The Unpredictability Of Commercial Financing

I  got a call from a customer with not untypical cash flow management issues and was looking for more alternatives to try and solve his problem.

What I really liked about our discussion, is that this guy understood his business cold and could tell me instantly anything I asked during  my qualifying process on the phone, providing the information off the top of his head.

After this type of discussion, I never have any doubt that the client is going to be successful in their business because they have clearly been able to quickly and effectively demonstrate their intimate knowledge of what’s important as well as the things they are doing to grow the business and protect cash flow.

The challenges in this case was rapid growth and how to properly cash flow more sales, which is not an uncommon problem by any stretch with small business owners.

The business owner had also been surveying and studying his financing options in the market and had an above average grasp of where the capital markets are at and what types of options and financing structure where available to him.

Yet despite his above average knowledge level with respect to business financing and how the market in general would view funding his business, he still hadn’t been able to get proper funding in place, even though he’d been working at it for about 6 months.

This is becoming a more and more common theme in the phone calls I get these days.

The commercial financing market is not only hard to understand at times, but right now its almost impossible to predict.  And even when you have a business in a “finance-able” position with a totally on top of it business owner, there still can be a lot of art and science into the process of locating and securing financing that the business needs.

More specifically, deal positioning, deal timing, and financial support documentation are now much more critical to lenders than any time in recent memory.

And while I am confident that the caller is more than capable of figuring everything out on his own, how much more time can he invest in the process and how is that time investment impacting his growth strategy?

If you’re business is making money and the only thing blocking you from making more money is capital, the it makes a great deal of sense to pay for the expertise required to keep the business properly funded versus losing out on the future profits lost from mucking around with something that is not only difficult to understand at times, but almost impossible to predict.

Click Here To Speak With Business Financing Specialist Brent Finlay

customer called me to discuss options, had them figured out, but still didn’t know what to do

The Best Business Financing Deal May Very Well Be The One That’s Available

When anyone looks for financing of any type, they are intuitively looking for the best deal with the best rates, the best terms, the best fit for what their doing.

And many business owners will start out with their own set of criteria of what they are looking for in terms of amount of money and what the related terms and conditions need to be.

The challenge is then how fast their perception of what’s available to them can be lined up to the reality of the capital markets at any given point in time.

Let me explain.

At any given time, a business may be eligible for certain types of financing rates and terms, but what lending source can provide it?

When the overall market is operating during a period of sustained economic growth, more lenders will be providing similar terms on similar deals most of the time.

When the market is operating during a period of uncertainty like the current recession, the same financing opportunities can still exist for a given business, but its likely that there are fewer lenders that will provide the best potential deal at any given point in time.

The reason is that economic uncertainty increases risk and losses for debt lenders just like any other business.  And to protect themselves, some debt providers will leave the market all together for certain types of deals for a period of time, some will cut back, some will expand their criteria for approval, and so on.

The result of all this is that the ultimate best commercial financing deal can be very hard to find in times of greater economic uncertainty.

And when most financing requirements have some sort of time line that needs to be met, the best deal can very well be the one that can be approved and arranged in the time required.

This doesn’t mean what you can get a hold of is the best potential deal in all respects.  It just means that its a source of money you can make work in the time you have.

Searching for a better deal is always an option, but there are two things to consider with looking elsewhere.  First, you may run out of time and either miss out on the opportunity you’re looking at, or incur additional costs from the delay.  Second, if you are unsuccessful finding something better, there is no guarantee the first deal is still going to be available to you later, especially in strained economic times where lenders are known to change their minds or lending direction quickly.

Its a bit like the old “bird in the hand is worth two in the bush” saying.  Sometimes a deal that’s close enough to your requirements needs to be good enough, at least for the short term until more predictable options are available.

Click Here To Speak With Business Financing Specialist Brent Finlay

Business Finance Contingency Planning

We are now in a time when there are no real predictable rules with respect to business financing and capital procurement, creating a greater need for business finance contingency planning.

There are two basic types of contingency planning business owners and managers need to be consider these days.

