Welcome to week eight of our GVR Masterclass and today we have a special presentation.
Our sponsors and partners from Ally Bank are bringing us a presentation around alternative
ways to access capital.
As we talked about when we first kicked off with GVR about the need to discuss venture,
but also how can we provide you all information about alternative ways of accessing capital
as a small business owner.
So I am truly excited about this presentation.
Ally is an amazing partner here at the Fearless Fund and we are happy to have them join us.
I'm going to go ahead and bring Antonio up so he can go ahead and get into the presentation
and introduce himself.
Welcome Antonio.
Thank you very much Siobhan.
It's a pleasure to be here and thank you for the invitation to participate in this
wonderful program.
On behalf of Ally Bank, we congratulate all the participants for being a part of this
inaugural cohort.
Ally is certainly very proud to be a part of this venture, no pun intended, but I also
want to congratulate and thank the folks over at the Fearless Fund and the Fearless Foundation
and especially you Siobhan for being so kind and allowing us to be a part of this wonderful
program.
And I hope that the presentation that we have for you all today is of high value to you
all.
We're kind of going to take it a different route than what you all have been hearing
so far and I hope that it still provides some level of value in whatever endeavor you have
your own in your entrepreneurship world.
So a little bit about me, just a two second plug here.
My name is Antonio Pisano.
I work for the Department of the Bank called Community Reinvestment Act or CRA as it's
better known, the acronym.
CRA has been used for many, many years on behalf of banks as a way to give back to the
community in different ways and I work for that side of the bank where we reinvest or
help reinvest back into communities in which we are created by way of loans and investments
and even grants.
So, you know, our work with the Freelance Fund and the Freelance Foundation is just
a small example.
So to bring up the PowerPoint slide, I'd appreciate that.
So as Siobhan mentioned, today we're going to take you kind of on a alternate route with
respect to, you know, business financial management principles and access to capital.
For purposes of this workshop for today or this class today, we're going to focus on
the latter a little more on the access to capital piece and really more on the alternative
piece as Siobhan mentioned.
So far, the primary focus through this program has been, hey, how do we get my business to
be venture ready?
How do I be, how do I get, you know, a position or to be an attractive business that a fund
may want to invest in, right?
Well, we're going to take you a different path and talk about not only some other alternative
ways of accessing capital and different forms of capital, but also how to best prepare for
them.
So in many ways, it's going to take you down the road map of debt, you know, and making
the comparison, you know, to some venture capital.
So with that, can we get the next slide or, oh, I have control.
Look at that.
A real quick disclaimer.
The materials provided in this presentation and any comments or information provided by
the presenter are for educational purposes only, and nothing conveyed or provided should
be considered legal, accounting, or tax advice.
Please contact your attorney, accountant, or tax professional with any specific questions
you may have related to the information provided that are legal, accounting, or tax in nature.
Now that we've got the boring stuff out of the way, why don't we get started?
We're not going to cover everything in this agenda.
This is typically about an hour and a half to two-hour presentation that we like to do,
but we are going to focus on about two-thirds of it, which we felt was the more important
areas that we wanted to cover.
And some of those include some of the basic differences between debt and equity.
By now, you've heard about equity and how to prepare for that.
Today, we're going to focus more a little bit on the debt side.
We're going to talk about how determining the use of funds and how that should impact
the type of financing or capital you may need.
And within that, we're going to talk about short-term versus long-term capital needs
and mirror them against short-term and long-term goals.
We're going to talk about the C's of credit.
And in this example, we're going to talk about the five C's.
of credit and what those mean. And then we're going to end it with a couple of things that
we feel are also important to capture, and those are some best practices in preparing to be
loan ready. So a lot of the theme in this program has been about getting venture ready,
but we're going to talk about what it means to be loan ready. And you're going to find there's
a lot of similarities in there, but there's also some real distinct parts, right, that we will
dive into a little bit. We're going to talk a little bit about, not too much, but about
the common types of loans and lenders out there when it comes to debt type of capital. And given
the environment that we're coming out of with PPP loans and stuff like that, I'm sure there'll be a
lot of questions around that as well. And then we're going to end it with going over a couple
of the more basic or key financial ratios. I promise you we won't go too deep into the math
on it, but I have found in my years that it's important for business owners to know what some
of these ratios are, and more importantly, what they mean. So we're going to touch on that. And
then we're going to end there, but in this presentation, there are some appendices that
go deeper into the financial management side of things as well. And if there's time, I can
certainly touch on some of those. But for now, I think we have enough of an agenda for the next
hour. So that said, let's proceed. So high level, differences between debt or loans and equity. So
when we say debt, we're talking about loans, right, lending, and how it compares to equity.
So as you may have heard so far through the first seven or eight weeks of this cohort, venture debt
or venture, I'm sorry, venture capital in the form of equity really focuses on growth, right? How
quickly can you grow sales, you know, and how much will that cost you, right? So when folks are
seeking to secure venture capital in the form of equity, typically it's very top line oriented,
right? Where are my sales now? And where can an infusion of capital of equity, where can that
take me in terms of top line sales or top line revenue, right? And when we talk about debt,
just to compare it, it's really focused more on repayment, right? It's focused more on, hey,
I need additional inventory, or hey, I need to hire a few more people, right? So going back to
venture capital, the P&L more often than not, is probably the most important financial statement
that you'll produce, right? It's that top line revenue number. Where am I in my sales now? Where
can an infusion of capital take me, right? Venture capital is usually best used for increasing sales
or enhancing organizational capacity. It's also, you know, a permanent sale of ownership of your
business, and therefore it can be viewed as much more expensive than debt in the long run, right?
