Copyright 2011 The Streetwise Guide
Smashwords Edition
mailto:thestreetwiseguide@gmail.com
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About Streetwise Guides
Streetwise, adj. Having the shrewd resourcefulness needed to survive in an urban environment
You can have all the business qualifications in the world, but without knowing your way around the rough and tumble of business you will have little chance of success. There are myriad stories of MBA graduates, global marketing managers, ex heads of multi nationals, highly qualified academics, experienced accountants and lawyers who have tried to run their own business and failed miserably. Conversely, there are far more stories of individuals who have left school in their teens and built up very successful businesses. Some of these have become household names - Richard Branson, Charles E. Culpepper, George Eastman, Henry Ford, Soichiro Honda, Ray Kroc, John D. Rockefeller, Vidal Sassoon.
A survey of 500 UK business owners and managers (of businesses with more than 50 employees) by The Institute of Leadership and Management found that only 32% had a university degree, 12% left school under the age of 16 and 7% did not even leave school with a basic school certificate.
What these individuals lacked in formal education they made up for with their streetwise skills. However many of those would have learnt those skills the hard way, struggling for the first few years as they learnt the street fighting rules that you often need in business to survive and prosper.
The Streetwise Guides will give you those skills. They will teach you how to work the system to your advantage. They will reveal the secrets and expose much of the hypocrisy in the business world, especially when dealing with bankers, accountants, lawyers and other business professionals. They will also teach you how to do business with the big end of town. They will show you the strengths and weaknesses of the Corporate World and teach you how they think so that you understand how best to deal with them, whether as a customer, supplier, creditor or debtor.
Finally, The Streetwise Guides and its publishers offer all care but no responsibility if you follow advice from this book and it does not work out. Very little in business is black and white. Just many shades of grey. You have to decide on the decisions you make. In particular as to how much professional advice you receive. People do regularly run businesses without receiving any professional advice from either lawyers or accountants. We would encourage you to use them as little as possible but, at the end of the day, it is your family’s finances that are at stake. You have to decide whether you want full belts and braces or just a bit of string to stop your pants falling down.
The Streetwise Guide authors always welcome feedback and can be contacted on
mailto:thestreetwiseguide@gmail.com
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Chapter 1 - Introduction ...
... street fighting with your number one enemy
This ebook will give you the tricks and tips, cons and cheats to maximise your chances of raising that loan, whether that is to buy an office block, a new business venture, a new house or just a better car. It will show you how to motivate your bankers and how to manipulate your figures so you realise your dream.
A word of caution.
This ebook will show you how to turn a sow’s ear that no one in the world will lend money against into a silk purse that will have bankers falling over themselves to lend you money. They may even buy you lunch. To do so you may end up deluding your banker. It is fundamentally important that you do not delude yourself. By all means encourage your banker to live in cloud cuckoo land but keep your own feet firmly on the ground.
Borrowing money can be an intensely boring pastime so we have written this book with a degree of levity, but borrowing money is a very serious undertaking. As such, it must be undertaken with caution and care. While this book will encourage you to 'do it yourself' as much as possible, neither The Streetwise Guide, its our authors nor our publishers accept any responsibility if you stuff it up, so if you are in any doubt you should consult your accountant or lawyer.
Everyone borrows money: to buy a house, to buy a car, to buy an office block, to buy a business.
When you borrow money you are usually dramatically improving your lifestyle, and your chances of making your first or 50th million. You are also probably taking the second-biggest risk of your life - behind getting married and having kids. Like all risks, this one carries the promise of great rewards. There is no doubt that the quickest way to millionairedom is through borrowing money, and we would always encourage everyone to make a million dollars if they can!
But whether you make that million or only $100,000 can depend heavily on the deal that you can negotiate with your friendly banker.
How Much Do You Know?
But what do you know about banks and bankers?
Do you know how they arrive at the amount they will lend you?
Do you know how to qualify for the cheapest interest rates?
Do you know why it is that one bank will say no, yet the one across the road will say yes?
In short, do you know the rules that they are playing by?
Probably not.
Yet you will know everything there is to know about the car, house or the business you are buying. You will research other prices. You will try everything possible to find out the vendor's bottom line. You will suss out how negotiable they are on payment terms. You will take great interest in their personal financial position to help you negotiate the best deal.
