I came across a quote from Mark Twain the other day on the topic of bankers, loans and borrowing. Twain, who happens to be one of my favorite quote sources ever, says; “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” How true this is in my experience. More importantly, is how true this is for entrepreneurs as it pertains to loans and borrowing for their small business.
Let me quickly explain why the traditional advice we hear about only borrowing when you absolutely need to is the worst advice an entrepreneur that has yet to make his first million could ever take.
Just as Twain says above, a valuable lesson I learned early on in my business career is that borrowing money or getting loans of any kind is exceedingly difficult when you most need it (when it is raining) and exceedingly easy when you do not need it (when it is sunny). Why you might ask? In a word, creditworthiness. Let me explain the concept.
When I have money, the bank knows full well that I am much more apt to pay back the money borrowed. In turn, the bank knows lending money to me or anyone else that does not have any money is not a real wise idea. That is called creditworthiness, and those without money don’t have much of it.
Creditworthiness not only impacts whether or not the bank will lend you money, but also the price and terms of the money lent, which is equally important. In other words, the interest rate (cost of the money) and payback period (terms) will be far less favorable when your creditworthiness is poor vs. when it is good.
So what does a savvy entrepreneur do when it comes to banking and borrowing?
He uses generous credit terms in good times to expand his business and then at the first inkling of trouble ahead in his business, he starts borrowing every penny he can get his hands on. The savvy entrepreneur respects the “cash is his oxygen” principle and knows with utter certainty there is but one poison arrow for his business and that is running out of cash.
Thank the lord above that I learned this lesson very early as an entrepreneur. I can think of 2-3 different occasions since where I saw a cash crunch coming on the horizon and immediately started borrowing aggressively. The cash brought in from the borrowing in each instance subsequently gave me the resources to march th
The moral of the story is the next time some smarty-pants-credentials-on-the-wall-finance-wizard tells you not to borrow unless (or until) you absolutely positively need it, ask him back how many days of his life he’s owned a business for himself, and when he replies zero, you will know how much credence to give his advice. ZERO of course.