233. “Debt and Leverage” with Emily Reeves

Dawn talks with Emily Reeves, VP of Capital Solutions at Bridge Marketplace, about when debt and leverage make sense for businesses doing roughly $100,000–$500,000 in revenue and why founders either avoid debt or take on harmful “easy money.” Emily explains how loan pricing reflects risk, contrasting hard-to-get bank loans, SBA loans (cheap but heavily collateralized with personal guarantees, spouse guarantees, liens, and long-term consequences), and higher-cost options like merchant cash advances that can effectively reach 100–200% APR. They discuss asset-based lending tied to receivables, inventory, equipment, or real estate, the importance of knowing your numbers and having a clear use for funds, debt service coverage ratio, and how tighter lending has fueled private credit. Emily also covers preparing to borrow proactively, what happens in distress (workout departments), and considerations for buying businesses, including seller financing and lending based on current—not future—value.

In this episode....

Who is Emily Reeves and whom does she serve? (01:09)

Why Owners Fear Debt (01:50)

Easy Loans Trap (02:58)

Risk And Pricing Basics (04:00)

Bank Loans Reality (04:25)

SBA Loans Fine Print (05:45)

Beyond SBA Asset Lending (09:52)

Equity Versus Debt (10:56)

Bootstrap Or Big Raise (11:44)

Know Your Numbers (12:36)

Proactive Debt Strategy (14:35)

How Lenders Underwrite (15:45)

Debt Service Coverage (16:42)

Assets When Unprofitable (18:00)

Two Camps On Leverage (18:31)

Banks Tighten Up (19:18)

Private Credit Boom (19:56)

More Diligence Needed (21:02)

Founders Know Numbers (21:11)

Preparing For Debt (22:40)

Finding The Right Lender (23:31)

When Business Hits Distress (24:31)

Workout Departments Explained (25:27)

Shame And Support Resources (27:15)

Buying Businesses With Debt (30:16)

Seller Financing Reality Check (32:40)

Where To Find Emily (34:31)

Emily Reeves’ Info:

LinkedIn: https://www.linkedin.com/in/emilyelizabethreeves/

Website: www.bridgemarketplace.com

Transcript

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Dawn Kennedy: 0:03

Welcome to Business Mastery with Dawn Kennedy, your quick under forty five minute dose of expert insights and strategies to make a positive impact on your business and life. Let's get started. Hello and welcome to this episode of the Business Mastery Podcast. We are diving into everybody's favorite topic debt and leverage. And when it makes sense, financing and all the things. So I have Emily here who has years and years of industry experience in this realm, and we're going to be talking about all things debt and leverage and when it makes sense. So thank you so much for being here with me today.

Emily Reeves: 0:40

Of course, this is truly one of my favorite topics. I do think when you start talking debt and financing to founders, it's the last thing they maybe want to think about. It's certainly the least exciting a part of running a business, but it's probably one of the most important as well. So I love chatting about these things. I've been in finance now, I used to say for a decade, and then you actually do the math and you go, oh, it's, oh, it's been longer than that. So it's a very long time now.

Dawn Kennedy: 1:07

Can you tell everyone who you are and who you serve?

Emily Reeves: 1:09

Yes, absolutely. So I'm Emily Reeves. I am the vice president of capital solutions here at Bridge Marketplace. We serve all businesses, companies doing one hundred thousand dollars a year to companies doing five hundred thousand dollars a year. Largely, we specialize in inventory financing for suppliers in big box retail. But I have worked with every kind of, you know, business there is, from people paving asphalt parking lots at Lowe's to staffing companies alike to even these really cool consumer packaged goods companies you've seen on shelves at your local Walmart and Costco.

Dawn Kennedy: 1:44

Amazing. All right. So you understand the ins and outs and the bits and the pieces. So let's just start with the question, why are so many business owners either so afraid of debt that they choke off their cash or so willing to embrace it that they end up out of business.

