Any time you are going to utilizing equipment that you want to finance in rented or leased space where the financing is in the form of a lease, you’re likely going to need to get the landlord to sign a waiver.
The waiver is going to state that the leasing company has the right to come onto the landlord’s premise to collect their equipment in the event of a lessee default.
Because financing is in the form of a lease, the leasing company is actually the owner of the equipment as compared to an equipment loan where the business borrower would be the owner.
Why does this matter?
Well, first of all, it is going to be something that the landlord is going to have to sign. So while its not likely going to be a big deal in most cases, you can’t assume that your landlord or landlords will sign off. Therefore, it makes sense to broach this with them before you even apply for equipment lease financing otherwise you could be wasting valuable time.
And if this is a problem, then you will potentially need to be considering other options for financing sooner than later to make sure you don’t run into any timing issues or production or operational delays relating to getting equipment into place.
Where the landlord waiver can become an issue is when you are leasing assets that become attached to the third party rented facility.
A good example of this these days is high efficiency light upgrades.
This type of asset is a lease-able asset in many situations and is permanently affixed and installed into the landlords property.
When presented with a leasing waiver, the landlord may refuse to sign based on the risk that if their tenant defaults on the leasing payments that the leasing company can then come into the landlords building and remove all the lighting being financed.
This would leave the landlord without lights and a big potential mess and cost to deal with.
One way around this is to have both the building lease and the landlord waiver state specifically that in the event of a financing default related to building fixtures that the tenant would be responsible for making sure that the lighting was returned to its original condition prior to the tenant entering into their lease, or something to that effect.
This is an example of how financing needs to be coordinated among a number of different parties at times before being put into place. More specifically, when considering a landlord waiver we have a an applicant business, a leasing company, a landlord, an equipment vendor, and legal counsel for the leasing company and applicant at a minimum.
If you are looking to finance equipment that may require a landlord waiver, consider working with a financing specialist who is versed at coordinating the different parties involved in order to get the required financing in place.
This is obviously a good strategy if you can qualify for lower interest rates as its going to save you and your business money.
But what they fail to take into account when making these sorts of inquiries is the potential work involved and the time it could take to accomplish this objective.
First of all, the providers of cheaper money automatically fall into the category of lower risk lender, which means that they are going to take their time making lending decisions, that they will have considerable lending/funding requirements to meet, and that they will perform or require considerable due diligence on each and every deal that they consider.
So assuming that you or your business could qualify for cheaper money, its going to take time to get it into place.
If you have a timeline to hit in the future where an interest term on existing debt is coming due or you will have a commitment that will require incremental capital, you would be well advised to start the financing process at least 90 days ahead of time.
Once again, this is assuming that you would qualify for this type of financing.
So before investing time and money into a lender’s application process, the first units of time should be spent finding out what you can qualify for.
This can be done on your own or through the help of a business financing specialist.
This assessment process requires a review of your financial and credit profile which can then be applied to the basic lending and funding criteria of individual lenders or groups of lenders.
For instance, while not exactly the same, most “A” lenders will have very similar lending/funding criteria. And while understanding whether or not you fit a lenders criteria is going to be important to determine if and when you should apply for cheaper money, equally important is knowing what lender or lenders are also interested in the type of application you are putting forward.
Commercial lenders are continually “in and out” of the market all the time for certain assets, applications, industries, and geographies, or some combination of these as they work to maintain a balanced risk portfolio. So even if you can determine that you can meet a certain lender’s funding criteria there is no guarantee that they will be able to grant you funding at any particular point in time.
After performing the initial assessment, you may discover that you do not qualify for the type of financing your after. At that point, the financing exercise is about investing time to get your business in a finance-able position by addressing the areas that would cause you do be declined by lower cost lenders.
All of this takes time, and in many cases more time than you can imagine.
But being able to secure lower cost money can also be a considerable saving to you and well worth the effort.
If you’d like to find out more about your available commercial financing options, I suggest that you give me a call and we’ll go over your situation and requirements together.
How is that possible.
Well, first of all, you are going to have to pay a factor for their cost of financing, so in that sense its NOT free.
But, depending on the benefit you can gain in your cash flow from factoring, you may be able to reduce or completely eliminate the cost of factoring in with real dollar benefits.
Let me explain.
The scenario where the above will typically play out is in a market where the borrower is reselling goods and services.
Another characteristic of this market is that the primary end customers that drive the overall industry are slow to pay.
An example would be the oil patch where major oil companies (slow payers) are the cash flow stream either directly or indirectly for tier 1, 2, and 3 suppliers.
