Archive for November 2011
Business Finance Ready
November 30th, 2011
“Here Are Some Tips For Being Ready For Business Financing Applications”
One thing that many entrepreneurs are not not keen on is paper work and bean counter type activities that may drive them to the Aspirin or Tylenol bottle for headache pain relief.
But regardless of what a business owner or manager likes or believes is a good enough representation of their business, debt financing sources and equity investors have other ideas.
To this point, whether you are looking for business financing today or not, there is a certain degree of readiness that should always be in place so that there are no delays in applying for financing and there is no lost opportunities from a lack of basic information being available or presented to a source of capital.
For instance, one of the most basic requirements any lender or investor will ask for is the last two or three years of third party accountant prepared financial statements for the business.
If this is not always available and up to date, it should be as it will be very difficult to be considered without historical financials.
And if the amount being requested is over a couple of hundred thousand dollars, then the type of accountant opinion is also going to be important.
For small financing amounts, a notice to reader accountant statement can be sufficient to most lenders, but as the amount of financing requested and overall financing outstanding and the overall level of business complexity growths, the more importance will be placed on the accountants opinion through either a review engagement or audit.
These additional levels of verification cost more money, but these can also be the difference between getting serious consideration from the type of lender or investor you want to work with and missing out on a good business financing opportunity.
The same can be said for management accounting reports that show product margins, variance reports, and operating break even. Projections and forecasts of both cash flow and income are also going to be important to complete the picture of where the business is headed.
Having good records of company assets and reports of good standing with with respect to any government regulations can also be helpful.
These are some of the basics that relate to virtually every business and the more these items are kept up to date, the faster the business will be able to react to capital requirements.
Scrambling to get many of these items up to date can not only cause delays, but lead to mistakes and a poor representation of the business and your business management.
Having the basic core financial information for past, present, and future at the ready provides confidence to lenders and investors and can immediately separate you from other accounts they are considering.
Business FinancingRecapitalizing Equipment
November 21st, 2011
“Things To Consider When Recapitalizing Your Existing Equipment”
One of the ways that business owners and managers access incremental capital for business operations is through the refinancing or recapitalization of equipment that is owned outright by the company or nearly owned outright with significant equity in the assets to leverage.
We call this refinancing because in most cases the equipment was previously financed and since been paid off. For longer use types of equipment, there can still be an opportunity to refinance the assets a second time around in order to inject capital back into the business.
While this practice does work and in theory sounds reasonable to most, there are some things to consider when crunching the numbers.
First of all, most sources of equipment financing will only recapitalize or debt finance 65% to 75% of the appraised forced liquidation value of owned equipment.
So if you think the orderly liquidation value of your assets is $1,000,000, the forced liquidation value may only be $750,000, which can make quite a different in the amount of funding that can be made available.
Second, the financing that is available is not typically prime plus three or four, its more like prime plus nine or ten as the financing is on used equipment that has not gone through a sale transaction to crystallize value or go through a condition review by a dealer. The higher cost of financing is not in itself unreasonable and can be explained in terms of risk to the lender, but it still needs to be factored in to the cost of financing you can expect.
In situations where the business is in financial distress, the cost of financing will be even higher, likely falling somewhere in the 18% to 24% per annum range.
Third, most of these transactions will need to be done through a sale and lease back transaction where by the financing or equipment leasing company purchases the assets from the business and provides an equipment lease back in return for a defined period of time. The sale and lease back transaction can potentially trigger income tax effects due to the fact that the assets are being sold, so this also should be factored into the transaction.
Fourth, the process, especially for the lower cost sources of equipment refinancing, is going to take some time. Third party appraisals are typically required as well as background searches on the assets to make sure a clear title is available to the financing company. The entire process from application to funding can take 30 to 60 days to complete. Faster money is typically going to be more expensive money, so its important to plan ahead and not leave this financing option to the last minute.
Click Here To Speak To An Equipment Financing Specialist
Business FinancingEquity Financing Application
November 14th, 2011
“When Should Equity Financing Be Considered As A Source Of
Business Capital”
First of all, lets get clear as to what we mean by equity financing.
Equity financing occurs when ownership in a company is sold in exchange for an agreed upon purchase price.
The purchase price becomes new capital in the business and is recorded as such on the balance sheet.
In the business financing world, there are basically three general forms of financing…debt financing, equity financing, and some combination of debt and equity.
Equity financing, in many situations, occurs when a business or company can not qualify for debt financing.
Part of the reason for not being able to qualify for debt financing may be a lack of equity on the corporate balance sheet. Once this has been corrected through an equity investment, the business entity may immediately be eligible for different types of debt financing programs.