Emily Reeves: 2:02

That's a very good question. And I'll start with the first part of why are they so scared of it? Because there's been dozens of loan options in the market, whether that's invoice financing or asset based lending or SBA loans or bank loans or purchase order financing. But then on to that end, not only are there different loan products in the marketplace, there are different lenders, and each lender has their own credit box. And that's incredibly nerve wracking to navigate as a borrower. And that is why ultimately we built bridge. We have this really straightforward way of applying for a business loan, and we kind of match you to the best lender and the best loan product based on your company's makeup. That said, it's a shameless plug for bridge, but it does really tie into our mission statement there because getting debt is hard, it's tough to navigate. And even if you get a term sheet from a lender, who's to say that that's the right loan product for you or a good rate? It's really tough to navigate. And why do businesses take. Or why do some businesses take on a ton of debt and fail? Because they take the easy loans. I would say they take these merchant cash advance loans, that the sticker price is really hidden from them. They think they're paying forty percent Apr, and that's if they're smart and they're uploading things into ChatGPT and they can kind of see that sticker rate. But depending on when that loan is paid back, that might cost the borrower one hundred percent Apr or two hundred percent Apr. And they don't realize it, but it's very easy money to get. You can get that cash in a matter of a couple days, and business owners take it because they need to. And that is ultimately a big loan product that puts businesses out of business because they didn't take the time to navigate the market. See what loan options are out there, see what lenders are out there. Don't spend the time on it because it's not fun. It sucks. Finding debt does suck. It's not an enjoyable process. So we kind of go with the path of least resistance, but that doesn't really help us in the long term.

Dawn Kennedy: 3:51

Yeah, I mean, the easy cash, if you will, is the one that the other side is also carrying the most risk. So before we we go to more into this, let's talk about why there are different rates and why it takes longer to get some products than others. And just kind of kind of set the expectation that we all know the funding is not equal, but do we understand just where the extremes are and how they get priced that way? Absolutely.

Emily Reeves: 4:20

So pricing is typically tied to risk. So your lowest cost of capital right now, and I would like to say that's a bank loan. And bank loans do exist, but they are this magical mystical unicorn product that exists in the market. If you want to get a bank loan, hopefully you took out your first credit card with the bank when you were sixteen and in high school, and you've had your savings account with them for two decades now, and you've maybe financed a car and they have your mortgage and they know your collateral really well, that's how you're going to get a bank loan these days as a business with no existing relationship with a bank, unless you're really willing to bring some personal assets and some true, meaningful deposits. The bank's going to make more money giving you a credit card. The banks making more money right now on the cash that they have invested in the markets. So the bank is really not incentivized to cater to small to medium sized businesses because the risk is not worth the reward. They'd love to give Heinz ketchup three billion dollars to finance their business. A medium sized business that needs five million dollars. That's not going to happen because, again, they make more on their interchange fees. They make more with their depository accounts, cash being invested in the bond markets. So when the banks fall through and they really have significantly during Covid because things really change. Banks had a ton of money invested in commercial real estate. And when that market, the bottom fell out during Covid, banks had to really shore up their balance sheets because they were sitting on a lot of losses. And so who steps in the SBA to the Small Business Administration is a government guaranteed loan. And that's going to be your second tranche of cheapest capital. But again, that capital is tied to risk. So you have this very cheap cost of capital. How are they going to offset their risk? Well, they're going to collateralize this thing out the wazoo. I like to think that an SBA loan is really just a personal loan tied to your business, because there's a lot of things about SBA loans that business owners don't realize. Not only are you personally guaranteeing this loan, your spouse is going to have to personally guarantee this loan. They're going to want to see outside income on your spouse's side. They also put a lien on your house. So there's going to be a second lien on your house. Should you default on the loan, the SBA can go after your house. You're also going to have to get a life insurance policy for you and any other business owners that are guaranteeing the loan. So the SBA, yes, is guaranteeing it, but if you default, they have a lot of levers to get that money back. And you've now guaranteed the government in your personal loan that you're going to pay it back. And if you default, that affects a lot of things in the long term. You can't cosign for other government loans for your kids. So if they need student loans or things like that, if you've defaulted on a government loan, you're not going to get that kind of loan again. So it has major impacts on you as a borrower and your family.

Dawn Kennedy: 6:57

And I'm going to jump in here too, because I see the idol loans that were taken out with the loans back. And these have thirty year terms on them. So even though the cost of capital was like two percent or maybe even as high as for these SBA products have a thirty year repayment term, which is like, why kind of I think a lot of people took them. But if you didn't recover post Covid or you had to pivot or one partner's like, I'm out. Good luck getting out of that SBA responsibility because they will not let a guarantor off. So even if once one person says, I'm going to pay my half or I'm going to pay my twenty percent, they're not going to let you out. So that that's another piece of the SBA because they're guaranteeing that the bank will be made whole. Not that you will not fail.

