¶ Using Debt Properly in Business
Hey everybody , I'm back here with my friend and partner , Eric Howerton .
Good morning United States of America . Good morning .
We're here with another episode of Big Talk About Small .
Business . Dude , you had some freaking incredible energy . Just then you think , dude , I'm in the last business . Dude , you had some freaking incredible energy .
just then you think , dude , I'm in the last business , I don't know why , because I woke up at like 1220 , 115 , 230 , 4 o'clock . Yeah , that's one of the pleasures of getting old and having a prostate condition . Oh , this is . I mean , you know , I heard somebody say .
Some comedian said the other day the only time I don't feel like I need to pee is when I'm peeing and it's just keep drinking the coffee , iced tea and and all day , and and it'll just keep flowing .
It's beautiful man .
But it wakes me up . Thank God I have a urinal in my house . I don't know if I told you that it's really convenient . You just kind of lean against the wall . You know , it's the first house I've ever had with a urinal in it .
I've never even heard of someone having a house with a urinal in it . You're the first house I've ever had with a urinal in it . I've never even heard of someone having a house with a urinal in it . You're the first person I've ever heard that has a urinal in their house .
My new house is insane . It's got a waterfall in the shower too . That's great . So yeah , like my wife , she still has really thick hair and everything and she lathers it all up and conditions it and then she gets under the waterfall . It's the only thing that really gets it out .
Yeah , because it's just a good volume of water , just like pours out of there .
And then the thing is so big it has like her side and his side , yeah , and each one's hooked up to a different water heater . How nice , dude .
Yes , you just don't run out Dude , you're living it up , man .
Oh man , I'm jealous . I'm telling you I'm a little jealous . We'll put some of that stuff in your new house , will you ? Yeah , that's going to be awesome . Yeah , it is , man , anyway . So we're here today , we're going to talk about business and entrepreneurship , as we normally do .
We normally do , yes , and one of the topics that we think would be good for our audience to to learn about is how to properly use debt in your small business . You know , I think a lot of people are scared of debt and they think all debt is bad , right , and the fact is it's not .
I mean , yeah , too much debt is bad , yeah , where you can't pay it back .
Yeah , that's a bad thing when you can't pay it back , that's really bad .
Or when you could have the rug jerked out from under you at any minute by your lender , that's not good , right , right , but the fact is you know , um , your , your lender , which for most of the time we're talking about banks although we can talk about private lending too yeah , but your banker really should be like a business partner to you .
I mean , you're , you're sort of wedded together , yeah and um , they know a lot , and most my experience is banks aren't really very greedy .
they are risk averse right , but they're not greedy , they're not trying to capital , you know , freaking exit out in some massive way that makes them rich .
No , no , they aren't . They just want to get a certain return on their money . They pay so much for their money and they expect to make something on that .
Yeah , it's almost like as fundamental as they pay . They're paying what ? Basically all their depositors for lack of a better term a certain amount for that money and they're selling that money for a certain amount , right ? So they got to sell their money a little bit . That's why .
Yeah , they got to make enough on it to stay in business . They got overhead , right , okay , they have a lot of overhead . Yeah , they got people and facilities and insurance and so they need to make their return . But it's not excessive . You know , if you look at banks , really there's like a three or four percent spread on almost everything .
I mean , you know they don't get all their money from depositors . They buy the majority of it at a particular rate , but they have to have depositors because if they don't have enough depositors then the government won't lend them money .
True , have depositors , because if they don't have enough depositors then the government won't lend them money , true , yeah , um , so you know , they've got to have a ratio of of deposits to loans which is somewhere around 10 or greater , and I think it's .
It's important for entrepreneurs to like to understand that whole system , because if you're not aligned to that , like I mean , I've had this experience a lot where I didn't understand the banking system and recognize that it is a business , it's not a charitable foundation . B is not the public stock market no Right . And it's not VC capital .
It's not private equity capital . They're very risk averse . It's not angel investors yeah , they have to be . They're very risk averse . It's not angel investors yeah they have to be .
They're bankers . They're bankers Right . They got a real tight margin . They can't afford to write a lot of losing loans Because for everyone that loses money , they got to have 50 of them that make money Right , and so that's a really big deal .
And they are heavily regulated by the government , so they have very limited discretion on what they can actually do for you Right Now . It helps . If they like you , sure , and trust you , they will want to try to help you within the confines of the constraints that are levied on them by the government that insures them .
Their depositors Okay , so you know the government that insures them , their depositors Okay , so you know , there's no question , a good relationship with your banker is essential . I think a lot of people don't understand that . I'm going to come back to that .
But the other one is I think entrepreneurs and small business owners often think banks will lend money on their business plans . No , they don't care about your business plan .
They want to see one .
Yeah , and they want to act like they care about it , but really they don't . What do they care about ? They care about your sources of income and your assets to collateralize any loan that they give you . And if you don't have assets to collateralize that loan , you've got a problem .
And if you don't have income , that's hopefully not dependent on the business that you're trying to get money for as a small business .
If you don't have income that's not dependent upon the business you want money for .
Right , like other sources of income outside your business , that's what they like .
They like to see that you're also getting money from other places .
Yes .
You personally are stable and you can pay back the loan personally if the business cannot pay it back . Bingo .
Got it . And so I think a lot of people don't understand that they go with their business plan . They got no assets , they got no other income .
