Debt and Risk

Is there healthy debt? What is your risk factor? What are the reasons why you are going into debt? Leo and Claudine answer these questions and cover the groundwork of personal and business debt and risk involved.
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Speaker 0 00:15 Hey everybody, welcome back.
Speaker 1 00:17 No, there’s Saturday show of business and legal talk with Leo and Claudine. Come on car. The, here we go. Good morning. How are you doing? Rockin have you had your coffee today? Always great. Always welcome to another great show. Yeah, this is going to be great. Um, we have a lot of conversations with clients, um, uh, about, you know, stabilizing their business and, and we’ve talked about that over the course of a number of shows is, you know, obviously our goal here is to create businesses that are sustainable. You, you focus on the profit. We focused on protecting the business. So we’re always looking at risk, always, always, always looking at risk. I’m always planning for the rainy day. Um, and then not just the rainy day, but what happens when that rain continues to fall for an extended period of time? We now have a storm. And so what we really want to avoid that risk or minimize, mitigate risk.
Speaker 1 01:16 Um, and so what we’re going to be talking about today is debt and debt, debt and risk. And, and what is, what is healthy debt? Is there a such thing as healthy debt? What is, what is your risk factor? And what, when you start looking at going into debt, what are the reasons why you’re going into debt? Because again, if, if the mil of money, if the client stopped calling it the phone quits ringing, what do we do with the debt? And, you know, bankruptcy is not, um, not what, what we want to be looking at. Nobody does. I, I, I don’t think, um, and you know, there was a time, uh, and, and we talked last week on the show. There was a time about 10 years ago that, um, you know, bank bankruptcy attorneys were popping up on, you know, three or four on a corner.
Speaker 1 02:07 Um, and you know, now you’re, you’re, you’re hard pressed to find somebody who, who pushes bankruptcy. So, um, that, that’s an indicator of the market. It’s changed. Um, but I think a lot of people came out of that market with, um, some fear of, of risk. I know a lot of people who, uh, were very intent on putting cash in, in their safe and Nuna safe location. Um, not just keeping it in the bank or not just putting it into some sort of an investment. Um, but, but keeping cash around for that rainy day. So we, we really need to kind of explain what is, what is debt, what, I mean, obviously we know what debt is on, on the basic level, but when is it appropriate when you, when you’re looking at getting debt. I know you have made the point, um, a number of occasions at the time to go get a business loan is when you don’t need the business loan because when you
Speaker 2 03:00 need it, it is too late, too late, it’s too late. Right? So that, that’s a topic for today and I’m excited about it. Well, let’s get into it. Um, I got to start by reading this. It’s just, it’s just so funny. Um, Americans who are already under record levels of debt are taking on, taking out wedding specific loans. Um, Skyler Ramirez, this is just a, an article that, you know, we, we like to have the juice for you guys so you don’t have to. So we actually go there in the weekend. Look for Jews to talk about it or in our shows. And this is one of them, right? Um, Skyler Ramirez has a loan for his house, his car, and now he’s fiance’s engagement ring. Nice. This 26 year old had already picked up a diamond solitaire from Tiffany of all places. Right. That set him back a pretty penny.
Speaker 2 03:52 Right when he happened upon a, an AF what? A wet and related loan. He, while he was checking his credit score at credit karma, I thought, Hey, I’m gonna make a pretty sizable purchase. Maybe as you get along for it. I didn’t want to be using that. The cash or pulling money from savings or investment account. Huh? Is that a good thing? It took about 15 minutes, uh, to get approval for a five figure loan. So you know, five fee. Well, when was the last time you walked in? Have you walked into a Tiffany’s? They’re not, they’ll charge you through, go through the door. By the way, their oxygen is built into their pricing model. Wow. But you’re not going to be able to walk away with anything unless you know, unless you drop in, at least in K.
Speaker 2 04:36 that’s right. And they’re all kind of hanging around to say malls. You know, like if the big cities, you’re going to have the server Salvatori for Ragnow your good or um, car T air, your Tiffany, they’re all hanging out together. That’s adult whole different crowd. Now if you have $100 million in the bank and you want to burn through a few million and you want to buy a few diamonds, be my guest, right? But if you’re bar that’s buy that whole, another thing is to borrow, well, get this, um, and interest rate is not that bad at about 8%. It will take more than three years and $300 a month to pay it off. So here it tells you something about where we are as a society. And you know, this whole generation of thing we keep talking about in a, um, the greatest generation, you know, the ones that were, you know, hoarding cash in it made it into cans, the, in the Mason jars. And then we went through the generation excers you know, that uh, we saw our parents struggle, you know, like didn’t want to borrow anything. We started borrow with a little bit of trepidation. Those ones were going to grow up in the 80s and then the millennials, they’re like,
Speaker 2 05:48 while we went the other way with our parents, millennials is a kind of an interesting thing. Um, this generation they are like, well we understand that. We don’t know if we want it. So is that a good thing for the economy? Not to borrow? I don’t know. But as a general rule, you know, my position, I don’t like that. Right. And um, I think there is such thing as good that and bad,
Speaker 1 06:15 well, the safest position, you know, if you do what we do in the legal world, w we are looking for protection against everyone. If us and insurance brokers w w what we try to do when we draft a contract is we try to predict everyone if that’s possible and then have some sort of a, a resolution for that. What F so we don’t get taken out by it. It’s, it’s when the, what if happens and you haven’t thought about it and you haven’t planned. So obviously the most safe position to be in is debt free completely because if the income slows down, your, you’ve protected yourself against it. But you can’t always run a business that way. And there are times that people hold themselves back in their business development and growth because they’re unwilling to utilize credit or debt.