Emily Reeves: 7:47

That's exactly it. That's exactly it. And you now have this loan for thirty more years. That could be some people for the rest of their lives, and you're stuck paying that and your spouse is guaranteed it. So if something happens, if your life insurance doesn't cover it, your spouse is on the hook or your house is going to be taken. And that's not to say that these are bad loans. They're not. But you need to know what you're getting yourself into, and you need to know what's important to you. And you need to know what you're signing up for, and I don't. There are some very good SBA lenders out there. We work with SBA products. We have lots of SBA lenders on our platform. That's not to say that they're all bad, but some aren't as candid upfront as to what to expect. So they give you this term sheet and they dangle this five hundred thousand dollars in front of you, which you don't really know what comes along with that. And by the time you do, it's a little too little, too late.

Dawn Kennedy: 8:33

Right? Right. And they are big loans. The SBA generally won't give you a ten thousand dollars or twelve thousand dollars expansion loan. I mean, they're going to be huge generally.

Emily Reeves: 8:43

Yeah, they're going to be sizable and they're going to make sure that your house covers that. They're going to make sure that maybe your spouse's income can cover the loan payments if your business doesn't. That's why they're looking at your personal financial statement. They want to see what other income is coming into the household. I can pay down their loan should the business fail.

Dawn Kennedy: 9:01

Okay. Okay. So the more expensive. So those are the cheaper ways to do loans and business. And those are generally priced lower also because let's put it in perspective, these businesses that are going for the bank loans have the tax returns. And they're looking for expansion and they're not in an urgent need typically for cash because the bank is not in the position generally of okaying loans for distressed businesses.

Emily Reeves: 9:31

That's exactly right. And to your point, again, you need three years of tax returns for an SBA loan. And if you don't, they love to do startup loans. They'll let you create this forecast and what you think the business is going to do. But if that doesn't hit the way you thought it would and your numbers, you're still on the hook to pay back the loan with a size in your forecast. So just something to think about. But to your point, there are more expensive loans in the market. It just depends on what type of business you have and what your options are. And really it comes down to assets. So if you don't have the cash flow to support a loan like you would need for a bank loan or an SBA loan or the personal assets to support an SBA loan, let's look to the business loans. Let's look to the business assets then. So what does that look like? That's accounts receivables. That's inventory. That's commercial real estate. That's equipment. You need to have some kind of tangible asset. Otherwise, what is a lender lending on when people love to say, oh, I had this government contract. The government has decided that they're going to pay me twenty million dollars over the course of six months. Six years. I need ten million dollars to start this because I have to hire my team and bring on the infrastructure. That's not how it works. You certainly need. So you get away from this cash flow based loans, and you move into this more asset based lending side of things. So that's accounts receivable financing. That's an asset based lending facility. That's equipment based financing. These are all obviously for existing businesses if you need a start up loan again, SBA cdfis no one else is really coming to the table with money. You really have to have some cash for your business to get things off the ground, or you bring on investors, and that's when you start to get into this equity dilution phase of things, which is okay, but that's probably going to be the most expensive money you give up not only if you should sell and exit, which is, I think, the goal of most businesses. You're also giving up a little bit of ownership decisions as well. So not only have you diluted your cap table and should you sell, the dollar that you took is going to cost you twenty dollars in the future, but you're now not the only person making decisions and who's truly, literally invested in the business. You have now this kind of business partner who's not there doing the day to day, but they certainly have something to say about the way you're doing things. And it's something to think about as you think about the cash that you need to run a business.

Dawn Kennedy: 11:41

Right? So why do you think that we end up in this place where. Because it seems like there's two schools of thought. One is take all the money up front, make all of the investments, and then you'll have this runway it's built and you're going to smooth sail. The other one seems to be bootstrapping. It's like when we get to this point, we might need some capital. And when we get to this point, we might need some capital. And when we get to this point, we might need some capital. So from your experience on both sides, is there any particular industry that you see leans more one way than the other people who are listening. Are there certain ways that people should do a business upfront? For example, restaurants generally can't open until they're inspected, meaning you have to buy the stove. You can't bootstrap the stove, right? Yeah. So but there are other places maybe where there's a time to take on debt that we're not as willing because we made it as far as we did bootstrap. Yeah.