It's not apples to apples, it's apples to oranges, so we can't really make a straight comparison
on the two. However, it's two different organizational structures that yield two
different types of returns, but that also costs us in two very different ways, right? When we give
up ownership, you know, typically it's in perpetuity unless you buy somebody out, you know,
and again, it's usually a function primarily of sales, right? Growing sales, you know, and at the
same time growing your balance. Debt, on the other hand, or lending, really focuses on repayment,
right? You know, you walk in, you know, for those of you that have the opportunity to walk into a
lender, whether it's a bank or some other type of lender, you know, one of the initial questions
or initial things that that lender is trying to determine is your ability to repay that debt,
right? And usually the first thing they go to is also the P&L, the income statement, right?
And they're trying to determine, well, how much debt can this business support in terms of
repayment ability? So it's very different versus venture equity, you know, where it's a balance
sheet, right? You're giving up ownership and repayment is going to be a function of how much
equity you build up over time in terms of that investor getting their money back, right?
Going back to debt lending, the balance sheet is a financial statement that matters most.
This is key. And sometimes as business owners, we don't realize that the balance sheet is actually
that much more important to a lender than the P&L. And I say that because while repayment
is a function of the P&L, being able to see, okay, you have X amount of net profit or X amount
of EBITDA, and I'm going to use that to determine repayment. The balance sheet really tells us a
lot more about a business. It tells us your overall health, right? It's possible that you can have a
profitable business, but your balance sheet may not look as strong because maybe you have,
you know, too much debt, or you have debt that may exceed your assets, for example, right? And
therefore, net worth is not as strong. Debt is best used to match the cash cycle of the business.
For example, inventory, accounts receivable financing, or contrary, or on the opposite side,
fixed assets, right? That can be used as collateral or other fixed assets, which we'll
get into when we talk about the use of proceeds. Debt is usually a pledge against your business,
right? That can be used as repayment, right? So at the very minimum, you know, your business
may be the collateral for whatever loan you go out and obtain or try to obtain, right? The good
part about that is that you can either pay it off over time, right? Say, you know, it has a term
associated to it. So if it's a three-year, a five-year, or a 10-year loan, as soon as you
pay that off, it goes away. And whatever collateral that was attached to that
is freed up as well, right? So that's a difference versus equity, right?
And we leave a note here at the end saying, think about what type of capital you need
based on what you're using it for. So what we need capital for should be one of the, if not
the primary driver in determining what type of capital we're seeking, whether it's equity or
whether it's a debt or a loan, right? So determining use of funds and the type of financing required.
You know, we talk about keeping it simple, right? I come from the lending world. You know,
I come from doing about 15, 16 years of commercial and small business lending,
you know, and typically it wasn't uncommon for me to see throughout those 15, 16 years,
folks walking in and saying, hey, I need a business loan. First question is, well,
how much do you need? And the response we get pretty frequently is, well, how much can I get?
Or what's the max, right? And that's usually a good indicator to that lender that's saying, hey,
this person probably hasn't done their homework just yet, or this entrepreneur maybe hasn't fully
flushed out a business plan yet to determine not only how much they need to get the business off
the ground or to grow the business or take it to the next level, but also what they need it for,
right? So determining the use of funds will usually help route you in the right way in
terms of what type of capital or what type of financing you need. So keeping it simple.
And the way I like to talk about this is determine whether your capital needs are
short-term needs or long-term needs. So here's a couple of examples of short-term needs,
financing, long operating or cash cycles, or funding seasonal inventory that you need to build
up. Most common businesses that use this type of short, that have these types of short-term needs
are typically business to business businesses or B2B businesses, right? Where you are providing
a product or a service to another business, and maybe you're extending repayment terms
to that business. So you might be extending net 15, net 30, net 45 days repayment terms.
But in the meantime, you got bills to pay, right? You got to pay for the widgets, right? Or you got
to pay to put the lights on or the rent or payroll, right? So that's an example of a short-term need.
In this case, in a short-term need, typically the kind of debt or loan you'll need is most
likely a line of credit, right? Something that you can access in very much the same way as a
credit card, for example, something that you can access as you need it. And then as you get repaid
for those invoices or whatever it might be, you pay it down or even pay it off, right?
The second bullet point under this you'll see is that it must be used appropriately.
Oftentimes, business lines of credit need to be not only repaid frequently, but they should be
paid down to zero at least once annually. That's an important factor that oftentimes
businesses may not fully understand or the banks themselves don't do a good job of articulating
at origination, which then can lead to problems down the line, right? A line of credit is intended
to be used as that, as a line of credit where you use it, pay it down, use it, pay it down,
right? Short-term needs. Contrary to that are long-term capital needs. Long-term capital needs
are typically best for one-time uses, right? So most non-recurring one-time capital expenditures
such as the purchase of equipment or construction buildup, right? Those kind of examples are
typically a one-time in nature and typically is something you want to finance with a term loan,
right? You want to finance it with a term loan, right?
When I go out and purchase a piece of equipment,
the piece of equipment has a usable life
of five years or 10 years, and you
get a loan with a term that matches that lifespan.
So that's an example of a long-term need or something
to that effect.
So in that example, a term loan is typically the best option.
Or let's say you moved into your facility,
whether you purchased it or you're renting it
and you want to do some improvements.
