Archive for September 2011
Sub Prime Commercial Property Financing
September 22nd, 2011
“Sub Prime Commercial Property Financing Sources Are On
The Rise Again”
In the wake of the most recent recession that started during 2007/2008, the sub prime lending market for both residential and commercial properties all but disappeared as many institutions were not able to survive the red ink being split all over their balance sheets.
But over the course of the last year or so, more an more sub prime commercial property financing sources have been popping up in both Canada and the U.S.
In some cases, its hard to even call these lenders sub prime as many are after the very same business that is currently being done by the major banks and secondary institutional lenders.
While the economy slowly strengths, drawing lenders back into the market, there is a slight change in market dynamics due to the behavior of the major banks towards deals that are a notch or so below a grade “A” rating.
This has created more demand in the market place for the types of lending sources that are still after solid commercial property financing deals, but willing to bend the requirements slightly here and there to get the deal done.
In the past, this was almost the exclusive domain of the front line, major brands.
But since the recession, requirements for business financing have not only become more stringent for the larger commercial mortgage deal, but also very time consuming as major lenders continue to react slowly to less than perfect financing opportunities.
Even for commercial deals that fit the lending box of the majors, the time it takes to get a deal done can take several months and loads of red tape to get completed.
Cue the sub prime or alternative mortgage lender.
These commercial mortgage lenders are also neither private mortgage lender or mortgage investment corporation.
They typically have a handful of very wealthy investors, which in some cases may be institutional lenders that are moving down market to operate through someone else’s business model.
These lenders are looking for the border line “A” deals, the A minus deals, and the B plus deals.
Cash flow, security, and credit are still very important, but there is less of an emphasis on some of the extensive due diligence requirements that you will find when working with front line lenders.
This type of funding source is also interesting to borrowers that might be able to qualify for a slightly better rate at a major bank, but don’t have the time or don’t want to invest the time and effort going through the application and approval process.
The alternative property financing market tends to work strictly through brokers with very little if any front line advertising or promotional efforts of their own.
In many instances, these lending groups will set up a number of different funds to target different risk profiles and/or property types in order to match up better with the return and risk expectations of a specific group of investors.
There is a lot of money out there trying to find a home, and commercial real estate mortgage financing in the right markets is very appealing to a certain profile of investors these days.
While there can be considerable range in the amount of financing that can be provided, the minimum deal size is typically several million dollars with the maximum size topping out at several hundred million.
With rates be relative to risk, you can find deals in the market that are very close to the conventional market for similar commercial property.
If you’re in the market for commercial property financing, this might be a category of lender that you should be considering.
Business FinancingKeeping The Balance Sheet In Order
September 13th, 2011
“Managing Balance Sheet Structure And Ratios Is Key To Managing Business Capital”
Its hard to look at the news these days and not hear or read about someone in a debt crisis, whether it be an individual, business, or country.
A debt crisis typically occurs when there is more money going out than going in and debt is used to fill the gap or hole in the cash flow.
Debt is acquired by leveraging assets on the balance sheet.
In order for any business to be able to access business financing debt and/or not get their existing debt called, they have to manage their balance sheet so that it meets the requirements of the lender.
In times of recession and down turn this can be extremely difficult, especially for new businesses.
But for existing businesses, governments, and countries, how many debt crisis scenarios could be avoided if better balance sheet management was being practiced?
By keeping the balance sheet in order (working capital ratio greater than 1, debt to equity ratio less than 5, all debt payments up to date, etc.) the business retains its ability to borrow money for times of growth and times of distress.
In good times, debt needs to be paid down, and in bad times debt may need to be required to keep the business going until the economic forces change back in favor of making profits.
But if a business is always living too close to the edge, good times or bad, there is no margin for error, and this is when a debt crisis occurs.
Proper planning and proactive management of the balance sheet will not guarantee that your business will never fail or reach a debt crisis moment.
But it will increase the probability that you will survive unexpected economic events by providing you with the means to finance yourself out of problems to a certain degree.
And if you do fall into this type of debt financing need, its going to be important to pay back the debt and build up your buffer for future needs.
While this may all seem totally elementary, building debt is an easy trap to fall into.
When things are going well in the economy, lenders will bend over backwards to give you access to more debt, even if it works against the fundamental balance sheet principals you should be managing.
And when there is a down turn, there is little forgiveness for those that are over extended as they are typically the first casualties.
The fundamentals are always the fundamentals.
Sometimes you have to say no to an opportunity if its going to overextend you too far for too long of a period of time.
Some times you have to retreat and try to minimize the damage when things are going against you versus throwing good money after bad.
By keeping your balance sheet in order, you will always have better options to consider than if you don’t.
And if you plan to stay in business for a long period of time, the ups and downs are going to be inevitable, so maintaining a strong borrowing basis is not really an option, its a requirement, unless you like walking a financial tight rope every once in awhile.
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Business FinancingGetting The Most Out Of Available Cash
September 6th, 2011
“Is Your Business Using Cash As A Hammer Or A Nail?”
Even though we are living in a credit centric time where cash management is becoming more of an after thought, the power of cash or being in a cash position is and will always be considerable for those that know how to properly manage cash.
When I’m talking about cash, it can be actual cash in the bank or a revolving line of credit that has funds available against the approved limit.
In either cash, we are talking about the lowest cost form of money you have at your disposal and how you should be managing it.
When I speak of getting the most out of cash, its based on having a good working understanding of what the cash flow will look like over a period of time as well as cost/benefit relationships between receiving cash and making cash payments.
Everything thing in any business can be boiled down to two things … time and money. Everything you earn and spend will result in a cash transaction at some point in time. Everything you acquire or need to repay will have a specific payments required at a closing rate or scheduled payment date.
By understanding the expected inflows and outflows of your business in sufficient detail, you can determine how to best utilize cash to get more than face value.
For instance, paying suppliers within a discount period may provide a greater return on cash than buying an asset for cash that could have been partially or completely financed.
Collecting money sooner than later provides more cash in hand to apply in the business, but what types of cash or non cash incentives have to be provided to do so?
The first step in any form of serious and worthwhile cash flow management is to complete a cash flow forecast.
I recommend that any business forecast the future inflows and outflows of their business for at least 90 days, and turn it into a rolling forecast by updating it at least once a week, adding an additional week into the future and carrying forward and/or adjusting inflows and outflows that have not been resolved on schedule. Also, cash forecasting should be done in weekly time segments as monthly segments are too long an interval to match up inflows and outflows.
By going through this exercise at least once a week, you have a much better perspective of the cash that’s going to be available at any point in time as well as when cash may be short or in jeopardy of being short.
This can be extremely useful in situations of business distress and business growth.
In situations of distress, its going to be important to understand exactly when all commitments are going to be coming due, which ones can wait, which ones will require some servicing, and so on. Its going to be important to make sure that funds are available every pay period to pay salaries, otherwise everything will quickly grind to a halt.
In situations of growth, more capital may be required to fuel growth in the form of more inventory, more equipment, more working capital, more accounts receivable.
Properly utilizing cash to keep the balance sheet in order and leveraging cash to its fullest to secure cheaper forms of business financing can be instrumental in funding growth.
But getting greater mileage out of cash starts with weekly cash flow forecasting, months into the future.
The sooner you start to incorporate this type of discipline to your weekly routine, the sooner you will start seeing the benefits.
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Business Financing