Speaker 2 07:08 Well, okay, so check this out. So back to this whole funny article about, um, I call this silly debt. I mean, why in the world with anybody get alone, uh, to, uh, call me crazy, I don’t get it. But people have do it. And by the way, I may be an outlier. Remember there, there’s this whole mob mentality. People, what if I see you? If I know if I see enough people doing something, I’m going to want to do it. Right? It’s like we can’t help it. We like sheep, right? I’m the man for wedding loans has quadrupled really in the past. You can’t even imagine this article is as of June 19th what days. Oh, okay. So that’s that few days ago, not too long ago, um, yesterday, the man for wedding loans has quadrupled in the past year. He said making it the, this is a, somebody that interviewed making it the company’s fastest growing line of business couples borrow on average, are you ready for this? $16,000 in typically pay it off within three years. Interest rates range from 7% to 18%. Making a cheaper option for many credit cards was true. If you’re going to put a wedding on a 30 when a 28% APR credit card, gosh please down 18% sign of sounds a whole lot better, right? Please say, excuse me. Right. Um, Y it’s going on flooding. I mean, have you seen a lot of, I mean, do you, do you know about,
Speaker 1 08:36 no, I’ve never heard of it. And I do have children who are at, you know, marrying age, although they’re not married or getting married right now, but we wanted to get married. Their friends are, and, and you know, weddings are a part of the conversation on a regular basis. And I have not, I have, I have kind of gotten accustomed to the idea that people spend regularly $20,000 on a wedding. And I, I think that
Speaker 2 09:01 you’re selling yourself short. It’s more like 30. Okay. Hey, so, but keep going. Keep going. I’m sorry.
Speaker 1 09:06 Well, I just, I so yeah, I mean 20 is kind of the number that is stuck in my head and I think to myself, you know, that that’s quite a lot. I, I’m sure there’s people listening going, I’m just rolling their eyes going, that’s not a lot at all. You know, cause it’s expensive. The party is very expensive. Um, so I’m just, I’m a little bit shocked that we’re now, um, it’s one thing if you save, if you have saved over the years and perhaps your family’s helping you out and, and, and so forth then, and you’ve got that money to spend. Um, and that’s what is available in your budget. But I just to go into debt over it,
Speaker 2 09:43 I don’t think so. Anyway. Um, hang on. We’ll be right back. Stay tuned. We’ve got some juicy stuff to talk to you about on regarding debt. You’re listening to business and legal talk with Lee and Claudine
Speaker 4 09:53 .
Speaker 0 10:03
Speaker 2 10:15 Hey everybody, welcome back business and legal talk with Liam. Claudine, where with this shout the good stuff about business and help you be profitable and sustainable. Hey, so listen to this. So we’re on the topic of good debt and bad debt. So what is good debt? Uh, you know,
Speaker 1 10:32 it’s good debt is debt that that earns income. So if you borrow 10,000 for a business venture and that, that 10,000 is going to make you 20, then then that’s good debt because that means one, the debt is able to be paid off. It’s over. We can eliminate the debt when we’re, you know, ideally in a short period of time or, or, or soon or immediately. Um, but bad debt is debt that you take on and you get nothing for or nothing lasting, no investment. So for example, car card, you go into debt over your vehicle while it depreciate. So it’s worth less when you bought it than the debt that you carry on. It don’t even get me started with car loans. I know when you buy a brand new car and you drive it off the lot, the minute that you use this steps off the lot into your street, yet you’re lost like 15%.
Speaker 1 11:20 You do, you do. And, and you, if you’re going to do that, then there should be a reason because you know, obviously in business we do have depreciations and and things like that. And so there is a time to take on debt from a business perspective and that’s why you really, really need to be working with somebody who understands that. I think, um, our society’s general nature to not understand the numbers, excuse me, and not understand. Um, when we say 24% interest or 28 interest, it would be a lot more helpful if we knew what the dollar figure was, the actual dollar figures. So if you, if the average U S credit card debt in 2019 is 6,300 and some change. So if you’re carrying, if you’re carrying $6,000 on a credit card and you’re at 28% interest, what additional amount? So you already spent $6,000 that you obviously didn’t have to spend and now you just spent 28% more than the 6,000.
Speaker 1 12:28 What is that number? And I think that, you know, we have a lot of, um, rules and regulations about food labeling and, and ingredients and, and calorie counts and fat counts and carbohydrate counts and all of this stuff that we have to put on our food labels. I think it’d be fantastic if we had to put that on our credit card statements and not just what is your minimum payment because people look at the minimum payment and they think, Oh yeah, I can do that. But we don’t have any advisories on our credit card statements about if you make the minimum payment, it’s gonna take you, you know, 900 months to pay this debt off. Like that should be the little bar graph right there.
Speaker 2 13:07 You know, what blows my mind? Speaking of credit card companies, um, there are so many of them and they’re keep adding new and when some, when more people keep getting into a market and the market never seems to be saturated, tells you something about the industry, right? I every day that goes by in it after, do not mail me, please don’t send me credit cards. I get an average one to two a day, every day of the week as the appreciation from anybody card and brand names. I’d never heard of, you know, the visa, that master car in the, in in a thousand different variations and when, why? Because it’s a great business to be in.
