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-I had a-- a business coaching speaking event in Wisconsin. And I get there, and my-- you know when you reserve a car-- a rental car, you have to use a certain credit card? Well, I got there. And I guess that my card that I normally had, I left it in my other-- anyway, I had add the different credit card, so they wouldn't let me rent the car.
And then, all of the cars were already rented out. So long story short, I'm find myself needing to travel like eight hours. It was six hours in a taxi from point A to point B in Wisconsin.
SEAN KOUPLEN: Right.
-And so I had to tell the guy, I'm like, buddy, you can take my wallet as collateral if I don't pay you once I get there or whatever. And so it's important that we know what that term means. Business coaching realization: It's just a way to kind of guarantee that, if I don't pay you back, you can have this.
-Exactly. That's-- that's really what it is in its simplest form. And collateral can be almost anything. I mean, it can be real estate that you own. It can be equity in your home. It can be cars. It can be equipment, accounts receivable. It can be stocks and bonds investments that you own.
-I-- I want to clarify what's not collateral because I-- I work with a lot of small business owners that ask me to help them grow their business. And I'll-- I'll work with them. And a lot of times, they'll have things that are not, in fact, assets, but they think they are. And so what are some common things that people will put down as collateral? They'll say like, uh, my Joe Montana poster--
SEAN KOUPLEN: Right.
-Uh, my-- what are some things that people put down as collateral, typically to secure loans, that is not actually collateral.
-Probably the top three are personal property--
- --as you mentioned. And-- and this is-- this is a famous one. They'll put down, I have $100,000 of personal property. Well, I mean, it's an old couch. You know?
It's an old-- it's an old refrigerator. It's an old-- you know, so these things are worth pennies on the dollar at best. We may actually have to pay someone else to get those things. Business coaching tip: So personal property is one that cannot typically be used as collateral.
-Unless, you know, it is a-- it's-- it's, you know, jewelry or it is art or something that really has a market value. A second one is retirement funds. This is actually a big one. Business coaching lesson: If you have money in an IRA or a 401(k), they cannot be collateral-- collateral because they are protected from creditors.
That's the purpose of retirement funds. And so if you're putting money into a 401(k), you can't pledge it as collateral because we couldn't take it, even if we wanted to. The third item that people try to use as collateral is life insurance. Life insurance can build a value over time. If you have a whole life insurance policy and you're putting money into it, it will build a cash value over time.
But what you'll see a lot of times is people will put-- life insurance, a million dollars-- down. And a million dollars is the asset that they want to put up as collateral. That's only a million dollars if they die. It's a term insurance policy. And we do not want to have to kill you to get our loan. That's actually a legal.
-So-- so we can't do that anyway.
-So-- so those things-- so people need to understand whatever the collateral is that you are putting up has to be readily marketable today. If you stop making the payments today, we would have to be able to sell that asset.
-Now, I want to get into business coaching for this next one here, this next-- one of the-- the five C's here is character. And I think this is-- this is big because I see a lot of means to an end entrepreneurship out there that-- that, frankly, when I was growing up financially without much in the way of financial means, Eminem was one of my heroes. You know?
And then, after that it was kind of-- it was kind of that mentality of like, whatever it takes.
SEAN KOUPLEN: Right.
-And I think once I met my wife, she's much more of like a, hey, you know, let's do things the right way.
-She's a better person than you.
-She's a great person. Yeah, she's--
-Yes, let's be honest.
-No, she is.
-Yes, I know her.
-And she-- and she said, hey, you know, the character counts. And-- and so luckily, as I've-- as our businesses have grown and my career's matured, I've been able to build sustainable relationships, where I've known people for a decade and have, you know, tried to do the right thing.
-Talk to me about character and how big-- I mean, let's just say I have cash flow, I have credit history, I have collateral. But you know that there's something just weird about my character. Just how does that fit into the equation when the banks decide to lend or not?
-You know, the-- the bank is not-- we're not trying to judge people.
-It-- it's not-- that's not-- but we are trying, again, to-- to analyze risk. That's what we do. That's our job. So as you're looking at someone's character, what you're very interested in is if they-- if they do what they say they will do. And so the world is very small. And I would-- I would tell your viewers out there, and Thrive members, that your character, it's extremely hard to build it over time. It's extremely easy to lose that reputation quickly. And it-- and it takes decades to rebuild.
And some people never are able to rebuild whenever they do things that are-- that are not really wrong. Business coaching tip: So what we're looking at is just a person's tendency to be honest, do what they say they will do, you know, not over commit. In-- in business, there-- you see a lot of over promoters, you know, individuals that sell others on an idea that isn't a sound idea. And-- and they know going in that it's not a sound idea, but it's a way that they get money.
And so that-- that comes to pass. But probably the-- the biggest thing we're looking for is just your market reputation. Is this-- is this person-- and you know it. You think about all the people that all of us know in our lives. You know, certain people are rock solid. You can-- when they say something, you can really take it to the bank, so to speak. I mean, you can believe in what they say. Others, you know, are-- are more marginal. And so that's really what we're looking at.
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-Now, this final business coaching lesson is capacity. The capacity-- what are you talking about when you say capacity?
-Capacity is a way to say net worth but start it with a C. Because we needed a fifth C for the five C's of credit. Business coaching lesson: So capacity is really net worth. And capacity is really your ability to meet an obligation even if everything went against you. OK. So you're looking at I lose my job, my business doesn't go well, can I pay? Well, the only way that you can pay is if you have assets that you can liquidate that you don't owe money on, if you have investment funds that you can turn to.
So you're looking for-- another way of saying capacity is cushion. You're looking for someone that has financial cushion where they can withstand a downturn.
