Business Financing Realities

“Proper Expectation, Process, and Focus Are Keys To the New World Of Business Financing”

I had two very similar calls this week from business owners in search of business financing for a project in their respective companies.

The individuals had applied for financing at a financial institution and had spent months now trying to get an approval so that funding could be put into place.

Both were now at the point where they were starting to run out of time and were now frantically looking around on the internet for either a replacement solution or a bridge financing solution that would buy them enough time to get the desired funding in place.

I also get similar versions of this call all the time and I don’t expect much to change in the near future.

The problem starts with a fundamental lack of understanding of where we are at in the financial and capital markets these days and how debt financing sources and equity investors approach opportunities.

Sources of money are more particular these days as to what they will provide money for and how long it will take to make a decision and get funds in place.

Business owners still believe that if they have a good plan and a good story that they will be able to locate and secure funding without much trouble. Their basic mindset is “how hard can be be…or…how long can it really take?”

While there are times that the process of business financing can go fairly smoothly, My standard advise to anyone that will listen is that the its going to take longer than you think and its going to be more difficult that you imagine. If its easier than what I have described, then that’s a bonus, and you’ll be much further ahead of schedule, but just don’t plan for easy.

In order to get success, the approach you take and the process you follow is going to be very important. If you don’t understand what that means, then you’re going to need to invest in some help from those that do.

As far as focus goes, this was the main point I made to both callers.

Both individuals sounded like they had a workable situation underway. The key at this point was to focus in on what was required to get an approval in place and do whatever was necessary to buy time and comply with the lender requirements.

Starting a new funding request with a new series of lenders where time was already short would likely only serve to divert time and energy from the deal they needed to try and complete.

Yes, it most certainly is frustrating when a lender or investor takes their time getting back to you, or continually asks for more information or third party work to be done to complete their funding assessment. When the people you initially spoke with that were so keen to receive your application for financing and to assist your business now seem to be taking an inordinate amount of time working through their own requirements, it can be excruciating, especially if you’re on the clock.

And sometimes you also have to know when things are not going anywhere and then make a course correction. But typically when things don’t go anywhere in the world of finance is due to some combination of 1) talking to the wrong financing sources in the first place; 2) not properly presenting the information in a format and level of completeness acceptable to the lender or investor; 3) not having proper risk management in place to secure the deal; 4) not having enough time for financing process to be completed; 5) not staying on top of all the individuals that need to contribute to the application.

Unfortunately for my two callers, as soon as they hung up the phone with me, they probably called the next listing they found and put in a call. In most cases they will be greeted by a marketing person who wants to take a look at their file and see what can be done. In both of these cases, based on the information I was provided, this would only serve to take precise time away from trying to make what they already had going work…even more so if they make a few additional calls.

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How Superbowl Preparation Relates To Business Financing

“Success Does Start With Preparation, Regardless Of What The Objective Your Trying To Achieve”

The Superbowl didn’t go so well yesterday for my Steelers… that is for the part of the game I actually got to see versus chasing my kids around.

Regardless of who won, what was well known before the game began was that both teams were prepared to play, that sufficient preparation had gone into the two weeks leading up to the big game and for both the Packers and Steelers, success was only going to be possible through the necessary preparation, or at least it would considerably strengthen the odds of winning the game.

With business financing, there is a view among many business owners that securing third party capital in the form of debt financing or equity investing does not require a great deal of preparation and that knowing the process and managing the details of what leads you to getting business financing in the first place are not overly important.

The football equivalent to this type of thinking would be for the Steeler and the Packers to take two weeks off prior to the game, arrive a couple hours before the game began, and then get ready to play. This is not to say that this approach could not be successful, but their are long odds against it which is why no one does it.

Yet in the business world, the process of looking and securing capital for a business is very much like this at times. The business owner, once again in many but not all cases, doesn’t really understand the full process, starts preparing too close to the time the money is required, and assumes that he or she will be able to convince a lender or investor to provide capital without much effort or time being extended.

Once again, this approach can prove to be successful, as it has in the past, especially in the economic period prior to the last recession.

Which is what has also led us into the current economic downturn…too many people prepared to borrow or invest too much money into situations that were not prepared to receive and properly manage capital.

Now that things have tightened up in the capital markets, success once again goes to prepared more so than the unprepared.

While developing business plans, financial projections, and project plans for the future as well as developing a solid working understanding of the performance metrics of the past are not going to be viewed to be overly sexy by most business owners, managers, and entrepreneurs, the same can likely be said towards doing extra film study, extended practice time, and team meetings.