Speaker 1 13:45 Hey, driving in today, I don’t mean to interrupt you, but driving in today, um, I was listening to a radio program and they were talking about, um, that there is a whole entire black market for card credit card miles. Yeah. I guess that, I honestly don’t understand how it, how it looks. I would have to, I’d have to read into it, but there is an entire online market of a black market for credit card miles.
Speaker 2 14:15 So say I have 50,000 credit card miles and I banked him, I don’t want to use them, I can sell them.
Speaker 1 14:22 Right. Kind of like Medicare fraud. I can cash in on it. Yeah.
Speaker 2 14:26 How and yeah, you give it to you.
Speaker 1 14:29 I know. Well I will do some research into that. So yeah, we’ll talk. We’ll, we’ll, we’ll, we’ll bring it up next week because I, and I will do more looking into it. I, I when they were leading up to the story and it was, they were talking about black market and of course I automatically start thinking about, um, contraband and you know, I know when they said credit card miles, I thought, well in the heck do you do that? But you can go, apparently you can go online. And I’m kind of like, they have done with, with food stamps in the past where, you know, you pay $300 and you get $600 worth of food stamps because somebody selling, selling their food stamps. Yeah. Credit card miles. Wow. So anyway, I totally went off the subject on that back to them.
Speaker 2 15:12 Okay. So back to the, the, the wedding of fiasco here. Um, so what is driving this growth of this uh, end Bergen in industry and a wedding loans? Well, the same thing that drives all that debt, right? Well listen, so weddings are getting more expensive, right? No new, no shock there. Right? And people are waiting longer to get married. Um, so it used to be generally speaking that the father of the bride was on the hook for paying for the wedding. Well that’s not necessarily the expectation anymore because you may be 40 and that is 70. And who, how is it going to be able to, he’s been retired for 10 years or whatever you have. How many daughters? I have one daughter. You’re off the hook. I’ve got one daughter. Are you saying are we off the hook now? We’re, I don’t think we’re, we off hook.
Speaker 2 15:57 I don’t know. Sounds like we might be off the hook for putting on that wedding. Well, listen, so this, so this lady, this according to this article, married nog leaky got married in 1977. Her parents pay $10 per person per her reception. So a hundred people, three grand. Right. Okay. So 300 people, you know, they do the math is a, it’s not a lot, but she said that she will have to pay 11 times that for her daughter’s November wedding. So this, so you start to really see what’s driving this. Every increase in prices, right. And then you start to wonder, when I got married 20 almost 20 years ago, I remember that the plate, you can actually get away with about $12 a plate. Yeah. Now I don’t think that that’s what I mean. I think it’s much more expensive. Now. I need $30 a plate for food. That’s just the food, right? Forget about the honeymoon, the DJ, the pictures, the wedding dress, the venue, the decorations, the, your bridesmaids, everything.
Speaker 1 17:06 I would love to talk to somebody who has recently put on a sizable wedding and all the costs that are involved with that. Um, I am sure that we’ve, we’ve got some listeners out there probably just hollering at the radio right now,
Speaker 2 17:20 average debt per household, top $50,000 in the third quarter for the first time. This is as of this year. And that’s thousand mortgages. No, this is consumer debt, right? Uh, on secure consumer debt. Does that include cars, does not include cars, I don’t know. And it stayed above that level. So here’s something to consider. However, though, average household debt is still below that pre-crisis high of 53,000, according to the New York a reserve. So I think this is becoming an epidemic.
Speaker 1 17:55 Well, I, I was, I’m going to say that I’m going to go out on a limb here and I think that, um, business owners are maybe a group unto themselves and are probably the ones that are balancing out that statistic because I think by and large business owners, particularly here in the Valley who weathered the storms of, you know, 2008, nine, 10, 11, um, and under much more conservative now with their debt.
Speaker 2 18:21 I think so. And that’s, that’s what I’ve seen. And I think it is almost like two different, um, types of people. Those who just get consumer debt for the sake of getting debt and those who use the strategic debt as a means to get somewhere, right? And those are the business owners. So speaking of which, I think it’d be nice to transition out to the business, uh, you know, our favorite subject is business people, right? So you were asking me earlier, uh, earlier about factoring, right? And what role does it play,
Speaker 1 18:49 right? Business factoring what? So explain what business factory is because I understand the concept and I know that people have done it. I just didn’t put that label on it. So, Oh,
Speaker 2 18:59 okay. So say you have, um, it all plays out in how you manage your AR, but say you have a $100,000 worth of accounts receivable that it’s outstanding. So you send all those invoices and $100,000 sitting on your balance sheet as an asset. You’re about, you’re going to collect it sometime in the future, but you need money today, right? And everybody’s do net 30. And you know that if somebody do net 30, they’re going to pay you net 45. Great. But so say less. So 100,000 so say I invoiced everybody today. So 45 days from now, I should be getting my 45,000 but guess what? May be too late. I got payroll and I got to I. So what factor it is is there’s a third party that comes in, actually buys out your accounts receivable. Okay? So, and what they do is they take ownership where they secure and they give you an advance.
