Are There Any Bankers Banking Anymore?

This is a Stupid Without a License story from my new soon to be released E-Book! It was inspired by a surreal meeting I had with a young banker regarding a construction loan. I left the meeting completely dumbfounded and wondering if there are any bankers banking anymore!
I explain the details at great length in the video below but first let me set the scene for what I believe is a growing trend in this tough economic climate.
It’s a Privilege For Me To Do Business With Bankers Who Can’t Market – Yeah Right!


Recently I’ve been approached by a host of commercial bankers looking for business. It seems their marketing efforts are not producing the numbers so they’re on a hunt for more deal flow. Who do they call but me! Well this new lot are looking for lay downs or no brainers. To be quite honest I save those for the proven and smart bankers who deserve good borrowers. One banker went as far to say he was giving me a chance to prove myself. And he was asking me to send him deals? What a jerk!
Another banker said they were one of the best commercial lenders in the country and it would be good for my company and reputation to do business with them. Can you believe it? These guys can’t even market and they consider it a privilege for me to do business with them. What a joke. But it does get kind of interesting and worthy of a laugh now and then. Watch the video below and you’ll see why!

Commercial Bankers Are Losing Their Mojo

Are bankers banking anymore? Do they understand the mechanism they employ to make money? Have they lost their understanding of how to build assets in their institution and reliability in their community? Judging by this experience you’d think they’ve forgotten how to put a transaction together. I think commercial bankers are losing their mojo. What do you think?

When a Commitment May Not Be a Commitment

SEPTEMBER 16, 2011 BY GEORGE LOVATO JR
This prospect story is worth telling you about. One of BH Capital Ltd’s 25 affiliates made arrangements for a conference call. These calls are designed to more fully investigate the prospects’ opportunity and usually a chance for the prospect to convince me to take him on as a client. At this point we have usually reviewed a mountain of documentation. We have a pretty good idea of what the project holds. We just want to hear from the horse’s mouth the finer details of the project/engagement and what kind of financing structure the prospect has in mind. This was a real head turner.
Commitment Letter? Foreign Bank?

The prospect pontificated for about twenty minutes when he made a U-turn. He said he had been talking to a foreign bank and that they were willing to issue a commitment letter for long term financing. All I needed to do was lend him money for six months to build a power plant. Six months? Power plant? Commitment letter? Well he mentioned the name of the institution and where it was located…a half a world away. I said that I was not familiar with the bank and that the commitment letter, although it may be real, I could not count on it. He became argumentative and said it is the Bank of America of… I responded and said that that may be true but as the lender taking the biggest risk, and the lender having to rely on a bank I have never heard of, that I felt there was another way to meet his needs without the reliance of the third party. I went on to say that there were a couple of dozen American banks that I would not accept a commitment letter from now for various reasons. Basically he said he wanted to do it his way or no way at all and then he promptly hung up.
Banks Unable to Honor Their Commitment

Over my thirty years in structured finance I cannot tell you how many times I have been on the short end of the commitment letter. In my book The Obstacle Course I told a story of how a banker welched on his commitment. It has happened time and time again. I have seen banks unable and or unwilling to honor their commitments literally dozens of times. Sometimes the bank was financially incapable of funding as prescribed. In other cases they just changed their mind for no good reason. In yet other cases the internal consensus of a transaction shifted and they just pull out and leave you in the breach right at the closing table. After some research the picture was very clear. The prospect was naive and convinced with his own BS that this was a real bank with real capability. After some research the picture of the bank was quite different than he knew.
The bank was facing huge current losses. Their recent attempt to float new equity had failed. Even more recent their attempt to float new debt had failed. They were facing huge projected losses because they had acquired companies that were bleeding at a very rapid rate. In short they were in very poor condition and on top of that fact they had no experience in the energy field. They were just another bank on my list that I would not deal with.
Behind Commitment Letters Are People

So many people think a commitment letter will solve everything. It is the Holy Grail to completing andy kind of project. Frankly it is not. Behind commitment letters are people. Sometimes those people do not do what they say. Also things change and so goes the commitment letter. Banks just like businesses can fall the way of Lehman Brothers. They can fail too. And with the failure so goes the outstanding commitments that the bank has made.
The Deal is Closed When the Cash Shows Up

The rule for commitment letters is who is behind it? Do they honor their commitments and do they have experience in the area the project is situated? Look at who and what is behind this Holy Grail of letters. Remember the deal is closed when the cash shows up. A commitment letter is only a piece of paper.

