Raising Capital for Your Business: Debt vs. Equity

Leo and Claudine discuss the 3 main ways to raise capital for your business and the 5 biggest legal mistakes companies make while raising this capital.
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Speaker 1 00:12 Good morning everyone. You are listening to legal and business talk with Leo and Claudine here on power talk K FIV 1360. Today is Saturday, February 16, 2019 I am fired up. How about you Claudine? Absolutely fired up. This is such a great topic that we’re going to approach today. So I am your host LEL and the verdict founder and CEO of Greenland advisors. We are a fractionalized accounting and advisory firm concentrated specifically on help you grow and be profitable in Claudine does a great job and does her thing on the legal side.
Speaker 2 00:46 Yeah, we are a business and real estate firm located in Turlock Interlochen. Um, we focus on helping business owners stay alive in California.
Speaker 1 00:55 Great. And uh, so today we’re going to have, we have a great topic to discuss in that is raising capital for your business debt versus equity. We spend a great deal of time last week. I hope you tune into us. Uh, last Saturday we were talking about uh, renting, uh, for your business versus buying. And w I think we covered a lot of ground and I’m sure you had a lot of questions. You can always find us on the web and we, we make sure to remind you where you can find us because we don’t expect you to remember everything. Right? Um, and sometimes we can get, have so much fun with Claudia that we forget that we have an audience, right? And if we get too technical, you know, I’m sure you’ll let us know. So, um, we, we’re excited to have you back. And we were discussing important business, illegal issues that affect business owners on a daily basis.
Speaker 1 01:38 And we want to help you grow and your business, but not just be profitable but sustainable. Leah and Claudine will help you not just make it by, keep it, keep it. So as I said, led discussion last last week was about real real estate as a strategy for, for a business. Today we’re going to talk about raising capital for your business. And I’m going to give you some stats or you know, I always like to start with some stats. Claudia, you know, I’m, I’m a numbers guy. The federal reserve bank of New York has reported that the average small business owner spends 33 hours looking for a loan.
Speaker 2 02:09 Ugh. It’s just mind boggling. And I’ll, I’ll tell you anytime that my banker or my lender that I’m working with says, I’ll tell you what, I’ll fill out that application for you. I’m, I’m, I’m going to bring her flowers, chocolate, whatever. I know, um, we were working with a lender last week and, and kind of struggling with some of the questions and getting things together and she said, Oh, you know what? I’ll tell you, let me just, let me just fill out this whole thing for you. I thought you are fabulous.
Speaker 1 02:39 So, um, you know, I, I, I love working with business owners and, and, and really helping them take that idea to market. Sometimes we start at the business planning stage, but inevitably at some point, every business owner will be faced with. The question is, how do I keep growing? Correct. Right. As you don’t stay stagnant, you just, we just don’t see it. Right. It just doesn’t happen. You just don’t stay in the same place. But if either you’re growing and making your business profitable and brand, you know, I think everybody’s, I mean, in this beautiful country of ours, we have the virtuous starting from nothing and getting somewhere. Absolutely. Don’t you love those stories? That’s why I do what I do is I just, we, we are, I think we both are passionate about seeing the spark in the eye and helping somebody go from zero to millions and have those huge exit pay days.
Speaker 1 03:35 And that’s what really what I’m passionate about. But we cannot neglect the lending part of it. So debt versus equity, and there’s a lot of misconceptions. So let’s get going on the topic today. Um, according to Forbes magazine, the five best ways to raise capital for your business are this, right? This, you start with yourself and that our friends and family, and then you’d go into banks and traditional lenders and you have crowdfunding and then you have sort of like what makes it on TV, those unicorns that are worth billions of dollars and raise tens of millions of dollars in it and an equity. But not everybody gets to do that. Not every business, that unicorn, you know, and that’s a very special unicorn. And you, if you’re going to go ride the unicorn, take some lessons ahead of time, you know, um, I’m sure you have. Um, have you ever, uh, are you, you know, done the Airbnb thing?
Speaker 1 04:35 Uh, VRPs RBRBS okay. I’ve done Airbnb. Okay. But do you know the story behind Airbnb? Vaguely. It’s really cool. So, you know, this founders started with just an idea and nobody believed in it and basically they just, uh, they went, uh, one of them had to go to a different city to look for a place to stay and every hotel in town was booked, there was nothing available. Um, and then his friend, you know, is like, what, where are we going to stay? We need to take part of this thing. And the libel went on and he says, wait a minute, what if we turn this apartment where you’re staying? I’m kind of coming in, right? I’m going to stay at your house, but we have no money. So, and we need to raise money till we can go to this conference. Right? So they decided to turn the little department to three air mattresses, bed and breakfast, air mattresses, bed and breakfast.