The first has to do with existing loans and debts on the balance sheet.  Its not uncommon these days for lenders to cut back the limits on lines of credit and trade suppliers to reduce credit lines.  So even if the economy in general is not providing a negative impact on the profitability of your business, the business cash flow management process can be turned upside down by things completely out of control of the business manager or owner.

Demand loans for equipment can also be called at any time without a formal reason or negative repayment action on the part of the business.  This provides a stronger case for term loan products that do not provide the lender with such broad and subjective repayment options.

And in cases where a business has become late on payments or offside with debt facility covenants, it can’t be assumed that the lender is going to work with the owner or manager even if the cash flows are minor and expected to be rectified in the short term.

For existing debt or credit reliance, the business needs to develop contingency plans that will identify alternative sources of credit that can be secured and the related cost.  This has to be continually explored on a regular basis as alternative financing options will change as time goes by as well.  And the process can’t start when you have a financing problem as it can take more time than you may have before the business is negatively impacted.

For new business financing, the contingency plan that I would recommend is to start the process sooner even to the point when any new strategic direction is being contemplated.  The typical planning approach is to do what’s best for the business and then look for the money that’s required to administer the plan when required.  But the probability of finding and locating the desired capital has gone down on average, so it makes a great deal more sense to scope out the capital markets first and then adjust the strategic plan accordingly if required.  This is far more strategic than just assuming funding will appear when required.

Business finance contingency planning needs to take on a greater importance with all businesses that are serious about their ability to survive the current recession and profit into the future.

Click Here To Speak To Business Finance Specialist Brent Finlay

Have You Made Adjustments To Your Business Financing Positioning?

With all the changes that have taken place in the capital markets over the last 18 months, there is now a need to change the way that requests for capital are positioned with lenders and investors.

In the recent past, applications were primarily based on historical financial statements and a decent attempt at cash flow projections to support the request for additional or new business capital coming into the business.

But things have changed whereby there is a much greater demand by lenders and investors for the business owner and manager to put forth commercial financing requests that are more thoroughly supported by source documentation and spend more time on risk management than forward thinking marketing strategies.

From a lender point of view, we have moved into a commercial lending era of loan security, lender mitigation, and business risk management.  While there still is money available in the market for businesses to acquire, there is a great deal more work involved in convincing someone that you’ve thought through all the major risks that could impact the business going forward and have a plan to mitigate the risks either in a proactive or reactive sense.

In the past, a lot of the details which have always been important to a business financing deal were glossed over by lenders or investors due to the strength of the economy and the unlikelihood of many types of risk to be of an issue or concern to many business owners.  This saved on the due diligence process and was supported by decades of portfolio analysis that identified what areas of risk a lender or investor needed to focus on the most.

With the impact of the current deep running recession, most of that logic is thrown out the window as its a little more of an every man for himself type of world where the business owner now has to actually think about all the things that could go wrong in advance of asking for money.

In my opinion, it the financing world had taken more of this type of security and risk first approach years ago, the current recession would not have run so deep.  But in better economic times, everyone wants to get in on the lucrative capital financing markets so lenders develop more aggressive portfolios to get their share of the growing pie.

But things are different now.  Lenders and investors have made the necessary adjustments, which are akin to their survival as viable business organizations.

Unfortunately, for the most part, business owners have not adjusted the way they manage their business from a financial risk point of view and as a result their business financing positioning when asking for new capital can be way off the mark.

Its really a return to good solid business fundamentals that we are seeing in the market.  Over the long run, this should be a good thing.  In the short run, it looks more like pain and confusion to those trying to locate and secure business capital.

Click Here To Speak With Business Finance Specialist Brent Finlay

Bad Business Financing Assumptions To Avoid

Bad assumptions are a common reason for many of the problems small and medium sized business owners have  locating and securing business financing when they need it.

Here are some of the more typical bad assumptions that get made on a regular basis and either inhibit capital from being acquired or cause a business to face serious short term repayment demands from lenders and creditors.

• Using government remittances to cover off cash flow deficiencies is an acceptable practice that the related government agencies will understand and work with.

