Archive for the ‘Debt Financing’ Category
Asset Based Loans
July 25th, 2010
“Because There Are So Many Types of Asset Based Loans and Asset Based Lenders, It Can Be Hard To Determine Which One Is Best For A Given Situation At a Given Point In Time”
First of all, asset based lending is all about providing more lending against the available hard assets of a business. The more predictable the resale value of the assets pledged as security, the larger the amount of financing that can be provided by an asset based lender.
Just like all forms of business financing, there are different levels of asset based lending set up according to credit rating and business performance. At the lowest cost level, banks and institutional lenders have asset based lending divisions that focus on providing greater asset leverage to their higher end clients that have an asset intensive balance sheet and require more leverage than what the bank’s traditional corporate finance division can provide to run their business.
The more traditional form of asset based lender focuses on borrowers that do not quite fit the bank’s asset based lending requirements. Slipping into this realm of asset based loans can push the lending rate from prime plus interest into annual rates of 12% to 18%. The cornerstone of these asset based models is the businesses accounts receivable and the resulting cash flow they create.
Still higher priced asset based lending becomes more focused on individual assets , or groups of assets, such as accounts receivable, or accounts receivable and inventory, or inventory only, or equipment, or real estate, and so on.
Sometimes companies with significant assets in all major categories (accounts receivable, inventory, equipment, and real estate) will work with a combination of different asset based lenders to get the best overall leverage and repayment terms.
The challenge with all of this is to locate the most suitable asset based lenders that are relevant to your situation, assets, and needs at a given point of time. In certain cases, the variability among lenders providing asset based loans on certain types of assets can be considerable resulting in borrowers paying higher costs of financing than they need to.
But when time and money are short, its easy to take the first thing that’s available in order to keep the business going and then hope that there is going to continue to be sufficient margin available from sales to pay the higher interest costs and to get the business to a position of profitability that will allow it to return to a cheaper form of debt financing.
The best way to determine what you’re preferred options are at a given point of time is to work with a Business Financing specialist who understands the current market and lender underwriting.
Click Here To Speak With Business Financing Specialist Brent Finlay
Tags: Utilizing Asset Based Loans
July 10th, 2010
“Asset Based Loans Can Be Applied To a Broad Spectrum of Business Financing Requirements”
While the category of asset based loans and asset based lending is continually growing in terms of application and money supply, the overall financing category remains confusing and misunderstood by many business owners.
The general idea is that an asset based lender is more focused on the market value of the underlying security being offered and its liquidation pathway in the event of loan default.
While this is a strong underlying theme, this financing category is goes much farther a field in almost every direction.
There are asset based lenders that only focus on one type of asset such as inventory lenders, purchase order financiers, accounts receivable factors, equipment lenders or leasing companies, real estate lenders, and so on.
By focusing on a particular classification of asset, the lender can more accurately assess the market, set up a predictable and efficient liquidation pathway, and attract investor or lender financing to fund their asset based loan model.
But there are also asset based lenders that work across categories such as working capital models that finance against accounts receivable, inventory, and potentially equipment. Or term lenders that focus more on equipment and real estate.
And there are also different slices to the market in terms of bank and institutional lenders versus private lending sources.
The more the lending decision is based on the value of the asset alone, the higher the rate is likely going to be. Because banks also participate in asset based lending, greater scrutiny is applied to lower cost forms of asset based loans.
While there is large variation in business loan size among lenders, there are once again slices of the market that service different levels of financing. In general, asset based loans are for commercial financing requirements above $500,000 in order to justify the work that goes into assessing them and the ongoing monitoring that may be required on a monthly basis.
The more an asset based facility is based on working capital cash flow, the more monitoring that will be required and the more control the lender will have with respect to the cash inflows and out flows.
Because there are so many types of asset based lenders that tend to overlap with respect to the deals they will look at, there can be several different types of options and related pricing to consider.
Unless the asset based financing is bank or institutionally based, its likely going to be short term in nature (one to two years) and is being used as a bridge loan to allow the borrower the capital and time to get into a better financing position which will allow refinancing into a lower cost institutional program.