A Business Valuation is Critical to Raising Capital

SEPTEMBER 12, 2011 BY JIM ALAFAT
When raising capital for a business or business venture, most do it yourselfer’s leave out several key tools that drastically increase their chances of obtaining capital and making their dream a reality. Why? I ask myself that every time a client says “I don’t need a business valuation to raise capital”. Or they say, “I’m not paying for that,” they do it their way and a year later are still in the same rut when we first met. One thing I’ve learned from this business, the really successful entrepreneurs know there are costs to raising capital. As a result, they hire the right team of professionals and surround themselves with advisors to drastically increase their success rate.
Mistake #1 – Valuing Your Business Too High

One of the biggest mistakes many business owners or would be business owners make is valuing the business too high. As a result, when they try to sell the business, they find out it’s not anywhere near what they think it’s worth. They use wrong criteria for evaluating it’s value. This is a very general description of what a business valuation is, what is involved in valuing a business and some common mistakes many business owners or entrepreneurs make when starting a new business venture or trying to sell a business. I’ll also discuss possible solutions to increase your chances of a successful capital raise.
What is A Business Valuation?

‘Shark Tank’ is a TV show in which budding entrepreneurs take their ideas to a panel of Venture Capitalists (VC’s) and “pitch” them on investing in their business. One of the biggest reasons the entrepreneurs fail to gain capital is common, “I can’t get my hands around the valuation” one of the sharks states. The entrepreneurs have not properly done their homework, and most of the time, overvalue their business. A typical request would be to give up 20% of the business for $50,000. Simple math tells us they are valuing their business at $250,000 (20% x 5 = 100% // 5 x $50,000).
The panel asks the potential partner – “Do you have any patents? Do you have any orders to fill? How much revenue did you generate last year and through this year? Where are your sales coming from? Do you own any assets? How is your business structured (LLC, Partnership etc.)” and many other questions designed to determine a value of their business, their market and reason for the request. Most contestants fumble through this questioning because they don’t have solid proof what their business is truly worth, they guessed.
A business valuation is not an appraisal. An appraisal involves physical or tangible elements, jewelry, real estate, a classic car or inventory – something that can be touched. An appraisal can be part of a business valuation, the physical assets, but there is more to the value.
Three Common Methods to Value a Business

1) The Income Approach: Also known as a valuation approach, this method takes into account the annual income a property or business generates to produce revenue. Revenue or Net Operating Income (NOI) is determined by adding all the revenue a business generates minus all operating expenses. However, income taxes, interest and servicing debt are not deducted. Many models may call this EBITA – Earnings Before Interest, Taxes and Amortization expenses.
In the simplest form, the process works like this – assume our business is an antique store and has EBITA of $1,000,000 annually. A valuation multiple is applied to the EBITA. Many times it’s based on the discretionary earnings of the business. Assume that after interest, taxes and depreciation there is $500,000 profit. The sales price would be calculated on that amount – a common factor is 2 ½ times earnings or $1,250,000. Of course there are other things taken into account the inventory, furniture, fixtures or equipment, accounts receivables or the real estate (if we own the building) – but you get the idea.
2) The Market Base This approach looks at comparable sales of similar businesses in your area. Every industry is classified into a Division, then a Major Group, and finally a class. This is known as the Standard Industry Code or SIC. The Bureau of Labor and Statistics is a great resource for this information www.bls.gov.
Using our Antique Store, we are grouped in with Retail Stores, under Retail Trade and Used Merchandise. Comparable stores would be Second Hand Stores, Pawnshops, used Furniture even used book stores. The value is based on how these businesses sold for in our community or a general geographic area. This is not an apples to apples comparison – it’s similar to a home appraisal. If a comparable business or a home, was sold due to illness or some other issue where the owner was forced to sell below market value, that affects the sales price of your business, or how much an investor may be willing to invest in your endeavor.
3) The Asset Base This approach bases the value of the business on the overall assets that are in inventory when the business sells.
For our antique store, that could be a pretty good deal – especially if we are selling high end antiques or old jewelry. If we have $5,000,000 worth of inventory at wholesale and the retail value was $10M, we would anticipate a sales price somewhere between the two. If we own the building and real estate, that could be a nice thing for us.
Which Method is Best?

