Speaking Bankanese with Al Davis & Bill Lawrence
Paul Adams interviews Al Davis & Bill Lawrence
Hello, welcome to Sound Financial Bites, where we help you with bite-sized pieces of financial and life knowledge to help you design and build a good life.
Today’s post is all about business and career topics. We will be talking about speaking “bankanese”, and why you as a business owner or high level executive in a privately held company need to make sure you understand the way banks speak and communicate to save your company money and optimize your business.
Today’s guests are Al Davis and Bill Lawrence, both with significant corporate background before starting this partnership called Revitalization Partners. Revitalization Partners helps make sure that businesses are running in a way that can be properly presented to the banking community. It puts them in a position where they can get the best or most optimal relationship with those banks including the banking agreements. Now the main areas we’re going to hit today are preparing the go-to-market, thinking about your bank and your banking relationship is going to market, the personalities of different banks, and one of my favorites that I heard them talk about which is predatory lending in the business banking arena. Al and Bill, welcome.
Al: Oh, thanks for having us. We really appreciate the opportunity to talk to your listeners.
Bill: Thank you Paul.
When is it that you meet people and business owners?
Al: There’s a wide range of circumstances under which we meet business owners. We work with companies that are healthy companies, that are thinking down the road about potential sale. They look at their company and say, “What do I do over the next year to maximize my company’s return so that when I sell the company I’m going to get the most out of it?”. On the other side I deal with companies which are very much in distress. They’ve lost their banking relationships, they have creditors who are threatening to sue them. We have done probably more receiverships, where we’ve served as receiver, than anyone in Seattle. In almost every case where we have served as receiver, we’re not liquidators, that’s not our focus. Our focus is on fixing the company, getting the company to create value and then selling the company on behalf of the creditors. I would say out of the 22 or 23 receiverships we’ve done, all of them have gone that way with exception.
Bill: And to that end, we have worked with a lot of companies and helped them find new lenders, particularly when they’re looking for growth opportunities. They’re often looking to expand their capital base in circumstances where the current lender is not happy with them and we’re able to help them find a new lender that will help them with their needs.
One of my favorite things I spoke about a little bit in the intro is that you look at somebody changing their banking relationship as taking their business to market. What you’re doing is marketing the financials to that the story of that business. I had a lot of friends that had come with me to the event, and they talked about the story around the predatory lending. A lot of these people are in the payday loan space and had all these capital going in the predatory lending on individuals. That then shifted to the business community to become predatory lending. Can you guys gives us some stories of predatory lending that you shared at the event?
Al: Predatory lending is by no means new. Payday loan companies have been doing it for years and there’s a protection agency that came into place — Dodd-Frank. The rules on Dodd-Frank became more difficult. They found a home in small to medium-sized businesses, and they pitched, and I use that word exactly. The pitch is a phone call, or a letter, or an email to your business which basically says, “We can put X dollars in your bank account in 24 hours, just sign here,” literally. To cite one particular story of a company that we’re working with, there’s a company that literally outgrew its business. It’s a successful company. In fact they have more orders than they could possibly deal with. As a result, they took the orders and then had to buy a material, had to provide the labor in order to ship that product. As they ran out of money literally, they started using what I call Business Payday Loans.
Before you give the specifics to that story, tell me about the phone call you got.
Al: I was one of those people who got the phone call. I was driving to work and I was sitting on the freeway in Seattle traffic, and my phone rang. I answered the phone, and it was one of these lenders who said that she could put $250,000 in our bank account in 24 hours. Well given the freeway wasn’t moving very fast, so I suggested that she tell me more. She did, and basically her pitch was that if we just filled out some paperwork, we could have the money in our bank account in 24 hours. That was the accumulation of some things we had seen previously and things we’ve seen since. But going back to the company that we were talking about…
They got one of those phone calls at some point in the past and then you met them?
Al: Right. Exactly right. They either got a phone call, or an email, but they were getting desperate to ship their product because they had some very unhappy customers. They took out one of these loans and the amount is not important. What is important is that the owner of the company signed a guarantee on behalf of the company.
Personal guarantee.
Al: He has also signed a personal guarantee.
So he signed as business owner, and then he also signed as like husband and father.
Al: Correct. On top of that, he’d signed a confession of judgement which means if they didn’t get their money, they’d take this confession of judgement to court. He didn’t pass, and now we want you to exercise a judgement against him. On top of that, his interest rate for that particular loan was 48% and the money is removed on a daily basis from his bank account automatically. He has five of those loans ranging from 36% to 48%.
Thank you Al. Bill, when those loans come out and people were taking on those loans, they also mask how big the interest rate is, right? They charge a large amount upfront. If somebody takes out a $100,000 loan, it’s instantly $120,000.