And the right choice is not always the lowest cost. Some programs have very restrictive operating requirements that may not provide you with the flexibility you need to operate properly. Others may require high repayment penalties if you have the opportunity to refinance them before the term is up.
Regardless of the application, you will likely have a list of options to consider that can be hard to locate and harder to secure.
Because asset based loans will typically be one step in a multiple step financing process, you would be well advised to work with a Business Financing specialist who can help you map out a financing strategy that will work the best with the most relevant asset based loan sources available to you.
Click Here To Speak To Business Financing Specialist Brent Finlay
How To Secure Business Loans
June 30th, 2010
“Business Loans For Small and Medium Sized Business Are Secured By Preparation and Presentation”
There is an abundance of information on the web telling you how to game the system to secure a business loan or business credit, or how if you buy this book or pay this fee in advance, even the most clueless business person, or wannabe business owner, with the worst credit can secure business financing in no time flat.
Come on!
Yes, there are certainly ways to game the system. And you can get away with some sneaky credit application strategies that can get you lines of credit and term loans.
But like any loan, if you don’t have a solid plan to pay it back, you’re going to go into default on your repayment obligations and then what?
The path to financing a new or existing business starts with preparation. All businesses carry risk, and the people who lend out money want it back plus a return. So the inherent risks associated with any venture need to be understood and managed or why would anyone in their right mind issue a business loan?
For those that do issue questionable business loans, they don’t tend to do it for very long as risk catches up to the borrowers and the lenders portfolio turns to dust supporting the saying that a fool and his money are soon parted.
Preparation also helps the borrower better understand what he or she is getting into and perhaps may end up talking themselves out of getting a loan once they stand at a place where a truly informed decision is being made.
Unfortunately for many, preparation takes work and its far easier to plow ahead with an idea versus a well thought out strategy and tactical execution plan, find any source of money that can be had, and give it a go.
Good luck with that approach.
The other side of preparation is presentation. A lender or investor not only want to see that you thoroughly understand your own business or business opportunity, they also want you to convey the information in a form that they understand and can easily relate to.
Too often presentations provide excessive opportunities for lenders or investors to make assumptions or draw conclusions that may not be accurate or valid. This is a great way for an otherwise “finance-able” business loan request to get turned down.
Business loans aren’t easy to secure most of the time. There is art and science involved in the process of Business Financing procurement. Short cuts tend to lead to disaster more often than to success.
If you’re planning to be in business for the long haul, then its important to learn about, and constantly become better at, business loan preparation and presentation.
Click Here To Speak To Business Financing Specialist Brent Finlay
Action is Based On Urgency
June 13th, 2010
It seems that in about 95% of the Business Financing cases I work on with business owners and managers, there is no action to secure a Business Finance solution without a certain amount of urgency being present.
On one hand, we can say that’s just human nature, that people in general require a sense of urgency or immediate need to take action.
But in the world of business financing, this is becoming more and more of a problem as lenders continue to take a more conservative approach in 2010 out the backside of the current recession.
The result is that debt financing is not getting secured in time to close deals, shore up cash flow, finance growth, and so on. None of this is good for business owners or the economy in general.
Business owners and business managers have been conditioned to believe that getting a business loan of any size or structure can be done in matter of days or weeks. So the process for even applying for financing has typically been delayed until the 11th hour.
The need for urgency is pretty much always required in that once someone makes the decision to pursue some amount of business capital for their company, there is a need to focus in on the process and stay dialed in until its completed. Making a half hearted effort towards putting an information package together, not studying the financial metrics to demonstrate your business knowledge, and poor follow up and follow through on all requests for additional information can dramatically reduce the chances of success.
So while urgency and focus is a good thing, the timing of the action needs to be adjusted to achieve better results more often.
If we go back to the analogy of a clock and time left until money is required, business owners and managers have to reset their timing mechanism to not take action at the 11th hour, but at the 9th or 10th hour instead.
Perhaps its psychologically difficult for many to develop a sense of urgency earlier on in the process of seeking financing, but this behavioral correction needs to take place in order to avoid greater financial distress when an appropriate source of funding cannot be located and secured in the time required.
