Granting Credit: Think Like a Bank

Granting Credit: Think Like a Bank

The first step in thinking like a bank is to act like a banker.  The bank does not perform a service, does not manufacture a good for sale, the bank essentially does nothing but loan money, for a fee.  In today’s LA Times, April 1, 2018, in the classified section I noticed an ad for a husband and wife team loaning money in LA County for real estate deals.  This couple was acting like a bank.  I recently bought my granddaughter Avery, all the materials necessary to play bank: money, deal book, pen and “paid” stamp.


To play bank, you have to pretend to be a banker.  A banker loans money and receives a return on the money called interest.  We, as goods and services producers, find ourselves in the banking business without the necessary accouterments,  nor an understanding of the nature of banking.  We understand our businesses.  We sell a product that we build in our factory.  We get the procurement of raw material, the hiring, firing and management of labor, and we know how to sell.  However, in bad times, in order to sell, we are going to have to offer terms, otherwise, NO SALE!!


You think bank and money comes to mind.  We need money in order to run our bank.  Where are we going to get the money?

We already have it.  When we sell our product or service, the value of the sale is money.  It always has been.  In our quiet desperation to run and manage our business, we attempt to convert account receivables into cash as soon as possible – at the door as they say.  But, as money dries up in the marketplace, fewer businesses will be able to finance their operations.  China invested 18 billion in US real estate in 2016.  Yet, in 2017, their investment total was less than 7 billion.  The Chinese investors are being told to withdraw by the government of China.  Whatever the reason, money is being withdrawn.  This withdrawal marks the beginning of the end.  It has been said that a recession occurs before most of us become aware of it.  The Chinese withdrawal marks this station.  We are in a recession.  Sales will begin to dry.  To stay in the game, to grow in the recession, YOU MUST ISSUE CREDIT TO YOUR CUSTOMERS.  Converting the A/R to cash is not going to be instant.


You need to learn as much about your customer as possible.  Every ounce of information available must be passed along for your use, even if it feels like overkill.  And the hard part, you have to treat every customer as if they will not be able to pay and will sour.  It is unfortunate, especially for the customers that are good, and remain good,  we simply do not know.  The credit application must be signed, under penalty of perjury.  The potential customer must believe that you are serious.  If they don’t, if they are unscrupulous, they are looking for signs of weakness.  Make the customer believe THIS IS MY MONEY THAT I AM LOANING YOU.  Remember the wise words of Oscar Wilde“BORROW MONEY FROM A PESSIMIST, THEY DON’T EXPECT IT BACK.”


I don’t mean the contract for the sale of your product but the financing contract.  Yes, a separate one.  Remember, you are a banker now, with one contract for the sale and a separate one for the money.  Actually, consider setting up a financing arm.  GMAC was established to finance the sale of automobiles.  The separate contract lays out the terms of the finance: how much borrowed, terms of repayment,  interest and costs, amount, method and timing of payments and consequences for non-compliance with terms and conditions. In short, your basic promissory note. If you are selling goods, file a UCC1 financing statement.  This gives you a priority lien against the property.  If it is service, the lien, then being more general would apply to all personal property owned.  It won’t collect the money, but it will give a priority in the event things go bad.  The key is treat the sale and thus the financing contract as if it will go bad.


You have now made your first credit sale.  You are armed with your first promissory note.  Your first payment is 30 days away.  So, we done for the day?  When I started a business many years ago with my two brothers, Scott and Dave, we wanted to be real estate developers.  We started with a couple of unfinished houses, some land  and one complete home on the beach on East Broadway in Milford, Connecticut.  We had a tenant.  Brian was his name.  Dave was in charge of billing.  On the first of the month he pressed the button, an invoice was produced, a stamp licked and Dave would say, “I’m done, let go to the bar.”

The initial contact is before the payment is due.  As soon as the deal is consummated, your credit manager gets on the phone, email, text, smoke signal and asks the question of the new customer; “Hi, I’m Paul.  Welcome to the family.  Is everything alright?  Anything I can do to help.  And oh yeah, your first payment is due in 30 days.  Want to set that up now?”

Remember, it is your money.  They borrowed it.  Eyes wide open.  It isn’t being disrespectful.  It is business.  Feel uncomfortable?  Set up a separate entity.  Can’t, don’t have time, you can hire M3 to run your bank – for a fee of course, but a fee like paying your credit card processor.  Not a collection fee, but a money management fee. M3 can handle your money.  We can ensure that you get paid, because in order for all this to work, you are going to have to fund it.  This means that the money that you normally would have collected from a A/R conversion at the door is now being carried over an extended period of time.  How do you pay your bills?  How do you buy more material?  Simple.  You borrow.  That is what a bank does to meet their needs.  And you borrow at a lower rate than you loan it out.  This is how a bank makes money.

In the model I describe, you gain only the profit from the markup of credit, but you are selling where you normally would not.  You are providing credit in a market where none exists.  In that tight market, banks continue to operate.  They look to better customers.  Your credit policies, you management of credit   give the bank what it needs to continue to loan.  You have collateral – the accounts receivables of your sales.  And you have the process to convert and collect.


Continue to bill monthly.  Keep you finance customer in the loop – informed about what they owe and when they owe.  Get on the phone, and stay on the phone.  Be involved with the customer.  Know what is going on.  Update your files with ongoing changes in their business.  Be informed about your customer.  Stay in touch.  And do not be afraid to escalate to legal collection process (UOARM) when you have reached the point of no return.

NO file should ever go past 90 days.  91 Days is a referral to collection.

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