Speaker 2 19:50 So say that your, your AR is good, right? And you have good clients and they, for whatever reason, they’re going to take their sweet time and pay you, which they could if you let them, right? Right. You know what happens when you let somebody 35 days to pay, they’ll take 40 and ignore because we forget. I mean, it’s a human, it’s a human condition. You know, we, we have to be reminded by the problem is you looking at your cashflow and if you’re actually doing Casper and you know that two weeks from now you’re gonna at the bottom is gonna fall off. You need to collect 50,000 so you sale. So the factoring company will give you and theirs that’s the best. I keep growing business by the way. Um, uh, there is a host of companies and I used to have a client that was, that was dealing with that.
Speaker 2 20:30 That’s how I became really familiar with it. But there is dozens of companies that do this. And actually, um, Jeff Bezos from Amazon actually invested in one of them. he’s, he’s a pretty sure investor anyway, so I’m gonna advance you, um, 80%. So I’m going to give you $80,000. I’m going to put the money back into Europe and into your account tomorrow. 80 grand and then, but those receivables have not come to me. So I’m the third party. You don’t longer your receivables. So you’re assigned the rights of your accounts receivable to somebody and they’re going to immediately give you 80% and then once that payment, once people, you know, by the way it goes in the agreement is that it press, it presumes that you’re going to keep doing that with them. So they actually buy out your AR, you have an agreement and and all those AR a checks from the customers go to a lockbox, they cashed the check, right?
Speaker 2 21:26 And they actually recouped their money. If your AR is good and then when everything is, then they’re going to give you the rate. So right now I gave, you know they gave you 80 $80,000 right? What about the other 20 well, some of it is their fees, right? Right. So they take their fees out of the 20 is not the cheapest money, let’s just say, I can just imagine. But what are, what are the interest rates that isn’t, we’re not talking about interest rates here we are talking about like flat piece flat. Just like a negotiated fee. It could be 12% 13% 14% 15% is essentially it’s hard money. It’s hard money. It’s hard money rates 15 can you imagine? So your fees, $15,000 for basically helping you alone because you know what it is like, it’s like a payday loans. You know, this whole industry title loans pedal at payday loans titles, you need money and you have a free and clear car, right? Worth 5,000, they’ll give you 3000. They secure that. The deed on the, on the car note on, I mean actually they’re the, the, the, the pink slip, right? They get to own the car until you pay the loan back and they’re going to charge you 40% APR.
Speaker 1 22:34 So are we seeing more and more businesses do this a year? Really on that end of it, I’m not, not on that end. And businesses are, are essentially selling their, their invoices. I know in the legal industry you can, um, take out loans against settlements. Um, you can, yeah, you can. There are companies that will loan against settlements. Um, so if we have an idea or we’ve negotiated a settlement and it’s gonna, you know, it’s gonna pay off at some point. I have heard of companies that will take a little bit higher risk and, and loan money against a lawsuit, but I haven’t dealt with them. But I’ve heard that they’ll take a little bit more risk in that the lawsuit hasn’t concluded. We haven’t executed the actual settlement yet. Um, but we know that we’re going to be in a certain financial place. Um, and so I know from a legal side on, in our industry, there are people that will basically lay odds against, you know, money that’s supposed to be coming in, in the future. Um,
Speaker 2 23:37 so to answer your question, uh, before we go into break, factory has a place somewhere in the spectrum of loans. So we are talking about raising capital two different ways. You get to go the loan way or the equity way. Equity is actually used selling a portion of your company, right? We’ll get into that later. But on the actually borrowing and you most likely will personally guarantee the cheapest money will always be a bank.
Speaker 1 23:59 So what do you know, what, what kind of vetting do these companies do in terms of the, how solid is the AR? Um, are there certain industries that they stick in, which, you know, the average invoice is a small amount,
Speaker 2 24:15 so there’s a higher higher chance of not a one size fits. All right? So there are companies that go after certain industries like um, health care, right? If you’re our, um, home health agency and contracted with Medicare and your many solid all ed money coming from the government and you are on a page, it’s going to be cheaper than somebody who is in a different type of industry where there’s a little more uncertain and there’s more fallout, more collection issues, they’re going to be more expensive. So, but you start with the cheapest money, which is the more stringent, so the cheaper the money, the higher the requirements,
Speaker 2 24:53 the lower the requirements, the more expensive the money of course. Right? Of course. So you’re looking at a bank and we’re going to be talking about the, the remainder of the show as to what is that? The number one reason I get involved with a company is we are at a fork in the road. We want to grow. How do we grow? Do we sell a portion of our company or do we borrow? Right? That’s what we need to be fleshing now. But for right now, just know that there is so much money out there and you can get at, hold on, we’ll be right back. You’re listening to business legal talk with me and Claudine
Speaker 4 25:45
Speaker 2 25:56 comeback. We’re having some fun today. So much money to talk. Hey man, always fun talking about money, right? And uh, this is business illegal talk with and Claudina if you just joined us, we’ve been, um, we’re all about helping businesses, giving you the edge on the competition, the edge on the market, and how to really game everything to your, you know, your way so you can be profitable and sustainable, which is what we preach every Saturday at 10:00 AM here in power talk. So where we left it before the break is how’d, okay, so
Speaker 2 26:30 good debt, bad debt. Right, right. Good. That takes advantage of an opportunity. Right? So I ask a lot of questions when I’m dealing with, you know, when I speak and I’m asking for just dealing with potential clients is what do you want, right? It all starts with D, what is division? Where are you going? How, you know, the whole market are you in the right place? Um, I mean, because actually banks as well as venture capitalists, you know, we haven’t talked about equity, but when you’re selling a portion of your company, right? Banks used to be a little more, um, yeah, we liked, we liked the financials and um, I think your growth is good, you know, solid industry. Alright, that sounds good. You’re going to personally guarantee a fine. We’re, we’re, we’re, we’re, okay. Now banks are a little more judicious. They want to know is your, is your business going to be around five with so much disruption going on?