The credit risk is low overall due to the high credit rating of the main line oil companies, so its not going to be hard to get factoring.
And once you have factoring in place, you can go to your suppliers, who you are now paying in 60 to 120 days, right after the time you get paid from the oil companies, and offer them faster payment in exchange for early payment discounts.
These early payment discounts can be significant and collectively can equal or even exceed the cost of factoring.
So when factoring provides an 85% advance rate at the time of sale and you have a mark up of 25% or better, its easy to see how you can tell your suppliers, or at least main suppliers, that you can pay them in ten days or less if they can provide a big enough discount.
And for many of the vendors servicing this market, they are more than happy to be paid less faster as it greatly improves their cash flow, and cash flow uncertainty as well.
With a proper factoring account, a business can also be set up for growth which means larger annual purchasing from vendors which in turn can lead to even bigger discounts.
So while its easy to say that Factoring is too expensive at 12% to 24% per year, what good is cheaper money if you can’t get enough of it to fund all the sales that are available to you.
In the end, all business financing should be considered on a net effective cost basis.
Put another way, can you put more money in your pockets factoring than not factoring?
Getting hung up on the interest rate is a complete waste of time.
Sure, you should always strive to pay a lower cost of financing, but not if in doing so you are significantly delaying growth, or end up with greater restrictions on use of funds which ends up making you less net dollars.
If you need to work out a working capital financing scenario and would like to see if Factoring could work and its effective cost, then I suggest that you give me a call so we can go through your situation in some detail to see what might work.
The question largely is which process do you follow?
This needs to be answered in a couple of different ways.
First, all business financing processes can be classified into one of two different categorizes.
Process #1 we will call the off the shelf business financing process while process #2 is a customized approach.
With process #1, the lending institution has a product or program that they provide on mass that has very specific requirements and a process to follow. The off the shelf process tends to be very rigid in terms of the requirements and therefore is not very pliable with respect to being able to adapt to an application that does not meet the stated requirements.
To get business financing from an off the shelf program, you may need to adjust or adapt your requirements to fit the lender. While this may seem counter intuitive to a business owner, the reality is that swimming against the current with these well defined programs will not likely get you anything but frustration and a lack of funding.
Process #2 is a customized business financing process.
Now this is where things get really interesting.
Customized processes are typically provided by private investors that will consider a wide range of debt, equity, and debt/equity scenarios.
The process for trying to arrange this type of financing will also typically involve some type of intermediary or front man for the money that brings deals forward to the private investing group.
This can be done through a formalized system like investment banking, hedge funds, or even IPO’s.
Every financing strategy that is pursued will have to be vetted through a chosen group of advisers which will likely include lawyers, accountants, business consultants, and even boards of directors.
The big challenge with the customized business financing approach for the borrower or applying entity is that the process costs money to pursue and the outcome is uncertain as the process will ultimately dictate the outcome.
This is also why most business owners spend most of their time working with process #1 in that the path to money is typically more clearly defined.
That being said, even though process #1 can provide a road map to money, there still is no guarantee that you will get the money you’re looking for if you follow it.
So regardless of whether you choose to pursue process #1 or process #2, the are no guarantees that one will be more successful than the other.
So getting business financing in place is more about increasing or maximizing the probability of success which will occur when you 1) select a process that is highly relevant to your requirements, and 2) stick with the process long enough to achieve the desired results.
In terms of point #1, it can take some work to figure out who’s process to follow and who you should be working with. There are all sorts of intermediaries making all sorts of claims out there and it can be difficult to choose a path that increases the probability of success just as its very easy to get sucked into the promises of a low probability gig that says all the right things, but is lacking in terms of substance and the ability to follow through.
In terms of point #2, because business financing in general takes time to complete and can be frustrating to complete, its easy to jump from one process to another without getting the desired benefit.
The goal in seeking business financing is not to secure optimal financing in my opinion, although that can be a secondary goal.
The primary goal is to secure financing that works within the time period you have to arrange it and then work to improve upon your balance sheet over time once you have capital in place to do the things you want to do in your business.
So selecting a solid and relevant business financing process and then sticking too it are going to be keys to getting the financing you are looking for.
There are times when a business has considerable equity in their existing assets would like to undergo equipment refinancing to leverage that equity for working capital, debt consolidation, or business expansion.
In order to accomplish this, the business can either get a term or demand loan against the identified assets or undergo a sale and leaseback transaction with a leasing company.
