Archive for August 2010
Business Financing Application – Key Components
August 27th, 2010
“Here Are Three Key Components That Should Be Present In Every Business Financing Application”
I’ve written before how a business financing application has everything to do with the story.
Today I’m going to take that one step further and talk about the three main components of the story and how they collectively wrap and tie all the other information together.
When I worked in the corporate world, any time I had to report on the overall health of the business at a given point in time, the higher ups always wanted to know three things:
Where are we at right now?
How did we get here?
Where are we going?
These are the same three questions that any serious lender or investor is going to want answered as well. So instead of just throwing a bunch of paper at them in the hope they get what they need, the process is a lot more effective if every element of a business financing application package is linked into the answer to one of these three questions.
For instance, the answer to “where are we at right now” is centered in the current financial statements, appraisals, estimates, quotations, bank statements, and so on that reflect the here and now.
“How did we get there” is partially answered by the historical financial statements of periods past. And “where are we going” is partially covered off by financial projections.
All the numerical reporting and projections are tied together from past, present, and future by the overall story.
Like any good story, the information has to flow from beginning and lead the reader in the right direction versus confusing the heck out of them or causing them to become frustrated with inconsistent information that leaves them unsure of what’s really going on.
But to really make the overall business financing story holds water, it must address all three questions and make sure the answers to any one do not contradict the answers to the others.
A well written business financing application is not going to assure that you’re getting the capital you’re after, but it will increase the probability of the lender or investor clearly understanding not only your request but the supporting information, which can be a major challenge in and of itself.
Next time you’re putting a business financing application together, take a few minutes to review it when you’re finished and see if you’ve answered each of the three questions. If you haven’t covered them off sufficiently you should consider taking a bit more time and tying up all the loose ends before submitting your request.
Click Here To Speak To Business Financing Specialist Brent Finlay
Business FinancingMississauga Asset Based Loans
August 23rd, 2010
“Mississauga Asset Based Loan Options Are Plentiful And Potentially Very Confusing”
If you’re seeking a Mississauga asset based loan for your local area business, you will definitely have some options to consider in this locale.
In Canada, the asset based lender world revolves around downtown Toronto, which many asset based lenders not prepared to wander beyond the boundaries of the Greater Toronto Area more or less to conduct business.
So being in Mississauga affords your business access to just about any type of asset based loan that is available in Canada from both Canadian and U.S. asset based lenders.
This is both a good and bad thing in some respects.
Its a good thing in that if you have good assets that can be pledged for security, regardless of what those assets are, you will likely find some form of Mississauga asset based loan to consider.
The bad thing is that there are so many different types of asset based lending models out there, which can overlap across asset classification and industry, it can be hard to figure out which financing facility is going to be the best fit for your business.
A good example of this problem is when a well established business is operating very profitably, but needs a higher ratio of debt to equity business financing to fuel additional growth. Virtually any type of asset based lender would be interested in this type of scenario, provided that the assets being offered as security fall within their program structure.
The challenge comes from the fact that there can be enormous differences in rates and principal repayment options. From an interest rate perspective, you could see potential Mississauga asset based proposals ranging from prime plus two or three to an offer at two percent a month and anywhere in between.
Asset based lending has long been associated with higher interest rates due to the higher leverage position the lender is taking, resulting in the lender holding more of a quasi equity position, which drives up the rate of return.
But for the larger, well established companies, major banks have jumped into the market and are offering prime plus asset based lending to companies that traditionally would be paying 12% to 18% per annum on a similar asset based facility.
Certain asset based lenders can provide better leverage to one group of assets over another, so if you utilize them across all available assets, your weighted average cost of capital may end up being high than if you split asset type by relevant asset based lending source.