So which one is best? A combination of all three. Together, they look at ALL aspects of the business – not just the assets or the revenue. But there is one element many entrepreneurs forget to take into account when valuing a business – the key people running the operation. Does that team come with the sale of the business? If the answer is yes – that can add a tremendous value since those folks know the client’s, they understand the market and were most likely instrumental in making the business what it is today. If not, then you need to rely on the above.
Mistake #2 – Why Not To Do it On Your Own

Another mistake when selling a business or seeking funds for a venture is trying to do it on your own. A project I recently reviewed was amazing. The conservative numbers show a great return on investment, there is a need for this service, the client has the market locked up and has created a virtual monopoly. He did his own market research, he’s buying the primary business asset at a great discount – so in his mind there is equity and he thinks this deal is a no brainer. Here is the problem, he refuses to accept anyone’s word that the money sources need an independent third party valuation and market study done for his business. He comes back with “The asset is worth X but I’m only paying Y” – exactly, if that’s what you can buy it for, that’s all it’s worth. “But I’m insuring it for X” That’s nice, how much did you pay for it?
Here is the dilemma, the capital sources are impressed with his credentials, he’s extremely qualified to run this operation. He’s recognized as one of the top 5 professionals in his field in the world and is uniquely qualified to provide all this information – for someone else. The capital sources could care less who he is – they won’t “take his word for it” – they want an independent study conducted to verify the information on their own. So here we are, a client who refuses to pay for an independent study and money sources refusing to give him a dime until he does. So next year, I’ll let you know that someone else paid for a study, took his business idea and is making millions, while this “expert” is sitting in the wings.
Mistake #3 – Why Do I Need a Market Analysis?

Which leads me to another major mistake – many entrepreneurs don’t understand why they should have a Needs and Necessity Study /a Market Analysis done. This is probably the most critical piece of the business valuation. If the person putting a value on your business does not know what the local market is doing, how can they provide a legitimate value? If you are getting into an industry that is in a downward spiral, who is going to invest in it?
Doing It Right The First Time Saves Money and Time

So what does all this mean? Hire a qualified source to help you raise capital. Make sure it’s a reputable institution or individual with a proven history that will require a market study and a valuation done on your venture. This protects you both – the entrepreneur won’t get stuck giving away more of the company then they should. The investor is going to know the value of the company and the market is there so you both have a legitimate chance at success. Yes, it is going to cost you some money you may not have been expecting to spend right now. It’s important to understand, a group that works with you to raise capital is going to do the majority of the work for you now, so in the future, when you come back – the paperwork and bulk of the work will be done for future equity raises, it won’t take as much to do it again.
Many budding entrepreneurs are not willing to spend the money to do it right the first time; they are looking for “the deal” and want immediate satisfaction. They don’t consider the long term consequences of their decision or the additional time and money it’s going to take to achieve success. It’s like the man who was aimlessly wandering through the desert, dying of thirst. He came across a shack, upon entering, sees a sealed glass container of water on a shelf. Next to it is an old fashion water pump secured to the floor and a sign above the water container saying “Don’t drink the water – unscrew the cover, prime the pump and you’ll get all the water you want – Don’t forget to put a full jar back for the next guy”. Do you want to drink the water? Or prime the pump?
Jim Alafat, CMPS

The Cost of Capital Formation

SEPTEMBER 1, 2011 BY GEORGE LOVATO JR
Recently I gave my ten thousandth explanation of why it costs money to form capital. Most entrepreneurs do not understand the process of capital formation. If it is borrowed money or an equity infusion there are a host of costs associated with capital formation. So let’s talk about the costs.
Lawyers Cost Money

The client is always responsible for the costs of capital formation. First is legal. Lawyers cost money. The client will have to have a good general corporate lawyer on hand to read and interpret contracts, loan documentation and various agreements associated with a loan transaction as well as review and assist in the preparation of due diligence documentation. Also if the transaction involves the infusion of equity then the entrepreneur will need a top flight securities attorney. These are a special breed of lawyer. If they are worth their salt they will bring capital resources to the table as well. These lawyers are a bit more expensive than the corporate lawyer. So be prepared for the bill to be larger and more extensive. However if they are good they will be well worth the cost.
Accountants Cost Money

Lenders and investors want the most up to date financial statements and also desire as much disclosure as possible. Enter the accountancy costs. Accountants also charge by the hour. Getting your most up to date financial statements prepared or for that matter a full blown audit will cost you a pretty penny. The fact is the “numbers” as we say will tell the story and are a requirement. Don’t balk at the need for the preparation of financial statements. If you need capital you are required to provide disclosure. This one of the first steps you need to take.
Professional Reports Cost Money

Appraisals, Valuation Reports and Feasibility Studies are a fact of life. Even the Need and Necessity study is now par for the course in required documentation. If it is real estate or asset based financing these reports are a must. They can get quite expensive. Third party opinion reports are now the second set of eyes on almost every transaction. The lender or investor uses them as a touchstone to test their own impressions of value and need. Appraisals are usually accompanied by a Feasibility Study or at the very least a Need and Necessity Study. Equity or convertible debt transactions now require a Valuation Report. There is less reliance on the appraisal then before. That is why you see the Feasibility Report as the second requirement to real estate documentation requests. Hold on to your wallet because these reports are costly and getting the highly experienced and recognizable firms will cost even more.
Professionals Do Not Work For Free