You want to do a build-out, maybe
you want to knock down a wall or put up some walls,
maybe paint, what have you, some minimum repairs.
Those are examples of one-time needs,
and a term loan is most appropriate to that.
So again, keeping it simple and determining your use of funds,
even before you determine how much you need,
because your use of funds may dictate, at the end,
how much you need in the form of a loan or debt.
So after we've determined that, another important factor
that we should always talk about when talking about securing
a loan are the C's of credit.
Depending on how long you all have had your business,
you may have come across something similar in the past
where somebody may have talked about the three C's
or the five C's or even the seven C's of credit.
Well, I met in the middle and I kept it at five, right?
But I feel it are five that are very important
and it's always very helpful for us as the consumer,
or in this case, the business owner,
to understand what these C's of credit are,
what are, you know, how do lenders evaluate them,
you know, and what are they really looking for, right?
So the five C's of credit, as I've summarized them,
are credit, capacity, collateral,
capital, and conditions.
And we'll dive right into them now.
So the first C, and it's the first C,
by no secret, is credit.
I like to focus on this one first
because more often than not,
it tends to be the most popular of the five C's.
People are always curious about
not only how their own personal credit score
may impact their ability to borrow money,
but also about business credit, right?
We hear, you know, we hear people talking
about business credit and what does that mean
and how does that get evaluated?
So we'll focus on the personal credit first, real quick.
So credit, as we know it, is the historical illustration
of one's ability and or willingness to repay, right?
You'll notice we have ability and or willingness to repay
because the willingness part
sometimes is a character feature, right?
Lenders may evaluate credit by saying,
man, this individual makes 180 grand a year,
but man, their credit is always a little bit sloppy
here and there.
And they may associate that with a credit issue.
Oh, I'm sorry, a character issue, right?
So we talk about ability and willingness
to repay oftentimes, right?
Lenders will assess the personal credit,
typically of any individual or entity
with 20% or greater ownership.
This is not true all the time,
but it's true more often than not,
where if there's a business
and there's more than one individual
owning 20% or more of the business,
more likely than not,
all those individuals that have 20% or more ownership
will be asked to provide a personal guarantee,
as well as their credit and their financial wherewithal
is gonna be evaluated as part of the application
on a case-by-case basis.
And depending on what state you're in,
spouses may have to serve as guarantors.
This is not too common nowadays,
but back in the day, it was a little more common
and it really relies upon what state you're in
and what the lender will require.
And if they're using household income
as part of their evaluation, right?
Lenders may also assess the personal credit of co-signers.
So if you're a younger business
who can benefit from the support of a co-signer,
much like in the mortgage world or auto lending world,
they may also be subject to having their credit scores checked.
As most of us, hopefully by now know,
credit scores are determined by a bunch of different factors.
The three or four most common
having to do with personal history,
personal payment history, obviously,
percentage of revolving debt available.
Many of you have probably heard of the 30% rule, right?
It's kind of like an unwritten rule
where depending on how much you have available to you
in the form of credit cards or lines of credits,
typically try and owe no more than 30% or less
on a continual basis.
That's typically a good rule of thumb to follow.
Length of credit history is also very important.
I always say that when it comes to credit,
your best friend is time.
Because, you know, the more history you have,
much like our driving records, the better, right?
Or if we've had some challenges in the past with our credit,
time is also our best friend in terms of,
in terms of, you know, getting it back together
and reestablishing it or improving it.
Types of credit is very important.
In the previous slide, we talked about installment debt,
like a term loan, versus revolving debt,
like a landline loan, for example.
And we focused it around the use
and what type of loan we would need.
But when it comes to personal credit history,
that's also very, very important
because the credit bureaus
factor in the type of debt we have.
Like if we have too much revolving debt,
like credit card debt versus installment debt,
that can typically impact our credit scores
one way or the other,
typically towards the negative side
if we have too much revolving debt versus installment, right?
They typically look more favorably at installment debt,
like term loans, like a mortgage or an auto loan
or a student loan, stuff like that,
or a personal loan that we got
that has a set term and a set payment, right?
Stuff like that.
And then just to highlight
the three different credit bureaus out there
are Experian, TransUnion, and Equifax.
That also applies to business credit as well.
Of the three, the oldest bureau out there is Experian.
So typically that one out of the three
has the most of the information than the other two,
typically more information.
The Experian used to be the old TRW back in the day,
25 plus years ago.
So, and in terms of business credit,
you'll notice I don't focus too much on it in this slide
or really at all,
mainly because while it is something that's real,
for example, a Dunn and Bradstreet report or DMV report,
typically, and if you have a DMV report, yes, it's helpful,
but unfortunately, lenders don't put too much weight on that
because they tend to be unreliable
or not really a true indication of all the historical debt
that a business may have had.
So if you have one available,
part of the due diligence that a bank does,
they'll certainly pull it,
but not a requirement
and certainly not something that carries too much weight,
believe it or not,
because at the end of the day, as business owners,
more often than not,
you will be asked to provide a personal guarantee
on any loan you take out,
unless you become a public entity,
at which point, you know, it's a different ballgame.
So anyway, C's of credit, first C being credit,
and probably the one that, again,
is probably the most important.
The next C, and again,
we're talking about debt and lending, right?
These C's, for the most part,
probably don't matter as much or at all
when we talk about venture capital in the form of equity,
but when we talk about lending, they certainly matter.
