Entrepreneur Beginners Guide
“Borrow Money from a Bank before You Need It”
A bank is a place that will lend you money if you can prove that you don’t need it. —Bob Hope, comedian, actor
When Lehman Brothers filed for bankruptcy in fall 2008 signaling the start of the Great Recession, I had a clear premonition that things were going to get bad really fast.
The announcement of the collapse was especially untimely for me. During the same period that the investment bank’s epic failure made national news, my wife and I were married. To remember our joyous union, we saved the newspaper from that beautiful fall day. The headline of the Atlanta Journal-Constitution read, “U.S. Tries Hands-On Bank Fix.” The article stated, “The United States and the globe’s other industrial powers pledged to take ‘decisive action and use all available tools’ to prevent a worldwide economic catastrophe.” It was yet another harbinger of economic calamity, the proportions of which had not been seen since the Great Depression. I told my wife, “If the economy collapses, at least we have each other, honey!”
Likewise, the timing couldn’t have been worse for my business. Almost immediately, the business. deteriorated. Companies began to go into survival Mode. Many of my best clients called to cancel orders. Companies that I had long-term relationships with severed ties. New prospects showed no interest in buying. Financial experts warned of the impending credit crunch. My company’s cash flow position was getting worse everyday. I couldn’t stand around and watch my company slowly die. I was desperate to save it, so I decided to explore all options, including getting a loan from a major bank.
Not expecting much, I consulted with one of my trusted bankers at Washington Mutual. She told me that I had no good options. Considering the recession and my poor cash position, no financial product available could help my company. She added that few businesses were receiving financing at the time. Hardly any credit lines were being extended. Likewise, hardly any installment loans were issued. The bank was open, but really it was closed.
With no reasonable options, I sourly remembered what an experienced banker had told me years before: “Borrow money from a bank before you need it.” It made sense when I had heard his words, but I never followed his advice. I had waited too long, and here I was hoping that a bank would save my company when ironically the bank needed saving itself (Washington Mutual was acquired by Chase a few months later.) Instead of relying on a cash infusion from a bank to help my company weather the economic storm, my team and I would have to survive the old-fashioned way by hitting the pavement and working harder than ever. I learned my lesson.
Banks prefer to lend to businesses that already have money and show signs of good financial health. Why? These businesses are most likely to pay back loans and thus are a low risk. On the other hand, distressed companies are a high risk and won’t find many conventional loan products at a major bank. They must seek alternative financing that invariably carries higher interest rates. Sounds counterintuitive, but banks and many other lending institutions operate this way. In another example of reverse logic, few people know that banks consider deposits liabilities, not assets.
When your company is experiencing high growth and increased revenues, strengthen your capital structure. For example, apply for additional credit lines or request an extension of your-current lines. Moreover, apply for an installment loan if appropriate to fuel more growth. Also, raise money from investors. As the economy shows small signs of recovery, banks are promoting new products and beginning to take greater risks. Take advantage of these opportunities.
Entrepreneurs must be mindful that recessions and economic downturns are inevitable. If you are in business long enough, you will experience one. Preparing your company to weather these storms is part of your job. One of the best ways to do this is to secure your company’s financial welfare by applying for and receiving credit when you don’t need it. If you wait until you need it, you could have the same fate as Lehman Brothers.