Then, when it comes to financing, you are likely to hit three or four banks and grab whichever deal comes along first.
Behind that 'Respectable Image'
It's not surprising, though.
Banks try hard to woo you with their marketing machine. They spend millions to convince you of their respectability, trust and honesty, all in the interests of getting you to accept their terms and their offer without so much as a whimper. And yet logic dictates that you should be suspicious of any organisation that has to sell its integrity through advertising!
The people who come between you and the bank do nothing to undermine this image of integrity and respectability. They dare not, for the banks wield remarkable power and the lawyers, accountants and brokers spend most of their professional lives dealing with them and getting new clients from them.
So most people forget that banks are capitalist, profit-making machines just like McDonald's. Their main purpose in life, like most other large companies, is to make profits, grow bigger and wield more power.
So in your ignorance you end up paying more interest than you need, offering more security than is needed and sign your life away with hardly a whimper.
Look Before You Leap
Borrowing money, whether it be to buy a Mini, a mansion or a meat factory, is one of the most important decisions of your life. You are making an agreement with an organisation that may become your number one enemy in a few years' time if you get into financial trouble. Making that decision without knowing the other party is like leaping into marriage to the first person who will have you - purely on their terms.
So this book is for anyone who borrows money. Whether you are borrowing $10,000 to buy your first car or $100 million to buy your first conglomerate, the same principles apply because the same philosophies underlie the bank's thinking.
This book will:
Help you negotiate the most advantageous deal;
Save you money and sleepless nights when you sign on the dotted line;
More important still, this book will show you how to have fun with a species that can be the most difficult and the most depressing to deal with - bankers.
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Chapter 2 - Banks ...
... their politics, hierarchies, emotions and arrogance
They come in all shapes and sizes. Some are very big (the State Bank of India has over 18,000 branches!); some are very small. Some are so small that they are little more than an answering service and a postal box.
Some call themselves banks; some don't. They caIl themselves finance companies, credit unions, credit providers, building societies, insurance companies, venture capitalists, equity investors ... the list goes on.
But any organisation that is in the business of handing its money over to you to fund a purchase - of anything - is a bank. They all have the same attitude towards you and they all ask the same two bottom-line questions;
1. Is my money safe?
2. Can I make profit from lending it to you?
In that order.
Most bankers, whatever sort of institution they work for, come from similar backgrounds. They have had similar training. And all banks use a similar basis for assessing risk and profit potential.
This is true whether you are dealing with a bank from Switzerland or a bank from Swaziland. All that differs is their politics and their valuation of assets within their borders. Swiss gnomes don't have much faith in coconuts and the Bank of Swaziland would have equally little confidence in the personal guarantee of some of the Swiss bank's clients!
It's Other People's Money
Never forget that all banks work by using other people's money. It may be $25 from nine-year-old Alex's savings account, or it may be $1.2 billion from Apple.
They have a very strong responsibility to look after that money and not to lose it. They call this their fiduciary duty – often a little pompously! ‘Fiduciary duty’ is often the first excuse a banker will use for turning down your deal - 'If it were my money it would be different, but this is depositors' money - we have a fiduciary duty to protect their investments.'
This is particularly so the less money you want to borrow. If you are borrowing $100 million, fiduciary duty is never mentioned but when you are asking for $10,000 this responsibility for depositors' funds is suddenly all-important.
There is no doubt that this fiduciary duty is very important. The world is full of stories of banks that have collapsed, losing people's life savings. In fact losses have been so common over the years that more and more strict controls have been imposed on banks' operations. What the banks don't seem to understand is that they are strictly controlled because, as an industry group, they have frequently proved to be quite incompetent!
You would think that such events would humble them but they seem to have done the opposite. The amount of attention paid to banks by the governments of the world seems if anything to have puffed up their self-importance even further. Many now consider themselves pillars of society and saviours of western civilisation.
Banks are Arrogant ...
You may wonder why we am telling you all this.
It is simply that this arrogance is one of the more unpleasant things about asking banks for money. Although they try these days to appear friendlier than they used to, their foyers exude arrogance; so do their offices. Even their pencil sharpeners seem arrogant!