So the second C that I prioritize is capacity.
And this, very simply put,
is the ability of the business to repay the loan
that you're looking to get.
That's simply all it means.
And most, you know, and the most important
or primary source of repayment is the income of a business.
So profit on recent tax returns or interim financials,
or if you're a younger business or a new business
or a business that's looking to finance growth,
like a second location,
then the projected income of a business
will also play a key role in determining
your ability to repay or your capacity, right?
Most lenders will also take into consideration
personal income,
more specifically, personal discretionary income.
So what that means is that they're probably gonna ask
for your personal tax returns also.
And in the event that there is income still available
after all your personal obligations are repaid,
more often than not,
that lender will use that personal discretionary income
as part of what they call the global cash flow.
So this is a plus,
especially if there's other household income available
to help pay for some of the personal bills.
So this more often than not can help,
can help the lender determine strong repayment ability,
but also can help the business secure debt
or secure a loan.
And at the very bottom,
you'll see a note that says,
most lenders require a minimum debt service ratio
of 1.25 to one.
That's a real number.
So industry-wide, most lenders, if not all,
typically use a minimum debt service ratio of 1.25 to one.
We're gonna talk a little bit about ratios
towards the very end,
but don't let ratios or,
decimal points, you know, kind of steer us away because it's math. And all that really
means is that for every dollar in loan repayment, you're going to have or seeking to have a
lender wants to see that at minimum, there's a $1.25 coming in, in the form of available
cash flow, like net income, you know, and global cash flows. So we'll talk about more
ratios towards the end, but that's really all that means. And again, for a lender, besides
the credit repayment ability is key, right? We've, we've all heard of the term cash is
King. Well, when we try and get debt or a loan, repayment ability is the key part for
any lender. And this minimum debt service ratio requirement is, is that magic number,
that magic minimum number that'll get us over the hump. Third C collateral, not everybody's
favorite C, especially when we talk about loans, because you know, more often than not,
most folks, especially younger businesses may not have that much collateral available,
right? So collateral, what is it? Collateral, tangible assets, securing the loan that can
be sold or liquidated by the lender in the event that the business is unable to repay
the loan. Much in the same way as a home is collateral for a mortgage or a car is collateral
for an auto loan. You know, typically at the bare minimum, a business and all of its assets
will typically be the first form of collateral for any type of debt or loan for the business,
right? So you should be prepared to pledge any and all available business assets to secure
a business loan. I purposely skipped over the personal assets that I want to talk about
separately. Yes. In the lending world, it is very common for folks to also pledge personal
collateral, you know? So this can be in the form of, you know, personal assets, such as like a
vehicle, like if you're asking for a small micro loan, for example, and you go to a lender that
may take that type of collateral, you may be asked to supply that. Or on the larger scale,
if you're a homeowner or have, you know, real estate assets available to you, and you go out
and try and get, for example, an SBA loan, it's sometimes likely that a lender may come back to
you and say, hey, you got to put up best available collateral. And they may determine that your best
available collateral may be the equity in your home because you have a service oriented business,
for example, that may not have sufficient or really many, you know, much in the form of assets,
business assets to secure the loan. So it's very likely and common to do that. It's not a hardline
requirement, but it's certainly something very common because we'll talk about SBA a little bit
towards the end. We'll just mention it, but there's programs out there like the SBA 7A Guarantee
Program that, for example, is made available to lenders when they come across transactions that
may not have enough collateral. And we'll talk about that more later, but here for purposes of
the seas of credit, collateral is that third C we talk about. Capital, very simply put, capital
is, depending on the lender, is typically how much capital we've invested into the business
or we will be injecting into the business. So the two most common scenarios are in a startup
situation. If your business is still within that startup stage where you're pre-revenue or you're
starting out right now, or let's say you've been operating, but you've been operating for less than
two or three years, which is technically a definition of a startup still, typically the
capital portion of the seas is how much capital you've injected into the business to help get it
started, right? So for startups, typically most programs, especially government sponsored programs
like the SBA, for example, will typically ask for between 10 and 30% cash injection or capital
into the business as part of their requirement, right? To acquire a business, typically they'll
want to see minimum 20% injection for something like that. And you see the comment there as low
as 10% for SBA loans. So the SBA really is there to help get these types of transactions off the
ground or funded in the event that there's either a collateral shortfall or a capital shortfall,
okay? And the last C, which in the past I used to say is probably the least important of the Cs,
but given our current environment with respect to COVID and the economic impact that has had
over the last couple of years, not to mention other economic conditions like the rising interest
rate environment that we're currently facing and stuff like that, this has probably become
that much more important, right? So conditions, and these are just simply economic conditions that
may or may not impact your business or the industry. So, I like mentioning this simply
because just know that when it comes to lending or debt, and I'm sure in very much the same way
as equity would work, conditions are very important because, you know, if your business
is positioned, you know, and it doesn't really align with current conditions or the current
economy or what have you, you know, then you can, you bet you that a lender is going to take that
into consideration. So, this is the last of the five C's, and I expect to have maybe a couple
of questions on all five. Typically, these are five areas that a lender or an average commercial
bank will typically want to evaluate as part of any loan application, okay? And I'm sure there's
a lot of overlap with respect to the equity side or the venture capital side as well.
