Money Matters

I am not claiming any expertise in financing, but I will share my small experience.

When I first bought the business I paid from a fund I had left over from selling our house in Arizona. It was essentially cash. We needed to wire the funds which was going to cost us like $200. It could have been more, but the amount was enough that I thought it was excessive. My dumb move was to just give them cash. So we had to collect $80,000 in cash. It shouldn’t be a surprise that most banks do not have that much cash laying around. I had to go to 4 different branches to get all the cash together. I then deposited the cash into our Wells Fargo account. Everything went through and we had other things to worry about. Then I noticed a $200 charge on my bank statement. It turns out that there is a charge if I deposit too much cash. So I got the charge I was trying to avoid in the first place. The bank workers tried to give me some tips on how to avoid these charges. Create multiple free accounts deposit in the different accounts etc. It all seems so strange. Whatever. They can have whatever rules they want. I don’t begrudge them that. I just had no idea that there could be a charge for depositing cash.

At Wells Fargo I had a Credit Card with a credit line of $7500. I thought that was going to be enough. But then I started running all of the expenses through that credit card. It was easier to keep track of the money for me. I was quickly using more than $7500 per month and I had to make mid-month deposits which if I didn’t keep an eye on the balance I would have some transactions declined. Especially in the gift buying months. I could easily buy $10,000 worth of gifts and then my normal expenses like stamps and FedEx and other things. It was starting to not work for me. I asked Wells Fargo to increase my credit limit. They politely declined. I started looking for another bank.

When I met with other banks I felt like I was talking to HS graduates who chose to work as a teller rather than going to college. They were nice, but I did not get the warm fuzzies that I was dealing with an adult or a professional or some one with experience. They most often pitched me on how to avoid bank fees to get the free checking. Funny thing is I went with the bank that charged the most fees. I don’t mind paying $20 a month if I am getting service.

So I moved to Chase. They gave me a credit card line of $10,000. I told them that I wanted to talk about buying my competitors the following year. They were very professional and kind of told me where my numbers needed to be in order to get that financing. I was very hopeful. Soon the $10,000 credit line was getting maxed out. I asked for an increase. They gave me a $15,000 credit line with just a phone call. I moved my merchant services to them partially to get away from Wells Fargo completely. That is another story.

So I finish my 2nd year in business. The first year I showed a Schedule C profit of $23,000 and finishing my 2nd year in business I showed a Schedule C profit of $48,000.
2015 Schedule C

I won’t go into the details of what profit means here, but you can see that I am claiming $48k profit on $333K in sales. That is 14% which means nothing. I think I can justify all of these numbers, but I haven’t been asked to justify them. The paradox is that I want to keep my profits low in order to pay less in taxes but high in order to qualify for more financing.

The easiest way to manipulate the numbers would be to play with cost of goods line 4. That comes from the looking at the inventory at the beginning of the year and the inventory at the end of the year. If I say I have more inventory at the end of the year then I made less money. If I said I had less inventory then I made more money. There are other ways to manipulate the numbers, but that is the easiest.

A company I worked for did not know for sure how much inventory they had. It was somewhere between $5 million and $10 million. That is a big difference. And they honestly did not know. The only way to know for sure is to do a physical count, which is a hassle and can cost money.

Ok so back to financing. I have to wrap this up. I was told that I could qualify for a loan based on 65% of profitability after adding back in interest and depreciation. I liked that information and it was one of the reasons I was convinced to move to Chase. That was a conversation I had last year. In January I said it was time to talk about how much I would qualify for. I have a really good business plan that involves me paying my competitor across the street a huge amount to move their customers to me.

So sitting down with the banker I was very disappointed. I was offered a credit line of $40K. What happened to the $400k I was going to borrow with an SBA loan? Well since I am in a service business there are not any assets to which a lien can be placed. That is why the $40K in credit was offered. It is was not the sales, the goodwill, the cash flow. It was the  hard inventory that mattered. Even though the SBA site says that it can be used for purchasing service and professional businesses like mine the SBA does not do loans. Banks do loans. And they decide what they want to finance. I was not happy and my opinion of Chase went down a little. It was especially the way it was handled. Very transnational. I wanted them to listen and tell me how to get to where I wanted to go. I wanted advisers, not tellers.

I applied for and got the $40K credit line. It costs me $150 per year and of course interest on any money I use from it. An odd thing happened. I was averaging $20K per month in credit card usage. I knew I was going to have to ask for another credit line increase. Then one day I was looking at my available credit and Chase had automatically raised the limit to $21K. Why would they do that? I am not complaining I just thought it was odd that they didn’t ask.

When I was getting the $40K credit line they kept treating it like it was a big deal. They made me get on a conference call and go over the terms. Again I just submitted my unverified Schedule C. I could have changed the numbers before filing with the IRS. After they gave me the line of credit a banker at Chase who I say Hi to every time I go in to get change congratulated me. She said that she had submitted others that did not go through. What was the magic in my numbers. I asked the guy on the conference call what would be the max amount I could get. He hedged his answer but eventually said about 25% of gross sales. Again these gross sales are NOT verified in the least. They are just what I say they are. So I got essentially 12% of gross sales. Next year I am going to ask for $100K credit line just to see what they will say.

One final note. I am looking at buying another store in Los Angeles. Typical the broker says that the business is pre qualified for an SBA loan. I told him I am interested in the business but I want to get completely qualified before I go any further. He put me in touch with some guy at Community Bank (never heard of them) We’ll see where that goes. Even if I don’t buy the business I want to see if they will actually loan me the money. I have my doubts.

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