Archive for the ‘Secure Capital’ Category
Securing Capital Takes Time You Can’t Image
July 23rd, 2010
“Getting Deals Funded and Closed Can Be Way Harder and Take Way Longer Than You Expect”
When working through business financing scenarios where a business needs to Secure Capital for some reason, there are a few things that tend to be extremely common from one situation to another.
First, the business owner is in a rush or pressed for time to get financing in place. This can be due to a number of reasons, but the most common would be that the process was started too late or the business owner spent too much time trying to secure business financing from the wrong type of lender before realizing they were wasting valuable time.
But even when you find the right lender and provide a good solid package of information, the amount of time it takes to get money advanced to complete your deal can be considerably more than you are anticipating.
Take one of my recent projects. The borrower had an immediate financing requirement that needed to be completed and funded in a matter of days. The nature of the transaction was that it typically would take two to four weeks to complete.
Why would it take so long?
Because of the number of steps that needed to be completed by different people. This is always a function of time you can expect a deal to take.
If everyone involved in the process does everything required when required, the deal could potentially get completed in less than a week.
But the moon and stars don’t typically align like that and the reality is that everyone is working on a number of things at any one time so the probability of each task getting done in the least amount of time seldom works.
From a lenders point of view, they are going to estimate more time than what is possible as the last thing they want to do is stick their neck out on a certain amount of time and then get yelled at when everything doesn’t get completed by that date.
From the borrower’s view point, someone in a hurry cannot possibly see how the outlined steps will take so long to complete.
In the recent project I’m referring, during the first five days of trying to get the deal closed, there was failed wire transfer, an email system that went down, and a main frame printing system that when down.
Each unplanned event added more time to the process and in almost every Business Financing scenario I’ve ever been involved with, something from the unexpected happens. It can be things like sickness, holidays, long waiting lists, people new in position, the weather, someone having a bad day, and just about anything else that Murphy’s law can offer up.
The key point here is that a business owner has to try and build in as much buffer into the process as possible and even development contingency plans if the unplanned delays are excessive. Failure to factor in more time than what you think should be necessary can cause a deal to blow up in your face, a contract to be terminated, or more costs being incurred.
Click Here To Speak With Business Financing Specialist Brent Finlay
Tags: Understanding Lending Models
July 14th, 2010
“Different Business Lending Models Create Both Opportunity and Confusion”
Sometimes a particular financing opportunity, especially when there are hard assets involved, can have many different business lending models that apply to it.
Even within a single lender there can be multiple groups that could potentially consider your deal. As an example, a major bank can have a business financing group, a corporate banking group, a subordinate debt group, a leasing division, an asset based lending group, and so on.
While there are some demarcation lines between the different lending groups, there still is some over lap and many times confusion as to who you should be talking to or what you should be considering.
The reason this exists is that lending models tend to be very specific in terms of what they will consider and how deals can be structured. They are also rather inflexible so as to maintain a certain amount of integrity in the lending policies that have been established in the first place. Following the rules is a big part of effectively managing risk and straying outside of the lines is not.
So for each different business lending application, there tends to be a different business models that are going to apply to provide a frame work from which money can be advanced to customers.
The challenge to the business owner is that each business is somewhat unique to any other business in terms of size, age, credit, asset composition, management, etc.
So many times, the financial profile of a given business can attract interest from different lending models. The hard part is trying to figure out which ones apply and which ones would be the better fit for the business at a given point in time.
Remember that business lending models are also somewhat fluid in that they can be discontinued, or make changes to their lending policies and practices. For instance, if a business lender has made a large number of loans and placed a significant amount of dollars into certain assets of a certain industry or sector, the lender may stop issuing capital at some point in order to keep its overall portfolio in balance. So a lending program that was available last week is no longer available through the same lender this week for a similar application.
The same can be said for loss concentrations in a particular sector like we’ve recently seen in the automotive industry where business lending all but dried up for any one requiring capital from that business sector.
The best way to approach the market at any given time is to work with a Business Financing specialist who knows the lay of the land and can quickly apply your requirements to the market at a given point of time so that you’re always focusing on the most relevant options available and not wasting time on shifting sands.
Click Here to Speak To Business Financing Specialist Brent Finlay
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
Asset Based Lending Grows In Importance
July 7th, 2010
“Asset Based Lending Has Become a Necessity For Many Small And Medium Sized Businesses”
The recent recession has elevated the importance of the asset based lending market, creating both higher supply and demand in the process.