If you’re in need of a Mississauga asset base loan, I suggest that you give me a call so we can go through your requirements together and discuss different asset based financing strategies and options available to you.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingToronto Asset Based Lenders
August 18th, 2010
“There Are A Wide Variety Of Toronto Asset Based Lenders In The Market Place”
Toronto asset based lenders come in a wide variety of shapes and sizes, each focused on a particular slice of the market. The bases of asset based lending is a clear understanding of the underlying assets being financed and the means to secure and take action to reclaim value in the event of default.
Because there are several different types of assets that can be deployed in a given business, there can be several different asset based lenders providing business financing solutions that can be relevant to your requirements.
The other key aspect of asset based lenders is the risk level they service. Risk levels are assigned by business financial performance and asset type. For instance, there are working capital asset based programs that are provided by major banks as a way to provide greater financial leverage to their large corporate clients that can’t fit into the leverage limits of the banks traditional corporate lending programs. These programs come at prime plus and are typically limited to financing facilities with a minimum working capital requirement of $10,000,000.
When a business does not qualify for big bank working capital asset based financing, the next level of asset based lending that provides similar levels of leverage can see the rates shoot up to between 12% and 18% requiring certain margins and cash flow turnover ratios to make the cost of financing work.
Toronto asset based lenders exist for different specific assets and asset combinations. Each lendng model is based on the lenders ability to monitor higher ratio and/or higher risk lending from a cash flow perspective and to predictably liquidate assets held as security in the event of loan default.
Like with any lending model, the greater the risk and the more unique the lending application, the higher the related interest rate you can expect. Many Toronto asset based lenders will also work within a certain loan size range with larger loan amounts being provided by fewer lenders for each type of asset based requirement.
In situations where a business has considerable amounts of receivables, inventory, equipment, and real estate, there can be several different Toronto asset based lender options to consider, each with its own potential unique pricing and terms of use.
Business Debt Financing Approval Process
August 16th, 2010
“Why Does It Take So Darn Long To Get A Debt Financing Request Approved?”
In the present commercial lending environment, it can be more than a little difficult to get a loan request of almost any sort approved and funded within what most would consider a reasonable amount of time.
Here as some of my observations into some of the current challenges debt lenders are having in the market.
First, the recent recessionary forces have eliminated a significant number of lenders from the market at large or from some of the country markets that multinational lenders service. The result has been more applications being directed at fewer lenders creating an instant back log.
Second, while economic growth would suggest we are climbing out of the recession, the capital markets are still trying to stabilize from all the fall out, causing debt lenders and equity investors on average to be more cautious in their approach to lending or investing new capital.
Third, many business owners and managers will make several applications for the same capital requirement to multiple lenders in order to try and get the best available deal. This also increases the application burden on the system, further contributing to the slowed down response time.
In an attempt to reduce the back log and get focused faster on deals that can actually be completed, more lenders have gone to requiring the borrower to pay a deposit after the initial deal assessment process is complete. For the most part, the deposit is used to cover third party costs incurred for assessing a deal such as appraisals, credit reports, etc. If the deal can’t be approved, the deposit is returned less third party costs incurred. If the deal can be approved and the applicant does not choose to take it, the deposit will likely be lost.
Outside of covering lender and investor costs of assessment, the deposit serves as a commitment to the borrower to continue with the business financing process and risk the deposit if they don’t take a commitment that follows the initial lending proposal provided.
There are pros and cons to this approach. From the lender side, the required deposit at a certain stage of the process gets rid of their back log as only those seriously interested in what the lender has to offer will proceed. On the other side of the coin, borrowers are concerned about the integrity of the deposit in that does it truly relate to third party costs required to complete the commitment process, or is it just an easy way for a lender or investor to grab fees without having any real intention or ability to issue loans for all the deposits received.
The answer to getting the overall system working better is likely some mix of the old and newer ways of doing things. But until there is a significant overall change, expect the time lines for acquiring capital to be considerable.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business FinancingDirect Lender Definition
August 13th, 2010
“How Do You Define A Direct Lender and Why Is This Important?”