Speaker 2 27:22 Right? And some, you know, you’re a fly by night. Are you a new thing or are you going to be around? Yeah. So with that in mind, um, there are certain things that you need to evaluate as a business owner. Whether or not you are, you can actually support or use that your advantage. Okay. One is, are you growing, um, how has your, you, you know, growth year over year, right? Like if you did $1 million two years ago and you’re doing 900,000 today, right? Should you be concerned? You’re going backwards, right? Right, right, right. So before people talk about loans but not realizing that the number one source of business money for your business is your own business. And long before I even talked to people about, you know, they actually have downloads have to talk me out of a lung. Why do you think you need a loan?
Speaker 2 28:25 And let’s look at your balance sheet. You know, you look, you look at your ratios, you know, I talk about this ratios to yield the cows come home. You know, I know what a bank is gonna ask before the bank is going to ask, right? W isn’t that power, right? So I go, all right, well you want to learn what was your net income? So if the debt to income or the debt service coverage ratio, which is the ratio that the bank wants to see between your net income and how much you can afford to and your principle and interest, it’s a very important thing. Right? And that is a Bay a various from 1.2 to 1.3 meaning that if you had, so think about it, if you had $100,000 worth of annual debt, principal and interest that that service, so you must have, so say over the span of a year, so, and at 12 months your debt payments are 100,000 it must be a pretty big size loans.
Speaker 2 29:18 You look at about 883 $8,300 a month to the debt service and a five to seven it could be, it could be. And that’s just your payment. So you’re just saying $100,000 of payments on your debt. Yes. Premium. It’s about a four to 500 depending on the interest rate, about 400 $500,000 if you’re looking at that. Okay, so here’s the asset test. If you’re, if your debt service is a a hundred thousand dollars a year, what will your net need to be even before you qualify for a loan? At least 20% higher. Okay, so 120,000 will support in theory, right? 100,000 worth of debt. Honesty, rise, really risk airy. Yeah. Right. But the banks will lend to that. But here’s the, here’s the shocker. A lot of people don’t even know what their net income is because they haven’t been doing a good job monitoring it, right? And you know that the bank is going to want to know, okay, what is your debt service coverage ratio on the proposed loan?
Speaker 2 30:11 And they want you to tell them that, uh, what is your debt to equity ratio? You know, how much that can you afford to have where every dollar of equity of your money that you put into, you know, that you retained earnings, your net income, that turns into retained earnings. Right? So it’s, it’s, it depends on the banks. It could be a, it could be one and it could be two and a half to three and a half dollars of debt for every dollar of equity. And the other one is your current ratio, which is your current assets of your current liability. So if something hit the fan, it’s all you have enough assets to the zombie apocalypse and they rent the liquid that your business do you have. If we were to liquidate everything, do you have enough cash and receivables in anything that can be converted to cash within 12 months and liquidate to pay the stuff that is due within a year, like your pay roll liabilities and your credit cards and your accounts payable.
Speaker 2 31:02 So that’s a two, two and a half to one. That ratio is at least one and a half to one, one and a half. So at one and a half to one is what a bank wants to see your, your current ratio, which is your current liability, your current assets of your current liabilities. So, so 1.55% more. I’m going to write down 2.5 to one and then 1.2 to one is like jeopardy, right? So one and a half to one. It’s your current ratio. If you’re listening to the Bay, write this down because that’s what banks want to see. And if you forget, just give us a call. Yeah, just give us a call, right it, we’ll repeat it. 1.5 to one is your current ratio, two and a half to one is your debt to equity ratio in 1.2 to one is your debt service coverage ratios.
Speaker 2 31:54 Okay, simple math up 400,000 to $500,000 loan. Depending on the APR, you have to have at least $120,000 a year or $10,000 a month worth of net income. But there’s the one thing about people neglect, well look, my financials look great and look at all the money that I’m making in the net income. You know, making money hand over fist, but there is not collected money, you know, is sitting on your AR, you’re not collecting it. Right. Do you think the bank is going to find out? Well yeah, and they’re probably, I mean presumably you would have had that on your balance sheet as an asset presumably. Presumably if you put in your invoices in there. Oh, but that’s a whole nother conversation for another day. So, um, so when you’re going to get
Speaker 1 32:39 alone, um, do you have to, do you typically have to factor all three of those? Yes. Before you go in
Speaker 2 32:48 wrote, but I won’t stop there. Okay. So I asked those questions, right? I ma if, if you were, if you came to me, Leo, I want to get alone, I would ask those next week. I’m just here. Oh, please don’t do that to me right now. Um, so I go, well, tell me about your business and tell me about what opportunity are you seeking? Talk me into it. Imagine I’m the bank. I usually have him play alone, right? Basically sell me as to what they need money, right? So I go, all right, well tell me the story. So we have, I’m gonna use a random examples. So we have, um, this, we provide a service. Say, you know, it’s an accounting firm. We provide a service, um, and we have a complimentary tax practice that, that we can add to the business and I can buy it for half a million dollars. And, uh, clients had been around for 10 years, they’re not going anywhere, and I’m going to borrow half a million dollars to put, to buy a half a million dollars. That actually turns over half a million dollars every year. Right? And they don’t, they average client in stays for 10 years. So, and then, then I’m going to think, well, I’m going to borrow half a million dollars to purchase something that is gonna be half $1 million every year for the next 10 years. So regardless of the interest rate, what is the return on that investment? Right. Right.
