Do Interest Rates Really Matter? | LoL #13

 Gemini Summarize this folder Analyze each file in this folder What can Gemini do with folders in Google Drive Sales pitch ideator Create compelling sales pitches that resonate with your audience and drive conversions. Learning coach Here to help you learn and practice new concepts. Tell me what you’d like to learn, and I’ll help you get started. Sentiment analyzer Analyze customer feedback to reveal trends and make recommendations. Your Gems will appear across Workspace Gemini in Workspace can make mistakes, so double-check responses. Learn more 00:00:00:05 – 00:00:17:14 Steph You know, I think about this topic is no business and no individual should ever be at a point of do or die. Given one factor, it should never be or die based on rate. It should never be. Do our die based on the cost of labor. It should never be, do or die based on the cost of inventory. 00:00:17:15 – 00:00:42:18 Steph If you’re so fragile that one of the metrics in your business can put you out of business, you as a business owner and as a human being, everyone should be nimble. Everyone should operate with the ability to evolve and pivot and every, everyone’s, every business. So I think that the the topic of interest rates should not be the, the sole factor. 00:00:42:18 – 00:00:44:14 Steph And if your business can survive or not. 00:00:44:16 – 00:01:02:13 Shane It’s all it makes me think is if you’re a business owner, look at yourself like a bank will look at you. What are my five strengths and five? You know what? Where am I at in those categories of cash flow? Collateral? Like what? All you’re doing is talking about your balance sheet and your PNL, right? So know your balance sheet, know your you know, how am I doing managing my business? 00:01:02:13 – 00:01:18:01 Shane There’s your character. Am I up to date on my debts? There’s your credit. Right. So like you’ve got all of those and then capacity. Do I have enough to survive if crap goes sideways, right. I think that kind of like lives in that same role. So all of those what we’re looking at and we just use stupid acronyms. 00:01:18:01 – 00:01:35:05 Shane In other words, it’s it’s the same thing that you should be doing when you’re measuring your own success. How great am I doing this? How am I how well am I going to be able to survive any type of downfall that comes, whether economic or something? In my industry or something in my geographic market, whatever that might be. 00:01:35:07 – 00:02:02:03 Shane All right. Welcome back to Lords of Lending. I’m Shane Pearson with Stephanie Dunn and Brian Conjola here. Hello. Good people. Very excited. Yeah. We’ve been talking for way too long already this morning. But we’re actually today tackling the question that I think every owner is asking. And that is do I wait for cheaper money or do I move now what we’re talking about is in reference to the interest rate and the fact that the fed might cut rates in this coming month, 2 or 3 weeks. 00:02:02:03 – 00:02:17:13 Shane How far are we guys? I don’t know, somewhere mid September Steph is going to talk to us a little bit more about some of her perspectives on how this SBA loan program is impacting our industry, but also, the general small business population. So go ahead, Steph. 00:02:17:15 – 00:02:48:20 Steph I’m an entrepreneur. I want to own a business. What do you recommend? Well, as lenders dealing with the environment that we’re in, tightening scrutiny, prudent lending by an existing business that has three plus years of cash flow, but also be mindful of did it cash flow when interest rates were high? Not only when interest rates were low, like, can it weather the interest rate environment shifts because this is not the first and not the last time that interest rates will have. 00:02:48:20 – 00:03:20:16 Steph Great. Okay, so is this business interest rate proof? Number one. Number two, do you have the operating experience to buy that business and transition into that ownership? And number three, I would say for me personally, I would tread lightly in the startup space. Yeah. And if you’re in the startup space, I would say the only way that you could probably weather that startup space would be bootstrap. 00:03:20:16 – 00:03:24:08 Steph It. Don’t borrow too much money at the beginning. 00:03:24:10 – 00:03:25:01 Shane Of it. 00:03:25:01 – 00:03:31:07 Steph Year, and make sure your debt to net worth is, well under one. 00:03:31:09 – 00:03:49:07 Steph One times debt to net worth. It’s that old age old takes money to make money. Well, it takes money to start a business. Yeah. And so I can’t tell you how many times I get a loan application for someone who wants to start a business, and they don’t have any money in the bank. 00:03:49:09 – 00:03:55:04 Shane Yeah, it’s a short end to the conversation when you get to that point. Right now. 00:03:55:09 – 00:04:08:16 Steph That is a recipe for disaster because then you know what that tells me? There’ll be chasing NCAA debt and high interest rate credit card debt here in the next 12 months, because you need money for operating capital. 