With respect to a term or demand loan, this is can be provided by any number of financial institutions, but regardless of the lender you speak to, this type of equipment refinancing will only take place if the existing cash flow of the business is capable of servicing the debt.
If the business is in a situation of distress or development, where cash flow is projected to be solid, but isn’t at the present time, it is less likely that a term or demand loan can be secured.
An equipment loan provides very little financial disruption to the business as the equipment pledged as security remain in the ownership and control of the business owner or owners.
A term or demand loan lender will also require first position security so it will be important that no general security agreement is in place against all business assets, or the GSA holder is prepared to remove the equipment you want to refinance from their GSA.
A sale and leaseback transaction will require the sale of the equipment to a leasing company in exchange for a capital or operating lease and the exclusive right to use the equipment for the term of the lease. Most sale and leaseback transactions provide capital leases where the business will repurchase the equipment at the end of the lease for a nominal cost.
Because of the change of ownership requirements, sale and leaseback transactions can trigger income tax effects so its important to review a proposal for this type of equipment refinancing with your accountant before going forward.
Asset based lenders and leasing companies that offer sale and leaseback equipment refinancing will consider situations where the business has cash flow distress or is looking at expansion to increase cash flow. The effective financing rates in these situations will be higher than for a company with a stable cash flow.
The amount of business financing that can be secured for either loan or lease is going to range from 50% to 75% of forced liquidation value of the equipment that you want to refinance.
The forced liquidation value will be established either by a third party appraiser or through the lender’s own internal equipment appraising resources.
Terms for repayment will typically range in the three to five year period, depending on the assets and the financial and credit profile of the business.
If you are in need of equipment refinancing or want to know more about it, please give me a call and we’ll go over your requirements together as well as potential options that may be available to you.
And depending on the terms you give to your clients versus the timing related to paying vendors, suppliers, and operating accounts, there can be a gap in the time between when you need the money from a sale done on credit and when you’re actually going to get the money.
This funding gap is primary filled by financing your accounts receivable.
There are two basic ways to do this with a bunch of variations.
The lowest cost for of accounts receivable financing typically comes in the form of a bank margining account where a bank or institutional lender takes security over the accounts receivable, as well as anything else they can get their hands on like inventory and potentially equipment, and offers to advance to the business a certain percentage of the accounts receivable outstanding. The advance rules will vary by bank and each lender will also have lending covenants related to the monthly and annual balance sheet and income statement of the business.
Typically a margining account can only be secured by a well established business with at least three years of operations under its belt and fairly constant level of accounts receivable outstanding over the last 12 month period.
AR margining is primarily for companies that are very stable and not in any type of boom or bust position.
The other main category for accounts receivable financing is factoring or invoice discounting where a finance company is actually acquiring the right to collect the accounts receivable that is owed to your company.
Similar to a margining account, a factoring account provides an advance of accounts receivable outstanding to the business. Also similar to a margining account, most factors will not finance an accounts receivable invoice over 90 days past due.
That’s where the similarities end as there are many different forms of factoring whereas bank margining is fairly consistent from one lender to another.
Factors live more in the boom or bust parts of a business cycle although there can also be factoring that competes directly with the stable market space primarily reserved for margining.
Accounts receivable factoring, for the most part is notification versus non notification factoring. Notification means that your customer makes their payment directly to the factor whereas non notification has the customer still making payment directly to the business, but the payments are deposited into a joint account that the factor controls.
Notification factoring provides greater control to the factor and allows them to finance both highly distressed and high growth situations due to the factors control of collections of a legally completed sale.
There is also recourse and non recourse factoring. Recourse basically means that the factor will charge you back if an account becomes noncollectable, or is not collected by a certain point in time. Non recourse essentially means that once the factor purchases the receivable from you at a discount, that they take responsibility for collection and loss from than point forward.
Each version of factoring has its own business applications and there can be very large differences in pricing from on factoring program to another, largely due to what is being offered in terms of notification, recourse, and size of the transactions being factored as well as the overall facility.
Because there are so many different potential variations to accounts receivable financing, it can be very easy to get focused in on a funding option that is not ideal for your business.
This is certainly an area of business financing and asset based lending where some financing experience can come in handy in terms of both locating a suitable financing source and getting a facility up and running for your business.
If you have an accounts receivable financing need, I suggest that you give me a call and we can go over your requirements together and review different margining or factoring options available to you.
The question as to whether or not you should consider paying these fees is a difficult one to answer for a number of different reasons.
On the dark side of the equation, yes up front fees are a perfect opportunity to be scammed by either someone who has no intention or ability to provide you with business financing capital, or someone who may place some money to legitimize their offer, but provide very little chance of funding once the money is paid.