Speaker 1 34:19 So, okay, so we, we see this probably in the farm community quite a lot. You go by land, we’re going to go into debt to get the land. We’re going to invest X amount of dollars to plant to develop it, you know, whatever. Or yeah, also develop line, whether it be farming or, or um, buildings. But we, we know that we’re going to go into X amount of cost to get to the point where the land is producing and then we know it’s going to produce for X amount of time. We can project what the yields are gonna be and we can project what we can sell the crop for to some extent. That’s the one variable. So as long as your ratios are in there and can accept some variation in what you’re selling the crop for, then that would be a good debt. And that’s how we are going to grow and step to the next level.
Speaker 2 35:08 Okay. I’m going to give you a red flag. Okay. Right? Uh, and for the listeners, whenever I hear the word working capital scares me. Working capital, meaning I need money for working capital, you know that there is actually loans. They know the fine working capital, what is exactly what is working capital. Okay. Do you see what I’m getting at? It’s a nebulous term. Okay. I want to know if I’m advising you on a loan, I know I need to know specifically what is for, I need a loan because I’m falling short and I’m negative on my cashflow every month and I need you to learn to get the bi-fold working capital. I say, no, no, you are on your, you’re fast on your weight. So you’re going to add loan to something is already not working. First of all, is your business making money? Right?
Speaker 2 35:55 Cause if it’s not making money, no amount on loan is going to cure it, right? And we’ve talked about that before but extended that. That’s kind of, that’s kind of a pillar of the business model is before you do anything, is your business making any money? Right. I heard of a great little business. Okay. And, and you know it once you’ve been around like me for a while and you’ve seen different profit and losses and you’re seeing different balance sheets and you heard about different industries, some trends begin to emerge, right? People let’s start talking about, Hey, you know, talking about the machinery business, right? And if I invest $10,000, say I bought it in cash and I can rent this for an I can safely, uh, get fi $5,000 a year on this machinery that I bought our cash. How long would it take before, he forbid to recoup my investment, right? Two years in the life and in the life expectancy of the machine without breaking down is 10 years. Right? And I know I can get $5,000 every year for the next 10 years.
Speaker 2 37:01 Why would I think that would be? Why wouldn’t you do that? Well, that’s, that was my question. Why wouldn’t I do that? So you make $50,000 or five X your investment. Now you got my attention. Got it. Right? This equals good debt. So this equals good debt. So it is, I train your mind to think of debt in this manner. So you’re as a business owner, here’s how I need to think. If I borrow $10 and if, let me put it through this way. If I came to you and I said, Claudine, if you give me $1,000 I’m going to do something with it and turn around and make $3,000 in 24 hours will you gave me and you believed me, will you give me $1,000 I win and I’m going to give you back $3,000 right? Right. Will you give me $2,000 if I’m going to bring you $6,000 of course.
Speaker 2 37:59 Right? And it goes on and on. So you find, if you’re convinced that if you give me, if you lend me money and you understand the business model and you’re going to make three X, does it really matter? I mean, at some point you’re going to say, no, I don’t want to put them 100,000 out to work. Right? Right, right. But you might be settling for 50,000 because it’s about return on investment. Well backs. I’m no different. Right? So you’ve just said they don’t want equity. You’ve just put yourself in the shoes of the bank. And so as long as you can do that from the very beginning and do it effectively, you’re going to get your loan. Do that exercise. Don’t do it for the bank. And note, do that exercise for yourself. Anyway, we need to go to break I here.
Speaker 1 38:36 So, Hey, stay tuned. We’ve got some more stuff. We’re going to, I promise you we’re going to bring it home. This is illegal talk with you and Claudine
Speaker 0 38:42
Speaker 1 39:10 Hey, welcome back guys. I can’t believe we’ve been 45 minutes talking about this and I can talk about this for hours. I know. Never get bored of money. I’m like, uh, you know, um, family ties. Um, Alex P Keaton. Oh, right, right, right, right. A years old. I waited, contemplating money. Right. I’m gonna look a little Alex. well, I think the concepts that were kind of vetting out here and that we’re, we’re working through is, is really about how to train your mind because we don’t get any real financial training as know, unless you’re, your family is or you’ve particularly sought it out. We have our, we’re conditioned to want. And you know, as we were talking about earlier in the show, the reason why people are spending and taking out loans to have weddings is because they’re no longer satisfied with going to the justice of the peace and paying 100 bucks for a license and having, you know, at the courthouse steps.
