:01.440
throughout our personal credit history, they report to those automatically. So we don't have

689
00:49:01.440 --> 00:49:06.400
to go out there and proactively tell the credit bureaus, Hey, I have a loan here. I have a loan

690
00:49:06.400 --> 00:49:11.840
there. Do that. Unfortunately for commercial or business credit, especially using stuff like

691
00:49:11.840 --> 00:49:17.920
Dunn and Bradstreet, typically you have to be a little more proactive to request a lender to

692
00:49:17.920 --> 00:49:22.640
report to your Dunn and Bradstreet. So yes, I would advise of that. And that would be a good

693
00:49:22.640 --> 00:49:28.640
first start is to, to subscribe or register, register to a Dunn and Bradstreet. And how do

694
00:49:28.640 --> 00:49:33.600
we start? Do we have a credit for one, two, in the same way that you asked the question, right?

695
00:49:33.600 --> 00:49:39.360
So going out and getting that first business loan, getting it under the business name. That's

696
00:49:39.360 --> 00:49:46.800
how you're going to establish that. Dunn and Bradstreet and other, other background type of

697
00:49:46.800 --> 00:49:52.800
agencies like LexisNexis or whatever, oftentimes, and you can request for them

698
00:49:53.360 --> 00:49:58.560
to also have other stuff reported. Like I've heard of folks getting their vendors,

699
00:49:58.560 --> 00:49:59.840
you know, and how you repay that.

700
00:50:00.000 --> 00:50:05.440
your vendors that can be reported, and that can also help establish business. I hope I

701
00:50:05.440 --> 00:50:10.400
answered your question. How does the lender break down the debt service ratio from your

702
00:50:10.400 --> 00:50:18.640
financial? That's a great question. So sticking to the business portion, okay, if you recall

703
00:50:18.640 --> 00:50:24.000
that table we had where we showed the business financial, typically it's going to be one

704
00:50:24.000 --> 00:50:30.080
of two things. It's going to be your net income of the business on an annual basis, okay,

705
00:50:30.080 --> 00:50:36.080
or your EBITDA. Your EBITDA is your earnings before interest, taxes, depreciation, and

706
00:50:36.080 --> 00:50:40.800
amortization. You can Google it if that's your first time hearing that. EBITDA, right? You're

707
00:50:40.800 --> 00:50:45.520
going to take that EBITDA or that net income annually, and they're going to take your debt

708
00:50:45.520 --> 00:50:51.120
service. So this is just real simple numbers, right? Let's assume that we came in on a loan

709
00:50:51.760 --> 00:50:56.800
annually, not monthly, but annually for you is going to be about 10,000 a year. That's just

710
00:50:56.800 --> 00:51:01.680
under a thousand bucks a month, right? Let's just assume it's a big loan, but it's going to be 10,000

711
00:51:01.680 --> 00:51:07.040
a year. That lender is going to want to see, remember the ratio 1.25 to one, they're going to

712
00:51:07.040 --> 00:51:13.440
want to see $1.25 coming in for every dollar in debt. So more likely than not, they're going to

713
00:51:13.440 --> 00:51:22.480
want to see over $12,000 worth of income or EBITDA available to repay that debt at minimum. The

714
00:51:22.480 --> 00:51:27.120
larger that number is, the better. Now, depending on the lender and depending on the kind of loan

715
00:51:27.120 --> 00:51:33.200
you're asking for, they may also incorporate any personal discretionary income you have available.

716
00:51:33.200 --> 00:51:37.440
So they will do an analysis of your personal financials. That's why you're submitting a

717
00:51:37.440 --> 00:51:41.040
personal financial statement, and that's why they're checking their personal credit history.