On the flip side, there are lots of ways to look at fees prior to funding.
Most of the major banks will not charge any fees to perform the initial due diligence required to get to a commitment stage. But its not uncommon that a commitment fee is going to be charged and there could still be a number of conditions in the commitment that still need to be covered off before you see any money. So is this an up front fee or not?
Another lender strategy in the commercial financing space is lender commitment to the process. The lender will provide a term sheet for funding with conditions early on in the process and will continue on towards a funding commitment and actual funding if a deposit is paid when the term sheet is signed back.
The rationale on the part of the lender is that 1) the borrower is showing seriousness in their application as compared to shopping it all over the place with little chance of follow through; 2) if any third party support items are required, the lender will commission then directly and pay then out of the deposit; and 3) if the deal cannot be funded, the deposit will be returned less any outside costs incurred by the lender.
The alternative to the above is that the lender asks the borrower for different third party reports, which the borrower has to pay out of their own pocket and provide to the lender anyway. The only real difference is does the borrower pay the costs directly or indirectly through a deposit.
There are also alternative lenders placing investor funded money that want to have their time paid for when considering any deal. These groups tend to be smaller organizations in terms of head count and want to cover their operating costs when assessing any deal. The rationale here is that because they are assessing alternative financing deals that could be some form of debt/equity combinations, the amount of deals they may have to process and the time required to complete a deal may be substantial and difficult to cash flow from success fees alone.
And regardless of how much a borrower may dislike paying upfront fees, the process of going through an application and trying to get it funded does take time and resources. Many will argue that external costs should be covered by the borrower, but internal costs should be born by the lender, investor, or intermediary.
There are many different points of view and sides to the different financing fees charged.
So what’s the right answer with respect to paying or not paying up front business finance fees?
As mentioned above, in many cases there are many forms of up front fees that you would not necessarily consider as such that are charged every day by national branded lenders.
The key point I’d like to make is that financing fees are a business expense if you choose to pay them and you may not get access to funds without paying them prior to funding.
Like any business expense, its important to pay for value and to do enough homework to know that you are paying the costs for someone that could truly help you versus someone that is just projecting help in order to collect fees.
Further, also remember that just because you paid an up front fee doesn’t guarantee you funding. There are lots of online message boards where individuals cry foul and scam when no such thing took place.
The scammers are going to prey on the desperate, promising things no one else is able to provide, sounding like the “very thing” you were looking for.
And legitimate sources of business financing will take upfront fees, perform their full due diligence and not fund the deal also.
So it can be very difficult to assess good from scam and its very much a buyer beware world out there when it comes to paying upfront fees either right at the beginning of the process, or somewhere down the line before funding will take place.
Not being prepared to pay any type of upfront fee in any situation can limit your business financing options considerably as well so weigh the pros and cons carefully before making a decision one way or the other.
So what do I mean by the proper mindset?
I’m referring to a perspective whereby your focus going into the business financing process is that 1) its going to be more difficult that you think; 2) its going to take longer than you imagined; and 3) the process will take unexpected twists and turns.
This goes along the lines of prepare for the worst and hope for the best, and if the business financing process goes better than expected, then so much the better.
But assuming it will go well from the outset is potentially setting yourself up for failure.
Because most business financing processes are difficult.
Why are they difficult?
Its a hard question to answer in one sentence but essentially the more people that are involved in the process, the greater the chance for delays, misunderstandings, incorrect assumptions, personality conflicts, and subjective assessment that does not go your way.
So to increase your chances of success, going in with the right mindset can help you stay sharp, make sure things are not slipping into unnecessary delays, and basically not allow you to take anything for granted and to always remember that its not over until funding is fully completed.
If you’re like most business owners or managers that have not experienced the dark side of business financing, then you’re probably thinking that I’m exaggerating.
All I can tell you is that in 25 years of working on business financing cases, it is rare that I see a deal that is approved and funded without some twist, turn, or delay.
Here are a few examples from just this year …
The application process moves to the commitment stage, just in time to fund the deal in the time period available, when the lender adds 7 new conditions into the final commitment without previously bringing them up. It became impossible to meet the conditions in the time remaining to close the deal and the deal was lost.
For a business refinancing case, the applicants accountant promised to provide completed financial statements by a certain date 6 weeks into the future. When the date came, the accountant had not yet started working on the financials, the existing bank pulled their facility and gave the business 30 days to pay them out before the bank closed the business account and started to realize on registered security.