Emily Reeves: 12:34

I mean, I think it's honestly knowing your cash position and your costs, like I think that there are and there's kind of this one school of thought, and I'd love to ask this when I'm interviewing candidates is you have two business owners. You have one business owner who is passionate about cupcakes. She loves cupcakes. They are on her socks. They are on like the decals of her car. She doesn't mind waking up at three a m every day to make cupcakes. She loves this business, but she hasn't really. She doesn't really understand the numbers. That piece isn't there. She doesn't really even know if the company is making money. Then you have another person who sells socks and he doesn't. He wears socks every day, but he's not incredibly passionate about socks. But he knows the margins. He knows the numbers. He knows what it sells for and what he can buy it for, and he has a good channel for it. What founder do you think succeeds? And people say the cupcake lady because she loves cupcakes and she's going, she's passionate about it. She's waking up every day to do it. I don't know, as a lender, you have to think. You have to take the socks, approach someone who truly knows the number. So to your point on a restaurant, yes, we need the stoves. Yes, we need the permits. Do you know what you're getting into? Do you know what your actual costs are? Do you know, like the timeline on things? Do you know the runway for permits? Like having a dream like this. I do truly believe I talked to so many founders about the American dream, where you can come here with nothing and build something, and there's a lot of luck along the way on that. There's also a lot of grit and understanding. No one just shows up and succeeds. You have to really put in the work on the back end. So as you think about bootstrapping things, yes, you've bootstrapped it to this point. Is there now a possibility that you can expand, that you can hire more to your team, that there's a true opportunity cost in taking in debt? And I think that's when debt makes sense. So is there something that you can do with this money that's going to help grow the business, or you think is truly like your debt is going to cost you X amount, but your revenue opportunity is Y and your gross margin is Z. That's how you have to think about debt is what is my opportunity here? Or can I borrow cash? Like don't, don't take debt to take out debt. Yes, it's good to have a rainy day fund and you never want to be proactive. You always want to be proactive with debt. You never want to be reactive. So you don't want an opportunity that hits you in the face, and two weeks later you need cash. That's when you get into that MC a world of things. That's where you're taking out cash. That's going to cost you, you know, two hundred percent Apr and you're not really thinking about that. Always know what's there in the market. Always know what you qualify for. Have a relationship with a lender should you need something. It's not a bad thing to have. Always be proactive. Know what you're using the money for. Don't just take it out just to have it for a rainy day. You can. Just depends on the way you're going to be charged. Don't take out an MC taking out cash flow every day just to sit on it. There's no point. You need to invest that in something. If you can get some type of, you know, again, even SBA loans, you're paying that back monthly. So if you really need to know what you're doing with that cash for debt to make sense.

Dawn Kennedy: 15:27

So yeah, let's talk a little bit about the reasons you would want to get cash. Like you were saying, are you growing? Are you investing? Are you doing things to grow the business? Right? And not just taking out cash for the sake of taking out cash? Can we talk a little bit about how the lender looks at something like a debt to income ratio in a business versus the personal finance where we've all, oh, I need to get a car. So I know the steps that I need to get a car, I need to save a down payment, I need to do this. And when I go to get the loan, I do know that, you know, they're going to look at the debt to income and my credit score. Yeah. Especially in the first few years of business before you've had your Duns number. I don't know if people understand maybe what that looks like to have a very heavily leveraged business upfront, or what that would look like to a lender. If you took out money and you were kind of using it, it was a rainy day fund, but it didn't have a purpose. How does that affect your decision making as a lender?