One of the things that has kept me a Steeler fan for over 30 years is their steadfast approach to running a business in a consistent fashion. Focusing on a proven model only makes the future results better. Flip flopping from approach to approach surely will not, especially over time.

Most business owners have a goal to be in business for a long period of time, and modeling out success for many will include the periodic or ongoing need for third party financing. To maintain stability with this critical business component requires a great deal of diligence and at times preparation.

Preparation never guarantees the outcome, but almost without fail will increase the probability of success and make the outcome more realistic to achieve.

Click Here To Speak With Business Financing Specialist Brent Finlay

Business Financing Scams

“Here Are Some Tips For Avoiding Business Financing Scams”

Some would argue that there are more business financing scams out there these days than legitimate lenders or financing intermediaries. Especially with the rise of the internet, its pretty easy for a clever scam artist to put up a virtually untraceable presence that makes strong promises but doesn’t deliver against them.

The reason why there are so many business financing scams is because there are always lots of people trying to secure money for a new or existing business and when they can’t get anywhere with the more well known conventional sources, they start looking for other sources.

And what really makes the scams work is issuance of some sort of commitment for the money being requested. Of course in return for being able to move forward, the scammer is going to want an up front fee of some sort. This is where things become tricky for the business owner as up front work fees and commitment fees are also requested by legitimate lenders making it hard to tell who are the good guys and who are the bad guys.

If you’ve come across a source of financing or an intermediary who claims they can lead you to a source of financing, here are some things to consider before stroking a check for any type of fee.

First, Google anything and everything you can find about these guys and see what comes up. If there are negatives, ask them to explain what happened that caused the negative press to occur. If you can trace any negative press back to the source, give them a call as well to get both sides of the story. If nothing comes up when you search for information, that can be just as bad as negative information coming up.

Legitimate sources of financing and financial intermediaries should have a very public and verifiable presence on and off the web. If they don’t, then you’re really in a buyer beware type of situation.

Second, what type of third party or social proof can you get from others that have had some type of similar experience with the lender. It may be difficult to get customer references from the potential lender as client confidentiality needs to be maintained (which is also something a scammer can hide behind when not providing you with this type of info).

Third, go to the better business bureau, FTC, or any other regulated body to see if there is any evidence of the financier’s existence or proof of wrong doing.

Fourth, go through the process and documents that they provide to you very closely to see what holes may exist. If there are items that are unclear or inconsistent with the intent of the agreement, as them to change their documentation and see how they react. The goal is to get them off the basic script and see how they deal with your specific questions. Legitimate businesses go through this all the time, are used to the questions getting asked, and usually have fairly straightforward answers as to what they can or can’t do to change what has been provided to you.

Fifth, disengage your emotional involvement in the deal if you can and stick with logic and your gut instinct. If it sounds too good to be true, then it probably is. Remember that 90% of the time or higher, business financing is never easy or quick to get in place. If someone is saying that it is, they are likely trying to get a hold of your money.

Scammers will prey on the fact that you’re short on time, that you’ve been turned down by others, that you’re looking for someone to take a chance on you.

And even if you do all the above and more and feel confident that you’re working with a legitimate source of financing, there is still no guarantee that whatever money you pay out will result in the business financing you seek. All money paid out up front is a risk. If you can’t afford to lose the money being advanced, don’t pursue the proposal.

Click Here To Speak With Business Financing Specialist Brent Finlay

Thinking Three Steps Ahead

“Does The Debt or Equity Funding You Accept Today Help or Hurt You Manage The Business Tomorrow”

I have often written that business managers and owners tend to leave the process of acquiring capital to the last minute and end up scrambling in many cases to get some type of financing in place before more costs are incurred or an opportunity is lost or some other dark consequence of not getting things done on schedule.

Not only does this very common approach to business financing create less than desirable results in the short term, but it also can wreck havoc on future business opportunities.

Let me explain.

The process of financing a business and managing a balance sheet is a lot about thinking three steps ahead as you try to proactively predict how things will unfold in the coming years and capital the business will require to operate within your predicted or desired path. And future predictions are not always going to be about growth. Sometimes the look ahead is going to be more on the gray or even dark side as you realistically or conservatively see a storm coming ahead and make a plan to deal with it that will hopefully lead to your long term survival.

Regardless of how you see the future, there is cause and effect in the field of view that needs to be factored into how you cash flow and fund your business.