Unfortunately, these types of situations are more common than not. Sometimes we can work our way through them and some times we can’t. One thing that always helps is having more time to work with and staying on top of all those involved to do their part in a timely fashion.
As I have said several times in other articles, business financing is very much about applying at the right place at the right time, but its also about having the right mindset for even when you are at the right place at the right time, things can still go wrong and you need to be able avoid the problems that can be avoided and quickly solve those you can’t see coming.
In the end, business financing is both art and science which is also why working with a business financing specialist can many times get you through the financing process in the time you have to work with.
One thing that business owners and managers have a hard time understanding is that business financing or commercial financing is not very pliable or flexible or even predictable and getting funding arranged that is within your strike zone or acceptable to you is or should be the primary goal versus trying to get the best deal.
Sure, we’re all interested in the best deal, but to be considered for such, there are a few things you’re going to need.
First and foremost, you are going to need time. Especially when you’re going after the cheaper forms of money out there, lower rates relate to lower risk which takes more time to assess.
Second, you’re going to need a highly competitive financing scenario where several lenders would be eager to fund the deal.
Third, you will need to be able to meet all the requirements that “the best deal” out there is going to through at you before any funds are going to be advanced.
This type of perfect scenario where the borrower has a considerable amount of leverage is few and far between in the world of business finance.
The rest of the time, the lender has the upper hand and will dictate the process, requirements, costs, and so on, leaving very little bargaining power for the applicant.
Lenders tend to be in a stronger position because businesses typically are in a rush and don’t have the time necessary to carve out a position of strength in the financing process.
But despite their apparent disadvantage when negotiating business financing arrangements, business owners and managers will still push their luck to try and get the best deal without sufficient time or resources to pull it off. This can happen in that anything is possible…its just not likely most of the time.
This is where the bird in the hand comes in.
Because of the inflexibility and unpredictability of business lenders, when you have one of them interested and lined up to provide you with the capital require, you have to seriously look at accepting their offer, even if you believe there may be a slightly better deal out there.
While a better deal may exist, are you going to find it and wrestle it to the ground in time to take advantage of it? And how long are you going to have to delay making money while the search for the better deal marches on?
And if you can’t find a better deal and return to the original offer, there is no guarantee it will still be on the table.
Lining up business capital is almost always a challenge and getting optimal rates and terms even more so.
Once you have something lined up that can meet you needs and is acceptable to you, even if not preferred or ideal, you are likely better off in many cases to take the money and get making money versus the risk of going back into the market looking for a better deal.
Over time, this approach allows the business to take advantage of opportunities on a timely basis.
If the optimal financing approach is taken, there will likely be as many miss steps as successes over time, which is not likely to get you any further ahead, but will be much more frustrating to deal with when things aren’t coming together they way you expect or require.
We have now gotten to the end of February in 2012 and heading into the last month of quarter one of 2012, so I thought it was a good time to give my two cents on what I’m seeing in the business financing market place.
As a whole, there are certainly more businesses actively looking for money that at the same time last year. At least part of that here in Canada can be attributed to the above average weather, bringing spring and spring optimism out into the open sooner than usual.
And while lenders are getting more active in the market with their promotions and overall marketing activities, there is still more demand and supply for what I would characterize as reasonable risk business deals.
We are also continuing to see the development of a wide variety of sub prime and debt/equity financing models to try and fill the needs of the market place, much of which was vacated by those that failed to survive post 2008 recession.
Global financial markets are still pretty shaky, which has a major trickle down effect to all regional markets, including Canada, where the economy for the most part is still performing fairly well compared to most other parts of the world.
Most significant sources of debt financing will at the very least be drawing some of their capital from global markets, so as the world economy goes, so does the appetites, at least to some degree, of individual country lenders.
The main constant since 2008 is that you need to have your ducks in a row when applying for financing as loose or less than complete financing scenarios will continue to have a hard time attracting capital.
And even if you have a stellar, well rounded out project or internal need to present for financing, it may still take considerable time to get the deal completed and funded. This is especially true with the major banks and front line institutional lenders.
The secondary market also has the luxury of being more selective as they have more deals than they can handle due to the tightening up of lending/funding criteria at the branded banks.
All lenders are still very concerned about their portfolios as not all of the aftermath from the most recent recession has been seen yet.
In general, there appears to be an increase in both demand and supply of business financing and that trend is expected to continue through the spring and summer periods.
Key message though is that if you are going to need business financing in 2012, you need to start the process sooner than later, and you should consider getting some help from an experienced financing consultant to help you navigate your way through a continually changing market place.