• New business loans can be used to pay off arrears related to government accounts.

• Personal credit of business owners or major shareholders of small business corporations does not have a large part to play in the making of business financing .

• The process for acquiring business financing is relatively straight forward and predictable.

• Trade credit can easily be acquired for companies that have been in business for several years even if business credit still hasn’t been established or if the business has overdue trade payables on its books.

• Your business bank will be able to provide you’re financing requirements, even if you’ve just been through a rough period where the business has generated financial losses.

• Business financing decisions can be be based primarily on the long term potential business opportunities in the future versus historical result

• The industry and geographic location where the business is located does not have any bearing on the ability to secure commercial capital.

• Prime plus interest rates are available to all businesses regardless of the level of potential risk to the lender.

• Once business financing is provided, as long as the business owner meets all the requirements of the financing facility, there is no risk that the lender will call the loans or restructure future repayment to the detriment of the business.

• If a lender does not want to continue providing your business with capital that there will be another similar lender prepared to provide refinancing quickly and with similar terms.

• Its not typically a problem to leave a financing requirement to the last minute or near the time when funds will be required as there are lots of sources of financing available.

• Shopping around a commercial financing request is the same as shopping around for the best residential mortgage interest rate.

• Once a commitment for financing has been provided, the closing process will be quick and there is very little risk that financing won’t be provided.

• Lenders will typically be understanding if you can’t make all your payments on time.

• The economy is currently improving and coming out of the current recession and the capital markets will follow closely behind.

The key point I’m trying to make is that the process of business financing is not easy by any stretch, especially if you want to secure a financing facility that best meets your requirements.  Significant lead times should be built into the process of locating and securing business capital, especially in the current recessionary environment.  Proper cash flow management and credit responsibility are also very important aspects of any lender decision making process.

Click Here To Speak Directly With A Business Financing Specialist

Business Financing Hypocrisy

From both a borrower and lender point of view, we are seeing more of what I call business financing hypocrisy.

Lenders are interested in your business until they’re not interested in your business at which time they will call demand loans, cut back on lines of credit, term out lines of credit, increase interest rates, and invoke whatever get out of jail free cards they may have build into their funding commitment to the business.

Borrowers are just as bad in that they at times will promise everything but the moon and the stars to make the lender comfortable with a capital request, but when things don’t go according to plan and loan obligations can’t be met, the borrower calls his or her lawyer and tries to come up with a legal strategy to basically get around having to honor his or her promises.

When the economy is going well, these types of scenarios are played out very infrequently.  But when a recession hits, as it has for the past two years, business financing hypocrisy is everywhere and its every man or woman for themselves.

The net result of this type of two way hypocritical behavior is that the financing markets are slowly down to a crawl in many sectors and geographic regions.

Lenders are asking a lot more to protect themselves with most commercial financing decisions now focused on asset based security and risk management.

Borrowers try to protect them selves by constantly looking for a better deal as they don’t like the changes in lender requirements and search for someone who is more in line with their expectations.

To say there is a lack of  trust from both sides overall would be an understatement.  In tougher economic times, most people tend to take a more conservative approach.

For the desperate borrower, its basically a take it or leave it market with the lender setting out what they are prepared to do without really any flexibility.

For better deals, borrowers have become more patient as lenders are having trouble hitting their borrowing targets which is the way they make money.  So for good deals, there is a high level of competition and as a result, a patient borrower can find some pretty good deals as lenders cut margins to only secure solid opportunities.

But regardless of who is in a position of strength or weakness, promises made by either side are very weak.  Business financing has become a game where borrowers have to become better players to keep up with the changes in the capital markets.

If you have a business financing requirement or problem you need assistance with, give me a call and we can go through it together.

Click Here To Speak With Business Finance Specialist Brent Finlay

Even Higher Priced Asset Based Loans Can Work In The Present Market

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.

Click Here To Speak With Business Financing Specialist Brent Finlay About Your Business Financing Needs

Having An Up To Date Business Financing Strategy Is Becoming More and More Important

Does Your Business Have a Business Financing Strategy?