And then , you know , like I was talking with with one of my um former students the other day in fact I had breakfast with him this week and he and his wife um future wife , you know , they both have w2 income and they want to start a business .
And I said , you know , and they want to get some debt for him , like dude , you know , get your money first before you quit your w2 jobs , yeah , or you're gonna have a real hard time getting it yeah , and then when you know and , and guess what , when you do quit your jobs and you don't have it in common being you probably should be very up front with
your banker . That that's that's part of the relationship . Maintenance is honesty . Bankers hate surprises yes okay . They want you to keep them informed every step of the way so they can anticipate what they have to do to mitigate the problem . They hate surprises , and a lot of small business owners only give them good news and never give them bad .
Because I think that they have their misunderstanding with your banker , this person that you're dealing with , your primary contact at a bank . They're not the ones with the money in their pocket lending to you . They're actually reporting up to somebody .
Exactly . They've got to sell you to the higher ups . Sometimes it's the board of the bank . It makes you go above a certain level where they have to buy , and so , in a way , they're representing you . You're absolutely right about that .
So if you make some actions from your original agreement like you quit your job right and you just didn't keep your banker informed that it was going to happen and you come in and you're only reporting back every 60 , 90 days and for two months a year , or once a year , yeah , and , and , and . You tell your , your , your contact .
Oh yeah , I don't work there anymore . I haven't been working there for two months . You're going to be like what ?
I had a guy . It's funny you say that I mean I had a guy . It's funny you say that I mean I had a guy who worked for me at one point for five years and he decided to go out on his own . Well , during the time he worked for me , he got a construction loan to buy a house and redo it . Okay , there's short-term loan , it's like a one-year loan .
Yeah , you got to fix it up and then you got to get it reappraised and you got to get permanent financing for it . So he quits his job with me . That already causes the banker to be like , oh man . And then his wife quits her job , but he's got to renew this loan that had a one-year window . He's like I don't know how I can renew the guy's loan .
Yeah , okay , he just blew it . Anyway , I think it's a fairly common situation . You're right , people don't keep their bankers informed . That's why I'm a big fan of if you do produce an open book management report that you share with all your employees , share with your bank too .
Just put them on the excuse me , put them on the distribution list , and then they see what's going on and they see , you know a good open book report . It explains the numbers and says what you're going to do about them if they're not good .
And you know you're communicating with them , so they know what's happening and they can keep their higher ups informed , as you said .
That's right .
I think that too , if you can as an entrepreneur , if you approach your bank versus like , hey , I need money and give me some money because I have all my ambitions as an entrepreneur , but rather you look at your banking partners as consultants and advisors with your business , I think that's a first good step to change that mindset , because entrepreneurs , let's
admit it , we can be a little bit egotistical . We know it all , right , we do . I mean , I don't know about you , but my best excuse I have now for everyone is I'm a narcissist , I apologize about it . Hey , I'm a narcissist , I apologize . But you know what that means . You apologize about it . Hey , I'm a narcissist , I apologize .
But you know what that means , you know what that gives you right . You are not . You say that Well , I can't be if I did it . That actually cancels out that I'm a narcissist Because I'm aware of it . So that makes me something . I don't know what it is .
You may have some narcissistic tendencies , but it doesn't mean that you're one . You have other things that balance that out . Thanks , man , you're empathetic .
okay , I am a little yeah , but I mean , if you can
¶ Building Relationships With Business Bankers
. But I had a problem in the beginning , like I just I just knew I needed capital for certain things , right , and I could never go get the capital Right . Just knew I needed capital for certain things , right , and I could never go get the capital Right . My response was well , there's nobody there to support me and my vision .
Yeah , and so I'm going to go do it my own way , right , which I don't know what kind of personality you classify that as .
But I mean , like I basically , when I I heard no , it motivated me to do other things and do it my own way right , and I'll tell you like it made it really challenging for , yeah , for a long time yeah , cash , cash yeah right , right . But I was strapping baby check floating and booty strapping , not cutting .
Yep , I understand . You've explained that difference before . Yeah , friday after 6 , was it ?
It was at 7.01 on Friday 7.01, .
okay , until what time ?
Until Monday at 6.59, . Baby , okay , there you go . I had an extra two Monday $200 to live through the weekend . I was actually telling some of my bankers yesterday about that and I was like , hey , I can do a podcast with you guys , because I was like you guys actually helped me out for like 15 years .
But a lot of that position that I was putting myself in was because I didn't understand what bankers would have to go through and how that whole thing worked from their perspective . So it is about being empathetic .
Yeah , it is .
If you can understand what your contact has to go through in order to award you any money .
Yeah , they want to help you if they can . If they like you , they want to help you . If you think about it this way , it how they make their business . Yeah , that's a sale to them to lend you money . Exactly . It's not like they just don't want to sell baby . Yeah , everybody needs to go out and sell . They need business .
No , it's right , you're right , they , they , they're approaching , they want to give you money . They , they do If they can .
If they don't lend out money to people , then they can't satisfy their shareholders .
They can't make a living . No , they can't make a living . All they can do is pay it out .
Yeah , it's like there is a bell when they close deals that they ring .
They celebrate doing more deals , I know , but the deal is like they have to meet certain standards , yeah , and if they have a lot of failures , then they lose their job , yeah .