They often make you wait when you turn up on time for an appointment, seldom get back to you when they say they will and generally show little interest in you - especially when you only want to borrow $5000 to buy a second-hand Nissan.
Even big borrowers get treated that way. Very big borrowers will have the banks tamed, but if you are only average it is unlikely that they will attend to you immediately you turn up for that appointment.
What makes matters worse for people who have little experience in dealing with banks is that their advertising campaigns are a total misrepresentation of reality:
The bank with the helping hand;
We always say yes;
Your bank;
Your friendly bank.
And if the last one isn't a contradiction in terms then nothing is! Somebody once said that there is no such thing as a friendly bank, they just have varying degrees of animosity!
The main problem with banks' arrogance is that it can totally undermine your confidence in dealing with them. This is great from their point of view as it is then much easier for them to charge you those extra fees, convince you of the need for that insurance policy, or get your spouse to sign the personal guarantee .
... But Not So Smart
It's tempting to think that this arrogance is part of banks' marketing campaigns aimed at boosting their profits and reducing their losses. Unfortunately we don't think they are that smart!
In fact, banks generally are not very smart operators.
There is an old adage that those who have money make money. Individuals who have money and lend it out tend to make high profits - when was the last time you heard of a poor loan shark? So, you would expect banks to make fortunes from the billions of dollars available to them.
And they do – for a few years, then they blow it all through bad debts, irresponsible foreign exchange trading and just being dumb.
The Curse of the Large Institution
The main reason for this lack of smart lending tends to be the institutionalized nature of the beast.
Most banks are highly institutionalized. Their leaders have usually got to the top by working their way up through the ranks, often starting as that spotty- faced bank teller who served you with little civility 30 years ago!
The people who run banks are more concerned with having tidy paperwork and a clean desk (when was the last time you saw a messy bank manager's desk?) and following rules and regulations.
Now, you may think that these rules and regulations have been pushed on them by the government to stop them going broke. That is certainly part of it, but of greater impact are the regulations imposed on them by their head offices to serve their own needs. And these internal regulations vary constantly with changing policies within the bank, which are set down by the board of directors.
The best example of this, and something you must be aware of when deciding which bank to approach for finance, is the constant swing of the pendulum within most banks between a policy of aggressive lending and one of conservative lending.
At a global level this swinging pendulum has generally been the trigger for most of the booms and busts that we have experienced. The most recent example being, what has been termed, the Global Financial Crisis of 2008 where we had a monster bust following a boom of banks lending more and more money on less and less reality. In that case, the banks were so broke that they had to be bailed out by taxpayers to stop what could have been a global recession far worse than the 1930s.
Now We Lend; Now We Don't
At a local level, individual banks within countries and even individual branches within those banks will have their own ‘booms and busts’. New banks will open and lend out willy-nilly to almost anyone in order to establish themselves. Established banks will suddenly have a bad run on one particular business area and stop lending to anyone else in that industry. Yet across the road, another bank would have had a good run with that very same industry and happily lend out money. These sorts of wild swings in lending attitudes are common. Banks are constantly fed by the fear and greed response. And this is where we come across one of the contradictions in banking. Banking is supposed to be a numbers game. Value the security, calculate the cash flow, interest rate and repayment period and – hey presto – you have a deal, or you don’t. But in reality, though these facts are used as a base, the final decision is an emotional one, usually around fear and/or greed.
Bankers are emotional
The emotional trigger works like this.
Some of the bank's lending goes bad - in a big way. It may be one big loan, say to a furniture manufacturer; or it may be a whole lending area that goes bad - say, central-city two-bedroomed apartments.
All hell breaks loose. Reports have to be produced, files are meticulously examined, the internal auditors turn up, approval procedures are reviewed, scapegoats sought, heads moved. (They rarely fire people in banks, just move them into marketing or debt collection - further proof of their inability to function as successful organisations)
A week later you walk in and ask for some money on a furniture business. What do you think the answer is?
This emotional response might affect the whole bank throughout the country.
More likely it will taint a city area or sometimes just a single branch. In the case of a single branch it may simply be that it has lost money on repossessing three Audis just as you walk in the door and ask for money to buy an Audi!