Speaker 1 40:01 I mean, so then from there, well we wanted to party and people were okay having a mild party and it was fun. He has some friends and family and we get married and so forth. And, and now we’re at a point where people are no longer satisfied with that. We have to have this elaborate 30 $40,000 party wedding and what is the return invest and what is the return investment? And so somehow we, well, somehow as a society we have conditioned our minds to think along those lines and that somehow we justify it, we accept it. And we were, people are obviously doing it. So conditioning your mind, right? Conditioning your mind as a business owner and frankly, just as a regular person who has to deal with debt. When you look at it,
Speaker 2 40:46 w w
Speaker 1 40:47 why am I going into debt? What is this debt going to bring me and how is this debt going to bring me more than what I paid for it?
Speaker 2 40:55 So let me give you a list. Let me put this whole concept of lending in marketing terms. Okay? Okay. So stay with me. If I came to you today and I told you, Claudine, if you give me $1,000 I’m going to turn around and invest it in some marketing gimmick and I’m going to bring you back $3,000 and I’m going to take a little from the top for my services. And if you believe me and you know I was good at it, will you give me $1,000? Yeah.
Speaker 1 41:25 Particularly if you’re going to bring it, bring me 3000 tomorrow, 300 times, you know, I don’t want to wait for it. 300% growth, right? And your a thousand
Speaker 2 41:34 okay. So if I told you, well I can do the same with $2,000 right? I still, you’d still do it. Right? Of course. Now if you were convinced that my system Wars and then I say, well what about $10,000 I’m going to bring you $30,000 and it goes on and on and on. At some point you’re going to say, well, I don’t care how much the return I can only part way with such, which I don’t have the liquidity, right. I’m going to done with 30,000 you can reap your back 90,000 but there is a savvy, a commitment in understanding from the other side on how to turn that investment into something, whether you borrow it or not. So not different with banks. Banks think about it that way is like how solid, how certain in my that if I give you $100,000 to your business, you’re gonna pay me back my interest by plus my principle, right?
Speaker 5 42:24 Yeah.
Speaker 2 42:25 There is methodology that we can all learn from the banking system and how they do it. Because they also have run a business, right? They borrow money at a cheaper rate and is sell it to us. And in terms of a London and there, it just so happens that their product is as money. Right? Right, right. But the methodology helps. So this whole concept of lifetime value of your customer over the cost of acquiring a customer, I think it can serve as all if you’re borrowing. I agree. So for instance, you need to know for yourself what the lifetime value of your customers, right? We’ve talked about that, we talked about it and how to get them in the cost of getting them. So if you knew how to fish for the eye or get or acquire the right customer, if you knew that if you went to certain plays and you spoke for 20 minutes and you invested $1,000 you will walk away every time with a $5,000 client. Will you do it? Absolutely right. Then will you do it in two different now? Can you clone yourself and be in two places at once and show up for 20 minutes and make $5,000 twice, whatever I have to do. Right. Only if you knew that that works. Right?
Speaker 5 43:34 Yeah.
Speaker 2 43:35 Why don’t we take our time to study our business in? No one makes money for our business, right? They’re borrowing becomes incidental. Right. I met with, I mean this is just a fascinating, I think there’s,
Speaker 2 43:50 I think as a business owner you should have lunch in or coffee or breakfast with as many people as you can and learn something from them. And if you, if you go into a place and you’re the smartest person in the room, you’re in the wrong place. You’re in the wrong the wrong room. Right? And I make it a habit to hang out with people that are smarter than I am. Right. And I met with this huge advocate with this entrepreneur that is probably going to build $1 billion company and in the central Valley in the next few years. And he told me that his methodology for raising capital is like, I have figured it out down to, I have dialed my business model to N within inches. And if I know, if I tweak this thing in my marketing funnel, if I do this theme with my, my other app, all these knobs that he turns, I can turn a a thousand dollars into $4,000 and I do it over and over and I’ve done it hundreds of times. So when he went and got a line of credit with a bank and he sat down, he had the bank eating of the Palm of his hands within 20 minutes. Why? Because they were absolutely convinced as he was, that it wasn’t even a, there was almost no risk.
Speaker 1 45:08 Right? And you know what, sometimes that comes along with a particular type of industry and if you’re good in the inner, in your industry, so if you are out there and you’re in that industry, you know, that’s great, you’re, you’re fantastic. But a lot of people are not in that industry and they need to put in the leg work to putting themselves in the shoes of the bank and putting on the performance and the presentation that the bank says, Oh, I want a piece of that. As opposed to going equity. Go around. Just want to get paid. Right? As opposed to going in with the opposite posture, where is your trying to get something from them and they sit back in the chair and go, man, I’m not really sure if I’m, you know, I don’t know if I want you to play with me. It’s a sales job. It’s a sales job. It’s a sales job with you. You write with your internal workings.
Speaker 2 45:57 You have to understand, you should know better than anybody how to make money in your business. If you need somebody else to tell you how to make money in your business, even you in your business model, you don’t know your business well enough. Maybe nobody should be giving you them any money, right? But if you’re convinced that you know your business and you’re actually, and you have a track record. And it was interesting cause I was last night listening to a banker speak and somebody was given a schpeel about their business and they were already talking about the profit and loss for this calendar year today. You know, it’s a things that’s great. And what do you think? Am I bankable in the banker goes, well I don’t know enough. It sounds like you’re doing great and you know I would do this and that, but I need to know that you’ve been successful for a while.