Emily Reeves: 16:26

That's a really good question. So whereas in personal side of things, you have debt to income. So it's how much debt does the person have? What is their personal financial statement look like? Lenders look at that. Certainly on a business standpoint, they want to make sure that people don't have this. You know, some lenders will look at it, some won't. SBA certainly does. But from a lender's perspective, for debt, you have something called debt service coverage ratio. So that's how much debt does the business have? How much income is the business generating and how much more debt capacity can they fulfill? And a typical debt service coverage ratio is going to be at a minimum one to one. Typically it's going to be one to one point two. Meaning for every dollar of debt you take out, you need to make a dollar and twenty five cents for a one point two five debt service coverage ratio. The lender wants to make sure not only can you pay your loan back, but you have some additional net income to cover things should something happen. There's additional net income if you are losing money. So if you have a negative net income, you really cannot support debt other than to just stay afloat. What is your cash runway. How? And that's where you start to get into, again, these MCA loans where you don't need to be profitable. They just care that you can pay the loan back in three to four months, and that's all they'll make there. They're totally fine with that because they've lent to enough people where they've made quite a strong return. And if you file for bankruptcy, you file for bankruptcy, and they don't really care. They've taken out your they've already made their investors money back and then some in the first couple of weeks on the loan. But the service coverage ratio is very important. But if you're not profitable, again, that doesn't mean all hope is lost. Many businesses are not profitable. That's very common to have a lot of cash burn. Lenders are going to look at equity investors that have already come in. Is there more cash to be invested in the business? Should we need to do a cash infusion or we look to assets, and that's where your AR and your inventory can be your best friend, especially if you're a goods based business. You can leverage your receivables or your futures payments from customers, your existing inventory or equipment to get a loan. You don't have to be profitable for those. You can get a certain type of loan using your assets as well.

Dawn Kennedy: 18:29

Right? But the goal at the end of this is to make the tweaks and the investments that you are, you're profitable, right? So the, the idea of using debt and leverage is something that I think, like I said, I think there's two camps. There's the business owners who would never want to be overleveraged or have a lot. And I happen to be in the very risk averse sort of side of things, although I have taken on leverage for expansion. And then we have the other ones that are like, you know, hey, listen, the purpose of business is to be able to continually reinvest and grow. So when you are seeing again, where the economy is now, how expensive things are, the fact that the banks are making a lot more money, not on interest in small loans, but in the bond markets, how do you see that affecting maybe the runway to apply for a loan or for financing? Or do you need more documentation? Are you looking for additional storytelling, if you will, with what you're going to do with that money? Or is it still you kind of like the risk hasn't changed that much, even though the rest of the environment has. It's just lenders are kind of moving in and out, but the business risk is pretty stable.

Emily Reeves: 19:42

You've certainly seen now that banks have tightened up on SBA is tightening, too. Now we're seeing lots of changes in legislation. You need to be used to be a green card holder. You now have to be a US citizen. So they're really pulling back as well. And that's opened up this private credit market. So private credit is just family offices that are willing to invest. They want to see a yield of twelve to fifteen percent Apr. And the lender then lends it at twenty four percent Apr covers their cost plus makes a spread, covers what have you. So private credit is certainly emerging in the markets. And you can Google private credit. And what's happening now. You're seeing a lot of funds start to implode because they started to just they had money, they had to lend it. No one else was lending to these businesses. Let's serve that. And we'll be able to, again, give our investors a really good rate of return. Twelve to fifteen percent is a really good number to get on your. But it's also very risky because you have these lenders now who maybe aren't doing the diligence that they're supposed to be. Because let's say you get one hundred million dollars to invest and you say, I've got to put it out there on the street. We need to get our fund has a certain requirement. They want to see X amount of dollars out. They want to see X amount of investment in. We're borrowing this. It costs us money. We need to get out there. And they do. It's very easy to put money out. It's not easy to get money back in. So you're starting to see some private credit start to implode. So you're going to start to see more underwriting requirements on these loans. So yes, more documents. Yes. More storytelling. Yes. More capable founders who really know their numbers. And that's probably the biggest key here is if I'm talking to a borrower and I want to give them a loan, and I have a question about their financials, if they can't answer it, that's a really big red flag to me. And yes, maybe you have a controller or a CFO who you brought on to the business. And that's really their main function is to know the numbers and to report things. But as a founder, you should still be incredibly involved for a multitude of reasons. One fraud, if you don't know what's happening in your business and your numbers and you can't point to it. It's incredibly easy for someone to start to defraud you, and we see that all the time. There's going to be an accountant who's worked there for twenty years, and she knows you have no idea what's going on. And she's known this for a very long time. And seven hundred dollars every month missing or every week is not going to raise a red flag to you. But also to that point, as a founder, the buck stops with you. You're the one who's guaranteeing this loan. And if you don't know what's happening in your business and in your numbers, and why your margins have compressed from sixty percent to twenty three percent over the last nine months, and you don't have a story for that, and you don't understand what's happening in your business. And if you don't understand what's happening in your business, how can a lender then have you expect a lender to come in and fund your business? You don't even know what's happening there. And that's really key. So that's where the storytelling comes in. And numbers tell a story. And if you can't answer and add an anecdotal kind of commentary on it, we're not calling the controller. When things start to go wrong to make us whole, we're calling the founder who's guaranteed this loan.