Speaker 1 05:29 Right, right. That was the birth of Airbnb. I just learned that not too long ago. But what is amazing is that for the first few years, they self funded their business and got to the point that people that started to believe in it got some traction. And so they, when you know the path of, okay, here I am myself. And then framily and France started getting in and, and then everybody else got involved and then they’d raise some capital and the rest is history. Right? I think that the company is worth billions, still privately held. I don’t doubt that eventually, basically they disrupted the entire hotel industry. Absolutely. And you see the same with Uber and Lyft, Uber and Lyft, right. Completely revolutionized. It’s amazing. So, um, there are primarily three, three main ways to raise capital for your business. Number one, you can always generate more sales. Correct.
Speaker 1 06:24 Right. Work more well, more. You know, you can only cut so much. I think every business owners that I work with, I’m always looking, Hey, how can you generate more sales? Right. More top line, but then eventually you need a little more and then you go to loans, right? Right. And then you go to equity, right. Those, those are the three main things. And actually a, I’m a, I’m a certified score mentor and I, and I do a lot of, there’s a worship coming up and we’re going to be talking a lot about, um, the simple steps to choosing the right financing and how you can take advantage of all the different things that are out there.
Speaker 2 07:02 One of the things too, I think that business owners need to look at is when is it appropriate to use financing? I know so many business owners, um, uh, kind of have the cash and carry mentality and you know, we’re happy if we are completely debt free. We’re not borrowing any money. We’re, you know, we’re self-sustaining. Um, but there does come a point in time where you need to know when to use lending.
Speaker 1 07:28 Right, right. And I’ve been just being told that time is just slipping away before our first commercial break. But, um, we’re going to start talking about the five, well, the five biggest legal mistakes company companies make while racing capita and that’s your area of expertise and we’re going to be diving right into that. Um, but there are more ways and financing is one-on-one, but then also there are ways that you can actually mess it up for yourself and for everybody involved. So you gotta do it right. But the opportunity is there for everybody. Um, I think more of that is to come. So you are listening right now to legal and business talk with Leo and Claudine here on power talk radio. Kay fib 1360. Stay tuned, we’ll be right back.
Speaker 3 08:28
Speaker 1 08:40 welcome back. You’re listening to legal and business talk with Leah and Claudine here. Power talk. Kay fib 1360. We’re very excited. Excited to have you back. Um, do you have any questions about this show? You can feel free to call, uh, Claudina Sharon, law-law.com two or nine four two seven 2200 or you can call me Leo a Greenland hq.com (559) 207-3148. So let’s keep talking about and having some fun with lending, um, before you get going. Cause I, I once you, once I unleased Claudine, there’s no stopping. So let me, let me kinda throw a little story. Do you know, uh, you know, we’re talking about wind generating. Sellings is not enough for, sometimes you might need generate all the cells, but you won’t be able to take advantage of market opportunities. Right? I love the story of Meg Whitman when she was with eBay cam, you know, um, that one was a unicorn. eBay, right? And there was an opportunity that basically to me, encapsulates when raising capital. It’s right. If you have the right opportunity at the right time, raising capital with it, lending or private equity may just make you a billionaire. Lil, you know, that’s the definition of success. What is the definition of success? Preparedness meets opportunity. There you go. So, um,
Speaker 1 09:58 there’s a story of eBay in Yahoo, right? Um, back in the back in the early, uh, back in the early days of the internet when, um,
Speaker 1 10:08 there was a, there was opportunity to get into the market of Japan. Japan is the second largest market in the world, right? So eBay was trying to get into the market, um, and um, they waited and they waited. And Yappo basically what entered the market in Japan for one day sooner than eBay. And for entering the market, it captured 95% of the online auction market and not being at the right place at the right time, cost eBay, a multibillion dollar market. So that’s why sometimes you got to take up an opportunity, uh, you know, and you need to raise capital and uh, but there are also things that you need to be worried about, right? If you are a business owner trying to raise capital. So I’m going to tell, uh, linelaic Claudine basically tell us, walk us through some of those biggest legal mistakes that she sees companies do.
Speaker 2 11:05 Absolutely. Um, so starting off with the idea of borrowing money from friends and family, you know, just, just that alone probably scares a number of people. It can be done. It just needs to be done correctly. It needs to be done, um, with a solid contract and, and a solid management of expectations. Um, if you’re going to borrow money in exchange for shares of the corporation, um, you have to be very, very careful because you’re getting into a longterm relationship, um, with that person. Um, I can tell you from experience, I watched, uh, uh, my brother, um, write some software back in the 80s that was used for court reporting and it was the first of its kind. And at that time, no software had ever been used to, to, um, transcribe, um, synography. Um, in fact, my mom for 40 years sat at a, um, I can remember all the way back as far as I can remember watching my mom sit at a typewriter, do transcripts.