Speaker 2 46:38 I want to see three years worth of financial statements, right? I want to see all of their financial statements and and I want to know why you’re going to collateralize it with. And then I want to know about your personal credit history. And then I want to know if you have all that assets in all this, the bank wants to make it so sound of alone that you showed up an atomic bomb falling into your business. They will collect every penny of it. Right? Right. Cause they don’t want chargebacks, they don’t want loans going bad. But if you have to ask the bank to figure out how to make money for your business, then you really can’t Euro liability, you’re not an asset to the bank
Speaker 1 47:16 being yes. Sitting at the bank asking for money is the wrong place
Speaker 2 47:19 for you to be. Yes. Yes. So people talk about Eylea you know, what do I need to do to get alone? You know, and they start telling me about their, their business fiko their business
Speaker 1 47:30 score, their personal score and they know all about the bank and even don’t know about the founders and they gathered the financial documents and they even have all the legal documents at the disposal. They even have all the financials and they have plenty of collateral. Right. But they don’t have a strong business plan. Right. Oh man. We have talked about business plans. Are you talking business plan or business model? Well maybe a little bit. It is embedded into the business plan that you actually have sound exactly your, your, your, your business model and your business model is just to me in simple, simple terms is how do you make money? Let me ask you a question cause I had this happen recently and, and it made me really kind of, it took my breath away at when the, when the subject first came up and I have a client who I work with who is um, negotiating alone, um, sizeable multimillion dollar loan with a bank.
Speaker 1 48:29 And, um, the subject of one of the members of the bank, one of the executives from the bank sitting on the board of directors for this business came up. Wow. Okay. And it made me, at first I went, what, wait. That’s, I don’t, I don’t know if I like that idea and I didn’t say anything at first. And then kind of resonated. Then finally, ultimately ended up PR broaching the subject. And um, have you ever experienced that? Have you ever had when working with a bank or working with a client trying to get alone, having the subject of one of the executives being on the boat? I could absolutely see why they would, but I could also absolutely see from my perspective, I say absolutely no way. Um, there’s no way I’m in a business relation conflict of interest. Yeah. I’m in a business relationship with you.
Speaker 1 49:21 You don’t need to know all of the internal workings of my business. You don’t need to sit on my board. Yeah. That’s the list actually happened to you. This is, hasn’t happened yet. Um, I have a feeling that, that the breaks have been, I put the brakes on that enough. I don’t, I don’t think it’s gonna happen. It certainly hasn’t happened yet. It would certainly happen over much protests for me. Um, but I thought that was it. It didn’t take everybody else in the room the way it took me. But I’m, you know, the nature of my business is to be suspicious and to look for liability and look for, you know, how is this whole thing going to go wrong? So I just was curious if you had ever come across that where that suggestion has been made either by the bank or the offer has been made by the company in an effort to get alone, say, Hey mr banker, how would you like to sit on our board? Just so you can kind of oversee everything. No, I’m so glad we agree on that. Yeah, no, no. So the, there are, there’s a time and place for everything and the strategic moves that does not want to right now that is different thing we didn’t talk about
Speaker 2 50:28 it at all today is about racing capital via selling a portion of your company, whether it is, you know, private equity, venture capital, whether it is seed money and some venture capitalists and even some angels will want to, they want a seat on your board to make sure that they have a say correct and how their money’s been deployed and correct. But keep in mind the difference there is a loan is being paid back and it’s being paid back with interest. When you purchase money or purchase equity, you’re not, you’re not getting that money back. You purchased the equity. When what you’re getting in exchange for the money as the equity, you’re buying a future return, it writes something. Exactly. So, so I can understand why you would want to have at least some oversight. Will the but alone, no. You know what is not about is I have changed my position.
Speaker 2 51:26 Money is not money for money’s sake. If you’re going and raising capital and you’re actually not talking to a bank, a bank, you go to a bank because you need money and you want to make sure that you can pay them back. But when you go to get equity and race equity through equity is when you want money and expertise. Well that, that, that absolutely as well, but it’s, it’s money that the business is not paying back then when the money with the business is going to pay, is that ideally dividends, correct. Profits or a way for a business, uh, an investor to give you, I’m going to give you 100,000 with the hope that you cannot pay me five times more than what I put in. So usually we just, I understand why it was, why some of the quote unquote repayment is connected to some oversight.
Speaker 2 52:09 I, I see that, um, but never on a bank. And I run and I will never suggest it, I think is a, it’s, it’s a bad thing. It’s a bad strategy. Um, I think you, the bank is there to, to, to meet a need and if you’re bankable, why not get alone, but don’t go to alone when you don’t, when you need it, because it’s too late. And, and from, from the legal perspective, from the attorney perspective, you know, how long and how voluminous those loan documents are. And you bet that if there’s not a clause somewhere somehow in there that says, you know, we can call the note due for a whole list of reasons. And one of those reasons happens to be that I am seeing certain decisions being made by the board. Oh, that, you know, I just, I see that there’s a real possibility, a real, real possibility that you could have problems with your loan if you’re not operating the business the way that particular person Cora sees fit.
Speaker 2 53:07 I w Y whew man. What I have, what I have you saw Sergeant. So I hope this helps everybody. Uh, today in, you know what? More than the money itself is, be disproportionally intentional as a business owner about making for your business King. Then you have a profitable business or you have a very expensive hobby. So I hope that helps you guys today. This has been a great show. Thank you Claudia Yan, and I hope you guys have fun too. You have been listening to business illegal talk with Leah and Claudine and I’ll see you next Saturday. Have a great week. Have a good week.