Archive for January 2011
Debt Financing Contingency Planning
January 26th, 2011
“Do You Have A Debt Financing Contingency Plan In Place?”
First of all, what do I mean by a debt financing contingency plan?
Well, if you’re in business and require third party debt financing to partially fund your operation in some way, shape, or form, then it’s important to have a debt financing contingency plan in the event that your current debt lender or lenders can no longer provide you with funding.
This has always been something that business owners should be mindful of, but most stable businesses consider the potential of their banking or financing relationship going south for no apparent being the most unlikely of events and not worth the time to continually stay on top of a contingency plan.
But guess what? Since 2008, the one of the most common financing requests are those that are required for no reason at all…that is one or more of the lenders financing a given business either called in their demand loans and chose not to renew them…for no apparent reason.
As I continually mentioned, the world of business financing has significantly changed during this last go round of economic down turn and the ongoing ripple effect from the fall out continues to pound the portfolios of the remaining debt providers. As a result, they will periodically need to shore up their risk profile by shedding accounts that don’t score high enough on the score card, or leave certain regions and/or markets altogether.
The end result is that many companies with otherwise solid balance sheets and a significant track records of business performance are getting their loans called for nothing they could have foreseen.
When this occurs, if there isn’t some type of meaningful contingency plan in place, the scramble to get alternative financing in place at best destroys equity due to higher short term rates, and at worst puts the company out of business.
So what do I mean by a contingency plan?
While by no means a comprehensive list of things to do, here are a few points that every business owner requiring third party capital to operate should consider.
First, make sure you maintain a relationship with your current banking representative. For many institutions, the personnel turnover very quickly from position to position. For many businesses, the owner may not even know who his contact in the bank or lending institution is. Having an active relationship where there is at least a quarterly touch point can help spot trouble before it lands on your door step.
Second, stay on top of who your next best option or options are and find a way to borrow some money from them. Its always going to be much easier to get additional financing from a debt provider that is already somewhat comfortable with you as compared to someone starting from scratch where there is a time pressure involved in getting a new facility in place.
Third, keep all your financial statements, asset lists, customer lists, credit profiles, company business plans, etc. up to date so that you’re always in a position to provide a complete package of information at any time or within very short order if required.
Fourth, constantly be on the look out for even a better debt financing program than what you have today, or alternatives that would also potentially work for your business. Debt lenders come and go as well as continually change their appetite for certain types of lending and industries, especially on a regional basis. So if someone is hot for getting into your market, take a serious look at what they have to offer and at least consider starting a relationship.
Fifth, maintain a moderate level of paranoia with your current debt financing source or sources. Banks and other institutional lenders are brilliant at lulling you into a false sense of security. But be forewarned… there is appreciable customer loyalty, at least not enough to save your account if you get in the risk managers cross hairs for whatever reason.
I understand that some people reading this will say they don’t have time as it is to do the daily stuff required in the business let alone make and continually update a back up plan for something that may never happen.
Just remember that if you accept debt financing or investor money from a third party that someday they’re going to want it back and it might now be when you’re ready or able to accommodate them.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingGetting The Most Out Of Your Cash Flow Management
January 21st, 2011
“When It Comes To Cash Flow Management, Are You Leaving Money On The Table”
Cash flow management can mean a bunch of different things, but in its simplest form, its all about allowing profitable sales to occur on a timely basis while minimizing out flowing cost amounts and improving the timing of inflows and outflows.
Here’s one example that touches on all of these areas and is over looked by many businesses.
A company is in a growth mode in an industry where they are in the middle of a distribution channel.
Even though the company has a strong balance sheet, credit, and cash flow, they can’t find a bank to finance their growth plan as many institutions, especially these days, are cautious towards anything moving too fast. In order to maximize revenues with the credit available, trade credit is stretched out to the max, forgoing all discounts, eliminating potential credit limit increases, and potentially harming credit overall.
The company turns to asset based lending and gets their accounts receivable factored at the god awful rate of 18% per annum, plus transactional fees. Sales double as there is now enough cash flow to cover the gap between collecting money and paying the bills. Trade credit discounts are taken full advantage of also causing credit limits to increase.
The net effect is that the business not only more than doubles its profitability as more sales are being spread over the fixed costs, but the trade credit discounts along are enough to pay for the incremental cost of financing that was created from going from bank margining of accounts receivable to factoring.