00:04:08:18 – 00:04:30:17 Shane Waiting for a rate cut, in my opinion, is like sitting at a green light, waiting for the gas price at that corner gas station to go down, and you’re blocking the freaking road. Traffic needs to get going. You need to get going. You got to put your foot on the gas. So today’s topic is to kind of circle around interest rates, the impact that it’s having on our industry, the impacts that it’s also having on you as a small business owner. 00:04:30:19 – 00:04:58:00 Shane And I think that the the more that you begin to look for what other forces are impacting your business, the more you realize that these, what the media is sensationalizing doesn’t actually hold you back that much. So Stephanie’s going to start us off with with some points that I think are a great fit for, understanding what the way that we look at that, at these, at this particular interest rate change, and what impact it has on us from a lending perspective. 00:04:58:00 – 00:05:02:11 Shane Also, just like the true numbers that hit your bottom line. 00:05:02:13 – 00:05:25:14 Steph Well, it’s interesting, this whole topic is interesting because we all talk about external factors in our businesses, right? In in lending business, for myself and as small business owners, we talk about those external factors that quite frankly are outside of our control. So external factors will always exist in the room, will always be external factors that are a part of our daily lives. 00:05:25:16 – 00:06:02:15 Steph So does that hold us back from to your point, getting to where we need to go while we drive our car? No, we still should stay disciplined to getting to where we need to go as business owners and as lenders. But the key to navigating external factors is understanding data behind the industries that we’re living in, and the real metrics in these small businesses that we own and the communities that we thrive in and understanding historically, where we’ve been over the last five years and where we need to stay focused and where we need to go over the next, the future. 00:06:02:17 – 00:06:33:08 Steph And so I think the golden nuggets for us is understanding the key components to entrepreneurship and success is the all of the metrics that we’ve talked about on a daily basis, understanding the business you’re buying, navigating start ups with caution. It takes money to make money, have have cash in the bank to be able to navigate these external factors and then really understanding those metrics going forward. 00:06:33:10 – 00:06:48:17 Shane Well, Brian, my question goes to you then what? And this could almost sum up the whole freaking episode is what is the actual impact of a 25 basis point cut that the fed might put into play on, let’s say $1 million loan? 00:06:48:19 – 00:06:49:11 Brian Very small. 00:06:49:11 – 00:06:53:10 Shane Not answering. I’ll give you the math. Okay? I’ll give you the math so you can respond with me with the answer. 00:06:53:10 – 00:06:57:07 Brian Okay, I’m gonna bring my calculator out over $1 million. 00:06:57:09 – 00:07:01:11 Shane Ten year term, about $140. 00:07:01:13 – 00:07:05:23 Shane That’s the difference in rate. Let’s double check my math to make sure that the GPT wasn’t lying in. 00:07:06:02 – 00:07:37:22 Brian And on a 25 year loan. It’s even less than that. So yeah, I think waiting to get in the game until those rates drop a little bit more. At this point, you know, where we’re at, generally speaking, most people that I’ve watched, most, folks in the finance industry would say that we’re probably maybe we peaked as far as rate goes, and then we’re starting to come back down and that those rates are expected to drop. 00:07:37:22 – 00:07:57:14 Brian I mean, the, market is generally expecting rates to drop in September and probably continue to drop a little bit more throughout the rest of the year and into next year. So I think it’s safe to say, based on all of that analysis, that other people who are way smarter than me have done, that we’re going to be experiencing some lower rates. 00:07:57:18 – 00:08:26:09 Brian So I think with SBA loans being that most of them are tied to a variable rate based on the Wall Street Journal Prime, you’re going to get the benefit of those reduced interest rates, whether you get in the game now or whether you wait. Folks who are looking for more of a fixed rate, obviously, that can play against you in a falling rate environment, but even still, probably not that much. 00:08:26:11 – 00:08:59:00 Brian Based on what you could get today versus what you’ll get in another year from now. So like Shane was illustrating the difference between, ten year note, 25 basis points higher or lower is not going to be that significant, a four percentage point lower. You know, that might be slightly more significant. But even still, I mean, maybe you’re talking 5 or 700 bucks a month on a ten. 00:08:59:03 – 00:09:07:02 Shane In a month. It’s like $150, man. 150 bucks across. Both plan like ten year or 25 year. 00:09:07:04 – 00:09:34:17 Brian So it’s not even that significant now at the end of the day. So I don’t think the rates should be an impediment to getting into something right now. I think that the bigger calculation is more like what Steph was saying. Am I doing a startup or my buying an existing