When looking for capital for their business operations or opportunities, business owners and managers will try to determine if who they are working with to source money is a direct or indirect lender.
The basic premise is that its better to work with a direct lender than an intermediary such as some form of broker.
But while this can appear to be logical on the surface, the term direct lender can be very misleading.
The truth of the matter is that all lenders, outside of private mortgage lenders, are utilizing someone else’s money to help fund their deals.
Business financing is about leverage for all those involved and many of the wholesale financing strategies that fuel larger transactions are far beyond the scope of this discussion.
Its not uncommon for any particular debt lender to have several different funding options to consider to fund the deals they are putting out to small and medium sized business owners. But are they lending all their own money? Again, unless they are a private mortgage lender or a certain type of equity investor, not a chance.
This is where people get confused.
The goal many business owners have is to work directly with someone who is lending out all their own money, but virtually no one is doing that.
And there’s a good reason why. If you look at your own expected return on capital for the money you hold, are you prepared to give it to someone else for a three or four percent return that may be secured, but hardly guaranteed?
The answer in most cases is absolutely not.
So why would lending organizations be prepared to do that on a very large scale when they could get a better return doing something else with their money?
The answer is they don’t.
When pressed on this issue by a client, I asked them to name me someone they considered to be a direct lender. After the client provided a name of a well know international lender, I went online and accessed their balance sheet as the company was publicaly traded.
The balance sheet showed total assets of over $500 billion and equity of slightly more than $50 billion, leaving the difference of $450 billion as debt financing, clearly showing that they were lending out someone else’s money, just like most everyone else.
Private mortgage lenders provide financing at higher rates, which reflects their desired cost of capital as the money they’re lending out is their money.
For lower cost sources of capital, the lender is providing a combination of equity and debt, with the debt portion getting above 90% in some cases.
Even the largest of the large may employ several different forms of financing for the deals they do. They may have their own pre-approved lines of credit they can draw against, provided the deal to be funded fits the underwriting requirements of the lending source, they may syndicate deals with other lenders to share the overall risk, they may outsource the deal to a strategic partner who has a funding source more closely aligned with the deal requirements. There are other potential funding methods and practices as well.
The key point is that the lower the cost of financing, the less likely you’re actually going to be working with someone sticking 100% of their own money into the deal.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingEstimating Business Financing Timelines
August 8th, 2010
“How Long Does It Take To Get A Business Financing Facility in Place?”
Almost every time I work on a business financing assignment, the business owner or business manager is pressed for time to get capital secured and funded.
And almost every single time I get asked the question, how long is it going to take?
If you’ve ever worked on any type of business financing request, you know that this is the ultimate loaded question. Lenders have a process they are going to follow and when the process is complete, that’s when everything will be done. To put an exact time line on that at the beginning is basically a waste of time.
I’ve worked on business financing cases where it took several years to complete the process. This is not to say that the lending or investing sources are slow. This is to say that it took that long to complete the process.
The biggest challenge in estimating time for the overall process comes in not knowing how fast everyone will do their part. The more people that are required to provide information to support a financing decision, the more likely its going to take an above average amount of time.
I’ve written about this subject before, but its one that never gets old and continually needs to be explained to business owners.
Just the other day I had a client press me for a time line for a transaction that had to get done in a few weeks. The initial time prediction was that if there was no wasted time in getting information sent back and forth, the deal should be completed in 2 to 3 weeks.
After wasting 3 days debating why it would take so long, the client agreed to get moving on the process. The financing process was outlined and three weeks later, the client still had not completed the requirements for step one.
This is far from an unusual situation.
The point is simply this.
All you can do is commit to the process and get everything done that is required, when its required, completed as fast as possible. That and a little luck here and there will get your business financing requirements satisfied in above average time.
If you’re focus every day is on making sure that you’re not holding up the process in any way and are communicating effectively with other parties (lawyers, accountants, appraisers, etc.) that may be contributing information or services to the process, then you’re doing everything you can.