So, now, in terms of best practices and getting, quote, unquote, loan ready,
here are some kind of best questions. I'm sorry, not best questions, but best practice type
questions that you can prepare for, and I teased a couple of them earlier, right? So, right off
the bat, what loan amount are you requesting? I'm sure this is probably the same type of question,
you know, in the venture capital world, in the equity world, right? But it's a simple one,
but not so simple, right? Because knowing the answer to that question requires us as entrepreneurs,
as business owners, to have done some research, have done our homework, maybe even done some
kind of a plan, right, like a business plan or a strategic plan or something to that effect,
to be able to answer this question in a very strategic way, right? So, what amount are you
looking for, right? The question right after that is, what will the loan proceeds be used for? What
do you need the money for, right? And the answer shouldn't be, I'm sure it can, but it shouldn't be,
you know, well, you know, I'm going to apply more inventory. Okay, well, what does that mean, right?
So, these two first questions are very key in getting a good dialogue started with any potential
member, how much you're looking for and what will you be using the money for. These other questions,
you know, identifying the primary source of repayment, what's an example of that? One example
of that is, let's say I have my business and I've had it for, you know, X number of years,
but now I'm looking to get, you know, to take it to the next level, either because I'm introducing
a new product line, or I'm opening up a second location, or I'm pivoting to a different business
model, whatever it may be. Well, the primary source of repayment is going to be that additional growth,
right? Along with the historical performance of the business. So, these are very, very important
to consider. I won't go over all of these in the interest of time, but very, very key to go,
you know, over these, what collateral, you know, do you have available and stuff like that. So,
I imagine that a lot of these are also very common in the venture capital as well.
And then along the same lines, and I apologize for the formatting, I don't know what happened
there, but along the same lines, in terms of best practices in preparing to be loan ready,
some basic documentation that a typical lender will oftentimes require, right? So, obviously,
you're going to need a loan application. You'll get that from whatever lender you approach,
you know, more than likely as part of the application, any and all individuals,
as I mentioned earlier, will have 20% typically, or more ownership, or who are identified as a key
person to the business, will be asked to fill out a personal financial statement.
So, that'll be part of the application, a copy of the credit report. So, obviously,
that will be generated by the lender. And then the rest of this here is stuff that we should
be prepared to provide, right? So, before we even get asked the question, we should make sure we
have all this available. So, right off the bat, if you're an existing business, last two to three
years, usually it's three years, of your business tax returns is going to be key to that. Alongside
that, last two or three years of your personal tax returns may be required as well, if the lender is
using a global debt service to help determine repayment ability, right? Your current year
financials, right? So, right now, for example, we're in the middle of late June. So, if you're
asking for a loan right now, you probably have to provide your 19, 20, and 2021 tax returns,
and then provide at least some kind of a P&L, and if available, a balance sheet through, let's say,
May 31st or April 30th, right? Something that tells the lender, hey, here's how I'm performing
this year in advance of having a tax return, because you probably wouldn't have one yet, right?
you'll be asked to provide a schedule of outstanding business debt, excuse me. So going
back to that business credit report, that oftentimes, more often than not, is not that
reliable, like an ambassador report, because not all things report on there, or not all
lenders report on there. The lender will rely on the business to disclose any known outstanding
debt, right, in the form of a spreadsheet or something equivalent to that, in order to keep
your bookkeeping, right? If you lease or you own a facility, like a warehouse or an office space,
something like that, oftentimes, even if you lease, oftentimes you may be asked to provide
a copy of the lease agreement. And the only reason this is important, and it's not important in all
cases, but if you're a manufacturer or you're a distributor or something like that, where you
rely on having a facility, that lender is going to want to know, hey, do you have a lease
that accommodates whatever loan term I'm going to give you? So if I'm going to give you a five-year
loan, I want to make sure that you have a lease that would accommodate those five years, because
what happens if, for example, you have a warehouse and you rely on your warehouse and your lease is
up at the end of this year? I want to know that you at least have a couple of options that
can take you through those five years, right? So it becomes a risk to a lender, right? So anyway,
number nine, business plan or executive summary. This is really important, especially for a newer
business. If you're a brand new business, pre-revenue, you just started, or you're within
those first two or three years, you can expect for a lender to ask you for a full-fledged business
plan, right? Because you don't yet have the history for the lender to rely upon to solely
make a decision, right? So having that business plan is very, very key. I like for any business,
regardless of how long you've been around, to have a business plan, but not required if you've
been around for over three years, right? If you've been around for over three years, then more often
than not, an executive summary or something equivalent to that is typically good. So anyway,
good examples of just kind of documentation to help you get loan ready, and that's good.
I'm going to fly through these next couple of ones, because I really want to get to the ratio
slides, but some common types of lenders and loan options. Again, by now, depending on what stage
of the business you're at individually, you've probably come across some of these or all these
already, but just right off the bat, banks and credit unions, typically the most sought after
type of loan capital, mainly because it's usually the cheapest form of capital, right? The goal
at the end of the day is to be an attractive enough business that lenders and banks are
finding for their business, right? That should be the goal of all entrepreneurs in terms of being
able to access loan capital. That second tier or that next tier after banks and credit unions,
typically are alternative lenders, but more importantly, like nonprofit, or I put in there,
CDFI lenders. CDFI is an acronym for Community Development Financial Institutions, and these
are typically like nonprofit, non-depository institutions that are usually mission-based
and have a primary focus on impacting local economies. And then the way they do that is by
being able to offer loan products and services that may not be designed or accessible to certain
folks. Like let's say you have a small business, you go to a bank or two banks, you get denied,
and then you go and find one of these lenders, typically that's what they're doing, or that's
what their target market is. Factoring, factoring is an old school form of financing that is
typically higher priced, and it basically involves securing funds in exchange for either an invoice
or an account receivable, or even a purchase order, right? It's an old school form of financing.
