Five Lessons about Banks
A significant amount of time was spent on the banking relationship during the interviews for Mistakes Millionaires Make. We had numerous entrepreneurs tell their story about how the bankers made doing business ever more difficult. We also interviewed a CEO of a bank to learn his perspective as well. The following are five key points to know about your bank:
1- Trust-based Relationship- The banker-client relationship is a trust based relationship. The banker, while conducting their own due diligence, is going to rely substantially on your representations. Make sure that you are being straightforward with the bank and don’t oversell them.
2- Bank’s Loyalty is to its Shareholders- While the banker-client relationship is trust based, be clear that the bank will always side with its shareholders in a dispute. Your bank, especially if it is a large national bank, will do whatever it decides is in the best interest of itself without concern for the entrepreneur.
3- May Shoot Themselves in the Foot, Killing You- Many of us saw example after example of banks making what appear to be stupid decisions during the Great Recession. I know Bank of America during my problems with TurnKey made decisions to cover the workout bankers behind rather than do what was best for the bank. There were a few other examples of this illogical behavior during the interviews for the book. Just know that in a severe problem banks often make poor decisions that often leave the entrepreneur with nothing.
4- Personal Guarantees- Personal guarantees are almost always required by banks in order to have a “secondary source of repayment” for the loan. The personal guarantees are required unless the company has other sources of capital, such as private equity, venture capital, etc. or unless the company has developed significant assets on its balance sheet. Generally, if an entrepreneur gets wiped-out it will often be because of the enforcement of the personal guarantee. Therefore, the entrepreneur needs to be diligent to reduce or eliminate the personal guarantees whenever possible. It is recommended that the personal guarantees have “carve-outs” that might include residences, trust accounts, etc. The key is, if you are seeking a $3 million line of credit and have $10 million in personal assets, the personal guarantee should only contain $3 million in assets through specific carve outs.
5- Limit Debt- Credit availability is cyclical. There are times when it is cheap and abundant and other times when it appears to evaporate completely. During the years when credit is readily available and inexpensive it is tempting to take advantage of it and over-leverage through acquisitions or over-expansion. Several entrepreneurs stated as a lesson learned to not do so. They ended up losing their companies as a result of over-leverage.
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Five Lessons About Banks- from Mistakes Millionaires Make
1. 5 LESSONS
BANKS
about
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Excerpts from Mistakes Millionaires Make, by Harry Clark
Take the Entrepreneurial Risk Assessment
at: www.pathwaypartnersllc.com
2. My name is Harry Clark and I
thought I had it made.
By 2004, I had:
founded two INC.
500 companies
450 employees
a $100 million
net worth
16. Be clear that the bank will always side with
its shareholders in a dispute,
deciding what’s best for itself
WITHOUT CONCERN
for the entrepreneur
Photo via Shutterstock
21. Photo via Shutterstock
Banks will always require personal guarantees
in order to have a “secondary source”
of repaying the loan
22. Photo via Shutterstock
They are not required when the company
has other sources of capital, like
private equity or venture capital,
or
when the company has
significant assets on its
balance sheet
23. Photo via Fotolia
The entrepreneur
usually gets
wiped out
of personal guarantees
ENFORCEMET
because of the
25. It is recommended that the personal guarantees have
CARVE OUTS
Photo via Wikimedia
26. Photo via Wikimedia
For example
If you want a $3 million loan and have
personal assets of $10 million,
the personal guarantees should only contain
$3 million in assets through specific carve outs.
28. Photo via Flickr
Credit availability is
CYCLICAL
There are times when it is cheap and abundant,
and times when it appears to evaporate completely.
29. Photo via Shutterstock
When credit is inexpensive,
it is tempting
to take advantage and
through acquisitions or
OVER
LEVERAGE
OVER
EXPANSION
30. Photo via Shutterstock
Several entrepreneurs
stated it as a lesson learned to
NOT DO IT
They ended up loosing their company
as a result of over-leveraging.
32. Or by taking the
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