Archive for October 2011
Borrowing Risks Related To Government Debt
October 28th, 2011
“The Ability To Borrower Money Is Directly Related To Government Debt In Arrears”
When a business starts to have cash flow issues, one of the first things that start to fall behind is government remittances for income tax, payroll deductions, and sales taxes.
The argument from the business owner is that there is no money available to pay these bills and still cover off wages and essential operating costs, so the government will have to wait.
And while this may very well be the case, the long term survival of the business is going to depend on having this be a short term scenario.
If it can’t be made short term, then a growing or consistent level of government arrears is likely going to start a death spiral for the business.
This is largely because you start the process of death by a thousand cuts.
Lets discuss further what can potentially transpire.
First, your existing primary business lenders will typically have a covenant that you are up to date with your government remittances. If you fall behind, at best they will charge you a higher interest rate until the remittances are brought up to date. At worst, they will demand repayment and kill your cash flow if you are utilizing any type of bank or institutional operating facility.
Second, if you want to try and restructure your existing debt, even if you have the cash flow and equity to attract more business financing capital, no lender is likely going to advance any new funds to you unless the government arrears are brought up to date. If there isn’t enough incremental capital available to do this, then restructuring will not be possible. Even if there is a way to restructure to get everything in order, it will likely involve moving to another lender, potentially a higher cost lender that works with company’s in a certain amount of financial distress, where the costs of transfer to the lender can be considerable, further putting you behind the eight ball.
Third, at some point the government will take action against you. Many times you can negotiate a repayment plan to catch things up, but if this goes sideways, then in many jurisdictions the government agency you owe the money to will step in and seize your bank account, register garnishee orders with your customers, and put you in cash flow management hell.
If you can keep the government stuff paid up to date, you improve your chances to maintain existing credit and improve your chances to secure incremental debt or equity financing.
When you’re behind with these accounts, your options are limited and in most cases non existent.
Having a plan to stay out of government arrears, or putting a plan in place to pay them up as quickly as possible is going to be important to long term survival of the business.
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Business FinancingBusiness Financing Specialist
October 19th, 2011
“What Exactly Is A
Business Financing Specialist?”
While there can be several different definitions to what constitutes someone calling themselves a business financing specialist, I’m going to give you my own spin based on my own opinion of the role.
To start with, a business financing specialist must be someone that is well versed in both finance and accounting with some direct experience working in a business.
The reason for these specific requirements is that the key to being able to assist a business owner or manager with their business financing needs is to first be able to understand exactly what is going on in the business and what their financing and credit profiles look like.
By having a solid background in business and finance, a business financing specialist can then determine what types of financing strategies will work and what types won’t work.
The second key requirement that a business financing specialist needs to possess is access to sources of debt and/or equity financing that providing business financing to the market that the business finance specialist serves. In addition to having direct access, the specialist must also be able to understand the lending/funding requirements of each and every source of business financing they work with and he or she must also stay up with their funding interests and criteria on an ongoing basis.
A business financing specialist is middle man (or woman), trying to connect borrower to lender, owner to investor, and so on. Without both sides of the equation, no amount of brilliant understanding of customer needs is going to do any good. The exercise here is to locate and secure capital that meets the requirements of the client.
If the business financing specialist or financing consultant cannot meet the client’s expectations, then he or she needs to work with the client to better define a financiable scenario or decline the engagement. Pushing a rope up hill is not an options. Either you have a workable engagement or you don’t.
The next characteristic of a business financing consultant is the ability to properly assemble information into a format and presentation that proactively addresses the targeted lender or investors key questions, concerns, and criteria. This is partially art and science which is developed over years of practice. The ability to tell the story properly separates the good consultants from the not so good.
The final main characteristic I will speak about is the ability to get a deal approved AND funded.
There is no consolation prize for getting close. Many times a financing deal will be 95% complete and fall apart at the last minute or level of sign off or both material and obscure reasons.
The ability to stay ahead of everyone else in the funding process, communicate on relevant and clear information on a timely basis, and problem solve issues as they arise are all keys to having business financing success.
The business financing or commercial financing process is not easy, and has even gotten harder since the start of 2008 when we have been pushed into a financial market place not seen since the second world war.
As a result, the need for business financing specialist is more prevalent now then ever.
It costs money to utilize this type of expertise, but that is no different than with other professionals including accountants, lawyers, insurance brokers, and so on.
The questions business owners and managers have to ask themselves are 1) do I know enough about the business financing process to do it myself; and 2) do I have the time to invest in the process or is my time better spent on core business activities?
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingEquipment Leasing Tax Advantages
October 12th, 2011
“Equipment Leasing Can Potentially Create Faster Asset Write Offs And Lower Income Tax Bills”
One of the first things I hear business owners say about equipment leasing is that they are going to be able to write their payments off and get a tax break from doing so.
