MBA1618 Guest Teacher – Domenic Aversa – How to Navigate the World of High Risk Lending

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Hi everyone, this is Dominik. Thanks for joining me. Today we're going to be talking about part of the credit and banking world that isn't often discussed, but unfortunately, in the current crisis, it's becoming a reality for many. Today's topic is about high risk lending and how to deal with the predators that exist in that very dangerous world. On the surface, high risk lending is just banking and investing. However, when you look closer, you will find that the players and rules have changed significantly from a typical business lending environment. Why have they changed? Well, it's all about timing and the corporate landscape. During a crisis, business owners are under a lot of pressure. They will try anything to save their company. The first place they start is with cash. They look everywhere for it because without cash, a company cannot exist. However, in this desperate search, they can get swallowed up and crushed if they don't know who they are talking with. They think that they are talking with respectable and respectful lenders and investors, but that's not always possible. The current global economy is challenging for many industries. However, there is one group that has been waiting for a chaotic and fractured moment just like this. They're opportunistic and they can be lethal. While the economy was growing, this group spent years amassing billions that they kept neatly piled on the sideline. They waited patiently for a recession, a crisis or a period of time just like this, where they could take advantage of weak companies. This group consists of distressed lenders and investors. Within this group, there are three primary categories that I describe as bears, sharks and vultures. Let's start with the first. A bear. What's a bear? A bear is someone that can cause you a lot of harm, but is generally just interested in eating well. Your primary lender and some suppliers that extend you credit generally are bears. During good economic times, they might be baby cubs, but during difficult times, they grow big paws. They're not happy that you can't pay your bills on time. They may charge you a little bit more to borrow from them, and they may even tighten the rules on you. But usually they're not interested in closing you down. They want you open. They want consistency. They want you to hit the numbers you projected. And they want you to pay on time, even if it's only a partial payment. They're just looking for something that's predictable. A bear will be your stoic friend. Unless, of course, you become unpredictable. You stop delivering on promises, lash out at them, or lie to them. If you do any one of those things, the bear will bite you. And whether you live or die depends only on the size of the bite. Sharks. Unlike a bear, a shark doesn't care if you live or not. They principally care that they get their huge chunk of flesh from you. They will lend you money, but it will cost you dearly. They often will lend against collateral that isn't secured by the primary lender. Sometimes they will lend against approved purchase orders, signed contracts and receivables. Other times they may take collateral from your personal assets, such as your home or other investments or savings. This group can include factoring lenders or other asset based lenders. Sometimes they offer to bridge loans to get you through a particular period in time, thereby bridging the gap of cash. No one really likes a shark, but you have to respect a shark. Why? Because they're giving you cash when no one else will. And they're taking a huge risk lending into a highly distressed situation. You may not enjoy doing business with them, but when in need, they're a lifeline for your company. The third category in this world, vultures. A vulture is just there to pick the bones in this moment of crisis. Your resolve may be strong. You believe that your company can make it through the rough patch. But the vulture knows otherwise. They know that you're already dead. A financial vulture is a highly experienced scavenger. Often they aware they appear wearing nice clothing, you using proper English, presenting business school credentials and boasting about the exclusive group of investors in their hedge fund. From a distance, they may seem graceful, but close up, you realize that they're gross and obnoxious. A vulture has two ways to approach you. First, they can lull you into a false sense of security, passively agreeing with you that you can make it through the crisis. Meanwhile, they con you into a very onerous loan agreement. They convince you to continue working really hard, making the company lean, saving the best while discarding the rest. They will encourage you to thrive. But all along they're waiting for you to make one small mistake, one mistake that will breach a covenant in your loan agreement with them. Often, these highly distressed lenders, investors include clauses where a default or a breach of of one item will trigger an automatic ownership stake for the lender. If this happens, they're no longer your lender, they're your partner. I refer to these type of deals as loan to own. Every time you default, they take a commission and another piece of your company. They systemically choke you out of cash and ownership. The vulture is only there to push you out and pick up your company for nothing more than than the mistakes you made. Second way they can approach you is they can show up as a competitor or an investment banker that's representing a buyer. Competitors that turn into vultures generally don't put on pretenses. They don't care if you see them as a vulture. They're enjoying your demise. They're there to poach your best customers, best employees, and and to tell your suppliers that you're going out of business. An investment banker, on the other hand, really only cares about his or her commission check on the sale of whatever assets remain in your business. They are there to sell and they don't care to whom. They just care that the deal closes fast. In either case, understand that all vultures are nasty. You generally want to stay away from them. But if you truly are on your last leg, then maybe there's some type of deal you can strike with them. They might pick up your company for nothing, but perhaps you can strike an employment deal with them, something that can help you and your employees. Often, a vulture is just looking to gobble up the competition so they own more of the market. The real intent is to squeeze the suppliers and raise prices on customers. They may need the experience that exists in your company to do so. Similarly, an investment banker may need you and a team of employees to help broker the deal because the buyer is looking for a certain skill level that only you and your team can provide. So this is the landscape. Now that you know the world of highly distressed landing, what can you do to prepare for this world of bears, sharks and vultures? First, Step Retain a lawyer. Not just any lawyer. Don't use your corporate attorney. Don't use your friend's attorney. Don't use your family's attorney. You have to find one that is experienced in dealing with distressed lenders and investors. This is an aggressive environment and the people in this space have highly skilled attorneys drafting their documents and enforcing them when there is a breach. Find a lawyer or law firm that has an insolvency department or people that have worked in distress situations. They will help you avoid big missteps and minimize the cost of the agreement. Secondly, search high and wide for new lenders and investors to avoid being completely gouged and bludgeoned. You want to have multiple people competing for your business. You need at least two or three interested lenders and investors to keep the other ones somewhat in line. If you have only one interested lender, they will squeeze you as much as possible because they know you have no other options. Search quickly, but reach out to as many different investors as possible. Third step, prepare a 13 week cash flow projection. Be sure to include three different scenarios for revenue and margins. Run a worst case, possible case and best case scenario. By going through this disciplined process, you will understand your true borrowing needs. You might be pressed for cash, but that doesn't mean you have to borrow more than necessary. Distressed debt is expensive. It will help you, but it's also a burden. You want to keep it to a minimum so you can pay it back as quickly as possible. So there you have it. A roadmap for navigating the world of distressed lending. In highly challenging and unpredictable economic times, it may be impossible to avoid financial bears, financial sharks and financial vultures. However, knowing how to prepare for each one of them will go a long way to helping to keep your company alive. If you are interested in learning more on how your company can survive any crisis, go to my website, corporateundertaker.com I know it's a difficult time for many people. I want to help in any way I can. If you contact me, I will send you a free copy of my new book that's called Business Lessons from the Dead and Dying. The book contains 50 lessons and tactics for dealing with all aspects of adversity and crisis. It also contains more than 15 different dramatic and shocking stories about severely troubled companies that I work with and operated over the past 20 years. It reads like a fictional crime thriller, but it's all true. Thanks for joining me today. I hope you found value in it. I wish you well. Back to you Omar introducing Fidelity Trader.

