June 22nd, 2008 12:58 EST
Beware of the Money Business
I`m in the money business, and have spent many, many years developing relationships with financial professionals " people who work both in corporate finance as well as those who service individuals. What I know about the money business is that the closer you get to the dollar, the more money you make. And when lots of dollars are at stake, beware because the sharks come out.
When someone finances a business, provides a loan into a company, or provides capital to someone who is starting a company, they typically receive a fee for that service. That fee is generally a percentage of the dollars that they`re able to provide to the deal. Generally, the fees add up fast.
Although it might apply to investing (that means equity " and not a loan that is paid back), this article focuses only on lending situations. And for purposes of our discussion here, lenders are different from equity investors because while an investor shares the risk and shares the upside, the lender usually protects himself in some way, gets paid interest or a fee for the use of his money, and then expects the money back.
I regularly counsel companies and individuals on how to best maximize the capital that their businesses require. There are many salespeople in the marketplace who try to convince would-be borrowers that their deal is the best deal. The most important concept for borrowers to understand is that the money business is highly segmented. Each lender has his own risk tolerance and has his own preferences about the kinds of deals that his or her company would be willing to do. Therefore, it`s imperative that you match the need that you have with the specific product that that lender provides.
If you go into a bank and your deal does not meet that bank`s criteria, you`re not going to get any money. That doesn`t mean that the money is not in the marketplace available for you to utilize. It just means that you haven`t gotten to the right lender.
Secondarily, people and businesses have different kinds of credit profiles. There is A credit, B credit, C credit, D credit, and so on. There are really poor credits, but there are some lenders who really like the tough loans. They like the bad credit because they make a lot more money when they make those loans. Because they`re able to secure their position in some way against some assets, they`re able to mitigate the amount of risk that they actually have. It just increases the likelihood that they`re going to have to take some extra action to get their money. (Extra action could mean foreclosure, lawsuit, etc.)
Recently, I was visiting with a long-time friend who told me that he needed to acquire some capital for his business. He had been talking to a variety of lenders about this and had procured proposals from those lenders to service his account. He asked if I would review those proposals for him.
In sitting down and talking to him, after reviewing the proposals, I was able to see that his business was probably a C credit. However, the proposal that he had received was one that would be appropriate for a D credit. Therefore, the structure of the deal, the pricing of the deal, and the terms of the deal were more onerous than were necessary for someone who was in his position with the upside and the forward momentum that his business had.
I was very quickly able to point out to him where the soft spots were in that proposal, what points could be negotiated, what points would probably be firm from the perspective of that lender, and what terms might go sideways on him if things started to slow down in his business.
As a result of reviewing my friend`s term sheet, we were able to save him $20,000 a year on a rather nominal amount of capital by money business standards. Not only did that happen, but we were able to request and receive an increase in the line of credit being extended by double. Not only did he reduce his cost of capital and the associated fees, but he also received twice as much capital as was originally intended.
By the way, we`re not talking about an immaterial sum of money to him; we`re talking about approximately a half-million dollars of credit being extended to a business that`s just a couple of years old. Furthermore, the borrower had shaky credit and the company was not highly profitable. You just have to know what the appetite of the lending community is at the time that you go in to ask for the capital.
Sometimes it`s about who you know, sometimes it`s about what you know, but make sure that you`re surrounded by people who know people and know information that is of great value to you so that you can make the very best decisions.
So, as you are working hard every day to build your company, or as you`re building your career, pay careful attention to the money that you have to acquire to run your business with. Money is one of the most expensive components of any business, and being able to save money on your money is absolutely imperative. Don`t pay for risk in capital that`s any higher than it should be. Make sure you surround yourself with people who you trust and who you know to look at your term sheets and at your proposals so that you get the best deal that`s available to you.
About Joel G. Block, President of Growth-Logic, Inc.
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker and advisor. To bring Joel into your company, please visit www.joelblock.com or www.growth-logic.com. Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship - http://www.entrepreneur-hub.com. And finally, for film makers: http://www.filmfundingblog.com/ - our newest achievement.