-Now, so let's just say that we have these five C's in place. And so, now what we have to do is we have to really put our best foot forward by really knowing and understanding our historical operating numbers. Walk me through a business coaching lesson on what that means when you say understand your historical operating numbers, your assumptions, the trends. Just walk me through what that means to you.
-Sure. We started out by listing all the things you need to bring to the banker, all of the financials you need to bring. And then we went through the five C's of how they'll analyze you. And now, we want to talk about how important it is to know your numbers. Business coaching tip: This applies whether you have an existing business or a new business.
And let's dissect the two for business coaching purposes. If it's an existing business, you really need to understand your trends. If your gross margin has begun to shrink. The difference between what you buy and sell your product at has began to shrink over time, you need to know that. You don't want the banker to point that out to you. And you need to understand why that is and what you are doing to turn it around.
If sales have dropped, you don't really want the banker to point that out. The banker doesn't want to have to tell you that your business is moving in a negative direction. If there have been huge increases, you need to know why that is. You need to understand it.
One of the most concerning comments that you receive as a banker is a business owner will come in, they want to borrow money, you look at their financials. There are some things happening in there, you ask about it, and they say, you know, I don't really know the accountant just puts these together. You know, I just work. I don't really understand the numbers. That doesn't give you any confidence in the financial performance of that company.
-I've seen this a lot. And so, you've probably seen it a lot. But I see a lot of business owners, in particular, in this world of where there's a lot of people that got this idea to open up a restaurant, or some-- it's like a passion. It has nothing to do with the money, they just-- they passionately want to open a restaurant or a bakery. Or they passionately want to open up a sports store.
There's a passion there. And it's not necessarily based upon a financial business model. And I'll sit down with the business owner, this is before they borrowed money. And I say, how many football jerseys do you have to sell to pay for the lease, or how many cupcakes do you have to sell to pay for just the lease. How many-- and, usually, they I don't know. And I say, well, before you go apply for the bank loan, you need to know this kind of stuff.
And so, these are some neat things-- these are some things that we all need to know. We need to know our historical operating numbers. We need our assumptions, our trends. Any other numbers that you feel like we just have to know when we're talking to a banker. I mean, do you want to know your break-even point? Or what else do you want to know?
-Yes, now if it's, again, we highlighted an existing business.
-So we're going to assume that they are breaking even. We just want to understand the trends of their numbers over time. In a new business, no question. You need to understand there are so many things we need to understand.
We need to understand the market. We need to understand the competition. We need to understand what we forecast the margin to be, what it's going to cost us to buy the product, what we need to sell it at, including overhead expenses. We do need to understand a break-even, no less, no question about that.
And so, we just need to fully-- and this is the least, I understand this is the least enjoyable part of business for everybody. Business coaching truth: But it is the most critical part of business. If you don't understand your numbers, you're not going to understand how to make adjustments whenever things are not working within your business.
-So we're going back to snow cone land for a second for business coaching purposes. So, I have a snow cone stand. I'm saying, hey, I want to open up 27 of these guys. You're saying, hey, you might have a great, great marketing and you might have a lot of customers at location one or two, but you still need to know your market, your competition, your margin forecast, your overhead expenses, your break even point, your assumptions, your trans-- you need to know those numbers.
-You do. Business coaching tip: You need to know those numbers frontwards and backwards. And you really need to understand, in addition to just the basic business numbers, you need to understand what you need to live. Myself as the entrepreneur, I need x number of dollars to survive on a monthly basis, and pay my mortgage, and pay my car. Can I sell enough snow cones to make that work?
So, it's actually more complex than I think people realize. I think it's very important that small business owners have a good accountant to help them dig into those numbers and put together very reasonable projections for what they think their business can do.
-Now, what about business coaching for highlighting your equity injection. What does that mean?
-It's very important to a bank that you have your own money into your venture. So it's important sometimes that equity injection, the money you've put in, it's not real clear. You've just paid expenses over time, or you've put a lot of sweat equity into a company. So it's just important when you sit down with the banker to make it very clear, this is what I've put into it. I'm not asking you, Mr. Banker, to put everything into it. I'm risking everything too. And this is how much I've put into it.
-And then, the final area here is we need to pay down those credit card balances. If we're going to put our best foot forward, we really need to pay down those credit card balances. Why?
-I understand that there are times when it makes sense to use credit cards. It does help build your credit if you advance them and pay them off. There are 0% rate opportunities out there that clearly can save you money. I will say there's normally a fee associated with those. So they're not free, per se. But I can understand why you would sometimes use them.
Business coaching truth: Most of the time, however, credit card balances are a sign of living above our means. The fact that we have we have had negative cash flow, so we have had to finance our life on credit. And that is typically a red flag to a banker.
-OK. Now, the final thing I want to ask you for business coaching advice here about as far as putting your best foot forward when working with a banker, I guess the question that I want to ask you is, is it important that the person looks the part? I'm not talking about they have to wear a suit and tie. But, is it important that somebody at least dresses to impress, or looks sharp or at least their first impression when you first meet them. Does that at all factor in, I mean, if somebody just looks the part, at all? Is that important, or does that matter?
-You know, I think it's important anytime you're going into a business meeting to show respect for the other person in the meeting by looking appropriate. Business coaching lesson: I do not think that a client needs to dress up to come into the bank. We're people. We have a uniform that we wear just like everyone else. And we want to look nice so that they have confidence in us. But they certainly don't need to feel like they overdress.
-Yeah, I'm just curious because I think that a lot of people have the stigma that maybe if I don't wear a tuxedo, go in there, just, can I get my bank loan?
-I might not get-- OK, so.
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