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Key Idea: Learn Bank-Speak

Tim Hennessy, founder of Ekkwill Waterlife Resources, had to learn how to launch his business while barely keeping his family afloat.   More...

Key Question:


Both Tim Hennessy and Frank Jao were able to convince banks to make them loans.

When your business becomes profitable and is growing, you may find that your cash flow is tighter than ever! You have profits, net income, but no cash. This is because you are increasing your investment in inventory or receivables. One way to ease this situation is to leave the profits of the business in the business to provide the working capital the business needs. Another way is to borrow money from a financial institution.

Q: What kind of bank financing is available to a small business owner?

A: The most expensive money to borrow is the money you get for factoring your receivables. Almost all factoring arrangements are "with recourse" which means you have to pay if the customer doesn't. Basically, you sell your receivables, at a deep discount, to the bank. The bank or factoring company advances you the discounted amount and you advise your customer to pay the factorer directly. In addition to the discount fee, the factorer withholds an amount as a reserve against uncollectible accounts receivable. If not utilized, reserves are distributed back to you. Although factored funds are expensive, the lending institution rarely has credit or reporting requirements so factoring can be a solution in small businesses with high gross margins that can absorb the cost of factoring.

Less expensive is conventional bank debt. There are basically two kinds of bank borrowings: lines of credit and term financing. Lines of credit are available up to a maximum negotiated amount, through a period of time, at a certain rate, generally collateralized by inventory and/or receivables. The amount that can be borrowed at any one time is based on the borrowing base, a certain percentage of assets.

For example, a borrowing base might be 35% of inventory and 80% of accounts receivable less than 90 days. The percentages are negotiated at the time the loan is applied for. Frequently, lines of credit are renewed as they mature, but the terms may change as the economy changes and as your business changes. These lines require interest only payments although the bank likes to see principal payments and additional withdrawals, the line going up and down, based on the seasonality and growth of the business.

Mature businesses with constant line of credit amounts make bankers nervous; the bank generally considers the note "evergreen" and, when it comes up for renewal, they'll want to convert part or all of it to term. If you obtain a line of credit, don't leave cash in your checking account, pay down on the line and borrow it back. This minimizes your interest expense and convinces your bank that you really are using the line as a line.

Term financing is just like your home mortgage or car payment. Each month you pay a fixed amount of principal and interest. If your business owns land, buildings, or equipment (capital assets) these can be used as collateral for term financing. If you own such assets personally, you can contribute them to your business as equity and then use them as collateral for a cash infusion in the business from a term financing.

Q: How does a small business apply for bank financing?

Bankers are vendors; they sell the use of their money. They do this for a relatively modest return and they take modest risks. Shop for a banker the same way you would shop for anything else you buy, look for the most value at the lowest cost. Interview lots of bankers, preferably before you need one, and keep them informed of how your business is growing. Before you submit a loan application, make sure you are aware of the following: Who will prepare the loan package and what will it contain?

The loan package should not be confused with the loan application. The loan application can be as little as a one page administrative document. The loan package could be 3 feet high! It contains all the documents that you provide and other documents that the banker obtains to present to the bank's Loan Committee.

For example, the Dun & Bradstreet report is almost always considered as part of the loan package and the credit decision.

Who's on the bank's Loan Committee? What is their lending limit? If they recommend the loan be approved, is that the final word or does the loan package go on to an even higher authority? You'll probably be dealing with one banker; he or she will present your case to the Loan Committee. Your banker will be motivated, because one's compensation and career depend on making money for the bank which is only accomplished by booking loans. But nobody can tell your story as well as you can. Find out who is on your Loan Committee and invite them out to see your business and meet with you.

Think about it

You think about it: Do you need to borrow money to grow your business? How much? Do you have the collateral and the capacity to repay the debt?

Editor's Footnote: If you really want to learn the language of banking, get familiar with the Risk Management Association and their credit scoring. It is the professional association for banking (over 3000 banks are members as well as 18,000 other financial institutions). If you are fully committed to making your business successful, you'll learn the key critical ratios within your industry and know where your business stands among the businesses within it.

Clip from: Money: All about Financing Your Business

Silicon Valley, New York City, Sydney and the World:   When you are just  starting, it is usually about your money, called MOM, an acronym for My Own Money. It is also called "skin in the game."  Very few of us have a track record and can write a business plan that is so compelling that we begin with Other People's Money (OPM).