When a business is in a startup and development mode and has not generated revenues nor is cash flow positive on a monthly basis, then an equity investor is typically required to provide the cash flow necessary to complete the development process and get to a cash flow positive position.
Higher rate forms of asset based lending that provide financing debt to equity ratios higher than conventional lenders, will say that they are renting equity to the business due to the high level of debt and risk that the business is covering.
All things being equal, most business owners will prefer to debt finance their business needs as it comes at a lower cost than and equity investment in most cases, and the business owner retains ownership and control of the company.
That being said, debt financing can be difficult to manage, especially when you are working with more than one lender where the risk of being offside with some lender covenant is going to be that much higher. Debt financing sources can also demand repayment at times for no reason or wrong doing on the part of the business, potentially leaving the business owner or manager scrambling to manage cash flow.
Because equity financing is connected to ownership, its typically not always straightforward how an owner will be able to sell their shares and exit the business. Most corporations have shareholder’s agreements that outline this process, but it can still take considerable amount of time to exit and there is no guarantee that the initial investment will be reclaimed.
Equity financing in many cases is considered to be a more patient form of capital as its placement is usually connected to the future earnings potential of a given business versus existing financial returns.
The higher risk associated with speculating on future returns also demands a higher risk which is going to be expected by most any equity investor.
More and more often, we are seeing business financing solutions with both debt and equity elements where the investor/borrower is only looking to be in place for a period of three to five years, exit the business, and make a high rate of return on the capital provided upon exit.
For most start up business situations, the entrepreneur is first utilizing their own equity to get the business going, leverage debt to grow the business, and then use third party equity financing to scale out the business in order for it to reach it market potential.
So depending on where you are at in your business cycle, there can be different debt and/or equity financing solutions that are going to be more relevant to you.
The key point here is that each situation is unique and as a result most business financing solutions are customized towards available sources of debt and equity that are available and relevant at the time of need.
Click Here To Speak With A Business Financing Specialist For All Your Equity Financing Requirements
Business FinancingAsset Based Loans
November 4th, 2011
“Asset Based Loans – When To Consider Them”
First of all, there can be many definitions of asset based loans.
For this discussion, we are referring to asset based loans in the context of a working capital facility that leverages the equity in accounts receivable at a minimum, but can also provide leverage on inventory, equipment, and even real estate.
The standard asset based loan or ABL type arrangement requires the borrower to open a joint account with the lender and that all funds paid to the business be deposited in this joint account.
The lender will, as they say, sweep the account every day and apply funds coming in to the balance outstanding on the loan. The borrower will request funds from the lender on a daily or weekly basis, depending on the requirements, to pay bills as they come due.
This is a highly simplified overview of how an asset based financing facility actually works from an operational stand point… each lender and financing scenario will have its own unique aspects.
Now back to the original question as to when ABL’s should be considered
There are two basic scenarios (with lots of variation within each one) where asset based loans can be considered to finance business operations.
The two scenarios include situations of growth and situations of financial distress…basically opposite ends of the lending spectrum.
In both cases, what is common is that the business requires high asset leverage to generate the cash needed to operate the business.
Under both these scenarios, conventional lending parameters may not provide sufficient leverage, causing the business to fail outright, or not be able to take advantage of growth opportunities immediately available to the business.
Most asset based loan facilities are born out of the inability of a conventional financing arrangement through a bank or institutional lender to provide the level of financing the business requires.
In highly stable companies with very strong balance sheets and cash flow, the ABL solution can be provided in house through the conventional lenders own asset based lending group. These institutional asset based lenders provide the higher leverage required at slightly higher rates than what their conventional business division would lend money out at. The large bank asset based lending programs are also only going to be available for growth and market development scenarios.
When a business cannot qualify for what we’ll call low cost institutional asset based loans, they turn to boutique lenders that provide ABL services at similar leverage, but at higher rates.
If a business is in distress, the asset based lender will provide higher leverage on assets and very tight cash management to give the business the best chance to turn things around or wind down the operations without destroying equity. Either way, this tends to be a short term solution until the business can once again qualify for a lower cost source of capital.
In situations of growth, the higher cost, traditional asset based lender will once again provide higher leverage at higher rates and serve as the senior lender until the business can qualify for a lower cost form of financing within a manageable range of leverage.
Unless a business is being funded by a low cost form of institutional ABL, the time period of business financing via an asset based loan is typically two or three years as the high cost of financing cannot be sustained over a long period of time in most cases.
Therefore, most traditional asset based loan providers are a form of bridge lender that does not expect to be financing the business into the long term.
Once again, there are many variations to these asset based loan programs, each with their own unique fit in the market place.
To better understand what type of asset based loan facility might be appropriate for your situation, you might consider utilizing the services of a business financing specialist that can help you navigate the landscape.
Business Financing