Those that start earlier, with a sense of urgency, will get rewarded more times than not.
Click Here To Speak With Business Financing Specialist Brent Finlay
Destroying Your Ability To Borrow Money
June 10th, 2010
For businesses that are otherwise profitable, there are a number of ways that a business owner can destroy or dramatically limit their ability to borrow money.
If a business is generating a positive cash flow over time, then it should be able to get Business Financing from the cheaper sources of business capital without too much difficulty provided that there is a valid business application for the funds being sought.
However, this is not always going be the case due to the lack of attention paid to certain key requirement that most sources of business credit are going to require.
The most common way to destroy a businesses ability to borrow is poorly managed personal credit. Even when a business itself has strong credit, the personal credit rating of the business owner or owners can destroy certain financing options. Why? Because even though a business has a good balance sheet and cash flow, the lower cost sources of financing expect the person or people in charge to be responsible with all types of credit they have to manage. Many lenders believe that your credit score is a reflection of your character and your commitment to meet all your obligations in a timely fashion. Sloppy credit with a string of regular late payments can lead to automatic decline for a request that would otherwise be approved.
Another major way to limit credit availability is to not upgrade your accounting review as the business grows in size. For example, beyond lending a few hundred thousand dollars, there will be lower levels of commercial lender interest in larger requests when the business is only providing notice of assessment statements.
Taking the financial statement aspect one step further, many banks and other lending institutions will only make lending decisions on financial statements that are less than 6 months old. Because corporations don’t have to file returns until 6 months after the year end, as soon as they are available to provide to lender they will already be too old to support a request for financing to certain lenders.
Institutional lenders will also require financial statements to show repayment ability of future loans and credit obligations. If the business owner has taken an approach whereby the tax level of the company is reduced to near zero and the available cash is stripped out of the business on a regular basis, an otherwise strong company will have a hard time borrowing money based on these practices.
There are many other habits and practices that work against a business’s ability to access capital. Failure to manage all the relevant elements will destroy potential financing options, increase rates, and make timely acquisition of business capital very difficult to accomplish.
Click Here To Speak Business Financing Specialist Brent Finlay
Debt Financing Has Become a Slow Walk
May 26th, 2010
It seemed that in 2009, business owners to a large extent were not in search for capital for projects or opportunities and were collectively weathering out the recession storm. Even when there was an opportunity to expand or get something done, willing lenders were difficult to come by.
In 2010, considerably more people are trying to get something done that requires debt financing, but lenders are still taking a very conservative approach to the market, bringing the process of Business Financing down to a slow walk or even a crawl in many cases.
What does this mean for business owners?
First of all, there is money available for business financing deals. But the process is likely going to take longer than you can imagine, so be prepared and start looking for financing sooner or further in advance.
Second, the devil is firmly in the details as money is flowing to those with business plans and commitments that are well ironed out and defend-able. So if putting together the deals is not your thing, then you should seriously look at getting third party assistance to not only develop a comprehensive proposal, but to also make sure that the positioning is appropriate in the current market place.
Third, forget about where the prime rate is at. Spending too much time chasing prime plus one money is likely not going to get you anywhere. If the only way your project will work is with prime plus funds, then make sure you’ve got lots of time to pursue the cheaper money. Even for solid projects right now, there is something of an economic risk premium added into most commercial rates.
Fourth, consider alternative financing sources. If there is sufficient margin in the project or business opportunity, then a joint venture or higher priced asset based loan may be what is the best fit in the short term. Cheaper money can always be pursued over time after the investment has been made.
Fifth, don’t expect any favors from your banker. Banks will tend to try and help their own customers first with expansion and growth plans, but it also doesn’t even remotely guarantee that they will be able to help you out.
If you want to increase your probability of debt financing success, then give me a call and we can discuss whatever strategies best pertain to your requirements.
Click Here To Speak With Business Financing Specialist Brent Finlay
Asset Based Lending In Vogue
May 6th, 2010
Some would say that 2010 is the year of the asset based lender, or at least that can be what it looks like for a lot of businesses trying to locate and secure financing.