Speaker 2 11:59 Um, he brought in some investors. Um, he traded, um, equity for it. And within a matter of months, he was voted out and they took his software and off they went and it became the nexus of what was the software that, um, close captioning was built on. Really. Yeah. And so it was just one of those things, I’m just not having experience and really not relying on the right type of people to provide the resource for you. So anytime you’re looking at, um, you know, equity, um, and, and trading equity for dollars, um, you have to be very, very careful. But on the bigger picture, whenever we’re looking at trading equity for dollars, um, that whole arena is what we call in the legal world is the securities arena. It is a very highly specialized area of law. And I’ll give you a couple of the basics. So, um, first anytime you’re raising capital and you need to make sure that you’re complying with federal securities laws and advertising or soliciting for investors, anytime you advertise yourself, if you put it up on the website that Hey, we’re looking for investors or, or any type of, um, solicitation you need to, um, you really need to be working with a skilled attorney.
Speaker 2 13:12 Um, because you’re with very limited exceptions, you’re prohibited from general advertising or solicitation in connection with raising capital. Um, and again, that means running ads, putting solicitations on your website, and the governing body is the SCC. And they have given a very, very broad definition of what is soliciting or what is advertising if you’re going to sell securities to non accredited investors. Um, and who are accredited investors, accredited investors or people who, um, are worth more than a million. Uh, and there’s some, there’s some variables in the definition, but essentially these are people who, um, are very qualified to make investments. Um, the goal for the sec is to avoid people being sold snake oil, um, in losing money. So they want to ensure that whoever you’re dealing with, you’re actually dealing with qualified investors. Um, if you’re using an unregistered person to help you find that security’s money, um, start up costs.
Speaker 2 14:14 Companies often make the mistake of using unregistered consultants or advisors to raise their capital. Um, anytime somebody is receiving a commission or a type of payment for finding your capital, um, that type of, um, they need to be registered with the sec. I’m not vetting your investors again. Um, that is a really common mistake. You get involved with people, you get into a relationship, they enter your business. If you’re chain trading money for stocks or some sort of an equity in your business, you are now in business with them and they now impact your business. Um, depending on how your bylaws are written or your stocks are issued, they could have voting rights. Um, and it is a very common mistake. Um, and in issuing preferred stock, unless your startup is raising 750,000 or more, issuing preferred stock is probably not a good idea. It’s a very complicated process.
Speaker 2 15:09 Um, and it’s very time consuming. Expensive. Um, you’re likely better to use promissory notes and use a loan rather than selling the, the equity in your business. So a promissory note. Um, just like any other kind of alone, you pay the payment, you pay off the loan, it goes away. They’re not part of your business, they’re just, um, somebody who lent you some money. How often do you get, um, involved with people who are looking to explore their options? You know, you know, exporting, raising capital through outside sources, not alone. Traditional launch. It’s surprisingly pretty often, but it’s more specific to certain types of industries. I see it more in product based industries. Um, I’ve got a few clients right now who we’ve recently done some contracts, um, where they are looking for investors, but they’re kind of in the friends and family arena still.
Speaker 2 16:03 So our, our role right now is just to make sure that they have a solid contract and everybody’s expectations are managed because investment is an investment. It doesn’t, not unnecessarily is it going to be a success only journey. You may invest in somebody’s company and it may not fly three years from now. You could lose your investment. Um, and so if your friends and family and your brother wants to give you $20,000 to, um, you know, build up your business or maybe expand your business, um, everybody needs to be on the right page. Right. You know, and there you have it. I mean, there is a, you got, I mean, I can’t stress this enough. You got to get the right people on your team and Claudia, and you got to have the real legal expert to help you. Right. Um, and, uh, on my side, you know, I, I’m very excited because it, the landscape and today’s business financing industry is changing. I mean, this is being, this is prime time for disruption and, and, um, you know, some of the, just, I love the, the industries that are being disrupted right now, uh, because they
Speaker 1 17:03 advantage of opportunity. Um, I, you know, let me, let me list, let me list a few of them. You know, the retail industry, but who remembers, uh, a blockbuster or a Barnes and noble or, um, uh, remember borders, right? Right. Well, there’s Amazon in diapers.com. Right? Um, what about the travel industry? I remember when you used to go and, um, and meet with your travel agent and book ad anywhere. Yeah. Well what about Priceline now? Yeah. Uh, trip advisor. There is one cool little app called hopper, which tells you the best time to purchase a plane ticket, a plane ticket, and it tells you, okay, you gotta wait a few more days. You gotta wait week now, uh, in two days the price will go down by 25%. And then DOD day to tells you, Hey, you need to buy today. Technology technology does crazy. The real estate industry, Zillow in auction.com Brazil took the market by storm. I mean,
Speaker 2 18:07 there was a day that you could not find a listing unless you had access to the MLS. And now you can virtually see everything that’s on the MLS.
Speaker 1 18:15 Right. And all of, and how about the payment industry with PayPal and PayPal and Bay, right. And then square. And then you have Venmo. When, uh, have you heard of Venmo? You can actually pay friends, you know, without having to write a check anymore. Nobody writes checks anymore.
Speaker 2 18:32 Oh yeah. When you have kids. So my minor in their twenties and they use all of these things, it’s, it’s it crazy world we’re in.