While this may be true, its not always going to work like that for a number of different reasons.
First of all, only an operating lease that is properly structured can allow you to write off all lease payments as an operating expense.
An operating lease has a number of different rules, which can vary by tax jurisdiction, but for the most part, require the lease obligation to have at least 10% of the original asset value be outstanding at the end of the lease along with the lessee having an option at most to acquire the asset at the end of the lease.
This is in contrast to a capital lease where the lessee is obligated to purchase the asset from the leasing company at the end of the lease term for a predetermined nominal amount in most cases.
If a lease qualifies as an operating lease, the payments can be classified as an operating expense and a write off against earned income in most tax jurisdictions (check with your own accountant or tax adviser).
But what does that really gain you?
If you have a capital lease, you basically fall under the same guidelines as owned equipment, which can be financed by some combination of cash and third party debt.
With a capital lease, you depreciate the asset and write off the cost of financing, if there is any, just like you do with an equipment loan.
Therefore, an operating lease does not give you a greater write off so to speak, but it can potentially allow you to write off the allowable tax expenditures faster.
For instance, one of the situations where an operating lease can have a nice fit is in the financing of grain bins.
A grain bin is going to be depreciated over 10 to 20 years as it has a long potential useful life. So the capital cost of the asset is going to be applied against earnings over a long period of time, minimizing the tax write down that is available in any one year.
But if the grain bin (or granary if you want to be really accurate) is financed via operating lease with say a three year term, 90% of the capital cost and 100% of the business financing cost can be written off in three years instead of ten or more years.
The other key element for getting an immediate tax advantage from an operating lease is you have to be taxable with a higher marginal tax rate being more beneficial than a lower tax rate.
Bottom line, there can be tax advantages to equipment leasing, but you better go see your accountant first and crunch the numbers as there is automatic benefit to leasing and the lease payments are not automatic write offs either.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business FinancingRules For Shopping Commercial Financing Deals
October 6th, 2011
“Here Are Some Basic Rules To Consider When Shopping A Commercial Or Business Financing Deal”
As a business financing consultant my first response to the question of how to best shop around a commercial deal is not to.
There is a saying in the commercial financing world that shopping is death.
While this may be a bit melodramatic, there is a message carried with the expression that should be considered by all business owners and managers seeking business financing.
Unlike a personal credit or residential mortgage application that is evaluated on three to five readily available metrics, a business financing application can take a considerable amount of work to complete.
Each lender only has so much time and resources to invest in reviewing all the applications for financing they receive, so it only stands to reason that they are going to put their efforts into deals they think they can fund with borrowers that are committed to working with them.
The more a deal gets spread around, the more likely the lenders involved are going to become aware of this and when they do, there is a good chance they may automatically decline the deal and move on to the ones they feel they have a better chance at closing.
If you are shopping your own deal around, one of the tell tale tip offs to a lender that you are in full shopping mode is the inquiries on your credit report. Any type of application for business financing will require a credit check and when your credit gets putted and there are ten other lenders listed who have recently made inquiries, then its going to be pretty obvious to any given lender what you’re approach is and they will respond accordingly.
This may be a chance you are prepared to take, but keep in mind that the lender that declines you for shopping (even though they will never say that) could have been the best option available.
The other way shopping can go horribly wrong is through the use of financing brokers. Employing more than one broker plus submitting applications yourself will likely result in lenders receiving applications from more than one source. This again can instantly kill your options with a lender as they wonder how widely this is being shopped and how serious you are about their funding services.
As a business owner or manager, the most important thing for you to do is to manage your own deal. What that means is that you need to keep track of all the places your deal has been and if you have third party agents working for you, they need to tell you where they are planning to send the deal so that there are no instances where the same deal crosses paths.
The second part of managing your deal is not allowing a lender to pull your credit until the end of the application process. One of the ways to get them to move forward without pulling your credit at the outset is to provide a copy of your credit that you have procured yourself for your personal profile and the business profile. This won’t take away the lender’s need to pull your credit before anything is finalized, but it does allow them to make an assessment based on something reasonably current. By doing this, you are eliminating all the inquires to your credit that are dead giveaways to other lenders as to how broad this deal is being circulated.
The most important aspect of searching for business financing is to intimately understand your own financial and credit profile as well as the lending targets that are going to be interested in both at a particular point in time so you can hunt with a rifle instead of a shot gun.
The best way to do this is to work with a business financing specialist who can develop a detailed understanding of your profile and requirements and get you in touch with the most relevant lender or lenders right away so that you’re not wasting valuable time trying to cover the whole market with applications.
Business Financing