The due diligence process takes not only time but money. Structuring a transaction should be done by the pros. Hiring a corporate finance consultant is a must. Get your own private banker to ply his skills during this phase of the process. A surgeon does not perform surgery on himself. Therefore the entrepreneur should let the professional step in and guide this part of the process. Getting the entrepreneur ready for the dance takes time and money as well. Preparing the documentation in an acceptable format takes time and money. Presenting the deal the entrepreneur seeks costs money. Presenting to the reliable sources takes time and money. Determining the final appropriate source for financing takes time and money. Your accountants, lawyers and corporate finance consultants will all have to pitch in to make the transaction a go for the entrepreneur. Even the final documentation will need all hands on deck for review and final negotiation. This costs money. Professionals do not work for free.
There are a host of other costs such as entitlement expenses, master planning costs, forecasting and budgeting, title searches, litigation and background checks. The list really does go on and on. Suffice to say that if you do not have this money in the bank when you start the process don’t start. No one worth his salt is going to work for free of put it all on the line for the entrepreneur when the entrepreneur can make or break the entire transaction. You need money to form capital. This is not a process where everyone around the entrepreneur is expected to take all the risk when there is little to gain.
Money Begets Money

I always get a kick out of the prospect that says if you charge “upfront fees” I am not interested. First of all BHCL does not charge “upfront fees”. But after I am done explaining to the prospect the aforementioned his tone changes. It’s easy to spot the guys with just an idea looking for a free ride as opposed to the serious entrepreneur who knows what he is facing to reach for the brass ring. In short money begets money. You have to have it to get it. Be prepared. It can be very expensive. But when the end goal is reached and the entrepreneur gets the capital he needs, then he understands it has been worth every penny he has spent.

Market Correction? Do Not Panic! This is Where We Should Be!

AUGUST 15, 2011 BY GEORGE LOVATO JR
I cannot take it anymore! The talking heads and Washington are driving me nutty! Between the two factions everyone should be jumping out of a window by now. Stop! Do not panic!!
Those of you that know me well can verify the fact that I have been saying the market was overvalued above 10,500. Put the puzzle parts together. The White House is not providing any leadership. On his best day the President is not even an “Armchair Economist”. He does not have a clue about what the Business Plan For America is. Congress as well has done a very poor job of instilling confidence not only from the American public but from foreign governments and foreign investors. Above and beyond that, the economy in in the proverbial tank. We have a government that cannot even tell the public what the true deficit is. So then why would it attempt to bump its’ head on 13,000? An overly optimistic group of traders and investors not really paying attention to the real metrics? Well it is more than likely all the above and some. Correction you ask? No this is where we should have been all along. The market has been overvalued for some time now.
We Need Organized Leadership

Europe is having its share of issues. But as far as we should be concerned, deal with our problems first then maybe move on to assisting others I say. For now we need organized leadership. We need to show the world that we are in control of our own numbers, budgets and forecasts. We need the American people to believe that the government really does know how to steer this massive economic ship. We need to have a government that promotes growth by stimulating the small business and its owners to reinvest and hire for expansion. Building businesses for growth through governmental incentives. That is the kind of boost we need. Give the incentives to the small business person I say. Let’s not put the governments’ money into beatification and highway off ramp projects. That is very short sighted. We need a Congress that stops bickering, takes off the party hat and puts on the hard hat. Look at tax incentives as capital to stimulate business growth. Thus economic growth!
We Need the Business Plan For America

I am tired of the Presidential rhetoric. I am tired of the Congressional verbosity. What we truly need is someone that has the Business Plan For America in his head and wants to put a plan of action that will put America back on the road to growth and prosperity. So Please Mr. Romney, tell us what it is. Since you are going to be the next President, share your Plan for Prosperity. We need it now more than ever. Leadership is lacking and it shows. We need to see your vision. We need to know that you have a sensible plan for business and for prosperity. We heed to see the same light at the end of this long and dark tunnel as you do.
The President has shown absolutely no knowledge of the theory of Economics. He has shown no knowledge of banking and finance. All he has chosen to do is blame the previous administration by saying “We inherited this problem and it is not ours.” Well guess what the day you took office Mr. President, it became your problem and you are, under the law, forced to take ownership of this mess. Get on with solving the problem and stop trying to tell us it is not yours.
Look For Bargains on the Stock Market

