Business Finance and Credit

Business Finance and Credit

Rule #1 of a Business Line of Credit – Banks Finance Performance Not Vision:

As a business owner, you have probably felt the wrath of your bank’s credit policies and are still wondering what happened; or worse, still have a relationship with them on their terms! What you probably did not realize is that it has always been a one sided, unrequited relationship. The majority of business owners have little or no idea how bank credit works and how it can affect their operations. Unfortunately, business owner will constantly return to their banks repeatedly expecting a different outcome (definition of insanity).

Have you ever been declined for a business loan that you needed to increase or improve revenue? The cardinal sin of the majority of business owners is that they use a completely different matrix for finance than their banks. This is because the majority of business owners make two erroneous assumptions:

  1. A short term liability like a business loan is exactly like cash on a balance sheet
  2. Internal growth rate is a function of debt service

First, I will address number one. Have you ever heard of a company that “grew into bankruptcy”? Sounds counterintuitive but this is how it happens; Although an operating line looks and smells like cash to a small business owner because they can purchase inventory, make payroll, expand their business, etc; it is a liability! The bank knows this, which is why the finance performance not vision. They cannot accurately measure your financial condition without determining the ability to cash flow the debt you as a business owner are requesting from the bank. Business owners generally dismiss this because they treat liabilities like cash but neglect to acknowledge the drag they are creating on their business.

This leads to number two. Internal growth rate is the retained earnings of a business that also projects the ability to handle debt. This is what banks look for. If your projected growth is beyond the internal growth rate your company can handle, by definition you need external financing. What if you have a potential for explosive growth as the result of an improving economy? Refer to rule number 1! For a lack of a way to put it, banks do not care. They are more concerned about debt service and collateral and vision provides neither.

To be fair to banks, it is extraordinarily difficult to quantify their client’s operational capacities without underwriting performance. Performance is the matrix for banks because performance signals several things:

  1. Barrier to entry has been met
  2. Equity is more than likely build into the success of the business
  3. There it probably more collateral
  4. The businesses systems and operations are prove
  5. Core competencies are well defined

Therefore, a bank can peruse through the financial condition of the prospective business and determine their ability to debt service the short-term liability they are providing with depositors cash deposits who are expecting a guaranteed return on the money. The truth is, the cost of money from banks is very inexpensive however, it is many more time more difficult to fit within their credit box, which is why vision is not financed.

There are options but you need to be prepared to divorce your bank and find other financial products. Here are some very solid suggestions:

  1. Factor your receivables – It costs more but it is boundless. As fast as you can turn your A/R is as fast as you can have cash in hand to cease all the opportunity in your market. Even if you qualify for a business line of credit, that may not be enough to finance your growth and if you commit to this, refer to rule number 1. Always treat this as a method to find a new plateau for your business and once you have capitalized on the increase market share and growth rate is between 2-5% return to the bank.
  2. Finance your building with a non-bank SBA Lender – Non-bank SBA lenders are transactional lenders. They will generally subordinate soft assets like A/R and Inventory, which will allow the business owner to fully utilize all credit instruments to their maximum potential.

AIG – Their Corporate Silver Spoon and Tax Payer Dollars

Tax Payer Dollars

AIG, too big to fail, propped up with another infusion of cash from the coffers of the U.S. Treasury. $170 billion of tax payer dollars that is suppose to prevent a catastrophic disaster. Instead of being grateful and humble, AIG executives prove once again the disconnect between the high powered business world and the working world. No “we really appreciate your help”. Just more excuses to justify millions of dollars in bonuses for them. Perhaps it’s time to call their bluff and let them fail. By handing out bonuses, AIG and other companies who find nothing wrong with it, are creating an atmosphere that makes it harder for congress to justify and approve more money down the road that would be intended to help them. Why should they get more?

The inner workings of business and finance are being exposed as window dressings made out of money deteriorates. Companies left too long with no one watching the store. A domino effect that has left our economy shattered and hanging by a thread. High stakes greed created a whirl wind with the force of an F5 tornado that has swept down from the corporate headquarters wiping out 401Ks, leaving small business and regular consumers out in the cold and essentially shutting down our economy. All the while, the people who sent this economic mudslide roaring down the mountain arrogantly and greedily cash their bonus checks with a smug satisfaction of business as usual. So what if it’s tax payers dollars. They have contracts and the company dare not break said contracts over fears those who don’t pocket bonuses may leave. Where are they going to go? You can bet they won’t be flipping burgers at McDonald’s or scanning your cans of Spam at the grocery store.

We, the American tax payer, get it. We do understand what’s at stake, but that doesn’t mean we have to be happy about it. The companies we have been bailing out obviously don’t. We have been told the only way to save ourselves requires handing out our hard earned money to save the likes of AIG. Big businesses and financial companies who have lived high on the hog for so many years, they can’t see their toes for their inflated waistlines. Executives who think nothing of holding out a hand and expecting tax payers to ante up so they can continue their arrogant, extravagant lifestyles and business practices. All the while smacking the American people along side the head with the other hand. Instead of receiving bonuses, everyone who contributed to our declining economy should be fired. End of story.

AIG plans to award executives another round of bonuses. $165 million. For what? A job well done? If you are confused as to what constitutes a job well done; you aren’t alone. In the real working world, if you played a part in running the company you work for into the ground, you don’t receive a bonus. You receive a pretty little pink slip on your way out the door.

Where was AIG when the people of New Orleans attempted to collect on insurance policies underwritten by AIG after Katrina pounded the city with Gulf Coast waters? The people who dutifully paid their monthly premiums with a guarantee their property would be protected. We have gotten use to hearing how insurance companies aren’t there for policy holders after a natural disaster (hurricanes, tornadoes, forest fires). Every trick in the book is dug up in their attempt to break their contract to policy holders. Yes, it is a contract. We pay you each month for protection. You take our money agreeing to provide said protection. That’s a contract. AIG, among others, didn’t seem to have a problem trying to scheme their way out of paying on claims after a storm of the century. Yet, they can’t figure out how to break a contract to reward bad decisions that brought their company to their knees. That’s because they don’t want to.

AIG justifies the intended bonus payments by assuring the government they will scale back 2009 bonuses by 30%. We are told these bonuses have to be paid because of legal obligations of the company. What about moral obligations to the country and their shareholders? Rewarding failed leadership demonstrates AIG’s lack of understanding and only accentuates what appears to be fat cat greed regardless of job performance. One of several companies, who are now considered to be too big to let fail. Companies who rejected and lobbied against oversight from outside sources. Some of the very people who helped create this pot of boiling goo now expect their contracts to be full filled come hell or high water.

Edward Liddy, AIG Chairman and CEO, saysthat if the company doesn’t honor their agreement to top executives, they will have trouble attracting and keeping the best people in the business. If these executives are the best, why did the company fail? Why are they asking us for our money? Liddy complains his employees would be concerned the government will interfere with and limit bonuses. He contends this could be detrimental in retaining qualified executives. If AIG had failed and the executives had lost their jobs, would they still have walked away with millions of dollars in bonuses? Would AIG have honored those contracts then? Contracts are broken all the time. The auto workers were forced to renegotiated their contracts in order to receive bailout money. Why not AIG executives?

The American people know how to sacrifice. When money is tight, the last thing you do is buy expensive furniture while remodeling or go on a fancy retreat or vacation. We don’t have a cash cow that will bail us out and our only option is to hunker down, cut costs and wait for the storm to pass. We now have companies and banks who are in an elite class where the common wisdom is, these mega corps are too big to fail. Perhaps we should take our lumps, let them fail and come out on the other side with smaller, more manageable companies once the dust settles.