Bill: That’s right Paul. The trick of this in the way that the letter is presented. If they also gave you a $100,000 tomorrow and it is literally tomorrow, they’d make it very easy for you to accept this money. It’s almost a too good to be true scenario. However, when you get the paperwork and you sign it, you have to pay back $130,000 or $140,000. You pay back a lump sum much greater than the amount that you borrowed, and in some cases it’s over a very short period of time.
It’s very easy for a business owner to fall into the trap of saying, “It’s only going to come out on a daily basis and it’s going to get paid off, and I’ll have the money with my next largest order.”. Then they come to find out and particularly with companies that are strapped for cash, that next big order doesn’t come. And when they finally get the paperwork and they sign it after the fact because that happens so fast, the way they close these things, is literally in 48 hours. They realize that when you look at paying back a $130,000 or $140,000, the annual percentage rate is somewhere in the 40%, 50%, 60% range.
But they might only be telling the business owner they were charging 8% on the loan, but once you count those points upfront, you borrowed $100,000 but it’s really a $130,000 debt you owe that day, now they’re only charging 8% on the $130,000.
Al: No, they’re actually only charging 8% or 12% on the $100,000, but they have processing fees and monitoring fees. They also have a fee for example if the ACH doesn’t transfer properly. If you take an extra breath there’s a fee. So what you see is when you add all these up, is it comes out to that $140,000, $150,000. Because the money is coming out daily, all of it is coming out every day.
Bill: I think the important thing for a business owner to understand, and this is the case of the client of ours, is that the money is coming out every day. It usually comes out at the beginning of the day, so you really don’t have an opportunity to have any flexibility in your cash flow. The key takeaway for anyone to really be aware of is that it comes across very smoothly. It looks like easy money. Number two, it comes very fast. You’re literally signing documents and by the time you’ve signed all the documents, it’s done, the money is in your bank. So it’s predatory and it happens very quickly, so don’t fall into these traps.
Many a time we have talked about people not wanting to open their kimono. I’ve worked with lots of entrepreneurs and business owners, and I am one myself, and I know there will be this internal feeling of, “Man, I’m just going to suffer through it and I’m going to get it paid off. It’s super embarrassing, I got duped”. The people who got into this may not look for help and that’s probably exactly what they should do is — get help.
Bill: Yeah, exactly. Let me just add one other thing. What we have found is in the first loan, if something happens and they end up unable to pay for the daily or weekly payments, these predatory lenders are more than willing to have a second loan and a third loan.This ensures that they can literally fund the payments to them. The other interesting thing is they don’t ask for a lot of financial statements: they don’t ask for past banking agreements, or what your current lending arrangement is at this point in time. So they make it very easy.
For those of you that had a chance to read the Maggie Richter interview, she talked a little bit about entrepreneurs and what they need to know to just get their mortgages done well, and how to think about banking. This ties in that way that I can almost see that business owner, entrepreneur, and executive that believes in their company get engaged by one of these predatory lenders. They feel like, “Oh! Somebody finally understands my business. Somebody finally gets it. There’s somebody who’s willing to be in it with me”, and not realizing until it’s too late. Hopefully, what the best the business owner can hope for is that they get the note paid off in a year. They make that lender an ungodly amount of money and hopefully not have to do it again.
Al: Well, let me add something that’s maybe even a little worse. Assume the business has a banking relationship. In most banking relationships you’ll find if your bank is providing you a loan of any kind, they have a stipulation covered in that, that you cannot borrow further money without the permission of the bank. And in almost every case, this happens so fast as Bill explained, that they don’t get permission from the bank. So now they have this loan, they submit their quarterly financial reports to the bank and the bank goes, “What’s this?”. They explained it to their banker and their banker says, “Your loan is now due and payable. We want our money,” with no further discussion. We’ve seen that happen several times now where they’ve forgotten about the loan they already have and they are not informing the banker or talking to their bank. Actually no one should sign one of these loans without getting advice from somebody — their attorney, their accountant, their banker.
A sober voice needs to chime in it.
Al: A sober voice is needed, because you have to realize these calls and emails are coming from call centers where people are dialing for dollars. They’re very good at it and they recognize the desperation of the owner of a company in trouble.
Bill: And by the way, not only are they on emails and phone calls, they’re actually advertising on TV now. So if you look at CNBC and other channels…
I hear it on the AM radio.
Bill: Yeah, and at the end of the day, a lot of companies are desperate and in need, but you can’t be so desperate as to not wait for a couple of days. Do the due diligence, ask the questions, and find out what the real bottom line is. By doing so, you can actually find other alternatives and find out the other options you have. But once you’ve signed up for this, it’s really tough to get out of.
But wait…there’s more?!
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Paul Adams is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Sound Financial Group is not an affiliate or subsidiary of PAS or Guardian.
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