This is why the decision making process of today can be so critical to what predictably is going to come next. Business financing done in haste most times creates a financing structure that will not easily allow for future moves without creating cost. In some cases, the capital acquired today will be a death sentence to the business if the future unfolds in a direction that is in congruent with what has been accepted or arranged.

An example of this would be an obsession with the cheapest sources of money. These sources not only can take an excessively long time to get into place, but they also demand close to extreme security positions and very stringent operating requirements that may or may not be met by expected future events. While cheaper money is always preferred over the alternative, the business has to be able to meet the requirements of the money, or be faced with demand to repay at likely an inopportune moment in time. And even if the business owner can comply with the demands of the money source, is there any flexibility left to allow for what comes next which might just require more outside money?

The process of thinking three steps a head requires that the business owner starts early and never stops looking for and understanding the available sources of business financing that are relevant to what he or she is trying to accomplish. The more pressed someone is with respect to securing capital, the less likely any capital required will properly allow for future moves.

Click Here To Speak With Business Financing Specialist Brent Finlay

True Cost Of Capital

“While There is Never Any Absolute Rules When It Comes To Pricing Money, Here Are Some Things To Consider When Trying To Understand The True Cost of Capital For Any Particular Application”

When seeking capital funding for any business venture, there can be a lot of different trade offs to consider with the different sources of capital that may be interested in funding a particular deal.

The most common forms of business capital come from debt and equity financing sources. And even though equity equates to ownership, there is still an implied cost of capital that needs to be factored in before accepting this type of money.

The most common problem business owners have when seeking capital is trying to locate money at a cost that does not likely exist. The second biggest problem is not properly comparing different forms of business capital when deciding on how to fund the business.

With problem #1, the business owner or manager does not understand the market and continually rejects potential offers to finance at rates above their target rate. There is nothing wrong with this approach provided that the target rate actually exists for the deal or will appear before the business runs out of time.

In order to avoid being in this situation, a more realistic perspective needs to be established. Remember that the cost of money always has to do with risk and supply with risk and supply typically being inversely related (as risk goes up, supply goes down).

As an example, its not uncommon for a business owner to seek unsecured business capital from private lenders at 10% interest or lower because they can’t secure anything from a bank and they have no assets to leverage. The proper perspective is that private lenders can lend their funds (and do) all day long on real estate and be fully secured and still lend at 10%+ interest rates.  so why would they take on a higher risk (unsecured debt financing) for the same cost of capital?

With problem #2, the business fails to properly make an apples to apples comparison with different forms of business capital and defers instead to self created rules or assumptions.

For example, when a business requires business financing capital in a risk range that could be funded through debt or equity the costs and trade offs between the two forms need to be properly weighed.

Higher risk deals can command debt financing rates in the high teens. Most equity investments want a similar return or higher. Yet when a business owner sees an 18% interest rate as an example, many will immediately believe that’s too high and turn to an available equity solution that could actually be higher over time.

With debt, the best things about it is that you retain ownership and if you pay it back you retain control of the business. With equity, unless there is a buy out provision structured at the start, there may be no easy or cost effective way to pay out the investor as the business grows, creating a very expensive source of capital. Even with a structured buy out, the true cost of capital, if anyone spent the time to figure it out, could be substantially higher than the original debt financing solution.

If the cash flow is available to service the debt, the high interest rate loan option should not automatically be dismissed.

The search for capital often times tends to be left too long so business owners are forced into taking what they can get. But when choices are available, being realistic on your expectations, and crunching the numbers to better understand the true cost, can mean a tremendous saving in the long run.

Click Here To Speak With Business Financing Specialist Brent Finlay

Business Financing Can Require Lots of Patience

“Any Attempt To Secure Business Financing Needs To Be Tempered With Patience”

Recently I was working on two different business financing deals. The first one was for a well established business with great cash flow, great credit, and a strong business model. The second financing scenario was refinancing a business that was struggling to cash flow growth and was trying to overcome many of the challenges that come with a start up business.

While on the surface they couldn’t be much different, the one thing they had in common was the amount of time it was taking to get the financing they needed into place.

And it wasn’t necessarily hard in either case to identify the potential source of business capital that could satisfy their needs. The challenges in both cases came from getting a final commitment in place and getting the funding advanced.

This is a very common occurrence these days post 2008 thru 2010 recession (which for many is still not over).

The lending process and related bureaucracy can be totally maddening to any business owner and manager who is used to taking charge of a situation and getting everything covered off that is required, within a certain time frame.

When it comes to business financing, the process can only be followed, not forced. As soon as you put pressure on a lender or a provider of capital, it will also inevitably lead to a no or decline of an application for funding that may have otherwise gone in your favor.