business? Does a business already make money, or do I want to strap this business with instant monthly obligations to pay a loan back before I even started making money with it? 00:09:34:19 – 00:10:16:12 Brian I think that’s what a lot of what I’m looking at in this data is showing, is that my hunch is that a lot of the defaults we’re seeing were from poorly underwritten loans for startup or new businesses who didn’t quite have these things figured out. They didn’t quite have their money making mechanisms figured out, and other businesses who were already in business who are still kind of like we’ve talked about in previous episodes, struggling from Covid, dealing with other debt, having to refinance debt, get more money to try and grow, and then not understanding how to actually capitalize on that injection of capital into their businesses. 00:10:16:14 – 00:10:32:11 Shane So the word is, I mean, don’t chase the rate. You got to really optimize your structure. That’s the that’s where all of this goes, is understanding all the different elements of your business. And, you know, as we’ll talk about throughout this episode and, you know, you’ll get into this is understanding. You need to know the different elements of how your business is run. 00:10:32:16 – 00:10:55:05 Shane And that should be impacting your decision today, more so than one thing that’s being sensationalized by the media, as though it’s going to change the world. And the stock market’s volatility around that is being driven by algorithms. When all of a sudden ton of algorithms that are watching the news and playing on people’s emotions. So don’t use the stock market, don’t use interest rates to govern how your day to day business runs. 00:10:55:06 – 00:11:17:11 Shane Figure out what the heck your pulse looks like, what actually is going on in the day to day operations, and work on your business. Don’t let your business control you so I think the ones, Brian, you brought up an example or you’re you brought up an example, Brian, about how, you know, you spoke to a small business owner that couldn’t answer some very basic questions of us trying to figure out what’s your business? 00:11:17:11 – 00:11:29:06 Shane Health. And I think that’s that’s the difference between the borrower who can knows how to use debt for growth, and those that are trying to use it as a lifeline. And if anything, it will really bury them. 00:11:29:08 – 00:11:53:00 Brian And that’s, that’s an indication of in general, small business owners. Yeah. He’s not an isolated person. He’s he’s kind of the representative of probably the majority of small business owners that we are trying to lend to, which is why it makes it so tough. And that’s a large reason why people fail at getting loans, because they are not prepared. 00:11:53:02 – 00:12:06:11 Brian They don’t understand what goes into it. And so therefore they don’t get the results that they are seeking because they haven’t been able to prepare themselves to get there in the right way. 00:12:06:12 – 00:12:26:22 Shane Also. Then quick step my maybe my question to you there will be like, what is the cost of waiting because of something like that? Like what what, what impact is it having on someone’s business if they have been sitting on the sidelines waiting to make a move, waiting to buy that piece of equipment because they fear the debt interest rate that they might take on. 00:12:27:00 – 00:12:39:03 Shane So, Steph, my next question is to you what what could waiting actually cost me as a small business owner as opposed to moving? Now? 00:12:39:05 – 00:13:16:13 Steph I would say timing is everything. I wouldn’t put the pressure on anyone to feel that I need to get in now. Like now I need to hurry up and get in. I think everyone, everyone needs to be cautious about debt. Everyone needs to be cautious about debt, and everyone needs to be responsible when borrowing money. And I think we really have to do those hard internal evaluations on how much is my what is my debt to net worth, how much leverage am I really putting on this family? 00:13:16:15 – 00:13:43:05 Steph And so I would say timing is everything in terms of it shouldn’t be a race, it should be. It’s not a sprint, it’s a marathon. And I think, interestingly enough, as we talk about this topic of interest rate, 1 or 2% fluctuation, either way shouldn’t make or break anyone. It shouldn’t make or break your home mortgage payment, and it shouldn’t make or break your business mortgage payment. 00:13:43:06 – 00:14:16:23 Steph I my theory over the last five years actually and this could be our next topic has. The question in my mind is are we overpaying for everything? Did those businesses the last five years and the businesses that are for sale today that I feel rushed to need to hurry up and buy? Is it overpriced? My theory is I tend to lean more towards thinking everything’s been overpriced the last few years, and so I don’t think the pressures have solely been these interest rate hikes. 00:14:17:00 – 00:14:42:16 Steph I think we’re paying more for stuff than we should be paying. And so when it when it comes time to thinking about your timing, look for those acquisitions that are priced fairly and correctly and don’t necessarily take the comps as the the correct timing basis. Right. Because I think everything’s been overpriced. 