Dawn Kennedy: 22:36

Right? really great point. So being prepared to even start looking at debt and leverage means you need to have a plan and you should probably give yourself a runway. I do want to talk about the really fast cash needs or things that come up or opportunities that happen that have a very short runway like ninety days or something versus these bigger debts that we want to take on because we have a plan and we want to be able to expand and staff whatever. What is sort of the process that you recommend business owners do beyond the go grab the balance sheet, go, go, go grab the checkbook, the balance sheet, and the last for for tax returns. What is your recommendation to prepare to get debt and leverage when it makes sense to grow the business?

Emily Reeves: 23:29

Yeah, I think talking to lenders, like I truly think picking up the phone. Everyone's first inclination is calling the bank. And like the bank's not really going to give you money, but you can ask your banker for a recommendation. Bankers will have to go out to lunches. They get taken out all the time. They will happily point you in the right direction of someone. That can make sense. But do your due diligence, like get to know the debt markets. Get to know the products that are out there based on your business. There is AI in ChatGPT. If you talk a little bit about your business, it will give you some recommendations on things to do, like use your resources, don't be scared of that. Ask other founders in your space or other people in your industries what they've done, and get a feel for it. Because I guarantee you'll hear war stories and triumphs galore, and they'll be able to give you something there, but truly start to understand what the market is, what the market looks like, and what the options are that are out there. Get your financials in order, but truly know what you need the cash for because lenders don't want to just see their cash sit. That's how they make money. So they don't just want to see that you have one hundred thousand dollars of their cash that you don't have a balance on. They want to make sure that you know what you're going to be using the funds for.

Dawn Kennedy: 24:29

Right? So then the next question, and the one that I know a lot of people are probably probably thinking, and this is what happens if you do end up in distress, or what happens if you start to see things sort of wobbling once you are leveraged or you have debt? I want to say that a lot of people don't like to talk about it, or they're very ashamed of it, and I want to get the lender's perspective on how would you handle a business that was maybe heading into distress?

Emily Reeves: 25:02

Your lender is going to let you know. You probably know, you hopefully know you've hopefully seen it, but your lender is going to know they're asking for financial reporting. They're seeing how the loan is performing, they're seeing if you're missing payments or if you're having late payments. If you're with a bank, they'll see your cash deposits. They might see negative. Most loans have covenants. So if you're starting to trip your covenants, the banks going to let you know to that point. Lenders have workout departments for a reason. They have to work out loans. This happens all the time. You know, no one would ever think. In a perfect world, no one would have losses. But there are losses and they do exist. And it is always in your best interest. No one is immediately putting you into bankruptcy. I will say this no lender is immediately defaulting on your loan and taking you for your personal guarantee and going for the house and the car and the business. No one wants that.

Dawn Kennedy: 25:51

Say it again, louder for the people in the car.

Emily Reeves: 25:54

Yeah. That's fair. No one wants to take over your business. Trust me. Not a single. And it might be in their contract. You might see the lender can come in and take what have, you know, lenders in the business of operating businesses, they are going to work with you to the best of their ability and your ability to get this loan paid off. No one wants a loss. Your lender doesn't want a loss. You don't want a loss. Your lender does not want to sue you. It's probably going to cost them more to sue you and to exercise their rights to a personal guarantee than it would for the actual loan to be repaid back. So they're going to work with you. The operations don't just shut down, but in that case, your lender does become your best friend even then, because they are going to continue to support you through this workout, through this hardship. Everyone has the same interest in mind. You want to keep the business going. They want to see their loan be made whole. They don't want to see anything bad happen to you or the business. They're not going to get paid back. So they will continue to work with you and they will sort of tell you sooner than later. So very few lenders say, oh no, it's bad. We're done. It's no, we're starting to see these things. What's going on? What's the plan? But all lenders have workout departments. If they don't, that's where it gets. They don't you know, no lenders don't. Everyone has this workout plan. Everyone's done workouts before. Hopefully you never want to be a lender's first loss. If you are, they're not going to do it very well. So you should be okay, right?