Fear is one of the main reasons banks turn down lending applications.
You need to understand and accept this because being rejected for a loan can be a very humiliating experience. You might see it as an attack on your judgment. You think it's a good investment; they don't agree. You might see it as an attack on your integrity, especially when they don't give any good reason. You can easily think it is because they don't trust you.
Either way, you walk out of the bank feeling down, with your self-confidence eroded. So you walk into the bank across the road, willing to accept any terms at all. The bank across the road says thank you and suckers you in on a nice profitable deal (for them) with your in-laws as guarantors. All because this bank has just bought second-hand Audis for all its managers - from the first bank you saw!
Understanding the Enemy
Emotion is what makes banks' lending criteria go round and round and up and down.
So use it.
Find out which banks are making good money in your area. Talk to the bank staff, find out what they like lending money on and what they don't. You will be surprised at what people will tell you if you simply ask.
If you have a successful opposition in town, find out which bank they use and go and see the same manager!
If someone in your industry has gone broke, give their bank a wide berth. Or, better still, use it for practice. It is going to turn you down anyway and will try to find as much wrong with your proposal as it can, so use this process to dig out the weaknesses in the presentation you have put together. When they do turn you down, pump the manager for information; get them to rip your proposal apart. And if by any chance they accept - don't sign. You are bound to get a better deal across the road.
Above all else when dealing with banks, don't let them get you down. It can get very depressing - even when they say yes. When you leave their office go and have a cappuccino. Go and have sex. Go and have fun!
After all, it's only money!
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Chapter 3 - Bank Managers ...
... and the eleven golden rules
'Responsible Corporate Citizens'
Bank managers are a direct product of the banking institution. Most started off as junior staff - bank tellers, finance company reps, etc. They moved up step by step, department by department, branch by branch.
By the time they reach a position of responsibility they know little of the business world outside their one particular bank. (There is little movement of staff between banks; most promotion is done from within.)
Their success within the bank has usually been through good paperwork, good reporting, keeping their head down, taking no risks and generally being a 'responsible corporate citizen'.
Some maverick types do succeed for a short time - usually when the bank is in one its 'lend, lend, lend' emotional states. But as soon as the bank pulls its head in it normally pulls in the mavericks' heads as well and puts them into debt recovery which is probably enough to make them leave!
So the person you are dealing with has, in all likelihood:
Been with the same bank for 20 years;
Been moved to a new department every three years;
Been moved around the country three or four times;
Spent time in the sin bin of debt recovery or knows of many colleagues who have; and
Had any spark of initiative or originality well and truly knocked out of them.
You are unlikely to be dealing with a mover and shaker.
There are exceptions to this of course, but not many. If you find one, follow them from branch to branch if you can.
This situation may improve over time. More university graduates are being recruited as analysts to work alongside managers and crunch the numbers for them. This should help dilute the pool- but don't hold your breath.
If you can understand your bank manager's background (ask them - they love telling you) you can better understand their motivation, which normally has three phases:
1. Cover my backside;
2. Cover my backside;
3. Cover my backside.
They simply don't like risk.
Not just the risk of losing the bank's money. As any self-respecting bank teller who has been in the job for more than a month will tell you, money is just like cabbage - a product to sell.
The greater risk for them is the risk of sticking their neck out too far. Going out on a limb and having it chopped off. Yes, back to debt recovery.
But if you want to maximise your borrowings, minimise your costs and minimise your own risks you have to break them out of this mould. This applies whether you are applying for your first loan, extending an existing one or persuading them not to refer you on to debt recovery.
In short, you have to motivate them, excite them and enthuse them.
Make Them Keen!
Now this may sound like another classic contradiction in terms: an enthusiastic bank manager? Surely an impossible task. But you will be surprised how easy it can be.
The restricted career your bank manager has had is the very lever you can use to open them up and get them well and truly on your side.
If you look at any deal in which a borrower has got a bank to bend some rules or overlook some pitfalls you will find an enthusiastic bank manager.
This enthusiasm has been brought about by the bank manager getting a real buzz from being involved with the client's business, often at the expense of their other work within the bank we saw a classic example of this a few years ago.