It's not so much of a loan as it is in advance. It's something that actually,
since the last recession back in 2008, 2009, has kind of come back to life. It used to get
kind of a bad name. It's become a little more common now because we have so much access to
information nowadays where we understand it better, but typically it'll be a slightly more expensive
form of financing. Then we have crowdfunding, fintech, online lenders, which in many respects
are kind of in that same ballpark, but again, since the last recession of 2008, 2009, we've
seen a big rise in online lenders, fintech, and a lot of that originated out of crowdfunding type
or peer-to-peer type lending tools or vehicles. Those are some of the higher examples of loans.
I won't go into detail on this. Just know that by now, I hope...
that all of us would have heard about the SBA,
the US Small Business Administration,
if for no other reason, because of the PPP,
that the Paycheck Protection Program loans
that were made available in response to COVID.
However, for those of you that maybe hadn't heard
of the SBA prior to PPP,
just know that it's an extension of the federal government
that is designed to provide support
to the small business community in different ways,
primarily in lending programs.
They don't lend money directly,
unless it's a disaster loan,
but through lending programs
or through technical assistance programs as well.
But some of the more common types of SBA loans out there
are a microloan, which typically loans under $50,000.
The SBA 7A loan is probably the most common SBA loan program
out there.
So for those of you that may have already walked into a bank
or will be, more often than not,
if somebody talks to you about an SBA loan,
it's probably going to be an SBA 7A loan
that they offer you first.
And in that scenario,
all the SBA is doing is providing that bank or that lender
a federal guarantee on that loan of up to 85%,
but usually, on average, 75%.
So it hopefully helps, or it should help,
incentivize lenders to do more loans
and to do loans that they otherwise may not have done
because there's either a lack of collateral
or a lack of capital or a combination thereof.
So there's some other examples there
that I won't go too deep into in the interest of time,
but happy to answer any questions after that.
And this is the last piece I wanted to get to,
key financial ratios.
So the idea behind sharing a few of these
with entrepreneurs that are at various stages
is to just kind of help, I guess, demystify what ratios are.
And sometimes, depending on your level
of how long you've been in business,
these may or may not apply to you as much,
but I feel as having been a lender,
a commercial lender for about 15 years,
I can tell you that as lenders,
we look at most or all of these ratios behind the scenes.
So if we're looking at them as a lender,
I always feel it's important for, as an entrepreneur,
to at least understand what these mean, right?
And typically, these ratios are typically a function
of your balance sheet, right?
So if you recall earlier in the presentation,
I said that to me as a lender,
yes, P&L is important because it tells me your sales,
it tells me if you're profitable or not,
and it helps me determine whether or not
you're gonna be able to repay a loan, right,
because of the ratio.
But I also said that in spite of that,
a balance sheet, in my opinion,
is the most important financial statement for a business
because it tells you the health of the business.
It tells me your assets, it tells me your liabilities,
and with that data,
I'm able to calculate some of these ratios.
Very high level, the four ratios I picked out,
the first debt-to-net-worth ratio.
Let's see.
And I'll, yeah, and I'll just skip to this,
but this one gives me real examples.
So the first one, top left-hand corner,
debt-to-net-worth ratio.
Sounds intimidating, especially when we start seeing division
and we start seeing decimal points,
but let me demystify it for you, right?
So all debt-to-net-worth ratio is telling us,
how much debt do we have for every dollar of net worth?
That's all it's telling us, right?
So in this example,
where there's total debt of $100,000
and there's total net worth of $65,000, okay?
When you do that math, $100,000 divided by 65,
it spits out a ratio of 1.54.
So I tell you your debt-to-net-worth ratio is 1.54.
What does that mean?
All that means is that for every dollar in net worth
we have in our business, we have $1.54 in debt, okay?
When we think about that,
we might think it's a bad thing, right?
We might think it's a bad thing
because we're thinking, hey, we have net worth of this,
but man, we have $1.50 for every dollar net worth.
Yeah, it's not the healthiest thing,
but all that really means is that
you're probably at a growth stage in your business
where you're financing your business with debt
to be able to eventually get over the hump
and increase sales, right?
So as you're repaying back that debt,
hopefully your sales are growing, right?
And that ratio is gonna get smaller and smaller
because as your sales are growing,
so is your profitability, hopefully,
and so is your net worth, right?
So yes, it's not great in this scenario.
scenario. However, it tells us basically that you're financing with debt. And there's a
couple of other examples, but I at least wanted to get in the weeds in that one just because
I felt putting it in plain English sometimes helps, right? I'll do one more, and I know
those questions are coming in, but I'll do just one more. Let's see. The current ratio
on the top right is probably the most common ratio. So using these numbers that I took
from a real balance sheet, current assets of $72,000, current liabilities of $18,000,
and it spits out a ratio of 3.97. So current ratio is a liquidity ratio that estimates
the ability of a company to pay back short term obligations. So our ability to repay
back short term obligations using just our assets. So in this example of 3.97, all that
tells us is that for every dollar in short term liability that I have, like debt, for
example, or any liability, I have $3.97 of assets. So just hearing it in English and
in plain words, we can tell, hey, that's a pretty good ratio, right? That means that
for every dollar in liability that I have, I have almost $4 in assets. That's all that means. So
anyway, I felt it was important to at least cover that, and I want to be mindful of our time and
questions. So with that, let's enter into our Q&A portion, and Trevon, do I simply go in order and
start answering each one, or is there something else I got to do? I will assume that I will just
go in and answer these questions. So question number one, I've heard a lot of people recommend
this, but I haven't done it as I'm still doing my research. Would you recommend using your
business EIN number to open up credit cards on behalf of your business? What tools can we use
to build credit for our business? How do we start if we haven't established business credit, but
want to? Okay. Whoever question number one is, you cheated because you asked three questions in
one. So I'll do my best to answer all three. So for the first question, would I recommend using
your business EIN to open up a credit card or any kind of loan for your business? Absolutely.