718
00:51:41.040 --> 00:51:50.800
And they're going to see, hey, XYZ individual has an additional $12,000 a year available after

719
00:51:50.800 --> 00:51:54.880
they pay off all the personal expenses. They're the owner of the business. We can rely on that

720
00:51:54.880 --> 00:52:00.640
income to help with repayment. That can also be included as part of their evaluation and as part

721
00:52:00.640 --> 00:52:07.600
of getting you approved for a business loan. Question number three, can proven track accounts

722
00:52:07.600 --> 00:52:13.840
capital investment? Well, only if that proven track time is capital being invested. In other

723
00:52:13.840 --> 00:52:21.200
words, if we're talking about, hey, I have invested $20,000 into my business over the last

724
00:52:21.200 --> 00:52:25.040
two years, depending on the lender and depending on the stage of your business, they may give you

725
00:52:25.040 --> 00:52:30.800
credit for some of that. They may count that as capital injection. But if we're talking simply

726
00:52:30.800 --> 00:52:38.640
about sweat equity or just personal time you put into it, yeah, they're going to give you credit

727
00:52:38.640 --> 00:52:44.640
for that as they should, but not dollars. At the end of the day, the way I like to see

728
00:52:46.720 --> 00:52:51.520
projects being financed is if you call it a project. So let's just say that you're a year

729
00:52:51.520 --> 00:53:00.400
into your business, you've invested $20,000, but that $20,000 was part of a $50,000 plan that you

730
00:53:00.400 --> 00:53:06.080
put together a year ago. And now you come to the lender and say, hey, Mr. Lender, I had this

731
00:53:06.080 --> 00:53:13.600
business plan laid out where over a year of time, I needed to inject $50,000 of capital into my

732
00:53:13.600 --> 00:53:21.360
business. However, I already put in 20. Here's where I'm at now. I need to secure the other 30.

733
00:53:21.360 --> 00:53:26.800
Is that possible? Yeah, it's possible, but I'm more of a fan of doing it all together before

734
00:53:26.800 --> 00:53:32.480
you start spending your money. In other words, securing the loan or any kind of debt financing

735
00:53:32.480 --> 00:53:37.040
before you start putting out your own capital. Why? Because at that point in time,

736
00:53:37.040 --> 00:53:41.520
you're a little bit stronger. At that point in time, you still have the cash in the bank. A

737
00:53:41.520 --> 00:53:46.400
lender can see you have the cash in the bank and a lender can see that you've put out a good plan

738
00:53:46.400 --> 00:53:53.760
that shows that you in fact need 50 and you have 20 available to put in. Anyway, I hope I answered

739
00:53:53.760 --> 00:53:59.440
that question, but for the most part, yes. For the 10 to 30% investment, is that what's

740
00:53:59.440 --> 00:54:03.600
recommended as an investment for a business? Just want to get a better understanding. Yeah,

741
00:54:03.600 --> 00:54:09.040
that's a great question. Most lenders out there are going to want you to have skin in the game,

742
00:54:09.040 --> 00:54:13.280
right? Hopefully most or at least some of us have heard that term, but they're going to want us to

743
00:54:13.280 --> 00:54:19.120
have skin in the game. Most certainly, they're going to want to see that you put in at minimum

744
00:54:19.120 --> 00:54:25.200
that 10 to 30%. That 10 to 30% really matters or depends on what kind of loan you're going to be

745
00:54:25.200 --> 00:54:30.160
securing, right? If it's a government sponsored or government guaranteed loan, like an SBA loan,

746
00:54:30.880 --> 00:54:35.040
typically if you have a little bit less, they're a little bit friendlier about that

747
00:54:35.040 --> 00:54:39.440
because the lender is going to benefit from having a guarantee from the SBA.

748
00:54:39.440 --> 00:54:45.920
It can help offset any concerns with respect to capital injection. But yes, to answer the question,

749
00:54:46.000 --> 00:54:51.840
that is what's recommended at minimum to invest into your company, especially if you're in that

750
00:54:51.840 --> 00:54:56.240
startup phase or if you're in that two to three year range, you're going to want to see that you

751
00:54:56.240 --> 00:54:59.840
have capital. Think of it this way in layman's terms, right?

752
00:55:00.000 --> 00:55:05.320
You know, it's going to be in our thinking as a commercial lender, right, they're going

753
00:55:05.320 --> 00:55:09.160
to be thinking it's going to be harder for an entrepreneur to walk away when things get

754
00:55:09.160 --> 00:55:16.920
tough if they have 30 percent in or $40,000 in versus, hey, I got all that loans to finance

755
00:55:16.920 --> 00:55:20.120
my business and things got tough, you know, and you walk away.