And then if they have a lot of failures as a bank , they lose their charter career , understanding that that principle that banks are a business .
Yes .
So then you can better relate , because if you're an entrepreneur , you're obviously in a business , but if you don't understand what their business needs are , you're disconnected . And then you don't , you don't look at them as advisors , you don't talk with them , you're actually fighting against them .
Yes , and then you might make a bigger , potentially bigger mistake by going and finding other sources of capital . Right , because to your point in the beginning of this deal , it's like debt financing is not a bad thing .
No , it's generally from banks , but there are other private lenders , usually higher interest rates , right Higher interest rates .
Yeah , different terms and conditions that can be very aggressive . Yeah , convertible notes , which will take the most expensive form of financing .
Take the equity from your business . Cheap rates .
Yep , yep , and then you pay them a million for something that cost them $20,000 a few years ago , from $20,000 a few years ago , you know , I mean . And so I think that , like , if you can have that perspective , you can better discuss with them and understand why it's really why they need things , they need a lot of things .
But if you don't understand why , then you're like this is bull crap or whatever . You know , nobody trusts me . Mark , like my thing would be . Mark is why I got a loan from the same exact contact and he's , but I don't understand why he did . Now I feel like it's something about me in my business .
I want to talk about a little bit about the relationship with your banker , okay , because that makes a big difference .
You want them to want to help you , and the way to get that is to have a personal relationship with them , is to be honest as we've talked about is to provide them with constant information , not hide anything from them , and then they want to try to help you . Now my experience has been I like to go to the top of the bank .
Okay , I don't want to deal with that new lending officer I just hired , like three months ago , from some other bank . He's like three years out of school with their finance degree . I want to deal with the top person if I can with their finance degree . I want to deal with the top person if I can .
So that then implies to me that you need to be dealing with local banks , true , okay , maybe regional banks that are based in your area , the headquarter in your area .
Yeah .
Where you can have that kind of relationship , because you're not going to get it with Bank of America At least I'm sure as hell not going to . You know what I mean . Or Citibank , or you know Well , they're headquartered in New York , right , or whatever . They're just too big .
They don't care about us , we're little business people , but the community bank has a real interest in businesses in their community .
Yeah , so that's the thing I think you know a lot of people don't quite understand is you know they try to go to these bigger banks and they fight through the system and they're dealing with somebody who's 18 levels down from the hierarchy , from the top of the hierarchy . So you know you want to .
If you can meet the top people , yeah , and you know , become friends with them . It's not that hard , by the way . No , it's not , because they're interested in building relationships in the community .
Well , they want to find entrepreneurs , exactly . They want to find business leaders and lend them money and be part of that ride of a successful business , because that's a great portfolio piece for them , because that gives them more business owners to come to this bank , I mean it's their business .
It's a virtuous cycle it is , and they want your cash flow too . That's the other thing a lot of people don't understand . They want your cash flow . So if you're going to borrow , you're better able to borrow from a bank that's got your accounts that you're running all your money through .
Because if you had a business that's doing $12 million a year , let's say in revenue , it's got a million dollars a month flowing through it . There's going to be so much money in there at all times .
That helps them as far as their ratios go , yeah , to be able to lend that money out , okay , so that's really important money to them kim on the relationship thing .
Yeah , and you said you want to deal with the higher ups . Right , this is what I think is a really big point . As an entrepreneur , how do you run into these higher ups ? Because what I've seen a lot of small business people do and entrepreneurs is they don't freaking show up to places where those people are yes , yeah , like and it's so .
It's such a problem nowadays because you can hide in a hole at your freaking computer desk at your house , sure , with your dogs .
You gotta get out in the community , you understand this . I mean you've been so involved as far as I threw down my glasses it makes me so . I mean you've been involved in a million different things , like the cancer challenge and things like that , where you just naturally meet those people .
Absolutely , you know , yeah , yeah , I mean in the events chamber events like chamber of commerce .
that was what I thought of , yeah man , don't not join the Chamber of Commerce because you can't find a pathway to get a direct return on investment .
Exactly , oh , I know it's so valuable , it is extremely valuable and the cost is so low it is yeah , and then when they have an event , you need to show up for the event .
For the ribbon cutting or whatever . The you need to show up for the event . Yeah , be a participant for the ribbon cutting or whatever . Go to the ribbon cutting , Support your business , Get ingrained with it , Like you might have a technology business , software business . You know that's another problem .
A lot of people think just online and so I don't need my community anymore .
Right Now it's opening a hair salon . What are you doing there ? Right ? But it helps because the other people are there , Absolutely .
And you show you care about the little guy or whatever , and your banker then knows oh well , if they don't come in for their meeting with me , I'll see them tomorrow , most likely at this event . So they're not going to be worried about you . Right , right , like you're a human .
I think the other thing too is , though , get press locally Totally Become known . Yes , because there's safety in . It's just like selling . You know , it's like we always said like carpet bomb . Then send your salespeople in Carpet bomb with your direct mail , your email , your social media . Then , when your salespeople show up , they know who you are .
Yes , and it's a lower risk . Yep , same thing here . Okay , carpet bomb with your PR . Be known out there , be in the business media in your local area . Start your own podcast . Yeah , start a podcast . Be active on social media . That's it . No , I mean the podcast is a great example .
Oh yeah .
