At ACI, our success is entirely dependent on the success of our clients

A liabilities management advisory group, ACI is engaged in assisting clients with the development and implementation of long term strategic plans that will lead to greater financial stability and success. The needs of every company are different, each with unique sets of circumstances and liabilities issues.

For some, this requires extensive financial restructuring; for others, simple management tools that can be implemented for improved operations.

Even though each plan must be customized to meet each client’s greatest areas of need, the following three common areas of concern are always addressed:

1. Reducing the cost of capital;
2. Reducing debt exposure; and
3. Eliminating the corporate guarantees of business owners/stockholders.

The Vicious Debt Cycle:

Who wins in the debt cycle? Quite frankly, banks, lending institutions and lawyers are the big winners.


Banks

In simplistic terms, the cycle works like this: You and 9 of your neighbors each deposit $100.00 into a checking account, and $100.00 into a savings account. The bank now has $2,000.00 from you and your neighbors. Banks generally do not pay interest on checking accounts, but pay nominal interest rates on saving accounts. Assuming the bank pays 2% for your savings account, the bank now has an annual cost of maintenance of $20.00. The bank now turns around and lends you the $2,000.00 at an annual interest rate of 7% and you walk away thinking you got a very good deal. The bank is now making $140.00 per year from the money deposited by you and your friends, a gross profit of $120.00. (Not a bad return on a $20.00 investment)

Now compound these numbers by 100 or even 1000 times, and you will begin to see what happens to your money. You begin the cycle, and end the cycle. Each night, if the bank doesn’t lend the entire amounts deposited, don’t think they take a loss. They simply invest excess funds each night in an overnight treasury type investment account with the Federal Reserve Bank. They may only make a 1 or 2 percent margin on those funds, but you can rest assured that they do not take a loss. Then, as if these profit margins are not sufficient, most banks charge service fees for the checking accounts. Fees vary significantly from bank to bank, but supposing the bank charges each checking account an average of $5.00 per month, the bank’s revenues now increase by another $600.00 per year for the 10 checking accounts. Banks have also learned that they can charge all kinds of fees tied to their business loans, further increasing their profitability. Unfortunately, in too many businesses today, the banks are making more profit off the business than the business owners/stockholders.


Lending Institutions

The cycle is not too different, but changes slightly with the cost of funds for the lending institution. Most lending institutions receive their capital from banks or equity investors. Lending institutions operate in many different ways, but generally have a higher cost of funds than do the banks, and consequently, a higher interest rate on loans or leases. Lending institutions generally have relationships established with these investors or banks and go to them on an “as needed” basis. The capital is quickly made available to them, and consequently there is usually little or no wait for the funding to occur. Most companies never know of the “behind the scenes” financial negotiations that occur to place such a loan. They are simply happy to get their money. In order to compensate for their higher cost of money, most lending institutions charge fees or points in order to boost the profit margins on loans. Most charge all expenses associated with establishing the loan to the borrowing company including attorney fees which can run into thousands of dollars. Again, in simplistic terms, the cycle begins with you depositing funds in the bank or with an investor depositing funds to the lending institution, and ends with you taking your (or the investor’s) money back out, paying premium dollars for borrowing money from your own funds combined with the funds of other people. As with banks, lending institutions also frequently make more profit from the business than do the business owners/stockholders.


Lawyers

Most lenders, whether banks or lending institutions, hire outside lawyers to write or review most business loan agreements and documents, nearly always at the expense of the borrowing business. These fees can run into the thousands of dollars for small to medium sized businesses and even into the hundreds of thousands of dollars for large business borrowers. Then, to protect your own interests in the transaction, the business must have its own legal counsel review and negotiate documents with the lawyers of the lending institutions. In short, the business pays for both legal counsels, and usually is the looser again.


The Great Tax Write-off scam:

In all, one of the great sales pitches comes with “it’s okay because this will all be tax deductible”. So in short, you pay huge fees and high interest rates to the lending institutions, and large fees to your lawyers and theirs, to get the tax deduction and save money on your taxes. Have your accountant prepare a scenario of what the difference would be, and you will find that in almost every case, you pay far more to the lending institutions and lawyers that you would ever pay in actual taxes.


Who controls the business?

When lenders are involved, they control the business. READ YOUR LOAN AGREEMENTS AND LOAN COVENANTS! You are told what you can do, what margins you must achieve, even how much you can pay officers and directors of the company. You virtually lose control of the company when lenders are involved.


 
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