The 80/20 Of Business Finance

Archive for April, 2010

With all the changes that have taken place in the capital markets over the last 18 months, there is now a need to change the way that requests for capital are positioned with lenders and investors.

In the recent past, applications were primarily based on historical financial statements and a decent attempt at cash flow projections to support the request for additional or new business capital coming into the business.

But things have changed whereby there is a much greater demand by lenders and investors for the business owner and manager to put forth commercial financing requests that are more thoroughly supported by source documentation and spend more time on risk management than forward thinking marketing strategies.

From a lender point of view, we have moved into a commercial lending era of loan security, lender mitigation, and business risk management.  While there still is money available in the market for businesses to acquire, there is a great deal more work involved in convincing someone that you’ve thought through all the major risks that could impact the business going forward and have a plan to mitigate the risks either in a proactive or reactive sense.

In the past, a lot of the details which have always been important to a business financing deal were glossed over by lenders or investors due to the strength of the economy and the unlikelihood of many types of risk to be of an issue or concern to many business owners.  This saved on the due diligence process and was supported by decades of portfolio analysis that identified what areas of risk a lender or investor needed to focus on the most.

With the impact of the current deep running recession, most of that logic is thrown out the window as its a little more of an every man for himself type of world where the business owner now has to actually think about all the things that could go wrong in advance of asking for money.

In my opinion, it the financing world had taken more of this type of security and risk first approach years ago, the current recession would not have run so deep.  But in better economic times, everyone wants to get in on the lucrative capital financing markets so lenders develop more aggressive portfolios to get their share of the growing pie.

But things are different now.  Lenders and investors have made the necessary adjustments, which are akin to their survival as viable business organizations.

Unfortunately, for the most part, business owners have not adjusted the way they manage their business from a financial risk point of view and as a result their Business Financing positioning when asking for new capital can be way off the mark.

Its really a return to good solid business fundamentals that we are seeing in the market.  Over the long run, this should be a good thing.  In the short run, it looks more like pain and confusion to those trying to locate and secure business capital.

Click Here To Speak With Business Finance Specialist Brent Finlay

Technorati Tags: business capital, Business Finance, Business Financing, business financing positioning, commercial finance, commercial financing

Bad assumptions are a common reason for many of the problems small and medium sized business owners have  locating and securing business financing when they need it.

Here are some of the more typical bad assumptions that get made on a regular basis and either inhibit capital from being acquired or cause a business to face serious short term repayment demands from lenders and creditors.

• Using government remittances to cover off cash flow deficiencies is an acceptable practice that the related government agencies will understand and work with.

• New business loans can be used to pay off arrears related to government accounts.

• Personal credit of business owners or major shareholders of small business corporations does not have a large part to play in the making of business financing .

• The process for acquiring business financing is relatively straight forward and predictable.

• Trade credit can easily be acquired for companies that have been in business for several years even if business credit still hasn’t been established or if the business has overdue trade payables on its books.

• Your business bank will be able to provide you’re financing requirements, even if you’ve just been through a rough period where the business has generated financial losses.

• Business Financing decisions can be be based primarily on the long term potential business opportunities in the future versus historical result

• The industry and geographic location where the business is located does not have any bearing on the ability to secure commercial capital.

• Prime plus interest rates are available to all businesses regardless of the level of potential risk to the lender.

• Once business financing is provided, as long as the business owner meets all the requirements of the financing facility, there is no risk that the lender will call the loans or restructure future repayment to the detriment of the business.

• If a lender does not want to continue providing your business with capital that there will be another similar lender prepared to provide refinancing quickly and with similar terms.

• Its not typically a problem to leave a financing requirement to the last minute or near the time when funds will be required as there are lots of sources of financing available.

• Shopping around a commercial financing request is the same as shopping around for the best residential mortgage interest rate.

• Once a commitment for financing has been provided, the closing process will be quick and there is very little risk that financing won’t be provided.

• Lenders will typically be understanding if you can’t make all your payments on time.

• The economy is currently improving and coming out of the current recession and the capital markets will follow closely behind.

The key point I’m trying to make is that the process of business financing is not easy by any stretch, especially if you want to secure a financing facility that best meets your requirements.  Significant lead times should be built into the process of locating and securing business capital, especially in the current recessionary environment.  Proper Cash Flow Management and credit responsibility are also very important aspects of any lender decision making process.