It's like continuous pr . Sure , yeah , we're communicating , yeah , but we're just not selling anything . No , we're not . I mean not that we wouldn't , I mean hey , hey , hey , you know , at least it would pay for our coffee over there that's right .
We're selling our sponsorship for five dollars no , ten dollars an episode , because I think we both want at least ten dollar drinks . Ten dollars , oh okay , yeah , we gotta think better . No , no , we will , it's not .
It's not a verbal contract , no , okay uh , but no it so being known , though , does reduce their risk totally , and it's gonna be more . Um . You're more likely to attract the higher level people , but you can also just go to the bank and go over to their office and introduce yourself . Most bankers like talking with business people . Yeah , okay .
And they like talking with their depositors and they like talking with people they're lending money to or could lend money to . Just go sit down and talk with them . Yeah , hey , how's it going ? Yeah .
Why is that so hard , man people ? I think that they just don't . You know , I can , I can understand , like , if you're starting your new business , like there's , there's so much about entrepreneurship , right . That's why we we have never-ending dialogue here , because there's just so much . You never run out .
You never run out , but like to go into it with a mentality and to have one experience where you go hey , banker , I need a loan for a hundred thousand bucks , I'm going to start my new business , so . But when we talk about the , the bank financing , there's a lot of value to this debt capital , right .
There is .
Can you talk a little bit about why would it be more valuable for me to build this relationship with the bank , understand what they need from a loan , make sure I have the assets , gather the assets and get a loan from the bank , versus running out and getting equity-based top capital Like ? Why is it more valuable to have debt capital ?
Well , I mean there's a lot of reasons . I mean , first off , I think people don't really understand return on invested capital in their privately held company . That's the number I always look at , okay , okay .
So I can tell you with , like , like most of the businesses I ever had , I was generating at least a 50% return on my invested capital in my business , meaning how much money did I put into it versus how much did it make ? Yeah , it's not always a question of what's your profitability percentage . That doesn't mean that much .
What matters is your return on invested capital , okay , okay . So if less capital you have to put into it , when you can borrow money and there's no upside for them , all they get is you pay them back what you borrowed plus interest . Equity , you're chasing a bigger . And if you're successful , all you're doing're chasing a bigger .
And if you're successful , all you're doing is chasing a bigger and bigger and bigger number to try to buy that back . Okay , so equity capital , if you're successful , is super expensive . Yeah , it is . It's the most expensive capital there is now .
if you lose money and go out of business , equity capital is great because debt usually you still owe but if you lose money , you're're back to square zero , and I mean like all your relationships are pretty much tarnished at that point , exactly , yeah .
So yeah , I mean I think you know if you're going to have a successful business , you're far better off to borrow money , yeah .
If you can .
I mean and that goes to yet another factor I think people look at like , oh my God , you know , maybe there are other sources . There's mezzanine lenders . They lend money to privately held companies that banks would never lend them at a higher interest rate OK , but they invested in growth companies and usually they've got a kicker .
Let's say it's a five-year mezzanine fund or six year fund where they put the money in and then they got to get paid back in six years Okay , and maybe they charge twice the normal interest rate and maybe if you sell the company , they get a three or 4% kicker . Okay On the deal . However , there's no strings attached to that money .
There's no debt to equity ratio that you have to maintain Profitability , nothing . There's no constraints at all other than six years from now . You got to pay 100% of that back to us and you got to make your interest payments along the way .
Okay so , but that is another , another source and a lot of people would look at that and go , oh my god , they want 18 or 15 or whatever
¶ Optimizing Return on Invested Capital
. Again , if your company is generating a 50 return on invested capital and you can borrow this money at 18 , you're still far better off you see what I mean .
So what's your calculation you're talking about is 50 percent of what you're invested in invested capital right .
Let's say you start your business for a hundred thousand dollars , okay , and after three years your book value is three hundred thousand . Okay , all right . And let's say that business is doing two million a year . It makes a two hundred thousand dollar profit . After paying yourself a reasonable salary , your return on invested capital is 200 over 300 .
Okay , that's 67 . Okay , okay , you see what I mean . So if I can borrow money and do more of that and grow that , right , that's the way to go . The gap , the difference , is pure profit for me as the owner . So it's all about return on investment cap . I mean , I'll give you an example .
If I in real estate , it's really clear , okay , let's say I buy a building for $2 million , okay , all right . Let's say that building needs a bunch of work . So I'm going to do a bunch of work to it . I'm going to make it worth $3 million . So I go get a construction loan from the bank for 80% of the post-construction value , post-improvement value .
They call that a subject-to appraisal . So , subject to me doing all this stuff that I'm going to do , it's going to be worth $3 million , so they'll lend me 80% of that . That's $2.4 million , right , I'm going to buy that building for $2 million . With the first draw on my construction line , I got $400,000 left to make all my improvements .
Let's say really the improvements cost me $600 , not $400,000 left to make all my improvements . Let's say , really the improvements cost me $600,000 , not $400,000 . So I put $200,000 into that deal of my own money and then at the end I turn around and sell it the $3 million After I get done . I sell it for $3 million . I pay my $2.4 million back .
I put $200,000 into it over the time I owned it . For $3 million , I pay my 2.4 million back . I put 200,000 into it over the time I owned it . My return on that is 400,000 over 200,000 . Where's the 400,000 ? 400,000 is the difference between 3 million and 2.6 . Got it ? Okay , that's a vastly simplified example , but I'm just trying to .