Dawn Kennedy: 27:08

Yeah. If you want to use a lender with a little experience, right. You know. Right. Yeah. And the question on that also is, I mean, do you have consultants that you refer people to? Are there? So it's like if because it feels like a lot of times if your business starts to struggle, our very first instinct is to pull the head into the shell like a turtle and not let anybody know and not talk about it and it affects every area of your life. And I can't think of a single business that I am aware of or I've worked with, or I've even had myself that did not have that season where you're like the perfect storm of all the bad things came over. And sometimes it's unsuspected. Again, the pandemic is sort of that that really easy thing to look back at and say, I didn't have a choice.

Emily Reeves: 27:57

Or tariffs, you know.

Dawn Kennedy: 27:58

Tariffs.

Emily Reeves: 27:59

So many things that you can't plan on. And it's it's not personal. And I do think to your point, there is a lot of shame around it. Like, especially if it was like a family owned business or a business that the founder had purchased and things changed. Like you just don't really know what to expect. And until you're there to that point, there's so many resources out there. There are tons of fractional CFOs, but I think it's truly having an understanding of your business and knowing how and when you can pivot and like not falling asleep at the wheel, like knowing when there are challenges that are going to be coming and knowing how you can pivot and overcome, and the pros and cons of all of those. I think during Covid, everyone started making hand sanitizer. Great pivot, but everyone is doing it right. So what is that going to also cost? So just to thinking things through, having a plan, knowing that like the only constant is change and you're going to have to stay quick and nimble. And I do think having debt sometimes allows you to do that as there are new opportunities that come up, or there are chances to pivot and evolve as a business. It's going to have to happen. Kodak is no longer, you see it in big, big businesses and small businesses. Everyone has these challenges.

Dawn Kennedy: 29:03

I think you said something very important, though, and that it's not personal. For whatever reason. We tend to take business struggle as if somehow we're failing. And I think when you see businesses closing, we tend to pity the founder or feel bad or feel bad about ourselves. And in this debt and leverage conversation, I want to make sure that people understand that there are lenders who do not judge this as a personal failure?

Emily Reeves: 29:31

No, not at all. And no one does. I don't think that you look at the cupcake woman. Who should she go out of business? It's not a personal failure. It was just something that didn't work out. It doesn't mean that she didn't love it. And there wasn't passion and it didn't make her happy. And it wasn't the greatest couple of years. And she didn't affect joy in so many people's lives. But at a certain point, you have to ask yourself, what are the goals of this business for me? And are they aligned? Is this business that I have aligned with my goals? And I think that's a really key thing is, yes, my goal is to feed my community and to take care of people. My goal is also to keep a roof over my kids head, and my goal is to keep this thing going in a really sustainable way that makes me money. And if it's not, is that actually aligned with your goals?

Dawn Kennedy: 30:12

Right, right. So one other question about the debt and the leverage. From your perspective, buying and selling businesses are those things that we should also be thinking about as far as debt and leverage goes, because I've heard it on both sides where, well, if you're buying something, you should use. Owner financing, which may not be easy to do or practical for everyone or it's well, get the SBA loan and just buy the business. It already exists. It already has cash flow. What are your thoughts on that approach using debt and leverage when we're getting into and out of actual entities?