If you are growing, there is an abundance of stagnant capital that may be looking just for you.  Qualified investors (and people who believe in you) are looking for ways to grow their money either as a loan or as an investment for equity. It will require an excellent business concept, a well-detailed business plan (your story), and real financial projections. They will also require that you understand your financials, even if they are quite modest. Those numbers are the organics of a business, the basic 1-2-3s.

Business is just a series of problem-solving exercises. That's its nature.  If you do not have the stomach for it, get a job. If you think money is going to be given to you just because you have a good idea, keep your job!

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Ekkwill Waterlife Resources

Tim Hennessy, Founder

7502 Symmes Road
Gibsonton, FL 33534

Visit our web site:

Office: 813-677-5475

Business Classification:
Tropical Fish Farm

Year Founded: 1981

Learn Bank-Speak

HATTIE: Here's a bolt of lighting. To do business with bankers, learn to speak their language.

Tim Hennessy's Ekkwill has grown to be the world's largest producer and shipper of fresh water tropical fish distributing approximately 120 tons of livestock by air cargo every month.

TIM HENNESSY: We paid off all our creditors.

HATTIE: The shrimp business.

TIM: The shrimp business. Right, and we put together a bunch of business plans and proposals to different venture capital companies and different investors and that type of thing. A lot of them -- I'm talking 12, 15 over some period of time. At this time Sherry and I were living in a parking lot up in Tampa. Our joint income that year was under $2400. What we were able to do, again we're pretty broke and we really didn't have any assets either, is put together a series of notes. We found a fish farm that was an old tropical fish farm. It wasn't very big but it had a good earnings record and it was a good small business for this one guy. But this time we had done lots of business plans and lots of proposals and we had experience in the aquatic farming industry. We knew how to raise some kinds of fish. So, we were able to put down. He wanted 20% down and owner finance the rest. Pretty standard deal. So the trouble is how to come up with a 20% down.

HATTIE: Yeah, when you're living in a parking lot. What banker's going to give you a loan when you're living in a parking lot.

TIM: And then there's working capital too it takes to get things going. So we're able to put together a series of three debt instruments, three notes that were secured by assets that came along with the farm that we had not purchased yet. So with a stroke of a pen we actually created all these debt instruments at the same time and we were able to buy the farm with no cash. So we literally started the business with $5.

HATTIE: (Voiceover) Like Tim, Frank Jao, founder of Bridgecreek Development learned how to create the documentation the bankers need. To find a sample of the type of document the banker wanted him to prepare, Frank actually searched the bank's dumpster one night. He found one that had been approved, plugged in his own numbers and projections, and he got the loan. So you owned the land.


HATTIE: That's all you had though.

FRANK: Right. Right – even buying the land, I would still need a loan. Because $350,000 doesn't buy the land.

HATTIE: It wasn't enough. Okay - so what did you do?

FRANK: I approach a bank anyway. The bank basically told me that there isn't enough ingredients here that they can give me a loan of 3 million dollars.

HATTIE: So that is what you wanted? You wanted 3 million?

FRANK: Well that is what it takes to build.

HATTIE: That is what it took then – it takes more now – but that is what it took then.

FRANK: So I have to ask, 'Give me your list -- Give me your requirement list and I will go back and fulfill it. In one of the lists would be a feasibility study and a loan package. I found out that a feasibility study at that time – we could bring in a consultant to do them and pay them. So that solved the problem. Then we need to put a loan package together. A loan package normally being charged by the loan broker – back in those days – for a considerable amount of money. And I wasn't ready to do that and I couldn't even afford that. So I have to figure out a way that I have to do the loan package myself.

HATTIE: So how long did it take you then to go back to that same banker who told you no and say 'Okay, here's my stuff.'

FRANK: About three weeks in total.

HATTIE: Three weeks. So now you have been in this country for five years, six years and you have just gotten a 3 million dollar loan.

FRANK: That was the first loan I ever had -- at the time. And it was just amazing - I couldn't believe it.

Editor's note: The link just above goes to Frank's story. We all need to ponder this man's story and the story of another Vietnamese refugee, Thanh Lam. There is no whimping, whining, or moaning; they are grateful for the basic freedoms to build their life without a government dictating how they should live. In 1975 Frank & Cathie Jao immigrated to this country from Vietnam with nothing. If this story doesn't inspire you to get the money, keep your job.


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