00:14:42:18 – 00:14:59:01 Shane So don’t buy the hype, don’t get sucked into the hype. Everything is a freaking hype these days. Yeah, Instagram owns the hype world with every influencer that’s out there trying to sell you some new course, some new idea, some new philosophy on hurry up buying the business. Yeah, it’s. 00:14:59:06 – 00:14:59:16 Steph It’s I. 00:14:59:16 – 00:15:22:06 Shane Think it’s, it’s it will cause it it will cause you more. Hell if you don’t actually take the time to to be methodical on how you approach that. Granted, you’re talking to the guy that doesn’t like to wait. Brian knows this. I’m, I’m I’m one who goes in and has to clean up the collateral damage. A bit later, and, I call it. 00:15:22:10 – 00:15:41:17 Shane I’m going to rip this off from that Will Smith’s movie. The collateral beauty of it all, all the ugly that I created with my going too fast. Because eventually you get to the finish line. But holy crap, I screw a lot of people up. But, go with that a little bit. But I honestly still think that delay is it’s one of the most expensive line items that that really doesn’t show up on a panel. 00:15:41:18 – 00:16:03:20 Shane I don’t I don’t like how people I don’t like just waiting for the sake of waiting. And I think sometimes that hurts me. But other times I think within business and the ability to execute on decision and entrepreneurship in general, it can be a superpower if you know how to execute, if you know how to just get out and make a freaking phone call and sell instead of thinking about selling or trying to find somebody else. 00:16:03:20 – 00:16:11:14 Shane No, no, no, just go do it. Do the hard work. Be the make the uncomfortable decision and then let then figure it out as you as you’re in motion. 00:16:11:16 – 00:16:40:20 Brian Well, I think what you touched on there, Shane, is Yeehaw. Fail fast, test and fail fast concept where when you’re in business, you really need to focus on testing your hypotheses constantly so that you can be getting data and getting that feedback so that you can then make more informed decisions, you know, in, in tracking all of that stuff. 00:16:40:22 – 00:17:05:07 Brian So I think that that’s extremely vital for a business to understand. Those sorts of metrics that you’re talking about, stems from that. It stems from that concept of, hey, I got to test this out. Should we raise our prices? I don’t know, let’s try raising prices on these five things or literally raising prices for the next two weeks and see what it does. 00:17:05:09 – 00:17:23:06 Brian And if that if we still see, you know, the same level of demand, we haven’t seen any decrease. Okay, maybe we’re good, maybe we can raise them more constantly testing hey, is this marketing working? I don’t know, let’s test it out. Let’s run a thousand and see what we get back. 00:17:23:08 – 00:17:41:12 Shane Well, if you’re chasing a quarter point interest rate at this point, you’re chasing $150. Is that worth waiting or can you get out and go make two sales and make up that income just by making a phone call. All right. Like that’s, that’s that’s the difference when all is said and done and getting out there and just trying something different and seeing what the impact is. 00:17:41:12 – 00:17:43:02 Shane So now you I think you nailed it. Right. 00:17:43:04 – 00:17:50:14 Steph Well all right. Well if you haven’t feel it because of $150 difference, you have a more fundamental issue with that business. 00:17:50:16 – 00:17:58:21 Shane Preach, sister. That’s it. All right. We’ve had a great discussion today. If you like what we said so far. Be sure to follow and subscribe. Steph, finish this up. 00:17:58:22 – 00:18:23:21 Steph But all this stuff guys, has been fired up. You know what? I think the future of small business lending is. We’ve come 180. It will be being prepared. Okay, so this was the the end of it okay. So my closing remark is the average American household is at a record debt. Thanks for tightening. Uncle Sam himself is paying more on the federal debt than we are on defense. 00:18:23:23 – 00:18:48:11 Steph How scary is that? What does this mean for you? It means resilience is everything. If you run a business, you can’t wait to see what the fed does. You need to be proactive. Model both scenarios, get bank ready, position your company to weather high rates and low rates, but be able to move fast when cuts do happen. Because this environment, the winners aren’t those who can borrow. 00:18:48:13 – 00:18:53:02 Steph There are those who are ready when the money is available. 00:18:53:04 – 00:19:08:11 Shane Stop staring at interest rates and look into your business and figure out how to actually get it moving. Today. Put your foot on the damn gas and drive through the green light that’s been sitting there for the last year and a half, and everyone’s blown past you. 00:19:08:13 – 00:19:15:19 Steph As you waiting opportunity. Are you ready? Once opportunity presents itself. 00:19:15:21 – 00:19:19:14 Shane There it is. Ladies and gentlemen, thanks for tuning in to Lords of Lending. See you next time.