Just to be clear, when I talk about asset based lending, this can cover off a lot of territory including such things as inventory financing, factoring, purchase order financing, equipment financing, private real estate mortgages, and asset based loan facilities that take some combination of receivables, inventory, equipment, and real estate as security.
As compared with corporate finance provided through traditional lenders like banks, the asset based loan providers are much more in tune with how to liquidate assets in order to get loan principal repaid if required.
In a typical, non recessionary market place, there are essentially three different categories of Business Financing provided by the capital markets to small and medium sized businesses. The first tier would comprise the corporate financing and small business lending programs provided by banks and larger financial institutions. The second tier is the business version of the sub prime market that is still institutionally driven, but with a focus on subordinate debt lending and higher risk corporate finance scenarios. The third tier is asset based lending where lending risk and the related rates are higher than traditional banking rates.
In the current market, the corporate and small business lending is slowly coming back, but remains very cautious. The sub prime lending tier is pretty much non existent, leaving the asset based lenders as the predominant lending option in many situations.
For the most part, asset based lending is used to finance growth, transition business ownership, and provide bridge funding for companies that have experienced a down turn in their financial performance and have hard asset equity to leverage to cash flow the business until financial results allow the business to return or acquire a lower cost corporate financing solution.
Major banks also have asset based divisions for medium sized businesses that are asset rich and require greater leverage than what traditional corporate financing can provide. But for the most part, asset based lending is focused on higher risk scenarios where some amount of operational uncertainty precludes traditional lenders from wanting to extend business capital.
In the current capital market, asset based lenders are seeing loan applications for lower risk scenarios than what they would typically be exposed to due to the lack of financing being provided by the other sources discussed above.
The result has been a considerable expansion of asset based loans particularly in the real estate market where private lenders continue to fill the void created by banks tightening up on their lending activities.
This is a hard transition for most business owners who feel that the economy is climbing out of the recession, but can’t get their bank or traditional lending sources to provide any new capital to their business operations.
For many, turning to a higher cost asset based lender is a hard pill to swallow as they feel their business should qualify for lower cost financing alternatives. But in the current market, growth and even survival is going to cost more with respect to business capital for many small and medium sized businesses and the sooner business owners make the adjustment, the faster they will be able to get access to commercial financing.
This is not to say that asset based lending is the only solution or best solution, but the current reality is that these higher cost financing options may be the only option available in certain cases, making their consideration more critical to the business owner.
Click Here To Speak Directly With Business Finance Specialist Brent Finlay
Different Levels of Small Business Equipment Financing
April 11th, 2010
There are basically four levels of small business equipment financing where the financing required is no greater than $250,000.
The first level is obviously provided by traditional banks through both loan and leasing programs. In Canada, the chartered banks will make equipment loans via the small business loan program insured by the Federal government for total acquisition costs of no greater than $250,000.
These loans get financed at around 5.5% at the present time, or roughly prime plus 3%. Because this is considered very low interest rate borrowing, even though the debt is partially insured by the government, there is a fair bit of qualifying required. And even for those that do qualify, the amount of financing provided tends to range from 65% to 75% of the equipment acquisition and placement costs.
Some of the banks also have a leasing division that works outside of their commercial loan programs and administered at a head office level. While banks can provide equipment leases for smaller ticket amounts more common with small business, these programs are more focused on larger ticket amounts where the objective is to use low cost, high ratio lease financing to attract new commercial clients to the bank.
The second level of equipment financing is still through institutional lenders and is typically between 6% to 10% interest range. These are term loans that have similar qualifying requirements as the first level, but are more designed for larger value loans that don’t quite fit into the bank qualifications. These types of programs will also consider one off transactions in most cases.
The third level is equipment leasing from leasing companies where most financing requests considered are no greater than $150,000. The best interest rates from this group range in the 9% to 14% range and while higher than traditional bank loans, can provide financing amounts in excess of 100% of the equipment, delivery, and installation costs for strong financial and credit profiles. So for many small businesses, the higher costs of financing is a trade off for greater equipment financing and leasing leverage.
There is a second tier in this type of financing where weaker financing profiles will be considered in rate ranges from 15% to 20%. The leasing decisions tend to be very subjective on the part of the leasing companies which can make it very difficult to predict which of these companies will be interested in any particular deal.