If you’re like most business owners, the answer to the question of having an actual formal business financing strategy is likely No.

The status quo for decades for most businesses has been to focus on what generates cash flow and deal with business financing as a short term project, whenever its required.

This typically has some form of time pressure associated with it, and because there is no regular attention spent to how to properly go about getting financing arranged, brute force tends to be employed to get through the process, get the required money in place, and then get back to work.

This has been the “business financing strategy” for many small and medium sized business largely because it worked.

Leaving things to the last minute and scrambling around to get funding in place has been an effective strategy for many. Yes, it can be a pretty stressful process to go through, but its not required very often, the results get achieved, and the pain generated quickly dissipates due to small time box everything is forced into.

The challenge going forward is that the world, at least for the foreseeable future, has changed. The probability of leaving business financing needs to the last minute and then depending on brute force and will power to muscle things through has gone way down for a number of reasons.

First, there are significantly less business lenders now than 2 years ago, and the number continues to decline on an almost daily basis as the recession continues to unfold.

Second, many of the surviving lenders aren’t lending money as they scramble to collect the accounts they already have. Even if they wanted to lend money, many of them are having a hard time finding sources of funds to finance new business loans.

Third, the more established lenders are taking a more cautious approach to the market and are being more selective with opportunities and taking their time with deal assessment, not being particularly interested with anyone in a flaming rush.

And based on the current state of the capital markets, things are not going back to the status quo any time soon, effectively changing the status quo.

So now is the time to move to a more formalized business financing strategy and approach. This is something that all businesses require. Obviously smaller businesses are less capital intensive, but they still have cash flow and have to be able to fund it if they want to stay in business.

In my next post, I’m going to get into even more specifics as to why a business financing strategy is something that business owners are going to have to start investing time in to either stay in business or grow their business.

Click Here To Speak With Business Financing Specialist Brent Finlay

Commercial Financing Applications Need To Take A Different Approach

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.

For More Information On How To Better Position An Application For Business Financing, Click Here To Contact Business Finance Specialist Brent Finlay

The Business Financing Prime Rate Is A Bit of An Illusion

Most everything we here about the prime lending rates being kept at historically low levels by their respective country administrators to keep the global economy from stalling out during the recession is a bit of a farce for the small and medium sized business that contribute to driving the economy.

Yes, if you’re a well established company with a senior bank credit facility, your cost of operating has gone down due to historically low interest rates.  But in many cases, the cost saving that are realized wouldn’t make or break established companies with the balance sheets to qualify for low interest rate debt.

If a company gets offside of their balance sheet and income statement covenants with a bank, they either get their interest rate jacked up nullifying any savings, or end up with a special loans tag which can  lead to a forced payout that is even more expensive if not fatal in some cases.

For all other businesses that are looking to start, expand, grow, replace assets, and so on, interest rates near prime are mostly a myth.

Unfortunately, no one told business owners who are frantically in search of business capital right now, working off their long term conditioning of what should be available to them based on where the prime rate is sitting, that things are not what they seem.

Whether this is good or bad, fair or unfair isn’t really the issue.  Prime plus rates are difficult to secure because the economic risk is higher and lenders are being more cautious until the recessionary impacts work themselves out.

The key learning is that things are not what they seem and as a result, business owners need to reassess their ability to access incremental capital and the related cost that comes with it.

Failure to adjust to the current environment can not only waste valuable time and money searching for something that isn’t there, but it can also put basic business operations and incremental sales opportunities at risk.

The solution may be to forgo expansion or new business endeavors in the short term, or focus on lower levels of potential profit to cash flow a higher cost of capital.

For businesses offside on their financial covenants that have received a demand for repayment from their senior lender, it could be very unlikely that a similar senior lender is going to be available to replace the existing one and an extended search for money that has a low probability of being there could run the business out of time for structured and civilized refinancing.

Adjusting financing expectations sooner than later can have a profound impact on the long term health of the business.

Click Here To Speak To Brent Finlay About Your Business Financing Requirements.