I mean there's going to be commissions , maybe I get more than 3 million . I've got operating . Simplified example . Yeah , okay , but I'm just trying to . I mean there's going to be commissions , maybe I get more than $3 million . I've got operating whatever . Yeah . But my point is my invested capital was only the $200,000 I put into improvements .
Right , and so that's the profitability on the sale . Is that number divided by $200,000 . Gotcha , does that make sense ? 200,000 . Gotcha Does that make sense ? It does , yeah . So borrowing the money assuming that it was all loaded into my costs in there was well worth it .
So in that same example , what we're kind of articulating here is that's that that calculation is better by borrowing that money , but if you had somebody else , that put in money , right , then I'm gonna have to split the money with them at the end , or whatever they put in .
Yeah , if they put in half of it and I put in , if they put all of it in , I'm probably , they're probably gonna get 80 and I'm gonna get 20 if I'm lucky .
That's the sneaky thing about the whole equity thing .
Sure , Everybody thinks that's great . Though I'm going to go get an investor to help me buy this building . You see what I mean . That's what they want . Here's the reality of this . I've never had an investor in any real estate . I ever did . I was always a 100% owner , never did . I was always a 100% owner , never did anything I wasn't 100% owner of .
That's the other thing with debt you can have $20 million in debt , but you still own that business . That's true . You're still the owner of it .
Still the owner , and when things turn and change , and I mean , and the thing is with the business too , and this is why equity is so expensive the business it's like the value keeps going up . You're trying to set it up Little by little by little , like we always dream about these massive hockey sticks that happen over here . That's an anomaly , man , I mean .
But like it's just little by little and you turn around one day and then all of a sudden these macro circumstances happen that maybe you know , like like the covid thing , right , there's a lot of businesses that did extremely well during covid . Yeah , because it forced people to change their behaviors .
Then , all of a sudden , this extremely valuable business in that , in that circumstance , and if you weren't the owner of it , you just lost a whole bunch of your game , exactly so . So why make the sacrifice ? I mean , there's a lot to this whole discussion .
Sure , I mean , I think you know , if you've got the big potential payoff at the end , versus a small one , you're much more likely to make the sacrifices in the business daily that are going to make it more profitable and successful . Right , okay to yourself . You know what ? I may never get a big payoff out of this .
I want to suck as much money out of it as I can now . Okay , yeah , yeah , that's the thing . And then we're not even getting into the factors of the outside equity investors .
Directional guidance oh , oh , yeah , we yeah . That's a whole another podcast in itself where they totally distort what you're trying to do .
Yeah , absolutely , because they , you know , I mean that whole thing , that that whole thing is it gets really , and I was actually just talking with with a um , with a colleague or a or a peer in over coffee brought for the show and it was somebody you had on the show before I noticed .
Yeah , yeah , and we were just talking about , like he he needs to raise capital or he thinks he does .
But you know , there's a lot of different ways to do this and and we were specifically saying , man , if do , you look , you need to make sure , as the entrepreneur , that as you go out and get financing or capital , that it's something like are you still going to be doing what you love to do Because your main driver in your Big , big question , bro , it is ,
I mean , that's the core of it .
Thanks , man . I agree , man , it is Because I'm like dude .
I can tell you that in my experience of trying to raise capital , I got into places that I didn't really like dealing with that stuff . Man , I didn't like some of the people I was dealing with . Yes , it's like the purpose . I was behind it , I mean .
The purely financial investor is the one you want to avoid , if you can . Yeah , man , okay , that's all they care about , it's it . They have no passion for your industry .
They don't see vision to it . And then you're , you know , and as if you're an entrepreneur in my case being an entrepreneur that has like vision kind of drives .
Right , that drives everything for you .
If I'm meeting with you and you're going to and I'm looking for you to put capital in my business and you can't see the vision that's like super clear and quick and get excited about it , like I get really really , really , really frustrated fast because my time is being . I could go meet with a client and they can get it like that and then they buy .
I say the best capital on planet Earth is capital from the customer .
Well , that's another one we could talk about for sure , because they've got a vested interest in you Totally and they're sold on you . They're already doing business with you . It's the most valuable capital you could ever get .
Because if you have more customers buying your product or your service , it can have scale to it . And then , by the way , everybody that can buy you wants you .
And so if you focus more of your time on how do I get more capital from one to 100 customers and just relentlessly think about that , I know Because the problem is , and the good thing with banking is that if I have that relationship they can introduce me to more customers . Number one , that's true . Because they're a local banker in your community .
Yeah , that's true , and they like to do that . Yeah , good for me , a good banker likes to do that . They want to connect . They're connectors .
Well , they have a vested interest to see your business be successful so they can get paid back on their loan Right .
And make interest and do more loans with it , right , yeah .
Whereas an investor that is not attached to the business , not in the community , they're giving you money , they're all about their return , but they're not going to try to drive that . In some cases , yeah , going to you know , like they're not going to try to drive that . So in some cases , yeah , yeah .
So your debt equity , your debt financing , can be very beneficial for you it's low cost compared to your return on equity or return on invested capital . Okay , um , and I don't know what else you can say well and I think well .
Another thing like I like to think about when it comes to you know , to to that is these relationships they become if you look at them as advisors . They're actually you're not having to pay additional CFO type of thinking no , that's true , yes , that's a good point .
