Financial Freedom

Welcome to advice from a CEO. I'm Bill as I've shared in my prior videos I've been a CEO president past 15 years. I've managed hundreds and hundreds and hundreds of employees. It was mid nine figures and so today I want to talk about finance and in finance you can break it up into two ways. One is finance for you as an equity holder or finance slash your capital stack for your company. So I'm going to start with you as an equity holder in the business. Assuming you're a little larger of a business, meaning typically if you're probably more than five million annually, you're going to have a capital structure. I refer to it as a capital stack. Obviously, the cheapest debt you can get out there is a bank and if you're using a bank and what I would call traditional financing, they're going to do it off cash flow of your business or they're going to do it off the assets of your business.

So if you're not a manufacturer, typically if you're a service company, they're going to do it as a cash flow loan. With that, you're going to get what are called covenants. So covenants, think of that as just the rules to the game. They're going to borrow you money in exchange. Here are the rules in which you can borrow the money. So typically you would see what's called the fixed charge covenant, fixed charge covenant or FCC covenant. You're going to be managing your cash flow. So they want to make sure you're positive. Next thing you're going to manage is a debt to equity and making sure that you're not loading a ton of leverage on the business and so every month you're squeaking by.

That's going to be your cheapest form of capital. In order to get it, you're going to have to have personal assets, you're going to have to have a personally good credit score, you're going to have to have good cash flows on the business. And if you have a bad credit score, if you've got some trouble in your past, your business is going to have to be really profitable for the bank to go along and issue the loan. You, of course, can do an SBA loan. That would help you get around some of what I just discussed because the SBA backs the loan and so they don't have to look at you personally and they don't have to look at your business as hard. But SBA loans, you're just starting up, trying to get traditional financing is impossible. That's my two cents, from my experience. And this is all from my experience.

Next round of debt, I call it mezzanine debt. Mezzanine debt is a lot easier to get. You're probably still going to get some covenants of what you can and cannot do. Typically, if you're an equity holder of an LLC, you cannot be a W-2 employee. So you're going to get what are called guaranteed distributions, so distributions every month. Typically, with mezzanine debt, you would see something in the loan docs around the lines of nothing more than that, meaning that they're not going to allow you to do distributions. Typically, you can negotiate everything I'm talking about. So typically within the loan docs you can, they'll certainly allow you to do tax distributions but nothing above that. Mezzanine debt, well today I'm recording this in summer of '23 and so your interest rates I would guess are going to be around 12%. Prior to the inflation taking a run, you can get mezzanine debt. You can do pretty well at 7% and 8%, but now those days are long gone. So, mezzanine debt, and again, as the interest rate goes up, they relax. So, mezzanine debt can come from a family office. I've done that in my past. They were very flexible. They don't have the same requirements. So, again, traditional financing, one of the things I didn't mention, they're going to have, your financials are going to have to be some type of audited. I want to say some type of audited. They can be reviewed, as simple as that. But you're going to have additional costs in having an outside accounting firm making sure your financials are your financials. Mezzanine debt, typically you wouldn't see that, at least in my last CAP structure that I did with a family office out in New York. I didn't have, as I recall, any requirement to audited financials. And again, as you get further down in those interest rates, your costs are just going to go up to be in compliance. And then above that, above mezzanine, you can get into some really decent, think of it essentially as high-res. In order to do something like that, you would have to have serious gross margins to be even able to afford it. The interest payments are gonna be crazy. So, that's kind of a real brief overview on the funding structure, the capital stack for your business. For you personally, I've never banked where the business had their lines of credit. Why? Because they can offset.

So as an example, American Express, love American Express. I've got a platinum card they offer, a savings account. If I ever defaulted on my credit card, they could sweep my savings account. Just as much as if you have a check-in or savings account, you also have a line of credit with that bank. They absolutely, if something were to happen with the business, things got a little rough, they could sweep that account. So I've always kept my account separate from where I personally bank.

The biggest thing, again, as a business owner, if you want to play this game, is your credit score. That's going to be number one. And then of course the amount of debt that you're carrying, but that will be reflected in your credit score. And so I would say protect that at all costs. Meaning that don't go crazy on the amount of debt that you're going to decide to carry. If you've got a lot of debt, again, you've got to make up for it for the profitability of your business. The best book, as a side note that I've ever read, is I Will Teach You To Be Rich. It's the best book on managing your personal finances if you're in a place in which you need help there. I would highly recommend it. Got thoughts, comments, want me to go deeper on one of those pieces, whether personal or the company's capital stack? Let me know. I'd love to do it. Until then, be well. Take care.