A regional bank manager was so sold on an enthusiastic client that he lent them more and more money when it was obvious to everyone else that they were going broke.
I read a memo from him to his head office extolling the virtues of the company, promoting the great export orders that were 'just around the corner' and justifying his decision to lend them a further $500,000.
This memo was issued and the $500,000 advanced two weeks before the same banker appointed a receiver.
Surprisingly, the manager not only survived but was promoted!
Now most banks are aware of the dangers of over-enthusiastic managers and from time to time try to put in place review procedures to stop it happening.
The reviewers are usually based in head office, so what happens is that the reviewers and the local managers play politics for a while and no money gets lent. Then after a few years a new chief executive arrives, passes authority back to the local managers and they start lending money again.
So one of the first questions you should ask any bank manager is their level of authority and the approval procedure above them (while at the same time of course enthusing them about your project).
But in the same way that banks have emotional downs in certain lending areas, so do individual bank managers.
They might have been sin-binned eight years previously for lending on fishing boats. If so, they won't have forgotten and will be extra careful in that area. So if your manager says, 'I lent on one of these properties some time ago and it went bad on us,' say goodbye and leave.
Eleven Golden Rules
Here are the 11 golden rules for dealing with bank managers:
Golden Rule # 1 : Don't expect loyalty
Bankers are big on talk of loyalty, support and help. The reality is that as soon as the chips are down they shut up shop and call in the receivers. In recent years we have found only one exception to this rule.
A business loans manager took charge of a family business account that had been his first account 30 years ago. (Like all bankers, he had been transferred around the country in the intervening time and by pure coincidence had landed back where he had started.) He was highly thought of and secure in his position and of very strong character.
He supported the business through a year of restructuring and it survived.
Unfortunately, three years later the business hit another bad patch but this time had a different manager. He was insecure in his job (big layoffs were rumoured).
Receivers were in within three days.
Golden Rule # 2: They prefer to lend you money when you don't need it
Make sure you apply for loans when you don't need them! The worst thing you can do is to wait until you hit a bad patch and then ask the bank for financial support.
A printing company was being forced into a price war by the main opposition in town. To stay with them for six months it would lose $200.000 and need at least $100.000 from the bank to keep its creditors happy. What the owner should have done is ask for the $100,000 immediately (Without telling the bank of the price war, obviously). But he waited until his overdraft was near the limit and then asked. He closed down six months later!
In this particular case he was not helped by the fact that the opposition company banked not only with the same bank but with the same branch and the same manager. And the opposition was a much bigger client!
Golden Rule # 3 : If you have surplus cash, hide it from them
If you have surplus cash sloshing around never leave it in the same bank as your borrowings are. And always use your overdraft.
A long-established furniture manufacturer had a $50,000 bank overdraft facility. He had had a good year and at the end of it had not used his overdraft for the last eight months - so the bank cancelled it.
Six months later he hit problems and wanted the overdraft back. The bank wouldn't give it to him because - you guessed it - now he really needed it!
Another client had built up surplus cash of $150,000 that he was keeping to one side to cover forthcoming litigation. He placed the money on deposit at the same bank that had advanced him an $800,000 commercial property loan.
He lost his tenant. He told the bank. It grabbed his $150,000.
Golden Rule # 4 : Tell them the truth, almost the whole truth and nothing but the truth
The previous few case studies justify this dictum. If you tell the bank manager everything about your business, warts and all, they will focus on the warts and you will never get what you want.
A banker/client relationship is not the same as an insurance company/client relationship. It is not one of Uberrimae Fidei (utmost good faith). When dealing with an insurance company you must tell it everything you know that may affect its risk. With banks you only have to tell them what they want to know, and if what they want to know has a few warts in it then it usually isn't too hard either to avoid providing it, suggest alternative information or package up the warts so they don't see them too clearly.
But you must not lie to your bank manager. Not if you want to sleep at night and stay out of jail.
Golden Rule # 5 : Never deal with nervous or insecure bank managers
Now we know we are limiting the field here, but who said borrowing money was easy? If your bank manager is worried about his or her own job, and many of them are, they will never go out on a limb for you and will refer you to receivers as soon as you hit the slightest trouble.