Asset based lending has a number of different slices, but essentially we’re talking about lenders that have a primary focus on the asset resale or liquidation value for determining loan amounts and security ratios.
Surprisingly to some, major banks also house asset based lending divisions to focus on providing higher leverage to companies with well established cash flows. The bank version of asset based loans are also priced off of the prime rate, making them very rate attractive compared to more conventional asset based lenders.
The growth of this Business Financing segment has been built on the ultra conservative approach being taken by banks and other institutional lenders. A large chunk of debt financing has traditionally come from small business and corporate banking where the strength and steady advancement of the economy were factored into the lending equation.
But when things turn bad, banks tend to have a harder time realizing on security and getting full loan repayment from asset liquidation. Banks are also not set up to monitor business operations as closely as asset based lenders tend to monitor transactions versus collecting periodic financial reporting.
The extra steps taken by asset based lenders to manage lending risk creates additional cost which is another reason why traditional asset based lending is more expensive.
But even with a higher cost of financing across the board for most asset based loans, business owners are lining up to pay more for their debt financing requirements. And the reason is quite simple. In many cases an asset based loan is all that’s available at the present time.
From a lender point of view, there are more asset based sources entering the market, especially in terms of private mortgage lenders. As the affluent baby boomers grow older, asset based lending provides an alternative to the stock market with solid potential returns and underlying security to protect the investment.
Because corporate or bank financing has contracted for the time being, asset based lenders are also getting a higher quality deal flow than they would normally expect to see, creating competition among lenders for the better deals.
This has resulted in better pricing for the better deals with asset based rates getting close to bank rates in some cases.
Asset based loans have also become a transition step to the future as well. Any business that has suffered through the recent down turn, is trying to expand for growth, or going through ownership transition is likely going to have to look to an asset based loan in the short term. Once earnings stability can be established, they will look to move to lower cost traditional options.
But in the mean time, even at a higher cost, asset based loans are providing essential capital for business operations.
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
Acquistion Financing Madness
June 25th, 2010
“Vendors Distorted Sense of Business Acquisition Financing Reality Kills Deals”
Ok, so perhaps a descent into madness is a bit harsh, but when I see some of the things vendors do to sabotage their own deals, it truly makes me cringe.
Here’s an example.
A buyer calls me up this week and he’s trying to get a business purchase finalized. The company to be purchased is service based with a high percentage of goodwill in the purchase price. Typical of these types of deals, the buyer is putting in money, a lender is prepared to put in money, and the vendor NEEDS to put in money.
All parties are in agreement with the deal, except for one thing. The lender does not want the seller to get paid out too quickly and drain the available cash out of the company and is asking for a delay in vendor principal and interest payments for 1 year.
This is hardly an unreasonable request as no lender (or buyer) wants to be left with a cash strapped company within a year of the loan being issued. Because there is so much goodwill in the deal, there is very little real tangible security, so if there are any cash flow hiccups, both the buyer and lender are going to be … in the soup.
But in this particular cash, the vendor is prepared to kill the deal over this, so the buyer is calling me up trying to locate another source of acquisition financing.
News flash to vendors of the world
This is a good deal.
In this case, the vendor would get 70% of the purchase price on closing, and start getting repaid on the remaining 30% in 12 months.
While this is also a typical deal structure for this type of deal, in many cases the vendor will not consent to any amount of vendor financing, especially anything that will place them in a security position behind the primary lender entering the picture.
Usually a vendor will have to go through two or three potential buyers before they realize that 1) likely no one is going to purchase their business for cash (everyone wants to leverage their investment) and 2) no lender wants to take the majority of risk, especially for a thinly secured deal.
Once reality starts to sink in several months later, after a number of false starts, the vendor starts becoming a partner to the deal and considers taking on some financing risk.
In the mean time, money has been wasted on accountants, lawyers, and other advisory costs, not to mention lost opportunity for potentially both buyers and the seller.
So my advise to the caller was to go talk to the vendor and work it out. Any new lender I could bring to the table would offer a similar deal. And if they were to realize the current offer was on the table, they wouldn’t consider the financing request at all based on the strength of the loan commitment already offered.
Next to start up financing, acquisition financing is the hardest to arrange. So when you’ve got this type of deal in hand, grab it hard and don’t let go.
Why?
Because the likelihood of a better deal being out there, right at the moment you need it, is slim. And if you take too long deciding, the lender may pull the deal off the table leaving you with nothing, leaving you to start the process all over again with the next buyer.
Madness
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