Speaker 1 18:42 Okay. So equity versus loans, Le, let me start getting into that. When do you use either? Right. In my experience, equity is the most expensive money you’ll ever part ways with. Absolutely. So you’d rather have alone the or versus equity. However, sometimes you’re not going to be able to get a loan from a traditional bank, right? So if you go to the loan path, there are multiple ways, um, there, you know, I’m not sure if you’ve heard of some of these that nonprofit lenders like, um, Axion and tilt forward and Kiva zip that they are near. Actually, you can actually get a loan for like $5,000 nowadays, right? Um, and it’s good for startups in micro-businesses and mission-driven businesses and local businesses and underserved communities. Crowd funding, um, get the good for startups. Uh, the business owner, um, this is one of this profound in science.
Speaker 1 19:40 It presents the business idea. And while, ah, I mean, and I know you, if you tune into Facebook, if you any, any of this social media platform, you’re going to have somebody raising money through ’em go fund me. Right? You know what a phenomenon, unbelievable. But you know what upsets me about that? You know, I get it when you’re trying to raise capital through, go find me to a great idea, a noble idea of some product or service you want to bring to market. But what, Hey, I’ve seen people say, Hey, you know what, uh, I’m having this go fund me campaign because I can’t pay my bills. Right. How does that make you feel?
Speaker 2 20:14 I know some people have done it and I just, it’s, you know, that’s one step away from, from the fraud that takes place.
Speaker 1 20:22 You hear about this, um, couple that, um, you know, the, the, the guy who was homeless and they gave you the last $20 to, um, this couple and then they were so grateful and, uh, they, what happened next? They, they started a go fund me campaign, I think. Was it go fund me or was that the Kickstarter go fund me, go fund me. Right. And they ended up raising $400,000 and he was think it was sick actually more, right? I think it was six, but you could be right. But it was a lot of money. Say it was 400,000 and the whole thing was rigged. Yeah. So it gives a bad name to those who are legitimately right, trying to raise Kappa. But it’s a great way.
Speaker 2 21:04 It is. And if, and if you kind of stick to the people that you know, so we know, for example, if it’s somebody within your, um, you know, the school district, are you a parent of a child that, you know, and they’re needing a little bit of help and you know, the people and, and so forth. You know, I think once you get outside of your sphere of people, your orbit, um, you start to run a risk of getting involved in one of those unfortunate scams.
Speaker 1 21:31 So we’re going to start getting into, you know, when to finish the, this whole thing about loans before we get into equity. But, um, and we got, you know, and, and, and there’s the 800 pound gorilla, which is the banks, right. And how to deal with the banks and who knows how to deal with the banks. Right. And guess what? They have the playbook and they have the playbook and you don’t, and it’s a take it or take it or leave it program. So stay tuned everybody. We’ll you are listening to Leo and Claudina legal and business stock here. And when power talk. Hey, FIV uh, 1360, and we’re very excited to have you back. Stay tuned. We’ll come by rap right back.
Speaker 5 22:05
Speaker 0 22:22
Speaker 1 22:38 hello and welcome back. You are listening to legal and business talk with Leah and Claudia here in power. Takei FIV 1360. And we’re talking about raising capital for your business. Uh, and what is the best way to do it? The, you, uh, go in, you know, go to the shark tank or do you actually try to talk to a bank? Right. Um, and I’m going to spend some time talking about traditional lending, which I think is where everybody is. Yeah. And, um, it’s the world we know. It’s the whirlwind. No. And, um, what is it like dealing with a bank? You know, I, I, and you know, I don’t know if I told you this, but this is one of the most common, more often I get involved with a business where they’d be turned down by a bank, right? Right. And the bank says no. Right. And, um, and I just, you know, it’s, it’s, it’s, I can see the frustration and the business owners eyes like, well, I thought I was making money and uh, and the bank said no, and I gave him this great story.
Speaker 1 23:35 And, uh, uh, here’s the thing, banks are in the business of making money. That’s right. The house is never going to lose. So if you want to get traditional to work for, you have to know the game. You have to know the rules and play by those rules, right. Um, feed them what they want to be fed, give them what they want. And honestly, I would rather a business this exhaust every possible way through traditional lending then going the equity route. Absolutely. Because we all laugh. You know, it’s funny when it happens to somebody else that somebody walked in there raising $1 million, uh, for their company and they, you know, for X, X against, you know, 10% of their company, they’re walking away with 5% royalty and they lost their company. Right? Well, you see that on your favorite show, this chart show one of your favorite shows, one of my February shows.
Speaker 1 24:28 So let’s talk about, um, dealing with the banks. There’s three main things the banks look at. I’m going to give you right now some, uh, some, some good stuff that you need to know. And those are the current ratio. Okay? The debt service coverage ratio and the debt to equity ratio. Okay. So, um, the current ratio I bank wants to know about your liquidity, which is your current assets over your current liabilities. Okay? And you wondered what, what, you know, what are assets, right? And there’s two types of assets. There are fixed longterm or longterm assets. And they are your current assets. Those are the assets that you can liquidate within a year. And they are cash or cash equivalents. The money that a business will have in their checking account. Okay. Um, your AR for most businesses, AR if it is collected within 90 days, it’s part of your current assets.