756
00:55:20.120 --> 00:55:28.280
Right. That's that's kind of the simpler answer. All right. Let's see. Question number five.

757
00:55:28.280 --> 00:55:35.520
You mentioned that Don's number isn't much to ask, but Sam's just replaced it with the

758
00:55:35.520 --> 00:55:39.760
unique identity. Is this number important as far as both are concerned? I haven't seen

759
00:55:39.760 --> 00:55:44.880
it widely used. I've heard of that, but I've been, you know, I've been out of the commercial

760
00:55:44.880 --> 00:55:50.120
lending area for a couple of years now, but I've heard of the number. I think it's something

761
00:55:50.120 --> 00:55:59.800
that SBA uses a lot. So so that Sam's number is a good indicator for small business lenders

762
00:55:59.800 --> 00:56:05.880
when using an SBA product. And SBA uses that commonly. So to answer your question, yes,

763
00:56:05.880 --> 00:56:10.040
it is an important number to secure a loan. However, all those other factors I talked

764
00:56:10.040 --> 00:56:15.360
about, all those C's I talked about are still equally or more important. That Sam's number

765
00:56:15.360 --> 00:56:23.120
is relatively new to your point. And it really it really was from what I would call originator

766
00:56:23.120 --> 00:56:30.360
develop as a means to make credit profiles of businesses more comparable to one another

767
00:56:30.360 --> 00:56:35.400
with respect to SBA lending specifically. So, yes, whatever business tax returns are

768
00:56:35.400 --> 00:56:40.280
showing a loss in the prior year, will this discount you for qualifying for a business

769
00:56:40.440 --> 00:56:47.160
Unfortunately, it will have an impact if you're showing your most recent year as a loss. However,

770
00:56:47.160 --> 00:56:53.080
keep in mind all the C's that I talked about. So we're just coming out of a COVID environment

771
00:56:53.080 --> 00:56:59.000
where we were forced to shut down for the better part of a year over a year ago. And we all tried

772
00:56:59.000 --> 00:57:05.240
to and we all tried to recover over this past year. Right. So if that had a negative impact,

773
00:57:05.240 --> 00:57:10.040
as an example, on your business, well, we have an explanation for it. Right. We have an explanation

774
00:57:10.360 --> 00:57:16.440
for it. But with that, now you should be prepared to produce some kind of a plan that not only helps

775
00:57:16.440 --> 00:57:22.040
explain why you had a loss last year. Right. But more importantly, you know, how you're going to

776
00:57:22.040 --> 00:57:28.360
recover from that and how the capital or the loan that you're obtaining is going to help achieve

777
00:57:28.360 --> 00:57:34.280
that plan and hopefully produce profitability by the end of the year. Right. So. So, yes,

778
00:57:34.280 --> 00:57:38.360
it does have and it will have a negative impact, especially because it's the most

779
00:57:38.360 --> 00:57:46.120
recent year that the lender has to rely upon. However, if there's a good explanation and you

780
00:57:46.120 --> 00:57:52.440
can show a plan and even a budget or a forecast that shows how the loan you're trying to secure

781
00:57:52.440 --> 00:57:59.080
is going to help you achieve more positive numbers, then that, you know, that will be very,

782
00:57:59.080 --> 00:58:06.360
very helpful. Are the performance projections the same as one to two year cash flow projections?

783
00:58:06.360 --> 00:58:13.560
Great question. Yes and no. So the one to two year cash flow projection is if you have something

784
00:58:13.560 --> 00:58:21.400
like that, it's great because it shows the amount of cash your business will need in order to in

785
00:58:21.400 --> 00:58:27.160
order to to operate. Right. However, the reason I said it isn't it, isn't it? Because it isn't

786
00:58:27.160 --> 00:58:33.000
because in terms of performance, typically when we talk about projections, we're talking about a P&L,

787
00:58:33.000 --> 00:58:37.480
a profit and loss or an income statement. Right. Or we're talking strictly about sales,

788
00:58:38.120 --> 00:58:43.800
your your fixed expenses, your variable expenses and what that bottom line is. Right. What the net

789
00:58:43.800 --> 00:58:49.000
profitability is or net loss. Right. So there's a slight difference. And if we had more time,

790
00:58:49.000 --> 00:58:53.560
we would go over that particular financial statement. But it's really two two different

791
00:58:53.560 --> 00:58:59.000
things. Right. Cash flow talks about all those things that a P&L has, like income expenses,

792
00:58:59.000 --> 00:59:05.560
but it also talks about what your starting cash on the business was. A P&L doesn't do that.