In the same way that hopefully somebody has encouraged you to, and if not, I would encourage
you to, but in the same manner that you would go open up a bank account for your business,
hopefully using an EIN number, I would also encourage you to open up any kind of loan for
the business using that same EIN number. Okay. But still expect to be asked to provide your own
social since you will be a guarantor. So what happens when you go out and obtain a business
loan or a line of credit, the borrower will technically be the business and you're going
to use the business EIN or tax ID number for those purposes. But we, as the individual owner
or owners, we're going to be the guarantors on that loan. Nine times out of 10, you're not going
to be able to get around it, especially at the stage of the business that most of us on this
call, it's not all of us are in right now. So you're still going to be using your social,
but that's going to be for your purposes as the guarantor on the loan after the business.
What tools can we use to build credit for our business? So I mentioned Dunn and Bradstreet.
There's probably a couple more out there that are less known, but Dunn and Bradstreet or DNB
is the agency or the credit bureau that is most commonly used for businesses. Okay. It doesn't
work in the same form as our personal credit. So for all of us, none of us had to subscribe to
Experian or TransUnion or Equifax for our personal credit, right? Why? Because most or all lenders
throughout our personal credit history, they report to those automatically. So we don't have
to go out there and proactively tell the credit bureaus, Hey, I have a loan here. I have a loan
there. Do that. Unfortunately for commercial or business credit, especially using stuff like
Dunn and Bradstreet, typically you have to be a little more proactive to request a lender to
report to your Dunn and Bradstreet. So yes, I would advise of that. And that would be a good
first start is to, to subscribe or register, register to a Dunn and Bradstreet. And how do
we start? Do we have a credit for one, two, in the same way that you asked the question, right?
So going out and getting that first business loan, getting it under the business name. That's
how you're going to establish that. Dunn and Bradstreet and other, other background type of
agencies like LexisNexis or whatever, oftentimes, and you can request for them
to also have other stuff reported. Like I've heard of folks getting their vendors,
you know, and how you repay that.
your vendors that can be reported, and that can also help establish business. I hope I
answered your question. How does the lender break down the debt service ratio from your
financial? That's a great question. So sticking to the business portion, okay, if you recall
that table we had where we showed the business financial, typically it's going to be one
of two things. It's going to be your net income of the business on an annual basis, okay,
or your EBITDA. Your EBITDA is your earnings before interest, taxes, depreciation, and
amortization. You can Google it if that's your first time hearing that. EBITDA, right? You're
going to take that EBITDA or that net income annually, and they're going to take your debt
service. So this is just real simple numbers, right? Let's assume that we came in on a loan
annually, not monthly, but annually for you is going to be about 10,000 a year. That's just
under a thousand bucks a month, right? Let's just assume it's a big loan, but it's going to be 10,000
a year. That lender is going to want to see, remember the ratio 1.25 to one, they're going to
want to see $1.25 coming in for every dollar in debt. So more likely than not, they're going to
want to see over $12,000 worth of income or EBITDA available to repay that debt at minimum. The
larger that number is, the better. Now, depending on the lender and depending on the kind of loan
you're asking for, they may also incorporate any personal discretionary income you have available.
So they will do an analysis of your personal financials. That's why you're submitting a
personal financial statement, and that's why they're checking their personal credit history.
And they're going to see, hey, XYZ individual has an additional $12,000 a year available after
they pay off all the personal expenses. They're the owner of the business. We can rely on that
income to help with repayment. That can also be included as part of their evaluation and as part
of getting you approved for a business loan. Question number three, can proven track accounts
capital investment? Well, only if that proven track time is capital being invested. In other
words, if we're talking about, hey, I have invested $20,000 into my business over the last
two years, depending on the lender and depending on the stage of your business, they may give you
credit for some of that. They may count that as capital injection. But if we're talking simply
about sweat equity or just personal time you put into it, yeah, they're going to give you credit
for that as they should, but not dollars. At the end of the day, the way I like to see
projects being financed is if you call it a project. So let's just say that you're a year
into your business, you've invested $20,000, but that $20,000 was part of a $50,000 plan that you
put together a year ago. And now you come to the lender and say, hey, Mr. Lender, I had this
business plan laid out where over a year of time, I needed to inject $50,000 of capital into my
business. However, I already put in 20. Here's where I'm at now. I need to secure the other 30.
