Archive for August 2011
Assessing The Cost Of Money
August 30th, 2011
“How Much Should You Be Prepared To Pay For Business Financing?”
As a business financing consultant, my role in helping business owners and managers locate and secure business financing is to focus in on what is both 1) relevant and 2) attainable to them in the time they have to work with.
The cost of money is always going to be relevant to risk and supply for any business at any time.
Which basically means that the money (and its related cost) that can be available for what you want to do today can be very different to what may be available in the future or what was available in the past.
I bring this up because of the confusion that constantly gets created by different providers of capital, each living in their own little myopic world at times, explaining to business owners what cost of money they should or should not be paying.
One of the worst offenders of what I will call “cost of money confusion” are the major banks or “A” lenders who believe that if you can’t qualify for their low risk, low cost funding, that you shouldn’t be in business at all.
Worse yet is when they draw business owners or business managers in that are easily “on the bubble” at best in terms of qualifying for Big Bank financing, only to either provide a less than adequate financing facility or none at all.
This speaks to what is truly relevant to a business owner with a particular financing request. If you have lots of time, like 6 months or more, and want to take a flier at lower cost forms of money that you are likely not going to qualify for, then you may want to consider giving it a shot.
If you are under any type of time constraint where you’re trying to close a transaction, have an opportunity to expand sales, or need capital for some purpose where failure to do so by some time will either incur incremental operating costs, or cause you to have an opportunity cost incurred, then part of the criteria for considering different money suppliers is when is the cost of money less than or equal to the cost of the opportunity, transaction, or operating cost?
Because business financing can be difficult to secure most of the time, especially when you’re talking about larger amounts, sometimes the cheapest form of money is not the best target, even if you can qualify for it.
Relevance and availability is about zeroing in on best likely money supply source at a given moment for a given purpose.
Too often, business owners will spend months and sometimes years searching for the cheapest source of money because they have been brainwashed to believe its the only thing that’s relevant to them.
In the mean time, while they are looking and searching, they are likely forgoing some opportunity that could have been making them money…potentially far in excess of any incremental cost of capital they may have had to incur to get business financing in place sooner.
Don’t get me wrong…I’m all for super cheap money.
But…and its a big but…the circumstances and timing have to be right to go after it.
If you can’t operate on anything other than the cheapest forms of money available, then so be it. That will be a limiting factor going forward for sure.
The most cost effective source of money that exists at any given point of time, is the money you can secure (with terms and conditions that you are prepared to accept) and get funded in the time you have to work with… where the cost of capital is going to be less than or equal to the incremental economic return you expect to generate from investing more money in your business.
The notion that you should only consider money sources that fall into a certain snack bracket when it comes to cost is whimsical.
A good business man understands this and utilizes sources of capital that allow him to take advantage of opportunities and make a profit.
Sometimes, the net margin will be more and sometimes it will be less.
But without incremental capital, the margin is zero, regardless of the cost of money.
Business FinancingBusiness Financing Supply
August 22nd, 2011
“U.S. Credit Crisis Has Major Ripple Effect Through Business Financing Supply”
It has been an interesting summer to say the least in the world of business financing.
In a typical summer, things start to slow down by the beginning of August, with not much of anything going on in the last two weeks as everyone takes their last shot to get in some summer vacation.
This is not a typical year with a large amount of activity going on during July and August, much of which was unplanned due to the impact the U.S. credit down grade has had on the financial markets.
The primary form of capital to small and medium sized businesses is through the debt financing markets, which can come in a number of different shapes and sizes.
Every debt lender has to borrower the money they put out from somewhere and their own balance sheets must hold certain debt/equity ratios in order for the funds to keep flowing.
Sometimes the source of supply can go a few levels deep, with each successive source of debt financing having to manage their own balance sheet.
When the market took a nose dive, capital and equity went up in smoke, forcing some business financing sources to the sidelines, unable to produce a balance sheet that would allow their supply of funds to continue.
The result is that businesses that appeared to have a business financing facility lined up were left scrambling to find someone with money that they could move their business to.
In many cases, this is going to be more opportunistic lenders, pricing to the supply and demand of the market.
But shorter term money that is more expensive may be better than no money at all.
The same is true and more profound with equity investors and private placement houses who saw their capital get reduced significantly in a matter of days. And even if their are sources of equity that remain fairly unscathed to this point, they are still likely taking a more cautious approach to writing cheques on new deals.
The end result has been a very busy July and August with very little chance of a slow down of any sort as business owners and managers frantically look for new dance partners to fund their requirements.