In the meantime, look for the bargains on the stock market. Buy gold! In short go in two directions at once. I have been out of the market since early last year. I bought Ford at $1.66 I sold it at the top as well as a host of others that were all bargains I might add. I have been buying silver whenever I can and gold along the way. It is time to get back in the market but only buy the undervalued bargains. The market is where it should be. That is until the economy bounces back. So there may be a little more to go to reach the absolute bottom but you are starring at it. So pay close attention to the metrics and get in only where a bargain exists.
The Government Can’t Help You But I Can

On to other matters what about money for my business you ask? Well it’s out there but it is scarce in some respects. In others it is abundant. All solid businesses can form capital. In other words all good transactions get done. There is light at the end of the tunnel and we at BHCL see it. But it takes hard work and a good business plan and solid management. Have hope, for we are going to see new leadership in Washington come the election. If this guy was one of my bankers I would have fired him by now. So Mr. Romney give us your Business Plan For America. We need to know new leadership will in fact put us all on the road to prosperity again. Meanwhile call me if I can help you with your business capital formation project! I know the government can’t help you but I can.
Disclaimer
This is not an offer to sell nor an offer to purchase securities. This is commentary and opinion. Any advice to purchase or sell any financial instruments, securities or government bonds should be sought from a licensed/registered financial advisor and or securities broker/dealer.

Stupid Business Decision

JULY 10, 2011 BY GEORGE LOVATO JR
Writing books is very much a cathartic experience for me. As you will note in The Obstacle Course it is a series of personal stories that are intended to teach the reader on a number of issues related to running a business big or small. I have just about put the Obstacle Course II in the can and I am editing a final review now for the publisher. I love writing and I can tell you it gives me great pleasure. Recently however I had another experience with a client that I feel deserves to be added to the Obstacle Course II. It involves an SBD! SBD you ask? Yes, otherwise known as a Stupid Business Decision. I asked the publisher to stop the presses so I could add this story that I hope teaches the reader about how to avoid making the SBD.
Weeks of Intense Review and Analysis

Recently I was engaged by a client to restructure the balance of his company as well as add new financing. After weeks of intense review and analysis one of the solutions was to convert some short term debt to long term debt thus improving the ratios on the balance sheet and easing the cash flow burden. Along with a few other key solutions was to significantly modify the business model for greater efficiency and profitability. The branding was very strong but at an early glance anyone could see the internal operation and the method of delivery and inventory burden were outdated and expensive. After weeks of hard work, I could see the light at the end of the tunnel and I was just about complete with the short to long term conversion solution when the client makes a stupid business decision.
Close the Business

This is a business that produces millions of dollars in sales via a very sophisticated website. The top line is very impressive but the bottom line is very weak. Hence the need to modify the business model. That part of the project was in progress. The new model integration included a host of generally accepted business practices used by almost every internet based company. I was just about to drill down and then the client decides to close the business. Yes close the business. I was stunned. I pleaded with him not to do so. But the client was tired and did not see the forest for the trees. His emotions assisted him in making a stupid business decision. After some discussion I convinced him there was another alternative. Sell the entire package. He agreed. Now I am off to sell the entire deal kit and caboodle.
Now I Have a Business to Sell

It sounds strange I know. It sounds unbelievable but it did happen. Emotions and not wanting to adapt to a new business model were the driving forces behind this decision. He was worn out and he could not buy into the new more progressive way to run his business from the bottom line rather than the top line. Many of his business, internet and operating theories were just wrong or simply outdated. His belief in these skewed ideas also lead him to the SBD. Many things would have been required to change the business model and they were all achievable but he remained resistant. He had a tremendous amount of critical mass to work from but he was simply in love with his old and outdated way of doing things. I could not convince him otherwise. Now I have a business to sell. Not the best option but surely better than just shutting it down. So if you are interested in buying an internet business with a history of producing millions of dollars call me.
How to Avoid the Stupid Business Decision

The Stupid Business Decision. It happens. And when it happens it can have devastating effects on you, your company and everyone around you. Emotions are the key fuel to this fire. How do you avoid the SBD? It is simple. Stop! Listen! And above all bring in people around you to help you fully analyze every move you make and every decision you make when you feel overwhelmed by the environment around you. Follow your gut and not your emotions. There is a very big difference. No decision you make quickly can ever be the best one.

