If personal guarantees are demanded of you and your spouse/partner by some of the lenders, deal with the bank that offers you a similar line of credit without your having to give up your first-born. (Photos.com)
Ask for a draft loan proposal (In some cases you will be asked for a refundable, good faith, deposit). When comparing proposals don't look only at the interest charged on the operating loan (prime plus?). Equally important are the charges on letters of credit, overdraft, the yearly loan set-up fee and, rate and terms of repayment of a capital loan, and so on.
Also, you do not want to be nickeled and dimed to death with check and deposit fees. Demand a flat monthly figure for all bank services including the yearly loan set-up fee.
You should also examine the loan ratios affixed to accounts receivable and inventory, covenants dealing with maintaining effective net worth, and the limits on your capital expenditures.
If personal guarantees are demanded of you and your spouse/partner by some of the lenders, deal with the bank that offers you a similar line of credit without your having to give up your first-born. In any case, you should negotiate a full release from personal guarantees upon your company reaching a specified debt to equity ratio. Don't accept vague verbal promises; get everything in writing before you finalize the deal.
At the bargaining table throw the bank a bone such as your payroll with direct deposits going into employees' accounts at the branch, and if a retail operation, Visa or MasterCard, debit, or any other service that banks love to provide. This sweetens the pot for the lender. At all times be realistic when stating cash-flow projections.
Your rating changes drastically in a cyclical recession or if your industry is in a slump. No matter how patiently you explain to your bank manager that the situation is fluid and one needs to wait for the smoke to clear, he will be jittery. He will want to see more business plans, better cash flow projections (tied into a schedule to pay down loans).
It is critical at such times to remain calm and make conservative projections. Keep in mind that the only thing that really matters is one's margin of security for the loan. If your security happens to be inventory, it will not carry much weight. Intellectual property doesn't get a heck of a lot of credit either, nor do patterns, molds, or dies. It’s much better if your credit line is based on your firm's, or personal liquid assets and current dated receivables. You should realize that a major bank with 10,000 branches is run by the book that is watched over by an executive whose bonus hinges on his/her division's performance. So, there you are.
While such individuals can sometimes pass themselves off as business people among strangers, they never rate with their family, where their failings are known. Evidence is that when a vexing problem arises—whether to sell, buy or rent, whom to appoint executor of a will, to arbitrate in a family business dispute, or any involved matter where family members are unable to come to an agreement, a third party is called in to offer advice. Often this person is not a lawyer or clergyman but the genuine businessman in the family. The summons goes something like this, “You're a businessman, try and help us get out of this mess.” Evidently, the average man or woman feels that a businessperson can restore common sense.
In my experience, individuals who are petty cannot be counted on to keep their word. In business, seldom is a transaction put in writing and a deal signed on the spot. Ninety percent of all deals are verbal, be it by telephone or across a desk. A person's word is their bond. If you have ever watched the goings on the floor of a stock exchange you would imagine that in the bedlam a party could welch on a bad deal. Not so. A transaction, large or small, agreed on by a nod or word, is a done deal.
Manny Drukier has been in business, from manufacturing to publishing, retail to real estate, stocks to stockpots for the past 60 years. He is the author of two books and resides in Toronto, Canada.