Emily Reeves: 30:48

I think buying a business is a great idea. I think there are a lot of things you have to think about when doing it. One how crucial is the founder? How crucial is the founder? Is a team willing to stay on? You walk into something new, things change immediately. And what are those changes going to be that come if you don't have the money to finance it yourself? Would you give a friend alone if you had it to buy this business? Like, does it actually make sense? I think that's a really good question to ask yourselves. Do you believe in it enough that you would lend this your personal money to a friend to do it? If that answer is no, I think that's a really big red flag. As you're starting to think about these things, what are you going to do to the business to improve it, to scale it, to grow it? Because I think a lot of people see and we see this a lot. There's a failing business. I can come in and I can fix it. I can come in and I can make it better. I can take it to the next level. I can improve things. I can turn it around. Lenders don't look at it that way. And this is a really good analogy. When you're buying a house and you can update the kitchen and you can finish the basement and you can paint the exterior color, the house is going to be a lot worth a lot more money. But when you're getting a mortgage, what is the mortgage based on the future value of the house? After you flip it and invest in it, or the current value of the house right now? It's the same thing with business lending. So yes, you might be able to come in and make a bunch of changes to the business, and it might be worth a lot more in the future, but your lender is not looking at the future value of the business. Your lender is looking at the existing value of the business and the existing income that it's making, and that might not support a loan. And that's a big issue for a lot of founders is that they can't get a loan for it. Again, we talked about debt service coverage ratio. The business isn't making money. And yes, you can add new customers. And yes, you can cut costs. And yes, you can turn it around. That business is not covering a debt service coverage ratio. You will not get a loan for that business. That's something to think about. And if you don't have the personal money for it, yes, you can probably go to the seller and say, Will you finance it yourself over the next five years? I'll pay you seven thousand dollars a month. You can charge me interest on it, and you stay on for the next two years and you help me run it. I think seller financing is something that really makes a lot of sense for people buying businesses, because it keeps the seller incentivized to keep the business going. They don't just get to sell it, get their check and wipe their hands clean. It's not their problem anymore. Their future income is based on the success of the business. I think that's really key. And there are certain things people are ready to retire. They don't want. They're done. They're selling their business, they'd like to move on. And that's okay. That can happen. But it should be a very good business that you're stepping into that you can get a loan for. Otherwise, you're just giving someone an early retirement plan and you're inheriting all the problems.

Dawn Kennedy: 33:24

And you're inheriting the problems. Right? Exactly. Exactly. Very, very important, again, to ask that question, would you give your friend. I've never asked that myself, and it's a pretty profound question. Would I give my personal money to someone else to do it? Yeah. I think that also gets you out of your own head of most entrepreneurs are pretty, pretty risk tolerant, otherwise we wouldn't be doing the things right. So our risk tolerance should be tempered maybe by that question before we're like, I can turn it around. Like you said, they're not going to potentially lend on that.

Emily Reeves: 34:00

Sometimes it's not like, yes, the founder might have the best intentions in the world. Like, yes, again, you can come in and you can paint the business, you can paint the kitchen and you can redo the cabinets, but there might be foundation issues. Yeah. And like, are you prepared to take those on as well? And I do think truly is can this business stand on its own is really what that point of the question is getting to. Like, could your cousin Larry run it? Is it just you who's doing it? You're just the only change. Okay. That's a lot. That's a lot. That's a lot to take on.

Dawn Kennedy: 34:28

Yeah, definitely. Definitely. All right. Where can people find out more about you and about bridge and all the things. And hopefully people can reach out and have a conversation. If you are somebody looking to expand or to get some questions answered about debt and leverage and small medium business. This is the person to ask.

Emily Reeves: 34:50

Yeah, I'm I'm happy to help here. My LinkedIn is Emily Reeves, R e e v, as in Victor E s, where bridge marketplace dot com or bridge dot co. If you want to go to our website, check things out. My email is Emily r at marketplace dot com. And truly, I'm just here as a resource. I've seen everything big and small this last more than a decade doing this, and there's no question that I probably haven't heard before. And if I haven't, then I'm even more excited to answer it.

Dawn Kennedy: 35:16

So fantastic. We're going to put all that down inside the show notes. So if you find us on the day that we launch, you can reach Emily. If you don't, you can still reach her two years later. So thank you so much for this conversation. This is such a topic we avoid, but it's the topic that really keeps business running. And so I'm really grateful that you made it such an easy topic to understand and the questions to ask. So I appreciate you very much.

Emily Reeves: 35:42

I'm so glad. Thank you so much, Donna. I really appreciate it.

Dawn Kennedy: 35:45

All right. I'll talk to you all next time on the next episode of the Business Mastery Podcast. Take care. Thank you so much for listening to this episode of the Business Mastery Podcast. If you want to learn more about me, you can go to Don Kennedy dot com and you can now check us out on YouTube as well as, of course, any of your favorite platforms that host podcasts. Take care.