How To Raise Capital

MAY 12, 2011 BY GEORGE LOVATO JR
Not everyone is familiar with how to raise capital. There is an art as well as a science. Most entrepreneurs travel blindly down the Obstacle Course seeking capital from mostly inappropriate sources and thus wasting time. You hire a lawyer to handle matters you know little or nothing about. Your accountant is your wing man at tax time or when you need to prepare financial statements. You hire expert sales professionals when you need to move your product or service. You in essence build a team. The same goes for raising capital. You must hire the experts that know and can teach you how to play in this arena.
Do Your Due Diligence

Most recently I reviewed a website that cautioned the reader about the multitude of scammers and scoundrels called “Money Finders”. Indeed there are more good guys than bad in the industry. I have had my share of dealing with the bad guys time and again. I still can be fooled by the guy with the good story and persuasive manner. But for the most part I can spot the bad guys sooner than later. It is important to look at all aspects of the history of the person you are considering hiring to assist you. Not everyone is who they represent who they are. There are however some very good professionals in the game. You just have to do your due diligence.
Recently I had a fellow contact me saying all he needed was a loan and he would supply the collateral and he had plenty of it for other uses if needed. Well the US Treasury Bonds he was using as collateral were bogus. I found the fellow to be full of BS. The government was even on his tail as well as a host of others so take a look at this . Pay special attention to the “SR letter 02-13” link in the article. It is full of information about other scams out there.
You Need Experts

But back to the point; you need experts and a team to form capital. Your job is to run the business of the business. By spending an inordinate amount of time trying to find the right sources, pitching your request and scanning the horizon for anyone who will listen to you, your business will suffer. You need to deal with the good guys. You need team members that can assist you in attempting to accomplish your goals.
Try, Try and Try Again

And another important point. You may not be successful in raising the capital you seek. Not every capital formation project is successful. You may have a poorly structured transaction. Your timing in the market place may be ill timed. Your business may not have the capacity to borrow or the valuation of the company may be too far reaching. Albeit the team members may be able to assist you in avoiding some of these speed bumps but not every request gets filled just because you gave it your all. Sometimes it is just not meant to be. Rare but it does happen. Remember to try, try and try again. As you will see in my first book it took five tries to get to the finish line.
Find The Good Guys and Add Them to Your Team

About that website I mentioned earlier? Well I found the site to be well done. The site owner talked about how you never should pay “up-front fees” and that anyone who asked for them was a scammer. But he too had a product to sell and it was a two hour call. Unique and I would assume useful as long as the advice you received during the $149 call to be useful. At least what he was selling was advice over a very short call and not a business plan or a software package. His point is that he was giving advice and that is what I am saying in this blog. You need advisors, and good advice costs money. Sometimes you need access to contacts you do not possess. That too costs time and money. The fact is building a team takes time and money. No professional worth his salt works for free. Remember the lawyer you paid the retainer to? The same goes for the corporate finance professional that knows his way around and how to navigate the Obstacle Course. Find the good guys and add them to your team. When you are raising capital it is “People before projects!” as I say.

The Microwave Society

MAY 3, 2011 BY GEORGE LOVATO JR
Everything in Three Minutes or Less

I listen to and review anywhere from forty to seventy potential transactions a week. BHCL cannot help everyone. But you have to spend the time to listen to see who in fact you can help. Recently I listened to possibly my fifty thousandth pitch from a prospect. After twenty nine years of structured finance, yes, that number is pretty close. I often hear the same request surrounded by the same unworkable structure but this particular request illustrated the mass expectation of business professionals and entrepreneurs around the country.
Everyone wants everything in three minutes or less. They want meals in three minutes or less. They want credit card approval in three minutes or less. They want to be able to download Gone With The Wind to their home computers in three minutes or less. This is the state of our Microwave Society. Everything …Now!
The Golden Question

This particular prospect was requesting a loan for his business in the neighborhood of $5,000,000. The manner in which he wanted to structure the loan was unworkable. I then suggested we go another route. He said he would consider it. We talked about the alternative among other elements of the his business. It was clear there were possible underpinning’s of penitential in the proposed transaction. I listened some more. The conversation went on and then it happened. The golden question; “How long will this all take?” My response was that there is a procedure and with all factors considered, inclusive of numerous financial statement corrections, modifications and elevation in the type of accounting opinion, plus appraisals, valuations as well as a mountain of documentation required it would take up to six months. His response was simple; “I can get an approval from my bank for this in a week and close in two.” I suggested he do so and then the conversation ended cordially and I was back to doing what I do best.
I knew he was full of BS. I knew his banks could not provide an approval of any type. The transaction needed a ton of scrubbing before it would be ready to present. His posture was poorly positioned. After twenty nine years in this business and knowing the scores of banks and bankers I do, as well as being familiar with their procedures, this was nothing more than prospect smoke.
It Just Does Not Work That Way