Speaker 1 25:25 What about real estate? If you bought your building? Okay. So if you, okay, but now that you’re building, okay, so let’s, let’s play that. So if you bought a building that building, it’s sitting in a balance sheet and a separate LLC that if the landlord to you as the business and you paid rent to them, so they probably wouldn’t be on your balance sheet. Okay. What shows up in your balance sheet would be, um, really if you want it to have, you want it to be separate, right? What it’s going to show up in your profit and loss is going to be the rent that you paid to yourself on their separate LLC and to do it right. So you don’t want to commingle. Oh, see, that would be a co-mingle and thing. And the IRS doesn’t like that. Gotcha. Um, but the current ratio is your currents. You get your cash and cash equivalents. You got your, um, your, uh, accounts receivable and for both most businesses and that’s it. And anything that can be liquidated. So here’s the thing about a bank. The bank is thinking that there’s a chance that you may fail.
Speaker 1 26:27 Yes. Right. And, and you know what they do running their odds. Yeah. They’re, they, they basically, they look at your business and they want to make sure that you have a least one and a half. And honestly for me, that’s not enough. So that means that if everything hit the fan right, there is no business. They’re going take everything and liquidated. And if the liquidation of your business is one and a half times what you are, your current liabilities and what are your current liabilities, right. This is stuff that needs to be paid within a year. Okay. Does payroll fall as a, currently a rule is a current liability. Gotcha. Right? You got your most credit card debt in your business, uh, short term loans and your business. Um, all this stuff that is do your sales payable, your sales stacks, is that, you know, the sales tax that is payable accrued, but it hasn’t been paid.
Speaker 1 27:15 Everything that you have in all the expenses that you have incurred in your business, but you haven’t quite paid yet, right? That’s your accounts payable. That’s your current liabilities. So say for instance, if a business has $150,000 worth of current assets, they want you to not have any more than a hundred thousand dollars worth of current liabilities. So that its rate of one and a half to one, but that’s not enough for me. What I want my clients to have is twice, at least twice the amount of current assets, the stuff that you can liquidate versus the stuff that is, is what you have versus what you, Oh, got it. You know, if people owe you money, right, right. That’s, that’s an asset to you. Correct. Right. Because you’re going to collect it. Correct. Now, but here’s a problem. I think you’ve been working with me for any length of time.
Speaker 1 28:02 You know that I say that I, I gotta. You’ve got to build when it’s raw, you got to build by the fit. You know, if you, if you’re, if you’re in a service delivery industry, you’ve got to build right away, right? You got to get your class. Your customers have to get their invoices so they can have to pay you right away. So you like it when you send an invoice to a clients in 90 days later, they’re like, Oh yeah, what invoice? I don’t remember getting, do you want to send it again? Send it to me again. But why would you wait 90 days to find out that somebody owes you money? Right, right. Do you know that I actually run into customers that actually forgot to build their clients? You’re like, Oh my gosh, I can’t believe it. No, no. It’s not surprising to me.
Speaker 1 28:34 I know business owners, you know, whatever type of business they’re in, they’re so good at doing what they do, but then running the business is actually a completely different job. Right? You gotta have the systems and procedures. And those are the things that I measured when I measured the health of a business. You know that actually look at these three ratios. You know where they have this three prom pro, this three step process that I do. And it’s very simple. I usually go, you know what accountants do? No, I have no idea. They either breed, they act. Yeah, that’s right. But a different breed. But we love numbers and we account, you know, accounting is accounting. It’s accounting for things, right? So I go and look for the things and we account for things in one and we measure your current ratio, your debt service coverage ratio, and your debt to egg.
Speaker 1 29:21 We only talked about the current ratio, but we measured those things because that tells me if you’re bankable, you only get one shot to impress a bank. And believe it or not, this is like a dating game, right? Right. People go, Hey, I love you and I want to put a ringer here with have, have you haven’t dated the bank and you want to put a ring on the back. Right? Right. It’s kinda how it happens. You have to understand not every bank is for your flavor that our banks are love ag, right? That are banks that I love law firms since in service delivery businesses that are banks that absolutely love manufacturing, right there is actually called manufacturer’s bank, right? There are banks or , you have to understand their language and what they want, but the ratios are the ratios now, which is the next one is the debt service coverage ratio. What is that now? Now is that re, I mean I’m going to tell you, but most people don’t know that the bank wants you to have native income of 1.2 to one meaning that you need to have at least 20% more worth of net income. Then you do that service and that’s gross. That is gross. So, for instance,
Speaker 1 30:29 if you have a hundred console, if you have $100,000 in loan payments per year, so if you’re paying $88,333 a month worth of loan payments that are sitting in your longterm liabilities, then how much do you need to have an income to support that according to the bank? I’ll tell you, don’t worry. I already did the numbers for you. You saw me glaze over. Yes. Um, it’s just so you have to have $120,000 worth of net income, right? Over $100,000 worth of debt. Are you following me so far? So that is the 1.2 over one. But here is the thing that’s, that scares me is do you know that most businesses that go out of business that most businesses that die every year were profitable? They just didn’t know how to account for it. They not only, they didn’t know they had to account for it. They had millions of dollars in AR that they were not collecting, and the bag will go ahead and discount anything that is over 90 days.