Click Here To Speak Directly With A Business Financing Specialist

Technorati Tags: bad business financing assumptions, Business Finance, Business Financing, financing a business, how to secure business financing, securing business financing

From both a borrower and lender point of view, we are seeing more of what I call business financing hypocrisy.

Lenders are interested in your business until they’re not interested in your business at which time they will call demand loans, cut back on lines of credit, term out lines of credit, increase interest rates, and invoke whatever get out of jail free cards they may have build into their funding commitment to the business.

Borrowers are just as bad in that they at times will promise everything but the moon and the stars to make the lender comfortable with a capital request, but when things don’t go according to plan and loan obligations can’t be met, the borrower calls his or her lawyer and tries to come up with a legal strategy to basically get around having to honor his or her promises.

When the economy is going well, these types of scenarios are played out very infrequently.  But when a recession hits, as it has for the past two years, business financing hypocrisy is everywhere and its every man or woman for themselves.

The net result of this type of two way hypocritical behavior is that the financing markets are slowly down to a crawl in many sectors and geographic regions.

Lenders are asking a lot more to protect themselves with most commercial financing decisions now focused on asset based security and risk management.

Borrowers try to protect them selves by constantly looking for a better deal as they don’t like the changes in lender requirements and search for someone who is more in line with their expectations.

To say there is a lack of  trust from both sides overall would be an understatement.  In tougher economic times, most people tend to take a more conservative approach.

For the desperate borrower, its basically a take it or leave it market with the lender setting out what they are prepared to do without really any flexibility.

For better deals, borrowers have become more patient as lenders are having trouble hitting their borrowing targets which is the way they make money.  So for good deals, there is a high level of competition and as a result, a patient borrower can find some pretty good deals as lenders cut margins to only secure solid opportunities.

But regardless of who is in a position of strength or weakness, promises made by either side are very weak.  Business Financing has become a game where borrowers have to become better players to keep up with the changes in the capital markets.

If you have a business financing requirement or problem you need assistance with, give me a call and we can go through it together.

Click Here To Speak With Business Finance Specialist Brent Finlay

Technorati Tags: Business Finance, Business Financing, business financing hypocrisy, commercial finance, commercial financing

Most buyers who are looking to acquire a business will need or want to secure third party debt financing to maximize the leverage of the business assets and cash flow and minimize their down payment.

Put it another way, all cash purchases are fairly rare with respect to business acquisitions.  Even if an individual or company could pay cash, they will likely want to cover off some of the purchase price with debt capital in order to reduce their weight cost of capital.

But business acquisitions can be very difficult to finance with third party debt, even if the required business loan amount is only a small portion of the total funds required.

There are several reasons for the high degree of difficulty securing business loans, far too many in fact to effectively cover off here.  Instead, we’re going to focus on one of the key things that kill many business acquisition financing applications and that’s the historical financial statements provided by the vendor.

First, a lender will want to go back at least 3 years, but would prefer a longer view of historical performance.  The longer term view of the business may not support the repayment analysis, especially if the near term results are stronger than those 3 or 4 years ago.

Second, especially with smaller businesses, the historical financial statements are done under a notice to reader accounting statement, providing very little if any third party verification of the results shown.  For acquisition loan requests, especially those based highly on cash flow, lenders will not rely on notice to read statements.

Third, its not uncommon for the vendor to pull out all the stops the last year prior to sale to make the statements appear as good as possible which can also distort them compared to long term results, creating a lack of lender confidence in the financing opportunity.

Fourth, vendor’s may have several strategies to withdraw cash out of the business to save on both business and personal taxes.  These strategies may not be easily identified in the historical results and while the vendor can disclose them so a lender can add them back, vendor’s tend to only focus on what was actually reported.

Fifth, if the business has some amount of cash sale component, its not uncommon for the vendor to not report all sales.  The result is that the financial statements understate the real financial performance of the business.

While the buyer is the one trying to secure the financing, the ability to do so will correspond directly to how much the vendor has invested in the historical financial statements.  And the ability for the vendor to secure the highest possible sale price is going to likely depend on debt financing which will once again be influenced by the historical financial statements and the accompanying support information.