I mean , I had a piece of property I was trying to buy once , and my banker who was the founder , by the way , of the bank that I deal with High up as you can get , as high as you can go he told me give me the money for it , but he wanted me to do it , take it a different direction than what I was thinking . That would reduce my risk .
I did what he said . It came out okay . I'm still not sure I wasn't right actually , but I did what he said because that was what he wanted me to do and it worked out fine . So they do have insight that you can't deny okay , maybe it did reduce my risk and their risk by doing it the way I did . Well , that's the thing is .
You may never know , because I I mean basically that to make it simple to everybody to understand we created it was a development project and we created more individual sales than I was going for originally . So you know , you break it up into smaller pieces and you sell a little piece at a time , which you know theoretically reduces your risk .
I don't need to find one big buyer or two big buyers . I can find 10 small buyers over here and it worked out . But they do give you a lot of advice .
I mean , it's just , you know , like if I want to do something , I'm going to call them up and go hey , what do you think of this and are you going to support me in this and do you have any other ideas before I go ? Commit to do it Exactly ?
Hey , now I'm out , hat in hand , going to all these banks trying to get money for something I already said I'd . Do you see what I mean ?
Totally it's . Yeah , they're advisors and then they're also auditors . Yeah , Like I think that another thing . That's a good point . As an entrepreneur , you want to . You emotionally feel like that . You have to have the answer to every single thing and you're watching everything . It's actually way too much burden for any one person to take on .
I love having teams around me , whether they're employed , or whether they're not employed or contracted , or they're service providers like banks . Sure , you know , I want my finances to be looked at Right , you know , by other folks that have different perspectives .
Yes , because it's an aggregation of all those perspectives that you're reducing your risk as an entrepreneur it's true .
It's true , and if you consider your , they're probably a lot more conservative and risk averse than you're going to be oh yeah , absolutely , there's all the attention yeah , yeah , but that can be good .
No , it is , it's good for them . Yeah , that can be good . I need guardrails , bro . I mean I do . I was in a meeting with my wife and some other team right , I need guardrails and I said I admitted to everyone maybe I shouldn't have , but I scare myself sometimes .
Said I admitted to everyone , maybe I shouldn't have , I was like , but I scare myself sometimes I really do , I really do because I'm like , okay , like , but I need those people around me that are thinking that way so I can just , you know , they can watch out for me risking myself .
Yeah , you know but you know I want to go . You're always harder on yourself than you should be in my opinion . You undersell your capabilities and instincts . Sometimes .
Well , yeah , but that's so I can surprise .
Is that it , and surprise them with your performance in the end ? Exactly .
You got it . Oh , dude , trust me .
Like I said , like you know , js or alex maud , like my partners from white spider I mean guys I always knew more like I knew . I always knew more than what I led you to believe on the financial side of things . You know , I just didn't want to do it see , I like to do it I mean I hate parting with it because you know it's just so .
you know you were saying in my class anything you don't look at , you don't look at the numbers that often , or whatever . I mean , the first thing I do when I wake up is I open all my online banking accounts and I look at what's in each account . I know you do . I don't want any and you know what . I've probably looked at it twice already today .
I know you have , okay , but that's why I'm such a close eye on it .
All right , that's why I'm a partner .
And I'm in QuickBooks online and I'm running numbers on the company . Okay , and then , I'm looking at the month by month comparison of this year to all our numbers and try to figure out what the hell is going wrong .
Okay , You'd be a great partner . I am .
I like looking at those numbers Not that they're always good , but no . But you surprise . Yeah , you know you're not as bad as you act like you are . I think about that stuff , you know . But I anyway , I do think there's sort of a misconception of a lot of people that all debt's bad and it's not . No , and equity's always better and it's definitely not .
You know , I always like to say the golden rule is he or she who has the gold rules . So if they put the money into your business , you've automatically given up control of it right there , Totally . If they're the ones putting the money in your ideas and work is making it happen , it doesn't matter .
Well , and to the big point of that , banks don't think that way . No , they don't want to run your business .
No , that's the last thing they want .
That's the big point they live in fear of that .
That's why debt financing with banks can be such an advantageous thing for your business Because they don't want to get into the weeds of how you're running your business .
Yes .
They just want to make sure you can pay back the shit that they let you borrow , right ?
And the more you do it and the more you demonstrate to them that you know what you're doing , it just gets easier and easier and easier . I mean , honestly , I borrowed $950,000 like four or five months ago . I texted my banker , who's at the top of the bank , and I said I need $950,000 . He's like okay , that's it it .
Have you updated your personal financial statement lately ? The one I had in there was from june of 2023 . Yeah , go to the close , it's done , that's it . Yeah , okay , I mean , and you only get that by building up trust over time .
All right , they got to know that you can . The history of you paying back what they need you to pay back yeah , and that's paid back by the way , at this point already .
That's great . Yeah , because that's what it was intended for .
That's why they lended it , because they knew you'd pay it back , right . I would say another thing , too on this that's why they lended it , because they knew you'd pay it back , right . I would say another thing , too , on this . I know we're about to close up , but why you need debt financing makes a difference .
And then the terms that you needed , right , like if you can find that sweet spot where your bank—and also , by the way , they have different forms of lending oh , absolutely Different people , right ?