793
00:59:05.560 --> 00:59:11.320
It doesn't do that. I hope I answered that question. Last question. My business is a

794
00:59:11.320 --> 00:59:15.320
non-profit. Why do I have so many final lenders? Can you provide information on how to provide

795
00:59:15.320 --> 00:59:20.600
lending services? They're very limited. Yeah. Or else you wouldn't be asking that question,

796
00:59:20.600 --> 00:59:27.160
right? The resources to get a loan for a non-profit are fairly limited. And typically,

797
00:59:27.160 --> 00:59:32.680
if you do find a lender, it's typically going to be a non-profit that does something like that. So

798
00:59:32.680 --> 00:59:37.960
I can follow up with that later and do some research and maybe go through the program.

799
00:59:39.240 --> 00:59:49.000
But it is more heavy. So with that, I'm looking at the clock at five. So I'll stop there. I hope

800
00:59:49.000 --> 00:59:55.080
I answered everybody's questions. A lot of information to squeeze into a one hour presentation,

801
00:59:55.080 --> 00:59:59.880
but I hope you all found value. And again, I want to thank the panelists.

802
01:00:00.000 --> 01:00:04.640
and the Phillips Foundation for including us in this endeavor.

803
01:00:04.640 --> 01:00:06.520
I wish everybody the best.

804
01:00:06.520 --> 01:00:07.480
Good luck to you all.

805
01:00:07.480 --> 01:00:09.560
And again, once again, I congratulate you all

806
01:00:09.560 --> 01:00:11.800
for being a part of this wonderful program, too.

807
01:00:11.800 --> 01:00:13.600
So thank you very much.

808
01:00:13.600 --> 01:00:17.760
I think we'll turn it over to Siobhan or Trayvon.

809
01:00:17.760 --> 01:00:19.000
Yes, Antonio.

810
01:00:19.000 --> 01:00:21.360
I have been looking at the chat.

811
01:00:21.360 --> 01:00:23.880
Everyone is like, this is great information.

812
01:00:23.880 --> 01:00:25.280
They have enjoyed it.

813
01:00:25.280 --> 01:00:27.760
They've enjoyed the conversation.

814
01:00:27.760 --> 01:00:30.880
So much good information that I knew you were going to bring.

815
01:00:30.880 --> 01:00:35.440
So I am excited that you were able to bring this today.

816
01:00:35.440 --> 01:00:38.160
And so those who may be watching the replay,

817
01:00:38.160 --> 01:00:41.240
if there are other questions that come up for you all,

818
01:00:41.240 --> 01:00:44.440
for Antonio, please feel free to send them over to me.

819
01:00:44.440 --> 01:00:46.680
And we can see if we can get those questions answered

820
01:00:46.680 --> 01:00:47.960
for you.

821
01:00:47.960 --> 01:00:50.800
Just wanted to give you all a heads up and a reminder

822
01:00:50.800 --> 01:00:54.000
that we have our, you can sign up for the coaching

823
01:00:54.040 --> 01:00:59.280
calls for this week in the Mighty Network platform.

824
01:00:59.280 --> 01:01:02.040
So make sure you do that.

825
01:01:02.040 --> 01:01:04.560
You can do that up until Thursday.

826
01:01:04.560 --> 01:01:06.200
So looking forward to that.

827
01:01:06.200 --> 01:01:08.840
Hope you've enjoyed all of this great information.

828
01:01:08.840 --> 01:01:12.880
And I will be uploading the presentation into our network

829
01:01:12.880 --> 01:01:14.920
so you can review it on your own as well.

830
01:01:14.920 --> 01:01:16.720
Have a good night.