Soon he called back. I listened again. He reiterated that his bank could close the loan in record time. I asked why he called me back? His response bounced around and avoided a direct answer. I pushed the question again. He finally admitted his bank turned him down months ago but he did not want me to think that he had no other options. He wanted to deal with me from a position of strength. I told him he could but he needed a better position than his bank could do it two weeks. That was not realistic.
The conversation went on then timing came up again. I reiterated my original estimate. He responded; “For five million dollars you should be able to do it in three or four weeks! I can do a home mortgage in a week. Why does this have to take so long?” Once again I explained how complicated his request was and all that would be needed to complete the financing he was requesting. Again he pushed for a three week time frame. I cordially ended the call and suggested he continue to seek a solution elsewhere. I was just wasting my time.
This prospect’s perception was that he was requesting credit for a credit card and nothing more. His view, and more to the point was acquisition of any and all credit should be able to be accomplished in days rather than months. He did not understand he was nowhere near ready for presentation to the financial community. He just did not get it. Just like he downloaded Gone With The Wind in less than three minutes he was looking for the same service for a five million dollar loan. It just does not work that way.
Listen to the Experts and Follow Instructions

Complicated transactions take time to construct. A home mortgage in today’s market is a demanding task. There are a lot of moving parts to the application process. Now you take a very complicated commercial loan request, add in some accounting treatments that are inappropriate, two inch thick corporate tax returns and misstated values and you have a formula to eat at the clock. I can only suggest after reading this blog that you incorporate this thinking into your next request for a commercial loan. You need to be organized and patient. You also need to take the prescription that the doctor writes. That prescription reads…Listen to the experts and follow instructions.

The Opportunity Engine

APRIL 20, 2011 BY GEORGE LOVATO JR
Apologies For The Delay!

You probably have been wondering why I have not posted a blog in so long. There is an answer. I have been very busy with my partner on building a new larger, faster and more efficient server platform to do just that. Along the way a new business was developed. The very same tool that has reached you has now become a business. It is run by my partner but none the less I have been very involved. It is called the Opportunity Engine (OE). It will be used to do many things. Among them is to market the new syndicated internet radio program called Just Ask George. More details on the Opportunity Engine and Just Ask George are coming soon.
Also I will be using OE to release my next book The Obstacle Course II. Make sure you have the first book so the second book will sink in even further. If you need to buy it go to the Obstacle Course Book website or you can purchase it from BH Capital Ltd
A Product That Markets Itself?

Here is the interesting part. The OE can be used to market itself. Think about it. A business communication tool that can communicate about itself to sell itself through itself. Every time I use it, the value of OE is validated. Weird or neat? I think both.
I will be communicating with you as in the past, more regularly, now that our new platform is up and running. I am really excited about that as well. In my next blog I will tell you how the OE, as an unintended result, turned into a burgeoning business. It might be subject for another book!

Why Does Money Cost So Much today?

FEBRUARY 7, 2011 BY GEORGE LOVATO JR
What Does a Rising Rate Really Mean?
I listened to a friend recently predicting gloom and doom about rising bond rates. The fact is a little increase in the U.S. bond rate is good. Too much and could adversely affect the economy which we all know is fragile in its current condition. What does a rising rate really mean? First better yield on parked funds. Second, lending institutions will have a better basis to forecast a base rate to lend by in simple terms. And increased yields on invested money can mean more money to lend. In short it is not the end of the world.
I can recall a time when Wall Street Prime was a reasonable reference point for the cost of money. That has gone out the window. Rates are pretty much all over the board now. There does not seem to be a clearly defined interest rate pinpoint. LIBOR was also a reference. But that too is unreliable these days. What is a good bellwether? U.S. treasuries used to be and should become again the standard. But they first must stabilize and next they must be priced attractively. So at a time when we are all searching for anchors on a sandy beach, maybe a little increase in the U.S. bond market is not a bad thing. What Bernanke is doing now and how he is managing the course is in my opinion sound. Create demand.
Time and the Cost of Money Marches On
I recently had a discussion with a client on the cost of money. His reference point was his previous loan rate which was established seven years ago. It just happened to be five and one quarter percent. He wanted to renew his loan at the same rate. When I informed him that it was going to be in the mid to upper sevens he was shocked. He could not fathom the increased cost. His position was he had been performing on the loan and all should have been left unchanged. He did not see the reason why he should pay more. After some time I explained all that has happened in the last four years outside his bubble and he was astounded. What happened he wondered? How could what happened out there affect me? Well the reality set in and he then was more accepting that what he had seen in the news did in fact have an impact on him. What a surprise. Well time and the cost of money marches on.
I hear that same argument from a lot of my clients. Why does money cost so much these days? There are a host of reasons, much too long for this blog but suffice it to say a lot has changed. Losses from lending institutions must be absorbed. Risk must be accounted for in the cost of money. The cost of management of lending must be adjusted just to mention a few reasons. Do not be so shocked when you see the proposed interest rate. It is going to cost more. Pure and simple.
The Cost of Capital
There is a story in my upcoming second book (Due out in May) about this very subject. You can find my first book here. It speaks of the cost of capital in its varying forms. Commercial bank debt costs less than semi-regulated debt. Equity is far more expensive than both of those forms and the list and prices goes on. Cost of capital is volatile in today’s market. We must plan for it along with all the associated costs that accompany debt or equity. It has now become a cost to contend with. Long ago it was by most standards inconsequential. Today it is measurable and significant. In the story I mentioned in my upcoming book it relays an incident where the interest on a loan went from six percent to fourteen percent in a matter of a few months. This increased cost was never projected nor anticipated (variable loan rate combined with default covenants added to the loan) and as a result the client went out of business in the process. Lesson…allow for the varying and increased volatility of the cost of capital.
Everything Has Changed
Some of us feel we are unaffected by what goes on in the world around us. Others feel that as long as we are unchanged so is the manner in which we do business. The fact of the matter is that many things have changed in the world of finance in the past few years. So much so that even some of the rules that guided some of our decisions are non-existent or so radical is the paradigm shift it is hard to even comprehend. Suffice to say if we are in business, we must be more observant and mindful of the changes in our world, economy and in finance. Don’t listen to opinion but search for the facts and patterns. Open your mind as well as your ears. Most of all, we know now that everything has changed and that includes the cost of money.