I mean , if you need a loan for the car , it's different than needing a loan for , you know , a credit line , Right , based on your AR or whatever , exactly , yeah , like you know . And so , getting to know that whole , all those different positions- but I mean like yes , you need to go through .
Yeah , my first loan was for some computers that I needed for designing . I didn't have the $3,000 to buy the computer , so I went and got a loan for equipment . But it was a very small loan , very low risk for the bank , but they still made a little bit of change on it wasn't much of a process , but I paid it back , you know , on time .
And then I just started moving up a little bit .
I'm able to access more capital yes , exactly , although I was just going to say , on those computers like that , I love to lease stuff like that if I can , yeah , not only because it may mean I got to put less cash into the deal , which I'm always like . I'm going to preserve my cash .
My , as they like the , as the financial jocks like to say , dry powder , keep your dry powder , that's your cash . It's like I do every single thing I can to not give up any of my cash . Is that what you do ?
Yes , keep your cash . Keep your cash . Yes , keep your cash . Keep your cash , baby , keep your cash .
Do you have it in gold or silver ? No , I never did that . My brother does . He's got some gold , gold . I love those guys . You watch those TV commercials at night .
Dude , I love , yeah , yeah , I know I love that . I love reading about all the gold and stuff like that . I went to vacation a couple weeks ago with my daughter . We stayed at this Airbnb and they had this book about the gold rush . And I ended up reading about a 200-page book in like a day of just all about the gold rush .
Kit Miyamoto . Do you remember Kit Miyamoto ? Yeah , he had a gold mine when he was young . He and another guy . They rode bikes , motorcycles , nine miles into the desert to work their mine . When they did and they mined gold , they got into a shootout with a guy . Are you serious , seriously , trying to steal their claim ?
And Kit was riding around with a .44 Magnum tucked in his belt . Dude , I love steal their claim and Kit was riding around with a 44 Magnum tucked in his belt .
Dude , I love it . Okay , it's actually mind gold . Can we have him on the show and talk about this ? Because that's real business entrepreneurship right there , and look at him today .
He's like the leading expert in seismic design with a 400-person international company yeah Right , you know . And he's on the international news all the time . Expert in seismic design with a 400 person international company yeah right , you know . But he's on the net and the international news all the time .
But at one time he was out there riding his yamaha enduro out in the woods those were .
I bet you asked him .
Those were the best times mining enough gold and then taking it into town and trading it in for cash . Love it .
That is pure economics , right there bro .
That is pure economics man . Or she could be like what was the congressman recently who got caught with the gold bars at his house . Yeah , Anyway , he's in big trouble with that , Menendez .
What is the ? I mean ? Why is he in trouble ? Well , he got .
I think some other countries were paying him off in gold bars . It's like why do you have like $800,000 in cash at your house and gold bars and gold ?
bars everywhere I'm meant to go bars .
Nothing funny about that .
Everybody's got that right , no man man , I think that you know it's fascinating , so we shouldn't get on the gold thing .
I don't know why we got on gold , but anyway . So yeah , there's a lot to understand about this whole topic of borrowing . Banks are your primary and first place to go if you can deal with them , because you're going to get advice , you're going to get auditing , as you said , you're going to get lower cost debt capital .
That way , they're not going to give it to you if they think you're a bad risk Right , and you should really think about that too .
Yeah , because the option of running out and getting equity debt or equity capital , like really your situation , didn't change . You're still just . Everyone thinks you're super verbally risky and being honest with yourself about why am I ? But then you go out and you get the most expensive capital you can , which is equity capital .
That's your first run , yeah , you know , and I know that there's some businesses that need that .
There are . I mean , some of them just take so much capital that you can't pull it off without it , but that's not . When they develop drugs . Okay , it's a five-year window to get FDA . Yeah , we got to get equity to support that right . Somebody with a patient capital .
But I think the problem is with the trends that are going on . Everybody thinks the only and the best capital is equity capital , yes , when the reality is that debt capital has been what's really been financing everything and all businesses for a very long time .
It's some angel capital too right , but I mean there is really great benefits to doing the debt capital . Yes , I think we can keep talking Like we need to get some bankers on the show . We should , yeah , I've got some that we could bring in yeah same . Yeah , We'll bring you in together . We'll bring competing banks in together to talk about .
Ooh , that'd be interesting , wouldn't it ?
I always like talking to banks . You know , just like any business , I go look you're . I mean , here we've got like freaking 50 different banks in Northwest Arkansas or whatever it is . I'm like how do you differentiate yourself over everybody else when you're in this competitive landscape ? That's super mature , heavily regulated . That's super mature , heavily regulated .
How do you make your bank more attractive to the customer ? Looking at banking as a freaking business , I think it's always good to do that . I love looking at mature industries and like why does one company succeed over all these others at a much better rate ?
Yeah , and the cool thing here's what's great about it , because so many small businesses are in that boat .
right , oh yeah , they're going to the Brazilian and I've worked with some banks in some marketing consulting in the past and it's like there is so much opportunity to differentiate yourself . The problem with banks a lot of times is that they can't get out of their own way to actually make the change .
Yeah .
They have to stay focused on what the customer's behavior is doing , and if there's a simple one for banks be the absolute best technological , that's one that's important . It's important . Every customer wants it easier and easier to go see my shit , the app and get alerts and make deposits and move money around .
