Posts Tagged ‘asset based financing’
Business Financing Is About Focusing On What You Can Secure In The Time Required
February 27th, 2010
In the world of business financing, everything is all about timing.
Too often business owners and managers get overly focused on their ideal form of financing versus what’s available to them in the time they have.
A good example is the current situation in 2010 where many businesses are starting to see a return to more normal business patterns as we get to the back side (hopefully) of the current recession, but they lack the working capital resources to take advantage of available opportunity.
But because last year was challenging, they not only have weak financial statements to work from but also potentially strained working capital and credit due to needing to cover cash flow short falls over the last 12 months.
And even though they may have never experienced an off year before, they still may not be able to secure incremental working capital from their bank or move to another bank to gain access to a different source of capital.
But what is likely versus what they are focused on can be two completely different things.
This is where having a basic understanding of how Business Financing works can be so critical to your business. In times when a dog won’t hunt, its better to not go hunting, or take a different approach.
Lately I’ve been getting a rash of very predictable phone calls for this time of year from business owners frantically getting nowhere trying to secure additional funding with a weakened financial profile.
Is it possible to secure incremental financing or refinancing at prime plus rates in a weakened financial position while we’re still within in this more conservative recessionary lending period?
Yes it is.
Is it probable.
No it’s not.
There’s the famous Albert Einstein quote that the definition of insanity is doing the same time over and over again and expecting different results, which could have been written about business owners not understanding how to go about securing business financing at any given point in time.
Taking it even one step further, even if it were possible to secure your ideal financing in less than optimal lending circumstances, can this be accomplished in the time you have?
What good will it do to get the optimal commercial financing in place if you’ve missed the boat on solid business that could have helped you get back on track or at least generate some positive cash flow during the last 6 months of unrealistic money shopping?
When there is no financing contingency in place, and additional cash is required sooner or later to take advantage of opportunities or keep the balance sheet from further deterioration, the best capital to go after is capital that can be secured in the time required.
Once you get into this mindset, its not about getting the best potential deal, its about minimizing the costs associated with the most probable deals. And the most probable deals are likely going to be asset based with higher costs. They will also be bridge loans in that you’re not going to want to pay higher financing rates any longer than you have to.
Once you get focused on financing options that work with your capital needs and time requirements, the exercise becomes picking an option that you’re going to be able to afford even if the best case scenario is breaking even.
Remember, this is a short term fix because you believe better days are ahead.
But if business owners refuse to adjust their financing expectations for any point in time, they may not only descend into madness, but insolvency as well.
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Tags: What Type of Business Financing Can You Secure To Payout Your Special Loans?
February 17th, 2010
If you find yourself in special loans with a major bank for whatever reason, there is going to be some urgency to get them paid out before they start realizing on security.
There are a whole number of ways you can get into special loans, the most common is when you’re offside with one or more of your loan covenants. But even if you’re onside with everything, the bank doesn’t have to have a reason as these loans are typically made on the condition that repayment can be demanded at any time.
So, regardless of how you got there, the bank has stamped special loans on your forehead and are either trying to squeeze the cash out of you drop by drop, or have set some sort of deadline (typically between 30 and 90 days) for repayment to occur before they start realizing on security.
So what are you’re options?
If you’re truly not offside or only marginally offside on your covenants, you could potentially go to a competitive bank that is currently interested in your business profile and industry.
The first challenge with that approach is that other banks are going to think there is something more seriously wrong to warrant the special loans tag, so they may not give your request any serious attention.
The second challenge is that even if they are interested, they may not be able to move fast enough to assess your application and get financing in place before your bank starts trying to realize on security.
A bank refinancing request for several million dollars can take 60 to 90 days, or more to complete, depending on the assessment process required and the conditions that need to be met.
So, when pressed for time, and requiring a higher probability of success, many businesses turn to asset based lenders.
For service companies that may only have accounts receivable to offer up as security, factoring becomes the only viable option in terms of speed and predictability. But to even make this work, there will need to be enough margin to cover the higher cost of financing. While a bank line of credit can be right around prime, factoring will run at 1.5% to 2.5% per month.
For businesses that have physical assets, there are more options to consider.
With real estate, it still may be possible to get an institutional lender to provide financing at similar rates to the ones being paid out, provided that there is a recent appraisal and environmental audit completed.
If time is of the essence, then private real estate financing may be arranged at 65% loan to value and interest rates around 10%. There typically is only one year terms on this type of money, so you’re basically signing up for a one year bridge loan before refinancing will be required again.
Equipment refinancing will likely be based on a percentage of forced liquidation value with rates in the lower to mid teens.
If the business has a high investment in accounts receivable, inventory, and equipment, then a working capital form of asset based loan can be arranged utilizing all short term assets as security at rates from 18% per year to 30% per year.
And for any asset based solution, there are likely going to be lender fees to pay as well, making the exercise more costly.
If you spend too much time trying to secure a cheaper financing solution for refinancing, you could run out of time and potentially be out of business.
Bottom line, you want to avoid the special loans tag at all costs. A fast refinancing, if possible, is going to be expensive, and destroy a lot of value in the process.
Yes, every one wants the lowest cost financing, but lower cost financing is not only low risk, but very fickle as well, especially during economic down turns. And everything is set up so the plug can be pulled at any time.