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Last Update: Tuesday June 15, 2021

Key Idea: Borrow To Grow

Joe Dannis started a business and grew it with retained earnings until he was fully established.  With hundreds of customers and a hit product, it was easy for him to get a banker to finance the purchase of his own building. More...

Key Question:


Joe determined that his rent was too high and so he applied for an SBA-backed real estate loan. He was able to purchase his building and lower the monthly payments while investing in his future. He rents half of the space to another business and if need be, he can not extend that lease to make room for his own growth.

Q: How do you locate or identify the best banks to establish relationships with?

A: Most likely, they'll find you. Banks have super marketing efforts. You'll probably get mailings and telephone calls, invite them out to see your business. Don't establish a relationship now, establish relationships. When you need a bank, you want to have a few to choose from. Bankers are also very active on the rubber chicken circuit. You'll meet them at Chamber functions, networking events; anywhere they can rub the flesh. And yours is new, so they'll be delighted to meet you.

Q: When the time comes, how do you select a bank?

A: First, remember that bankers are vendors. They sell the right to use their money. You select a bank the same way you select another vendor and the same way your customers select you. All buy decisions are based on two factors: quality of product/service and price. Banks don't provide service, bankers do. The relationship is the key. It's not unusual for a business to follow its banker if the banker assumes a new position at a different bank. It's sort of like following your doctor from one clinic to another. And don't make the mistake of thinking that prime+2=prime+2. Banks are great at developing complex pricing schemes. Get term sheets in writing; make sure you have a clear understanding of both the interest rate and any associated fees. Fees can be paid in dollars or based on balances. Do the calculation; it could save you some money.

Q: When do we rent and when do we buy a location from which to operate our business?

A: We all remember when we bought our first home and were elated to send that first payment to the mortgage company. No more pouring cash into the rent dry hole, we were building up equity! At the end of the month, the benefit of the rental check is gone but when we make a loan payment we are buying an appreciable asset and getting a nice place to live, too! Should we approach the rent vs. buy issue the same in our businesses? Should we buy a building as soon as we can? Absolutely not, the situations are completely different.

For most of us, the home purchase is the most significant purchase we will ever make. We buy the house we can afford based on our take-home pay after taxes less other obligations, like car payments, living expenses, and savings requirements, like college educations for our children and retirement funds for ourselves. Although personal financial planning may have its challenges, it is simplistic when compared to providing our business with the capital it needs to grow and prosper. Forecasting working capital requirements, managing cash flow, is one of the most important aspects of operating a successful small business.

Buildings are what accountants call long-term assets. They are not liquid, cannot readily be converted to cash. And we all know businesses need cash! Cash is required to pay employees, purchase inventory, pay monthly operating expenses, and fund our infrastructure costs, like marketing and research and development. Cash reserves preserve our businesses when we lose a major customer or suffer reduced sales or increased costs because of economic conditions beyond our control.

Every business can service a limited amount of debt. Bankers like to talk about the debt-to-equity ratio, total liabilities divided by the total of common stock, paid-in-capital, and retained earnings. Bankers like a 1:1 ratio but are generally comfortable up to a 3:1 ratio. Anything higher than that and bankers get nervous, concerned that the capacity of the company to service the debt is not adequate.

As long as your company is growing, it is generally not a good idea to buy a building. Increased sales usually mean increased accounts receivable and, in non-service businesses, increased inventory levels. You pay your employees and your operating expenses monthly, your customers pay you in 45-60 days, and the growth has to be financed. Lines of credit can be obtained from banks to manage the cash flow of growth.

Should a small business always lease its operating facilities, and never buy its land and building? No, of course not! The advantages of owning property to a business are the same as the advantages to an individual. All we are saying is that while your business grows, its financing needs grow as well. The borrowing ability of any business is limited; make sure you have adequate borrowing ability to fund the growth of your business before taking out a mortgage. The property may appreciate, but unlikely to the extent of the profits of additional sales that are adequately financed.

If your company is mature, with relatively consistent sales and profits each year, consider investing in real property. If your company is still growing, try to anticipate both your financing needs and borrowing capacity. Having access to adequate working capital may contribute more to your overall profitability than real property appreciation would.

Think about it

Do you have the banking relationship you need to grow your business? If not, why not? Do you need to learn more about how to talk to bankers?

Clip from: Dawn Sign Press: The Pain of Starting

Joe Dannis, California's Small Business Person of the Year

San Diego: What are the most commonly used languages in the USA? Answer: English, Spanish, Chinese, Arabic, Hindi, French, German, then ASL. Yes, ASL. American Sign Language.

No less than 500,000 and as many as 2.5 million people use ASL every day. In this episode of the show language is subtlety transformed into hand, finger, body and facial combinations.

Take away any one of the basic senses and deep-seated creative power within the human mind is enlivened and focused interiority awakens. With today's micro-technologies, the deaf and blind are teaching us all about subtleties within language and our skills to communicate it. Here we meet extraordinary people in the midst of a revolution.

Joe Dannis is an advocate for American Sign Language. The Small Business Person of the Year from the State of California, Joe Dannis started DawnSignPress in 1979. He has always been out on the edge... being the first to advocate something new. Joe and his team publish materials to teach sign language for the deaf. Although he publishes videos and books for both children and adults, his biggest customers are schools and universities that offer courses in American Sign Language (ASL).

Today you'll meet Joe Dannis. He is one tough businessman, but he remembers nine very lonely years in the beginning. If he had to do it all over again, he probably would not. Learn from someone who has been over the hot coals and whose wisdom runs deep.

Go to all the key ideas and videos...

Dawn Sign Press

Joe Dannis, Founder

6130 Nancy Ridge Drive
San Diego, CA 92121

Visit our web site:

Office: 8586250600

Business Classification:

Year Founded: 1979

Borrow To Grow

HATTIE: (Voiceover) Joe knows his biggest current problem is too much revenue from one product. They are hard at work to produce their next best-seller.

JOE: For most people's ideas are good ideas. They're cute, but we want them to be more instructional, so we realized that we have to develop--to fill in gaps, from distributing, from marketing, if we can find out what's needed out there. And we also see current publications and realized we could do better at them. Like, there are sign language dictionaries. We're developing one, too. But we think that it's a real sign language dictionary. So what you see, we're trying to improve on. And most of the time, our ideas are one of a kind, which is why they say `There's no worries, no one can copy us.' There's too much work, it takes too long, it's one of a kind.

In the past, we did one or two books every year. Now we're able to do maybe three to five books a year and maybe five to 10 videotapes a year. So the best years are just ahead of us. We own--bought our own equipment. Thanks to technology, the little guys can now do just like you, just like your crew. Five, 10 years ago, couldn't do it. Only Hollywood could do it. Only the big guys could. So it's really wonderful to see that we now can. And people using the Web page, they're designing their own. Before, you had to hire someone. And I'm seeing the same kinda thing with multimedia. Only the big guys can. But give me five years, and I bet you'll be doing multimedia.

HATTIE: (Voiceover) With an SBA-backed loan, DawnSign was able to stop paying rent and buy a building which has plenty of room for growth.

JOE: I'm renting out half the building, so that if we grow, I can kick them out and take over that space, without having to move again.

HATTIE: You don't mean if you grow, you mean as you grow.

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