Be excellent at that . Yes , that is a really big point today .
It is , and you have to continue to be excellent , because the technology changes so quickly .
I saw the coolest thing . We had this case . I saw it . It was in a textbook I used to use in my small enterprise management class . In a textbook I used to use in my small enterprise management class , it was about a guy named Louis Chen who starts a bank on the West Coast .
Okay , and Louis' concept is I want to be the bank that all Asians want to do business with . Now , think about that from the start . There's a lot of Asians that live in the West Coast , right , because it's the closest part of the United States to Asia . Yeah , so he's like I want to go after the Asian market .
And so what he did is he thought we're all the Asian countries , you know , there's Vietnam , there's Thailand , there's Japan , there's China , whatever . He got bankers , lenders who spoke each one of these languages and put them out there in his bank , and then , when people came in , they directed them to other people like them who spoke their language .
What a genius idea . Simple , I mean . It's just so freaking simple it is . It's beautiful . And now we've got locally here . We've got a good example of that with Signature Bank opening up Bank OC , which is their bank aimed at the Hispanic market .
So cool .
They put Hispanic management and lenders in there who speak Spanish and it's like what do you want to do if you're a Hispanic business owner here , which we've got a lot of , absolutely Okay , and they're Lyria banks generally , generally , I mean , I hate the stereotype , but they they're very , um , suspicious of banks , maybe because in their own countries it's not
such a great it's industry as it is here , right ? No , exactly , yeah , it's not as regulated , it's it more volatile ?
Maybe so yeah , but anyway May not be as much opportunity . Yeah , I mean , dude , our economy provides opportunity for the entrepreneur .
It's a very unique economy and it's a jewel , and that's why we have so much fantastic entrepreneurial things that happen in america because our government allows us to do that and it gives it , you know , for the most part , it's like I don't sit there and think like , oh my god , what am I gonna do to make some money ?
I mean , no , I'm not gonna say I never thought of that , but there's . It's really a matter of which one of those things do I do ?
there's so much opportunity it's hard to narrow it down yeah , you know what I mean , and so I would imagine that anyone that isn't we got our fire alarm test going on again I imagine that anybody that has not grown up , born and grown up in this country with that opportunity and everyone around you is thinking that because they have the opportunity as well yeah ,
that it's . It's like it's a completely foreign experience it's true .
I mean , we have doing business in this country . You generally deal with ethical people . That's a big difference . Our culture is a lot more ethical than a lot of these other countries that we're talking about .
That's one of the risks for Americans when they go into foreign markets they don't understand , they don't have the same ethical sense and boundaries that we have here , or laws Sure , yeah , yeah , that that protect people , but , uh , but anyway , it is , um , it's very interesting . There's a lot we can talk about .
There's a lot of help we could give people who want to , small business owners who want to borrow money . If we have anybody out there in the audience who has a question about this and needs some advice or insight , we'd be glad to give it to them . Absolutely , absolutely .
So we've been there before Yep and we'll probably be there again .
I was there yesterday , I hear you . Well , anyway , um , I wanted to wrap up the segment with , uh , real quickly , with um , something that , uh , we're going to talk about doing regularly on the show , at least when we find these things , and that is the LinkedIn Hall of Shame .
Oh , I love it , dude . What is ?
this the dumbest question or post seen on LinkedIn , and I saw one the other day . I thought it was really funny . I love the guy's response to the question . So they've got these a lot of times , these AI generated questions , and this one was how can you use emotional intelligence to excel in venture capital ?
And this one guy I know through LinkedIn he's really funny , makes a lot of comments . He's a real hard-nosed guy said you can't leave your emotions out of it , you're better off . Then tell you but I do see these posts and I'm like , oh my God , why are they asking this question ?
And then all the experts quote unquote , coaches galore and other people weigh in on it with some bullshit . It's got a million different acronyms and buzzwords in it . It doesn't say a damn thing .
So we're going to . Is this the only dumb question you've ever seen on LinkedIn ?
Oh no , I've seen a million dumb questions on LinkedIn .
Yeah , so we're talking about getting this to be part of the show right on a regular basis . That's right , it happens constantly . It does .
And this is the problem with the whole social media thing is that anybody can weigh in with opinions right Right media thing is that anybody can weigh in with opinions right , right , or ask really silly questions that can drive an entrepreneur , especially new ones that don't know how to ignore .
A lot of the crap might fall victim to the class school book about how to run a business because there is no class school book .
Yeah that's right . That's really gives you truth . You got to consider the source of the advice , absolutely Right . I just take it for what it is . You can't so anyway , um , I guess this is going to wrap up another episode , man , yeah .
Well done , man . This is like episode 2000 or something , yeah .
I I get to spend the rest of my day at doctors . That's what you do when you get old . It's like unbelievable . I'm going to the foot doctor next , Then I go to the eye doctor after that , and this is after a lung scan yesterday . Oh man .
It's like all I do is go to doctors , you know .
People probing at you . I know that just takes more and more of your time looking at you .
Just the older you get , more and more it's always . It's always like some sort .
It's either neutral or negative yeah , no kidding , it's never like right .
Keep doing what you're doing okay there's something beautiful about it , though , to get to that point in life , to where that's okay , yeah , that's all right .
All right . Well , thanks again , everybody , and until next week . This has been another episode of big talk about small business .
Thank you Small business , Thank you .
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