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Dominic Aversa for that very, very important guest teacher lesson today. I'm a big, big proponent of self funding your business when you're getting started, to get momentum, to make sure that you actually have a viable business, that you're actually making sales, you have something that people want, they have product, market fit. Once you have some momentum and you're making revenue and you're hitting six figure revenue a year, it's a whole lot easier for you to get a whole lot on funding or investment. You're not desperate anymore. You're actually giving people an opportunity to invest in a viable business and a business that actually is working and that is actually showing real, real promise. So if you do want to go down the funding route, I would delay as much as possible so you can at least be on higher ground so you can have the upper hand in negotiations, so you can actually have something to offer other than an idea. I've mentioned this over and over again on the podcast. As an example, when you ever see an episode of Shark Tank, the first thing that the sharks ask the contestants are do you have any sales? Does this product have legs? Do you actually have a viable product? Because they don't want to invest in something that the market hasn't said yes, this is something valuable. And those who say yes, we have a million dollars in sales are like, oh yeah, I'm going to invest in this. And they're fighting over who gets the deal and they're even willing to take less of a percentage of equity. Get in on this opportunity. You want to operate from that vantage point, from that position where people want what you have. And even when you're in that position, you got to be careful of who you're doing business with, who you're partnering up with when it comes to the finances of your business. Just as Dominic mentioned in today's episode. Thank you so much for listening to the Hundred Dollar MBA show. If you love what you're here, hit subscribe right now. Don't forget to hit subscribe because when you subscribe hit, you get the next episode automatically. You also get access to over 1600 business lessons in our archives. Go ahead and hit subscribe right now. Before I go, I want to leave you with this Money is like oxygen to a business. And a lot of us, we want to be able to breathe and sustain our business. But one of the things you can do to make things a little easier on yourself so you can quote unquote breathe easy is to lower your expenses is to lower your what is required to run your business. You don't have to start with the dream project. You could start with a business that funds a business. You could start with a business minimal viable product that is like the light version of what you want to do in the future so that you can get some momentum, so you can get some sales so you can actually grow into that business that is a bit more expensive to run but brings you in the profit in the long run. Thank you so much for listening and I'll check you in tomorrow's episode. I'll see you then. Take care. Hey Fidelity Can I get a second.

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