Today I want to talk to you about why you should now be seriously thinking about expanding your business. People often say that timing is everything in life, and it’s true. Everything else being equal, timing can often play a crucial role in success or failure.
A good example of this was when the Trump Organization got caught on the wrong side of the asset cycle in the early 1990s. At that time, the market had turned negative and real estate values were falling. We were obligated on some very high notes with values that were underwater with no hope of the market returning in time. Among other factors, our timing in that market was just bad, plain and simple. The numbers for our liabilities were huge and many people thought that we wouldn’t survive, and quite honestly, I didn’t blame them. But as you probably know, that’s not the end of the story.
What did we do? We looked at the situation in its totality, and ended up having to think of some very creative financing solutions to the problems. You see, we decided that we did indeed have a card to play that was directly related to our own bad timing and the banks’ poor situation. And guess who helped us? The same people who held the notes—that’s right; the banks.
Why did the banks agree to help us? Because they knew as well as we did that they were going to be hurt very badly by the market situation, as were we. So they helped us; what else could they do? They had nowhere else to go.
Now I’m not comparing the situation today with the one then, but I am saying that for those of you in a position to take advantage of the current economic and financial situation, there is some tremendous opportunity today. The banks are in a different situation today, but you still have some cards to play if you are interested in expanding your business.
This is especially true if you are a business owner with, say, $10 million or more in annual revenues. If you fit that description, then in many ways, the timing is perfect for expanding. Granted, in a booming economy, many businesses can grow organically, by just continuing to do what they do. But you can also buy growth by acquiring companies, and it is in acquisitions where I see tremendous opportunity. In a down economy, many businesses are on sale, so to speak. That is the case today. You can buy high value for low prices, and that’s always a smart move.
Falling Real Estate and Lots of Cash
Why do I say this? Because it’s true. Like the early 1990s, we are in a very negative real estate cycle right now. There is over $150 billion in outstanding, interest only commercial loans throughout the country that were taken out in 2007 with 5 year balloon payments due this year. Of course, 2007 was the high point for real estate values, so those banks have choices to make…either foreclose on the properties and have their balance sheets ruined or renegotiate the loans. Of course, they will have to work with the borrowers to restructure the debt.
I bring this up to point out that many banks are simply incapable of making any new loans in the real estate sector, and yet, they are required to lend to stay in business. Many of the largest banks received enormous amounts of cash from the government to help them recover from the residential real estate meltdown, and so are loathe to venture into the real property lending business right now. But yet, they have all this cash. What do they do?
Here’s what they are doing: They are looking for business loan candidates in a very big way.
A Slow Recovery Means Less Competition
Why would the banks be in a hurry to lend to businesses? The last few years have been very difficult for real estate investors and the banks that backed them. Why lend out money now? It’s really very simple; it’s one of the few lending areas that is making money and is relatively less risky. In a nutshell, business lending is not real estate lending, which the banks are very wary of; and today, that is a big advantage for businesses of the right size.
And as I mentioned above, the banks have an awful lot of money just sitting around earning almost nothing. That isn’t banking; nobody makes any money that way. How bad is it? Banks are now charging effective negative interest for accounts on deposit, even though in many cases, few or no services are being used. Why? Because they need the fee income. But also, in many cases, banks are under obligation to take more federal money as a condition of their earlier bailout, so they really need to get that capital working for them.
Another part of the equation is the very slow recovery of the economy. Are we in recovery? I think we are, although I don’t think that the economy will be anywhere near it was for several years. The fact is, many businesses have failed in the past three or four years due to a very weak economy, and others will fail as well this year. That has been a horrible reality for many business owners, and it’s a shame to see, but it does give those who are still in business an advantage. Frankly, it means that for those of you still in business, there is much less competition.
Take the Banks’ Money
Throughout my career as an investor and an entrepreneur, finance has always been an integral part of every deal. Getting financing can be difficult and expensive. But today, if your business is around $10 million or more in revenues, you have a very good card to play. The banks need to make loans to viable businesses; now is your chance to get the money you need to scale your business up on some very favorable terms. Not a bad card to have in your hand. That way, when the economy recovers, you will be in a great position capture even more business with your greater scale. And as interest rates rise, which they will, your low financing rate will look like the smartest thing you ever did. And it just might be.
All the best,