The key take away is that spending money on a higher level of accounting opinion and bookkeeping  that can be more easily verified by the buyer and third party lenders should be considered an asset that can generate a substantial return by allowing the buyer to not only secure debt for the purchase, but a higher level of debt so the down payment does not have to be as substantial and higher purchase prices can be considered.

Click Here to Speak Directly With A Business Financing Specialist For All Your Business Acquisition Financing Needs.

Technorati Tags: acquisition financing, acquisition loan, acquisition loans, business acquisition loan, finance business acquisition, finance business purchase, financing business acquisition

If you are a buyer or seller trying to complete a purchase or sale of a small business, especially for a service based business, you hopefully will already be aware of how to approach the process of financing the transaction.

If its not a cash purchase, and additional financing is required, both seller and buyer need to be prepared to self finance the deal.  Basically the combination of cash and vendor financing will be all that’s going to work in a lot of cases.

Third party lenders have very limited interest in these deals as the transitional risk to the ongoing business is statistically high and there is very little if any hard security of value available to a lender to secure their lending position.

The current recession has dried up most of the sub prime business debt that is typically based on the historical cash flows of the business.  Even when these loans are available, the lenders expect both the vendor and the buyer to be making significant contributions to the financing package, so even in the best case scenario, a third party lender will only provide 30% to 50% of the purchase price.

Lenders will also require the vendor repayment to be done over a longer period of time than typically expected by the vendor in order not to drain the business of cash and equity in the short term which can impact the longer term business health.

And any debt financing that may be possible to arrange is going to require a lot of third party accounting support of the last three years business operations before a lender is going to be comfortable with the strength of the underlying business.  If the vendor has not invested sufficiently in third party reporting, its unlikely that the buyer is going to be able to secure any affordable Business Financing for the acquisition.

The biggest challenges right now in the market is that buyers are searching for financing that either doesn’t exist or that can’t be secured with what the vendor is got available to support historical financial performance.

The key take away is that the buyer and vendor need to try and figure it out themselves, or work together to try and get a third party lender to provide some of the financing to get the transaction closed.

For a acquisition financing to be secured, the final capital structure needs to be a win for buyer, vendor, and third party lender.

For assistance with acquisition financing, call business finance specialist Brent Finlay

Technorati Tags: business acquisition financing, business acquisition loan, small business acquisition financing, small business acquisition loan, small business acquisition loans

There are basically four levels of small business equipment financing where the financing required is no greater than $250,000.

The first level is obviously provided by traditional banks through both loan and leasing programs.  In Canada, the chartered banks will make equipment loans via the small business loan program insured by the Federal government for total acquisition costs of no greater than $250,000.

These loans get financed at around 5.5% at the present time, or roughly prime plus 3%.  Because this is considered very low interest rate borrowing, even though the debt is partially insured by the government, there is a fair bit of qualifying required.  And even for those that do qualify, the amount of financing provided tends to range from 65% to 75% of the equipment acquisition and placement costs.

Some of the banks also have a leasing division that works outside of their commercial loan programs and administered at a head office level.  While banks can provide equipment leases for smaller ticket amounts more common with small business, these programs are more focused on larger ticket amounts where the objective is to use low cost, high ratio lease financing to attract new commercial clients to the bank.

The second level of equipment financing is still through institutional lenders and is typically between 6% to 10% interest range.  These are term loans that have similar qualifying requirements as the first level, but are more designed for larger value loans that don’t quite fit into the bank qualifications. These types of programs will also consider one off transactions in most cases.

The third level is equipment leasing from leasing companies where most financing requests considered are no greater than $150,000.  The best interest rates from this group range in the 9% to 14% range and while higher than traditional bank loans, can provide financing amounts in excess of 100% of the equipment, delivery, and installation costs for strong financial and credit profiles.  So for many small businesses, the higher costs of financing is a trade off for greater equipment financing and leasing leverage.

There is a second tier in this type of financing where weaker financing profiles will be considered in rate ranges from 15% to 20%.  The leasing decisions tend to be very subjective on the part of the leasing companies which can make it very difficult to predict which of these companies will be interested in any particular deal.

The fourth level of equipment financing and leasing is pure asset based lenders that are strictly focused on the liquidation value of the equipment and tend to provide equipment leasing rates in the 18% to 25% financing range.

While there are a number of financing sources in the small business equipment financing and leasing space, the individual lender criteria can change constantly, especially with companies that hold smaller portfolios that can easily be impacted by changes in rate or even slight increases in arrears accounts.