Speaker 1 31:33 So if you have $100,000 worth of AR, but 50,000 of that, it’s over 90 it’s considered as if it doesn’t exist, is it going to mess up your current ratio? Yep, it do you see how those, so you not only do you have to be profitable, you can’t, you know, you can’t borrow if you don’t have the ability to pay. But most people do have what I call bank balance accounting, right? They think they have money in their bank, but they don’t even know where the business and make money. But it makes absolute sense because if the bank, if the bank is going to lend you money, they have an expectation that you’re going to pay it back. But if you’re not running your systems internally such that you’re on top of collecting your ARS, if your ARS at 90 90 days plus, right. You know how, how do they feel confident that they’re going to get their money back?
Speaker 1 32:19 Well, I mean, we’re talking about AR as in, you know, as if everybody knows it’s accounts receivable, right? The amount of money that’s owed to ya, that is your invoices, your invoices that are owed to you. Now, the last but not least is the debt debt to equity ratio. A bank doesn’t want you to have any more than two and a half times debt to equity in what is equity? It’s your, the, that you put in this, the, the, the net income accumulated over time, that’d be lost to the owners. So if, and to me that is, you know, that could be a deadly thing, you know, um, there comes a point in time that you are so overleveraged in that fact. I think I don’t want a business to get, if when you got about two, two and a half and three times your basic, for every dollar of equity, you’re using $3 a two and a half.
Speaker 1 33:09 You know, two 50 of leverage. Leverage is a good thing. Up to a point. Explain leverage for those who, who may be. So leverage is your ability to use resources. Person, what you have today. Okay? So you know, a lever allows you to move more weight. You know, if you use a lever, you can move more, you know, you can actually lift more weight, right? Then you have the ability to without it, right? So when you have equity, it’s is that it’s, you know, it is the constant, but you use that, you know, to take what you know. What about entrepreneurship? You know, you take advantage of market opportunities, so you’re going to borrow. And I’d rather you borrow then get equity. But if you’re going to borrow, if you start more than two and a half times, you have overborrowed. I’ve known businesses that have 10 times our ratio of 10 to one $10 of debt for every dollar of equity.
Speaker 1 34:05 Do you think that’s a good thing? Nope. Canada thing at all. So, um, those are the things that you have to invent. But aside from that, then you have to deal with our personal guarantees. And who likes personalities? Nobody likes because the bank has never done a loose. So they are already assuming that you’re going to lose, right? And they’re going to say, well, you know what, in case in case you go down, we’re going to take, um, some of your personal assets, right? And if you haven’t done a good job to protect your assets, then you’d really expose. But stay tuned. We’re going to continue talking about, uh, traditional lending and the, uh, one of the tools that you use to grow your business, uh, debt versus equity. You listen to legal and business stock with Leo and Claudine here in power. Talk a fib 30 60. We’ll be right back.
Speaker 0 34:45
Speaker 1 35:10 Hey everybody, welcome back. You’re listening to Leo legal and mrs stock with Neo in Claudine here at power talk KFI if 1360. And we are, can you believe it clearly? And we are the home stretch. Now. We’re in the home stretch, but we’re about to learn some really, really fantastic information because so often in business, um, we in it, I’m particularly with my industry, there’s a lot of fear and there’s a lot of don’t do this, don’t do that. And you know, if, if you don’t do this, you’re going to get, you know, a and so on and so forth. But you know, the information that you have to share here is, you know, super encouraging. It’s uplifting because it can be done. Absolutely. It’s, it’s, there’s not a big mystery. It’s just an education piece. And this is what I love. Yeah. The good news is, Claudine, there is hope.
Speaker 1 35:58 Yes. And I don’t want you to walk away feeling, Oh my gosh, I can’t figure this out. You don’t have to figure it out. I can help you. My staff can help you. We can help you here to Greenland, um, hq.com and um, by all means, you know, I, if you have any questions about the show and you want to call our offices, if you have any legal questions, call Claudine’s office, uh, to Erica. (209) 427-2200 in my office, Leo or Greenland advisors, five five nine two Oh seven three one four. I’d be happy to help you. You know, it may, if it is just a five minute conversation, if we make you better because of it and you get alone, we want a relationship. So buy here. Okay, so let’s get into the fun stuff. Here’s what I tell everybody.