And despite the low overall levels of interest, these types of sudden short term corrections can become more expensive in order to correct the new supply and demand dynamics.
Click Here To Speak With Business Finance Specialist For All Your Business Financing Needs
Business FinancingCommercial Financing Assessment
August 17th, 2011
“Commercial Financing Success Is Born In The Initial Assessment Process”
If you’re looking to locate and secure commercial financing for your business, regardless of the form of financing, then you may want to consider how important starting off in the right direction can be.
First of all, when I say different forms of financing, sometimes there can be a variety of different ways to leverage your assets and cash flow to get the business financing you’re looking for. The different forms of financing will also vary in how they are applied by any particular lender, so the combinations of potential solutions can be considerable at times.
On the flip side, the potential combination of solutions can also be a real smoke screen in that many of what you might consider to be potential options are not options at all due to the way you’re financing request and business financing profile align with a particular lender’s requirements at any given point in time.
Enormous amounts of time can be wasted chasing the wrong solution, and in many cases a suboptimal solution is selected because of time constraints or due to the business owner or business manager’s lack of understanding with respect to what was available to them in the market place.
So the first step towards commercial financing success starts with an accurate assessment of your business financing requirements and your financing and credit profile.
Each lender will have lending/funding criteria that you’re going to have to meet to get approved and funded.
If you’re financing and credit profiles do not meet these requirements for specific lenders, then they need to be quickly eliminated from the selection process of sources of commercial financing to pursue.
Therefore, it becomes critical to business financing success that you understand where you financing request fits into the market before you start applying to commercial lending sources.
But this initial assessment process can be hard to self assess if you aren’t actively involved in the market and aren’t grounded in what the current lending/funding requirements are for a given lender or lending category.
To avoid making the whole process a hit a miss approach, you would do well to consider the services of a business financing specialist who can perform the key initial assessment with you to best determine the financing target you need to be focusing in on.
This can not only save you months of time, but also allow you to successfully locate and secure financing in the time period you have to work with. Too often additional costs are incurred or transactions are lost due to the inability to get commercial financing in place when required.
If you are in need of commercial financing for your business, regardless of the application or the assets and cash flow you have to leverage, I suggest you give me a call so I can quickly assess your situation and provide relevant commercial financing options for your consideration.
Click Here To Speak With The Business Financing Specialist For All Your Business Financing Needs
Business FinancingMain Value Of Equipment Leasing
August 11th, 2011
“The Primary Value Of Equipment Leasing To Established Companies Is Leverage”
If you are a company that is more than two years in business, has established cash flow and credit, then equipment leasing can provide an incredibly valuable form of business financing leverage to you.
To be clear, equipment leasing can also be available to start ups and companies with less than two years of operating performance under their belt, but in those cases, the leverage than can be acquired is more similar to equipment loans or business loans for these types of companies.
For more established companies, equipment leasing solutions can provide financing amounts at or near 100% of the cost of the asset, and in cases where there are delivery, installation, and even training costs, these can all potentially get financed into an equipment lease as well.
Traditional business financing facilities provided through banks and institutional lenders will top out at the 75% to 90% lending range for the value of the equipment.
Leasing companies, on the other hand, can be much more aggressive with the financed amount, requiring very little money down, and many times only requiring the last payment on the lease in advance.
When you look at the overall balance sheet of a company, lower rates typically are linked to debt equity ratios ranging from 2:1 to 3:1, but if you’re generating enough cash flow, businesses like transportation companies can get up to 7:1 or higher debt equity ratios through the use of equipment leasing facilities to maximize the potential leverage of their equity.
For companies that still fall into the 2:1 to 3:1 debt equity ranges, equipment leasing is more likely to come in at or near 100% of the asset value due to the strength of the balance sheet.
Even in cases where a bank or institutional lender may beat out an equipment leasing company on rate, the business owner may still want to take the lease financing deal if he or she can go from say 75% loan to asset value to 100% or more.
This an be an enormous benefit to cash flow as available cash can be deployed into working capital to fund more inventory, more wages, more receivables which all can lead to higher profitability.
That being said, the equipment financing world can be very competitive, especially for companies with a strong balance sheet, cash flow, and credit rating, providing you with the opportunity many times to get both great rates and higher leverage through equipment leasing.
This is also an area where a business with strong financials can negotiate a better deal among competitive sources by better understanding just how far a leasing company will go to get their business.
Click Here To Speak To A Business Financing Specialist About Your Equipment Leasing Requirements
Business Financing