The fourth level of equipment financing and leasing is pure asset based lenders that are strictly focused on the liquidation value of the equipment and tend to provide equipment leasing rates in the 18% to 25% financing range.
While there are a number of financing sources in the small business equipment financing and leasing space, the individual lender criteria can change constantly, especially with companies that hold smaller portfolios that can easily be impacted by changes in rate or even slight increases in arrears accounts.
And being able to qualify for lower cost financing can be a very point in time event whereby at certain points in time, a business scenario can qualify for lower financing rates and at other times, the exact same scenario will not.
If you have an equipment financing or leasing requirement for small or large ticket items, please give me a call so I can quickly assess your requirements and provide relevant options for your consideration.
Click Here To Speak With Business Finance Specialist, Brent Finlay
Even Higher Priced Asset Based Loans Can Work In The Present Market
April 7th, 2010
The present capital market is more asset based and risk averse than what business managers and owners have gotten used to in recent history. And while a traditional asset based loan costs significantly more than what one would expect from a corporate financing program, the higher rates are something to seriously consider in the current market place.
The recession has created a lot of unfortunate circumstances for otherwise strong and well managed companies. As a result of lower sales, lender demands for repayment of existing debt, or capital required for expansion or equipment upgrades, business owners and managers are now forced to consider options they would never of previously given a second thought to.
But in lieu of where the capital markets are sitting right now, the asset based lenders have become the best option for many businesses, whether the business owner likes it or not.
From the borrower’s point of view, the lending rates between 1.5% and 2.5% per month can seem to be outrageous. But from the lender’s point of view, the rates reflect the risk in the market and are based more on an equity return than a debt return, which relates to the saying that with asset based loans, you’re renting equity as there are no other lower priced debt options.
From a cash flow perspective, the cash based loans tend to be interest only and are short term in nature, not intending to be in place for more than one or two years. So even though there is no principal pay down, the actual debt servicing requirement in the cash flow may actually be less that a lower priced corporate financing deal that requires an amortized repayment.
This is what can make the asset based solution affordable for many companies with asset equity and limited debt financing options. By being able to cash flow the debt service, even at higher interest rates, the business can potentially draw on the capital necessary to main or grow operations until things settle down and better financing options become available.
This is still a better option than selling off part of the company in that the owner has the ability to repay the debt at any time and retain full ownership and control. So like I said, its a lot like renting equity.
Commercial Financing Applications Need To Take A Different Approach
March 27th, 2010
With all the changes going on in the capital markets these days, business owners and managers need to reconsider how they go about applying for commercial financing.
The typical approach taken over the last several decades by small and medium sized business owners when applying for Business Financing was to start the process late and provide basic information including cursory business plans and thinly supported projections. Because of the strength of the overall economy, lenders and investors were comfortable with making lending or investing decisions from basic information.
This is not to say that considerable effort didn’t have to go into the process, but compared to today’s market, the overall lending requirements and demands for information have significantly increased.
The direction of greater focus is on management of business risk and the lender or investor protection against funding loss. For debt financing in particular, lenders are more focused on asset security and less interested on primarily cash flow based lending.
This is a significant departure to what businesses have gotten used and its a change that many still have not made when seeking financing. And the reality is that failing to change the positioning of a commercial financing application so that it aligns more closely to market requirements will likely result in no new capital coming into the business.
This is a real problem not only for dealing with short term cash flow deficiencies that directly impact operations, but also for all the time and effort that can go into long range planning that may not align with securing the capital required to bring things into fruition.
A better approach for debt financing needs to become more focused on hard security, details on customer and supplier financial profiles, projections that cover a longer period of time and have well supported variables, projections that include balance sheet, income statement, and cash flows, and a business plan that provides more tactical details and less theoretical potential.
Financing strategies are now going to have to be developed farther in advance to accommodate a very unpredictable and picky capital market focused on good deals where the risks are clearly mitigated.
Leaving things to the end of a transaction or waiting to close to the time when money is required is going to be a dangerous practice as the probability of getting anything of significant size into place quickly is low.