A property investor was dealing with a manager called Whimp (true!). His name reflected his character. The merest hint of trouble and he referred the matter to the recoveries section. Result: receivers within 24 hours. Twelve months later the bank was paid out in full.
Golden Rule # 6 : Bankers never lose brownie points for being too cautious
In the previous case study you may have thought that Mr Whimp and the recoveries section would be severely criticised within the bank. After all, the appointment of receivers was clearly uncalled for, lined the receiver's pockets with over $200,000 in fees and destroyed a good business.
Not so.
Mr Whimp was well covered. He had followed the rule book and referred the matter to the debt recovery section. No individual in a bank will ever be criticised for being too cautious. All they have to do is to fall back on their 'fiduciary duty to protect depositors' interests' and smile smugly.
As for the recoveries section, they were simply achieving their prime objective: 'protect the bank's interests'. No recovery department has an objective of 'protecting the bank's interest without upsetting the client who is in trouble or making the receivers Very Rich People'.
Golden Rule # 7 : Don't expect bankers to be competent
Most bank managers are not very bright. But don't worry: these ones are often the easiest to get money out of with minimal security and risk.
After all, a competent manager will assess your business properly, minimise the bank's risk and maximise yours. They will grab as much security as they can get hold of, take everyone's personal guarantees and tie you up nice and tightly - all the time smiling and pretending to be your business partner.
Would you go into partnership with someone who would not hesitate for a moment to take your house, bankrupt you and destroy your personal life if you got into trouble?
Golden Rule # 8 : Your banker is a potential enemy, not a friend
At best treat them as a pit bull terrier (nice boy, there's a good boy then) and as soon as you see the glint in their eye of worry over your business account remember the old adage 'All is fair in love, war and insolvency'.
By all means take them to lunch; it is always effective in keeping them reasonably tame. But don't pour out your troubles and expect them to be your best friend.
Golden Rule # 9 : Don't expect your banker to understand your business
No matter how much time he spends in your factory your bank manager will never understand your business, for two reasons:
1. Few of them have any understanding of the real world of business survival because they have never had to run a business.
2. Although they claim that they are trained within the bank to be objective, in effect this training makes them totally subjective in that they assess your business purely from the bank's point of view.
Golden Rule # 10: Don't expect them to understand balance sheets
Or any other figures for that matter. Some do, but not many. All the rest say they do, and most of them even believe that they do. The reality is that few bankers are trained accountants and their study and experience is all theoretical.
Golden Rule # 11 : Don't expect them to play by the rules
Especially if you are going broke. When this happens they simply grab everything, by any means possible, and shut the doors on you.
A car dealer hit the wall. The bank claimed security on some cars, which was disputed by the owner. The cars were kept securely locked in the car yard.
The bank manager simply arranged for a crane and truck to turn up at midnight. They hooked the cars over the fence and took them away!
Now you know where you stand with banks and with bankers. Let's talk now about borrowing money.
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Chapter 4 – Borrowing Money...
... why we do it; how to avoid it
Don't Do It!
That has to be our first advice to anyone, which may seem strange in a book about borrowing money.
But the full title of the book is ‘The Streetwise guide to Borrowing Money without Going Broke’ and it is the last word that lies behind our negative reaction to anyone who wants to borrow.
This is not to say that you should not try to achieve that end to which borrowing money is a means.
But sometimes you can do what you want to do without borrowing. Sometimes you can wait a short while. Sometimes you can persuade yourself that you didn't really want to do it in the first place!
Yet it is rare that you do. And why?
Because there is great pressure in life to 'succeed', and unfortunately most of life's 'successes' centre on material matters. How big is my business? Chris's is bigger than mine! How can I make mine bigger? How can I get a better house/car/stereo/boat?
And all the time banks are wooing you with 'easy money' to satisfy your cravings. They spend hundreds of millions of dollars persuading you that simply by calling in to see them and signing a few papers you can have that new car, buy those extra trucks, move to that great house.
In business there is even more pressure, whether you have a successful business or a struggling business.
If you are successful the bank wants to wine and dine you. It offers 'tailored' packages. It wants you to expand and be more successful- because at the same time it will make them seem successful. (Remember their emotions.)