Speaker 1 36:43 Don’t go to the bank where you need money because when you need money, it’s too late. What do you think? I mean by that? By the time you figured out that, Oh my gosh, I don’t have enough money, the ball’s already rolling. Yes, it’s already rolling and this is a dating game, right? And you can only make one first impression and you can only make one impression and that impression better be awesome, right? And banks love it when you know your stuff. And you know what? Here’s the thing, it takes me literally five minutes to look at a set of financials and to know that you’re bankable or not because I know what they look at. I know that a playbook and I know those ratios and how do we do that? So because I already know what the bank is looking for, we’d go in there with that mindset.
Speaker 1 37:26 Is like, we want to know what your profit and loss are. You profitable. There is no point of getting alone if you’re not able to pay the debt. Right? Right. People think you’re just going to get alone. No, we’re talking about a traditional lender where you know you’re going to get a great rate prime plus two. I don’t know what the prime is right now, but it’s, it’s gotta be low. Right, right. And to get to point, say a six, 7% over five years, that’s better than going to one of those online, you know, platforms. Um, uh, you know, they’re, they’re, they’re plenty and they’re actually, you know, I read of one of them that they actually, APR is like 40%. Can you imagine? 40% I’m not exaggerating. Some of them are not in the state, right. Instead of California. So they’re, they have different laws that they have to abide by.
Speaker 1 38:13 So you don’t want to get alone led down. Can you imagine paying $40,000 worth of interest on a, on $100,000 and the one year that’s just crazy. So, so here is what immuno and you don’t have to bring us to do that. You can do it yourself, but you’ve got to get your finances in order. You got to know your accounting. You gotta know I can’t stress this enough. You have to understand the intricacies between your profit and loss, right? Your balance sheet and your statement of cash flows, right? Those three, the bank is going to appeal. They’re going to dive in. They’re going to look at your ratios and if you’ll receive your, remember, you know there’s your current ratio while your, what will your current ratio have to be for them? If you remember that when two, 1.21 and a half, one and a half over one.
Speaker 1 39:00 Okay, now I want you to be better. And, and uh, but one and a half to one and your debt service coverage, which is the one that is 1.2 to one and your debt to equity, no more than two and a half to one, but how many business owners do you think know that I, I would say such a small, unless they’re in the accounting business, van, Lindsey and accounting business. I mean, honestly we, I, I practice law, right? So, so, so let’s, let’s go back. So there’s a three step process that we take our customers, you know, through, and it’s, the part of it is accounting for profit. Remember, we’re not an accounting for. We actually here to help you grow an increase in value so we can eventually have a great pay day. Um, you know, either sell your business or have it as a cash producing asset.
Speaker 1 39:44 It’s not about the accounting. Accounting only gives us information that we need and in this case, to get you get alone. So we actually look at your profit and loss from a holistic standpoint. We look at to see how you’re doing this year, how you did last year, and more importantly that that relationship between last year and this year. And are you as your revenue going up or is it going down to back, is going to want to know that you’re going somewhere, right? So if you show the bank, I set a financials where they’ve, um, your revenue was 2 million and in 2017 and it was 1 million in 2018, there’s going to give him one of the fuzzy feelings. Yes, absolutely. They are not going to get happy about, they’re not going to be happy about an abyss business being cut in half. Right. And then you look at you, is it profitable?
Speaker 1 40:23 Right. And are you, you know, it’s your, you know, are you making enough to the bottom line? Now I always say this right? And I ask, you know, I have friend of mine who owns a brokerage firm, a real estate brokerage firm, and I asked her, Hey, so, uh, you know, tell me about your sales and to tell me how big, how big is your business? You know, what are you trending? Oh, she said, Oh Leo, I have, if you know, we’re doing about 5 million, 5 million, 5 million in sales, that, that’s great. What’s your gross profit? Uh, I think it’s about a million. Uh, okay, so what do you really have? Do you have a $5 million business or a $1 million business? What do you think? A $1 million business, you have a $1 million business dressed up as a $5 million business, right? So if you understand that it’s, everything begins at the gross profit.
Speaker 1 41:12 So you have your sales, your discounts gives you net sales or an ad revenue, whatever you want to call it. And you have gross profit is DAS where I begin, right? So if you have Knuck, if you don’t have any cost of goods sold and then you have no cost to generating a sale, um, then your net sales is your gross profit and you have your operating expense and everything else. You fall to the bottom line. The bank was used to be at least 10% profitable. Is that too much to ask? To have 10 cents on the dollars that profit. Nope. It seems very logical. But you know a sad, most businesses be lucky to get to 10% in fact, most are losing money. Really? Yeah. This is a sad part. So most people are not, they don’t even know they’re not bankable. So the, here you go, right? You lost money last year and you may barely made a profit and then you show your unreconciled
Speaker 1 42:11 messed up financial Stu back. What do you think is going to happen? You might as well not even come back, right? You think you got to have a chance with that bank again? No. No. They have way too many prospects. Remember, they’re in the business of lending money right now. The good news is if you, if so, so what happens is I’ll say about 70% of the business that we engage with, they’re not ready to deal with a bank. So we go that step one we account for, we account for where the businesses that we account for your profit and damage. So we start blueprinting for our profit and it is, we gonna give the bank. It’s is it, this is an open book test, right? If I know exactly where you need to be for you to have your current ratio one and a half to one, I’m gonna help you get your business to the point that I know that is going to produce that, right?