This is where patience comes in.

Once you have a source of financing lined up that you are comfortable with, its time to gear down and start moving at the speed of the lending process, which can be delayed or slowed down for any number of reasons, most of which you have no control over.

And when you start running out of time on a deal or funding requirement and the financing is still not either approved or available for funding, the tension and pressure of the moment can push you over the edge.

But if you want the options you’re working on to remain options, you’re going to have to create whatever contingency plans are necessary to get you through to the other side of the process where the money is.

Remember that the more people that are involved in getting everything covered off for a lending approval and disbursement (appraisers, accountants, lawyers, consultants, credit committees, customers, suppliers, etc.), the higher the probability that the process will take more time than less.

Sure, everything can come together quickly and be in place ahead of your expectation. But most of the time it won’t, and without a healthy dose of patience, good options can quickly be destroyed, putting you right back at square one.

Click Here To Speak With Business Financing Specialist Brent Finlay

Business Financing Timing

“Acquiring Business Financing Can Be a Very Much Be a Point In Time Exercise”

I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.

So why were they looking for financing?

Their primary and only institutional lender could no longer underwrite the type of business they were in.

In the current economic climate, this is becoming a more and more common occurrence for even well established small businesses.

For this particular client, they were actually able to secure better business financing than the package they had.

But while you might think the debt financing could be easily replaced given the financial strength of the business, this is not always the case. For this particular client, while the end result was positive, there were not many interested lenders at the very point in time they required financing. And with the institutional lender they are working with now, there is no guarantee they would have done this deal 6 months ago, or would considering doing it at all 6 months from now.

The point here is that business financing can be all about timing where the needs of the business need to line up with the needs of a lender.

And even when everything lines up, there is no way to know how long that relationship will continue. As a business owner, you have to always be prepared with plan B in the event that a lender changes their business model or portfolio focus and leaves you as the odd man out, even though you’ve never missed a payment and have complied with all the lender requirements.

So the second takeaway from all of this is that as a small business owner, you always need to be on the look out for a better source of financing and an alternative source of financing. There is no true loyalty in this game, and for the most part it is a game in that both borrower and lender rarely disclose everything to each other in terms of their go forward business plans, leaving a certain amount of uncertainty in play.

Unfortunately, most business owners or managers only focus on business financing when they need money. Because of the “point in time” aspects of business finance, this can be a very dangerous and expensive approach to take.

Even for the most well established and profitable businesses out there, if they still rely on third party financing from lenders or investors, they always need to be asking themselves “what do we do if the lender or investor want their money back right now?”.

By proactively staying on top of the market and your relevant options, you stay ahead of the curve and ready to deal with the unexpected.

Click Here To Speak With Business Financing Specialist Brent Finlay

Securing Capital Takes Time You Can’t Image

“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

Market Opportunities For Business Lenders

“The Recent Turmoil In The Capital Markets Has Created Opportunities for Business Lenders”

Not only have we been witness to a large number of global bank failures in the last two years, but there have also been a number of high profile lenders that have downsized their operations in certain areas and completely pulled out of some jurisdictions all together.

The resulting shifts in the business financing sands have created both holes in the market and opportunities. The business lenders that remain now are presented with additional opportunities to expand their portfolios, provided they can adapt their services and risk management towards a new opportunity.

For the business owner or business manager, this has created new commercial financing options in the market to replace what has recently disappeared. Although the level of overall financing competition in all slices of the market is still down overall, the expansion by existing players is a welcome improvement.

At the same time, don’t expect these new programs to hit the market with any great force. While the lenders involved are going to be serious about exploring the identified opportunities, they are most likely to start by wading into the shallow end of the pool as they take their time getting used to water of a new market or niche.

So while it may be very much worth your while to explore these new options that could now be available in your back yard, you’re going to have to have some patience as market expansion in the world of business financing is more of turtle versus hare approach.

But as time goes by, positive experience will also lead to program expansion and more aggressive lending practices. And as the economy continues to turn around, more changes can be expected in terms of the lender mix and offerings in any market.

This will also have a dramatic impact on supply, rates and terms in certain locales where the dominant lender in a category has completely disappeared and competitors decide on their interest in filling the void that remains.

In a time when lending markets continue to trend through uncertainty its good to see some of the participants prepared to venture out into new areas where opportunity has become available.

Hopefully this will soon become more of the norm versus the exception.

Click Here To Speak To Business Financing Specialist Brent Finlay

Action is Based On Urgency

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