A friend of mine who is not a banker, yet has been involved in the financial world and is an educator made this comment to me. I think it’s great and worth sharing.

The quote has to do with predatory practices, and with the financial reform taking place, predatory lending is a focal point.

‘I hate the word “predatory” with anything related to economics, as it sort of absolves the “victimized individual” of responsibility for being stupid…’ MW

Predatory lending has a hype factor built into it as well. Lack of knowledge though is the real culprit; that’s why I’ve written “Barking With The Big Dogs”.

While driving home, I heard a typical hyped up debt free commercial.  The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices.  First, live with relatives, who bought a home.  However, did they have to get a loan to buy the house?  Second, rent.  Renting is not always a bad idea, just as homeownership is not always a good idea.  Both scenarios have pros and cons.  Third, buy a house.  Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage.  Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving  232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well.  If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan.  Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages.  Mortgages have pitfalls as we all know, but provide benefits.  The benefits are not just the ability to purchase property, but can increase wealth as well.  Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

I was going over the financial feasibility study with a client today. When the conversation turned toward financial ratios, I brought up return on equity as I usually do.

However, something eye opening hit me during the conversation.

Before I talk about my discovery, let me mention topics we hit on first. You’ll want to pay attention this today if you are interested at all in making money on your investments, etc. If not, both  you and future generations to come will miss out too.

When determining if the business was worth doing, we looked at cash flow. Cash flow statements are very easy to understand and it’s this simple…money coming in versus money going out. You can look at a personal checking account just as a business looks at their statements.

Next we discussed income statements. Income statements show business the items such as depreciation of assets on and other tax write-offs which reduce the taxable amount of income. The income statement, however, does not affect cash flow – money spent does. The income statement gives an idea about the net profits which are taxable.

From there, we reviewed return on equity. A difference between return on equity and return on investment is different, but in short, the return shows how hard the money is working. In just a minute, I’ll demonstrate some simple math; but first, let’s look at the Rule of 72 as it relates to how hard your money is working.

The Rule of 72 will tell you how fast the money will double in value.

To figure the time, you will only need the calculator between your ears. If you know the rate of return, which is mentioned on the feasibility study ratios page – or a CD at the bank, simply divide 72 by that number. The answer will be the number of years for your money to double.

For example, if you earn 6%, take 72 and divide it by 6. The answer is 12. Your money will double every 12 years.

Now comes the eye opening part.

I was looking at a money market account paying .01%. That’s right, 1/100th of a percent. At this rate, money will double every 7,200 years!

Without reinvesting the interest earned and simply setting it aside, in order to double the money, 11,920 years will pass.

Looking at interest rates on CD’s at .25%, which are not uncommon rates, money will double in 288 years. Can you and your family wait this long? Mine can’t.

Don’t blame banks for offering low rates, there is more to the story and you can read about it in “Barking With The Big Dogs” which is soon to be released.

I tell clients all the time when starting a business, find the money first before signing any contracts. As much of a “no-brainer” as the previous statement seems, it happens.

I know people who paid rent for six months before getting the funding for their business. Fortunately, the time was only six months.  Could you imagine being in a contract for three years at $1,500 per month without a business? You would be out $54,000!

Before getting the keys to the property, first do a business plan so see the feasibility of the project. Next, find the money.

When finding the money, where do you look?

As I’ve stated before in my article, “Why Small Businesses Can’t Get Loans“, only about 4% of money for start up business comes from banks. Some of the big banks (such as Bank of America as I am told) have blanket policies not to lend to start up business. Wells Fargo had an advertisement talking about new business owners having friends around in the beginning, but now the people are gone and Wells Fargo is there to help. Is this a way of Wells Fargo saying they don’t lend to start up businesses?

Some banks won’t make a commercial loan for under $200,000 as well.

When a bank doesn’t lend to start up businesses, this practice may be their policy; however, if the project is good enough, the bank can seek the backing of the SBA and still do the loan.

The SBA (partially) guarantees loans to bank. The idea is when a loan falls outside the banks normal lending practices and/or the client cannot get money elsewhere, the SBA comes in to help businesses get the funding. The SBA has been called “the lender of last resort”.  Businesses do not deal directly with the SBA.  However, the ultimate decision still rests upon the bank.

So where does the money come from?

55% – your savings

10% – relatives

7% – partners

6% – charge cards

4% – venture capitalist

3% – friends

3% – Angel investors

3% – mortgage property

5% – other

Now consider grant money.

Grant is money that does not have to be repaid.

Most grants however require matching funds meaning the recipient also has to come up with funds in addition to the grant money they are receiving.

Grants are usually available through public or private community foundations primarily granting monies to not-for-profit agencies and rarely, if ever, grant money to for-profit businesses.  The grant money for small business may come in the form of assisting you with help and education, not direct funds.

WATCH OUT FOR GRANTS – some grant wording changes throughout the conditions to terms such as – grant – to loan – to equity position.  In addition, to satisfy the conditions of a grant, you may have to spend the money received to do so, thus netting you no additional funds to operate.

When getting help from the government, there’s one thing you need to know right up front about getting money from the government…

They don’t have a single dime to directly lend to you for the start-up of a small business.

You may believe this statement to be untrue because of the way the term “government loan” is thrown around, and we hear about government loans all the time.  (Refer back the the SBA.  The bank is the SBA’s client, not the business.)

The bottom line is there is no direct money.  But that’s okay…

If the government had to give money to any American who wanted to start a business, just imagine how much money they would have to collect in taxes to fund such a program.

Besides, a capitalist system works best when the government uses a hands-off approach with regards to the competitive market system.  Having the government choose who gets funded and who doesn’t is socialism not capitalism.

Finally, getting a funding may not be as difficult as it sounds because money is out there.  If you have a good plan, collateral, credit scores, etc., you can find money.  However, be prepared to face rejection and get creative if you decide to follow your dream.