If you’re lined up to the wrong type of money, no amount of effort or commitment to any process will yield the result you’re looking for.
And trying to apply brute force to the process or attempt to bully someone into taking action on your behalf isn’t likely going to get you very far either.
When pressed for time, the best thing to do is develop your short term contingency plans to address any delays that may occur in getting business financing in place.
Finesse and forward thinking tend to out preform brute force and out right panic most of the time.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingKeys To Bridge Loan Financing
August 6th, 2010
“If You Need Money In a Hurray, Bridge Financing Could Very Well Be The Answer”
When a business owner or manager are under the gun trying to get financing in place for some need where there is some sort of official or self imposed time limit in place, one option to consider to get the capital you need is through bridge loan financing.
A bridge loan by definition is a loan for a specific purpose that will be repaid by a certain time or event in the future. The more predictable and verifiable the reliable the repayment plan, the more likely that a bridge loan can be arranged.
The most common use of bridge loan financing is when there is a gap between two ends of a transactional event with respect to time and capital is required to facilitate the transaction. In these cases, the capital is required to start the transaction and the completion of the transaction will pay back the bridge loan.
Regardless of how compelling or verifiable or predictable the exit strategy or repayment strategy for the bridge loan is, there is considerable risk of loss present in most of these situations.
As a result, the cost of financing can be much higher than what you would expect for traditional business financing. In fact, for some deals, the bridge financier may expect that you split the profit margin of the transaction with them as compensation for the money being advanced and the risk being taken.
While the effective financing rates in these scenarios may seem extreme as a result, the alternative may be to not do the deal at all at which point 50% of the potential profit is better than 0%.
A typical bridge financing arrangement that occurs every day is with the buying and selling of residential or commercial real estate. The borrower has purchased a new property and is trying to sell an old property at the same time, creating the need to utilize the equity in the old property to help finance the new property through a short term bridge loan. This is a very low risk transaction in most cases and as a result the relative cost is much lower than other bridge loan transactions.
The key to bridge loan financing though is the exit strategy. The more certain the repayment plan is, the more lenders will be interested in the deal and as a result, the lower the cost of borrowing will be.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business FinancingBusiness Financing Timing
August 1st, 2010
“Acquiring Business Financing Can Be a Very Much Be a Point In Time Exercise”
I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.
So why were they looking for financing?
Their primary and only institutional lender could no longer underwrite the type of business they were in.
In the current economic climate, this is becoming a more and more common occurrence for even well established small businesses.
For this particular client, they were actually able to secure better business financing than the package they had.
But while you might think the debt financing could be easily replaced given the financial strength of the business, this is not always the case. For this particular client, while the end result was positive, there were not many interested lenders at the very point in time they required financing. And with the institutional lender they are working with now, there is no guarantee they would have done this deal 6 months ago, or would considering doing it at all 6 months from now.
The point here is that business financing can be all about timing where the needs of the business need to line up with the needs of a lender.
And even when everything lines up, there is no way to know how long that relationship will continue. As a business owner, you have to always be prepared with plan B in the event that a lender changes their business model or portfolio focus and leaves you as the odd man out, even though you’ve never missed a payment and have complied with all the lender requirements.
So the second takeaway from all of this is that as a small business owner, you always need to be on the look out for a better source of financing and an alternative source of financing. There is no true loyalty in this game, and for the most part it is a game in that both borrower and lender rarely disclose everything to each other in terms of their go forward business plans, leaving a certain amount of uncertainty in play.
Unfortunately, most business owners or managers only focus on business financing when they need money. Because of the “point in time” aspects of business finance, this can be a very dangerous and expensive approach to take.
Even for the most well established and profitable businesses out there, if they still rely on third party financing from lenders or investors, they always need to be asking themselves “what do we do if the lender or investor want their money back right now?”.
By proactively staying on top of the market and your relevant options, you stay ahead of the curve and ready to deal with the unexpected.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business Financing