Obviously this exact scenario isn’t going to hold true for all companies. The point here is managing cash flow is about generating more net income for the business at the least amount of cost. The least amount of cost doesn’t mean you can’t use higher priced debt to fuel your business financing needs. What it does mean is there ways to gain cost savings in one area to offset increases in another where the net overall effect is going to be positive to the business bottom line, balance sheet, and cash flow position.
The example cited above occurs more often than you might think in growth markets and in some cases the trade discounts generated through more available cash flow are actually greater than the higher cost of asset based debt, driving profit to the bottom line due to use of the higher priced money.
I’m not advocating here that higher priced debt is good or bad. This is about what’s relevant to a particular situation and what net impact available capital will have on a growth situation, regardless of the cost.
If the results are positive, press on and grow the business, all the while looking for cheaper sources of money.
If the results don’t add up, then twist the rubic’s cube in other directions and see if you can find another angle to improve cash flow and profitability.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingAsset Based Loan Fit
January 14th, 2011
“When Does It Make Sense To Take Out An Asset Based Loan?”
We are in a period of time where asset based loans have grown in significance due to the more conservative approach currently being taken by banks and institutional lenders.
In most cases, Asset Based lending is significantly more expensive than bank or institutional lending, reflecting the higher level of risk inherent in the business being financed. With greater cash flow comes lower cost forms of asset based lending as well, but for the purposes of this discussion, I’m referring to asset based lending that falls in the 18% to 24% per annum type rate range.
Any business owner will tell you that you can’t function long term on those types of rates and for the most part, they are absolutely correct.
The higher priced, and more traditional form of asset based lending is meant to be short term in nature, dealing with either distress or growth.
In a distress situation where the business is failing, gone through a down turn in the market, or has been unceremoniously dumped by its institutional lender for some reason, an asset based financing facility buys time to either turn things around, wind down, or sell off in a manner that does not destroy value or equity in the process.
For situations of growth, if the growth rate is too high, especially for newer businesses or smaller scale businesses, banks and institutional lenders will shy away from business financing these situations due to risk of the business not being able to properly scale growth and crashing and burning at some point along the way to a better top and bottom line. Once higher levels of sales are maintained over a period of time, then lower cost forms of money will be more than happy to step in and take over the business. They just don’t have the stomach for the potential wild ride that may occur during a growth spurt.
Neither a growth or distress situation can be sustained for any length of time which is why the asset based financing can be a very good fit, even at significantly higher rates of interest than what can be secured through an institutional lender.
In situations where the business is asset intensive and needs a high level of financing leverage over the long term, an asset based financing solution can still work, but its going to have to be a lower cost version which tends to require a minimum facility size of $5,000,000 and strong cash flows and margins to support a lower cost of funds.
Business FinancingBusiness Financing For 2011 Starts With A Bang
January 12th, 2011
‘Business Financing Activity High At Start Of 2011″
While the new year always starts with a certain amount of renewed hope and optimism, the business financing activity at the start of 2011 has been very high to say the least. If the first ten days of 2011 is any indication of where the year is going, we should be in for a pretty good year.
That being said, I should clarify what I mean by the early on business financing activity I’m speaking to. This is coming from business owners and entrepreneurs actively seeking business business financing facilities. This could be for new projects or carry over efforts from last year. In order for this initial flurry of activity to translate into economic activity, there is going to need to be willing participants on both sides..ie borrowers and lenders.
The potential borrowers are certainly doing their part. It remains to see how lenders will respond to requests in the new calendar year.
In 2010, lenders and investors could be characterized as cautious and conservative throughout the year, trying not to make any mistakes in an economic turnaround that was hard to predict by industry sector and region. Last year also saw a continued retraction of the retail space as more lenders either left certain markets all together or went out of business due to failed porfolios.
In 2011, it will be interesting to see what the business financing mood will be like from the sources of financing as well as who will move forward to take on market share that has basically be vacated by competitors.
And one thing to know about the financing market, if this initial flurry of activity translates into funded projects, the action is likely going to continue as word gets around that money is starting to flow more freely.
The corollary to this statement is that nothing much has changed and all this new activity could fizzle out in the coming months, dampening the plans and aspirations for many for the coming year.
The next two months will be a key barometer for how the rest of the year will play out as without an increase to the available money supply for business activity, the economy in general can only progress so fast.
Hopefully the trickle of 201o can turn into a more steady and predictable flow in 2011.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business Financing