And being able to qualify for lower cost financing can be a very point in time event whereby at certain points in time, a business scenario can qualify for lower financing rates and at other times, the exact same scenario will not.

If you have an equipment financing or leasing requirement for small or large ticket items, please give me a call so I can quickly assess your requirements and provide relevant options for your consideration.

Click Here To Speak With Business Finance Specialist, Brent Finlay

Technorati Tags: business equipment financing, business equipment leasing, equipment financing, equipment lease financing, equipment leasing, small business equipment financing, small business equipment leasing

The present capital market is more asset based and risk averse than what business managers and owners have gotten used to in recent history.  And while a traditional asset based loan costs significantly more than what one would expect from a corporate financing program, the higher rates are something to seriously consider in the current market place.

The recession has created a lot of unfortunate circumstances for otherwise strong and well managed companies.  As a result of lower sales, lender demands for repayment of existing debt, or capital required for expansion or equipment upgrades, business owners and managers are now forced to consider options they would never of previously given a second thought to.

But in lieu of where the capital markets are sitting right now, the asset based lenders have become the best option for many businesses, whether the business owner likes it or not.

From the borrower’s point of view, the lending rates between 1.5% and 2.5% per month can seem to be outrageous.  But from the lender’s point of view, the rates reflect the risk in the market and are based more on an equity return than a debt return, which relates to the saying that with asset based loans, you’re renting equity as there are no other lower priced debt options.

From a cash flow perspective, the cash based loans tend to be interest only and are short term in nature, not intending to be in place for more than one or two years.  So even though there is no principal pay down, the actual debt servicing requirement in the cash flow may actually be less that a lower priced corporate financing deal that requires an amortized repayment.

This is what can make the asset based solution affordable for many companies with asset equity and limited debt financing options.  By being able to cash flow the debt service, even at higher interest rates, the business can potentially draw on the capital necessary to main or grow operations until things settle down and better financing options become available.

This is still a better option than selling off part of the company in that the owner has the ability to repay the debt at any time and retain full ownership and control.  So like I said, its a lot like renting equity.

Click Here To Speak With Business Financing Specialist Brent Finlay About Your Business Financing Needs

Technorati Tags: abl, asset based loan, asset based loans, Business Finance, Business Financing

In my last post, I laid out why its become more important for business owners to have a more formalized Business Financing strategy in place on an ongoing basis for their business.

Here are some additional reasons why this has become more important in the current market.

• No Senior Lender Security.  With the capital markets in major melt down, no senior lenders are guaranteed not to suffer significantly from the current recessionary process.  As a result, no matter who you’re senior lender is or how long you’ve been with them, and whether you’re in covenant or out of covenant, there are no guarantees that your demand loans will not be called or reduced now or in the near future.This means that all businesses need to have their financing profile up to date at all times and they should also have an ongoing awareness of their primary and secondary options to finance their business if required.  For many, many businesses, this is something that is beyond comprehension as several have gone decades without any senior lender related issues.  But the world has changed, and its time to adjust or be left scrambling when circumstances move against you.
• Source of Contingency Funds.  The term contingency planning is often brought up but seldom put into any type of practice for most business operations.  With the tightening up of capital markets and the unpredictability related to securing incremental business capital, its become more important to have a capital contingency plan in place.  This can involve working towards reducing the amount of leverage as a percentage of equity on your balance sheet, creating credit reserves in your cash or debt financed lines of credit to allow for short term down turns in business, developing emergency funding plans and sources of financing that can be injected into the business if required on short notice.
• Lower Risk Growth Plans.  While all businesses have the ultimate desire to grow and enhance profits, the strategic process for planning and implementing growth strategies need to take capital requirements into consideration to a greater extent that what we’ve typically seen in the last decade or more.  Strategic plans need to be more closely reconciled to more conservative capital availability predictions so that the business does not get over extended during a tough to predict and manage external capital environment.  This can be a major departure for aggressive business owners who are used to always being able to fund whatever projects they want to undertake whenever they want to undertake them.

This speaks to a more conservative approach to third party financing, whether it be debt or equity, until some reasonable amount of stability returns to the capital markets.

Click Here To Speak With Business Finance Specialist Brent Finlay

Technorati Tags: business finance strategy, business financing strategy