Speaker 1 42:56 A fire can help you get to one and a half to one. If you don’t have it, you don’t, most businesses that I started there are less than one on one. So they have just as many current assets as that. Your current liabilities, which is not good for a bank, you’re not bankable. So we get that fixed right away. And the quickest way to Bush your ratio is sell more or collect more or collect more. Right? And, uh, I think I mentioned this story a couple of weeks ago, um, to you, uh, before we started doing this show that had a customer that a few years ago that they had, they were consistently living about 10, $20,000 worth of invoices that were not billing every month just because they were sitting in somebody’s desk. Right? Can you imagine what it have $1 million that hasn’t been booked yet?
Speaker 2 43:42 We see, we see it little similar problem, a little bit different, but, um, where clients just don’t have the correct contracts and they don’t have the mechanism in place when they started. Um, so that when those invoices go out, they come back on time. Otherwise there’s a penalty and you know, we move on, um, really quickly. Um, but yeah, you can, if you can start collecting, that’s money on the table. So, um,
Speaker 1 44:07 I know we can talk about this for hours, but just, just, just this, the step is a very simple process. You got to know where you’re at
Speaker 1 44:15 before you know where you want to go, right? Then we can help you get there. And the second step after accounting for properties blueprint and for profit, right? It’s not about the revenue, it’s about the bottom line. Profit, profit drives everything. It drives it for your business. It drives it for the bank. Profit is like the lifeblood of your business, right? Then the third thing is a bank doesn’t like to see a business that is our yoyo. One year they made money, they lost money, right? They want to see a history of upward mobility in terms of revenue. Let me say that again. A bank wants to see a history of upward mobility, so if you’re a young business less than a million, what they want to see is they want to see you the $300,000 in sales in 2017 you do $400,000 worth of sales in 2018 and if you do 200 you know, five half a million dollars in sales into intensity, there’s a history of growth and even better if your profit is in alignment with that growth.
Speaker 1 45:12 If your top line and your bottom line and are in alignment with upward mobility growth, I assure you that your current ratio has a better chance of standing the test with the bank. So let me ask you, what if your, your, your debts are in line, but you’re, you’re kind of flatlined. You’ve been sitting at may three hundred thousand four hundred thousand for a couple of years. You haven’t, you haven’t dropped anything significant. I mean obviously there’s going to be some sort of a difference, but it’s, it’s negligible. Okay, so you’re saying that a business that necessarily, is this business profitable? Yes. Okay. So you have a business that is profitable. We’re just not on the climb. Okay. So what I would advise is you got to, your best defense is an offense, right? So what you need to do, if I was counseling this business owner, I would say, what do we need to do?
Speaker 1 46:01 Why your sales are flat? Have you asked yourself those questions? Well, perhaps that’s why you need the loan is because you need to invest more in, in personnel or product. So on and so forth. But I would ask before we’ll even get there, it’s what is your gross profit and and do you have a proven revenue model, right? Right. If you don’t have a good proven revenue model, no amount of debt is going to fix it. No amount of debt is going to fix. You don’t want to throw money at a business that is not a solid business. You’re not solving problems by going into debt. Correct. But if you have a business that is defensible and you know, we haven’t even talked about the intellectual property aspect of it, but you have a business that generates business, that generates sales and for instance is $300,000 worth of sales and you have um, 30% Warsaw cost of goods sold and you have 70% gross profit year over a year and then your operating expense has an increase.
Speaker 1 46:53 But, but what if your operating expenses increase in the yet your sales are flat, your bottom line is going to be a problem, right? Right. Yes. If you have a defensible position on a business that is, it may be you are tapped out the market that you’re in. Maybe you need to open the office, right? You need to grow then if you need to grow. And if your line is, it’s, you know, if, if businesses in line, you may be candidate for a loan and rather I would rather have you get prepped for a loan to get equity. You don’t want to get into until the time is right. Right, right, right. So we have been talking the past hour about equity versus debt and I think Claudine and I are the opinion if you want to push that as much as you can before equity and you want to have a profitable business, a profitable business is a magnet for loans.
Speaker 1 47:39 That’s right. A money losing business is not going to just not give you a loan. You may not even be around. We want you to be around, right? So we want businesses in the central Valley to thrive. So you be B, you have been listening to um, legal and business talk with Leah and Claudina. Hopefully this information was helpful to you. We are developing great topics in the next few weeks, um, and months to come and with guests. Um, and because you know, we want to have authentic talk and things that are going to help you show ’em. Stay tuned and we’ll hope to see you next week. You, uh, if you have any questions, reach out to you as a Greenland hq.com. That is G R E E N L a N D H q.com and Sharon law, S H E R R O n-law.com. We are here to help you be profitable and sustainable. Thank you. Very good. Have a good week. Yeah.