Is that possible? Yeah, it's possible, but I'm more of a fan of doing it all together before
you start spending your money. In other words, securing the loan or any kind of debt financing
before you start putting out your own capital. Why? Because at that point in time,
you're a little bit stronger. At that point in time, you still have the cash in the bank. A
lender can see you have the cash in the bank and a lender can see that you've put out a good plan
that shows that you in fact need 50 and you have 20 available to put in. Anyway, I hope I answered
that question, but for the most part, yes. For the 10 to 30% investment, is that what's
recommended as an investment for a business? Just want to get a better understanding. Yeah,
that's a great question. Most lenders out there are going to want you to have skin in the game,
right? Hopefully most or at least some of us have heard that term, but they're going to want us to
have skin in the game. Most certainly, they're going to want to see that you put in at minimum
that 10 to 30%. That 10 to 30% really matters or depends on what kind of loan you're going to be
securing, right? If it's a government sponsored or government guaranteed loan, like an SBA loan,
typically if you have a little bit less, they're a little bit friendlier about that
because the lender is going to benefit from having a guarantee from the SBA.
It can help offset any concerns with respect to capital injection. But yes, to answer the question,
that is what's recommended at minimum to invest into your company, especially if you're in that
startup phase or if you're in that two to three year range, you're going to want to see that you
have capital. Think of it this way in layman's terms, right?
You know, it's going to be in our thinking as a commercial lender, right, they're going
to be thinking it's going to be harder for an entrepreneur to walk away when things get
tough if they have 30 percent in or $40,000 in versus, hey, I got all that loans to finance
my business and things got tough, you know, and you walk away.
Right. That's that's kind of the simpler answer. All right. Let's see. Question number five.
You mentioned that Don's number isn't much to ask, but Sam's just replaced it with the
unique identity. Is this number important as far as both are concerned? I haven't seen
it widely used. I've heard of that, but I've been, you know, I've been out of the commercial
lending area for a couple of years now, but I've heard of the number. I think it's something
that SBA uses a lot. So so that Sam's number is a good indicator for small business lenders
when using an SBA product. And SBA uses that commonly. So to answer your question, yes,
it is an important number to secure a loan. However, all those other factors I talked
about, all those C's I talked about are still equally or more important. That Sam's number
is relatively new to your point. And it really it really was from what I would call originator
develop as a means to make credit profiles of businesses more comparable to one another
with respect to SBA lending specifically. So, yes, whatever business tax returns are
showing a loss in the prior year, will this discount you for qualifying for a business
Unfortunately, it will have an impact if you're showing your most recent year as a loss. However,
keep in mind all the C's that I talked about. So we're just coming out of a COVID environment
where we were forced to shut down for the better part of a year over a year ago. And we all tried
to and we all tried to recover over this past year. Right. So if that had a negative impact,
as an example, on your business, well, we have an explanation for it. Right. We have an explanation
for it. But with that, now you should be prepared to produce some kind of a plan that not only helps
explain why you had a loss last year. Right. But more importantly, you know, how you're going to
recover from that and how the capital or the loan that you're obtaining is going to help achieve
that plan and hopefully produce profitability by the end of the year. Right. So. So, yes,
it does have and it will have a negative impact, especially because it's the most
recent year that the lender has to rely upon. However, if there's a good explanation and you
can show a plan and even a budget or a forecast that shows how the loan you're trying to secure
is going to help you achieve more positive numbers, then that, you know, that will be very,
very helpful. Are the performance projections the same as one to two year cash flow projections?
Great question. Yes and no. So the one to two year cash flow projection is if you have something
like that, it's great because it shows the amount of cash your business will need in order to in
order to to operate. Right. However, the reason I said it isn't it, isn't it? Because it isn't
because in terms of performance, typically when we talk about projections, we're talking about a P&L,
a profit and loss or an income statement. Right. Or we're talking strictly about sales,
your your fixed expenses, your variable expenses and what that bottom line is. Right. What the net
profitability is or net loss. Right. So there's a slight difference. And if we had more time,
we would go over that particular financial statement. But it's really two two different
things. Right. Cash flow talks about all those things that a P&L has, like income expenses,
but it also talks about what your starting cash on the business was. A P&L doesn't do that.
It doesn't do that. I hope I answered that question. Last question. My business is a
non-profit. Why do I have so many final lenders? Can you provide information on how to provide
lending services? They're very limited. Yeah. Or else you wouldn't be asking that question,
right? The resources to get a loan for a non-profit are fairly limited. And typically,
if you do find a lender, it's typically going to be a non-profit that does something like that. So
I can follow up with that later and do some research and maybe go through the program.
But it is more heavy. So with that, I'm looking at the clock at five. So I'll stop there. I hope
I answered everybody's questions. A lot of information to squeeze into a one hour presentation,
but I hope you all found value. And again, I want to thank the panelists.
and the Phillips Foundation for including us in this endeavor.
I wish everybody the best.
Good luck to you all.
And again, once again, I congratulate you all
for being a part of this wonderful program, too.
So thank you very much.
I think we'll turn it over to Siobhan or Trayvon.
Yes, Antonio.
I have been looking at the chat.
Everyone is like, this is great information.
They have enjoyed it.
They've enjoyed the conversation.
So much good information that I knew you were going to bring.
So I am excited that you were able to bring this today.
And so those who may be watching the replay,
if there are other questions that come up for you all,
for Antonio, please feel free to send them over to me.
And we can see if we can get those questions answered
for you.
Just wanted to give you all a heads up and a reminder
that we have our, you can sign up for the coaching
calls for this week in the Mighty Network platform.
So make sure you do that.
You can do that up until Thursday.
So looking forward to that.
Hope you've enjoyed all of this great information.
And I will be uploading the presentation into our network
so you can review it on your own as well.
Have a good night.