GMAC Again?

JANUARY 12, 2011 BY GEORGE LOVATO JR
A Look forward – But First a Look Back
So here we all sit watching General Motors make another bold move. But first before we talk about the latest and greatest let’s look back. Years ago GM sold off the GMAC unit to a third party. The proverbial cash cow is tossed to the wind. Many in the industry said that was foolish due primarily to the fact that it was such an integral part of the overall business model. Nonetheless it was sold. General Motors continued to operate ineffectively after that transaction. They continued to receive criticism from the observation gallery about the transaction. The dealer body thought it was a stupid move as well.
Fast forward. GM purchase a second rate subprime finance company recently. All of a sudden someone at the helm begins to awaken. Next GM decides we need our venerable GMAC unit back. “Let’s get back in the business of finance!” What genius will get credit for this one? When I read about the purchase of the subprime unit I was not surprised but a little dumbfounded. They got kudos from Wall Street like this was a revelation. Now Wall Street is amping the volume up again about the latest revelation that they need to enhance the finance arm. To this I say hogwash! The business model should have never excluded them from the finance business to begin with.
Rewarding a Pencil Pushing Wunderkind
Now some pencil pushing wunderkind will be touted around the company as the next Bill Gates for coming up with this new and “fresh idea”. They will be given some notable bonus and the clock will continue to tick away. We as shareholders will continue to wonder who is at the helm and what map they are looking at. I say never reward stupidity. I know I have never been rewarded for it because if I ever was I would be a billionaire by now.
Because of my role in the development of AutoStar, I keep abreast of automotive industry matters. Next I have the good fortune of speaking with dealers all over the country. I speak frequently to the displaced General Motors dealers as well as the survivors. What I can tell you is Ally Bank is doing a poor job at servicing and managing the opportunity they have in providing financing to the dealer body as a whole.
Ally Bank?
GM needs a replacement service. Ally is just not what the industry needs. There are too many inexperienced poor quality field managers that do not understand, let alone execute, the much needed wholesale financing service the average dealer needs to remain competitive. I hear every day how they are fumbling the ball. I even have been in some negotiations with the “boys” from Ally and I am surprised in some cases that they were even picked to do the job on the first place. They continue to toss perfectly good clients under the bus. The credit qualification standards are archaic. Their overall approach is crude and very unprofessional. Simply they need to be jettisoned out of the picture. They have no vested interest in this industry. They do not care and thus they can destroy the industry from within at a critical time.
Cartographers Who Can’t Read Maps
But back to the cartographers at GM. I say you read the map wrong years ago. No you should not be rewarded for doing what you should have been doing all along and that is to provide a captive finance source. Read the map boys! If you have to, go back a couple of decades and read the annual reports. GMAC was part of your original mission! If you are going to put it back together put in a floor plan program with modern management mechanisms. Put in consumer lending products that meet the market demands. Provide what will work! Do not provide something for the sake of Wall Street. Pay attention to your dealers! They are your lifeblood. They are not a disposable asset which is how you have been treating them. They too have been around as long as you have. And oh by the way, don’t buy a percentage buy control or all of it! Get back in control of which way this ship is headed.