Posts Tagged ‘Business Finance’
The Business Financing Landscape Has Changed … Get Used To It.
March 21st, 2010
I’ve written a lot lately about many of the changes in the capital markets and many of the ways these changes have impacted the ability of small and medium sized businesses to locate and secure financing.
The hard part of these recession driven changes to the market is that there isn’t going to be a near term return to the market conditions we’ve basically gotten used to over the last two plus decades.
Let’s face it, the capital markets have not seen anything like this since the end of the second world war.
A large percentage of the capital markets were driven and built up over time by the long run health of the overall economy. Yes, there have been some significant bumps in the road over the last thirty or so years, but nothing as game changing as what we’re seeing right now.
Large parts of the market have disappeared all together as record numbers of bank and commercial financing company failures lead the headlines on an almost daily basis.
When the economy gets back to steady monthly growth, the crater in the market we now see isn’t going to fill up anytime soon.
This tells us that the go forward business financing market is going to take on a very different look for some time to come and it may take decades to get back to anything close to what has been in place in recent memory.
The biggest benefit to business owners with the old status quo was that there were numerous sources of capital all trying to carve out their own unique place in a market that seemed to be growing without end. Similar to the residential market, the commercial sub prime market exploded as companies raced to get their share of the market demand for more capital.
But when the economy slowed down, and highly leveraged companies started crashing all over the place, starting a domino effect like nothing we’ve ever seen and are still experiencing, collapsing the capital market structure that was created over several decades.
And while government bailouts have helped stabilize the money supply to some extent, its hard to know if the main beneficiaries are actually going to make structural changes to their practices or continue on overheating the economy once things get back on track, getting us all set up for another recession in the not too distant future.
Bottom line to all this is that things are going to be different from now on and may be significantly different for decades to come when it comes to locating and securing business capital that your going to be able to cash flow.
Business owners have been spoiled by the funding choices available to them, causing them to practice what I would call less that optimal business finance practices. In fact, in many cases, there is no business finance strategy at all.
The reality is that when you borrow money or take on an investor, the money belongs to someone else and they are going to want it back. The building up of debt over time without a plan to pay it down is good in theory from a weighted cost of capital point of view, but in reality sudden changes in the fortunes of your lender or investor can turn your business upside down in a hurry with no solution in sight.
Business owners need to get back to contingency planning, having some amount of capital buffer to weather financial market storms, and managing their balance sheets so that debt levels are kept in check.
The days of fast and loose money are gone for now and I’m not sure if and when they’ll be back.
Click Here To Speak To Brent Finlay For Your Business Financing Needs.
Business FinancingCash Flow Management Now Requires Greater Diligence
March 17th, 2010
As I’ve previously written that while the out look reports for the current recession are improving, the after effects are only starting to surface in many cases.
A recession impacts the money supply and the flow of cash through the economy.
When one area of the economy becomes cash flow constrained, the impact will slowly ripple through the rest of the economy through the related connection points.
On more of a micro level, this has the potential to impact businesses of all sizes from several different directions.
First, the business could have its commercial credit reduced by its lender or pulled completely if the lender goes out of business, which they are in record numbers.
Second, the business may not be able to access new credit for upgrades or growth, impacting its ability to perform.
Third, sales may be down to the point that fixed costs are not being covered off and cash flow injections are required.
Fourth, customers may become slow to pay or default payment.
Fifth, vendors may cut back on credit or reduce their own product line of goods the business requires.
All these and other scenarios can create negative impacts to the cash flow.
The most damaging aspect to these ripple effects is that you may not see them coming until its too late to do anything about it, or at the very least, leave you scrambling to address the problem. When you’re hit with multiple issues from different directions, the impact can be exponential in nature.
This is where proactive cash flow management has become critical in the current business environment.
As a business owner, the goal is to reduce risk where ever possible to assure the long term profitable survival of the business. Proactive cash flow management has now gone beyond accurate forward projections on inflows and outflows and now must include greater diligence into what could potentially happen to the business and how to mitigate the potential unforeseen risks.
And cash flow protection is likely going to cost additional money, but the alternative of not being proactive can cost substantially more.
Examples of more proactive measures could include:
- Accounts receivable financing for larger customer accounts.
- Credit reviews of existing customer accounts and a review of credit granting policies to new customers.
- Applications for credit with additional vendors.
- Development of an additional vendor list even if credit is not available.
- Internal operating cost reduction strategies.
- Inventory reductions.
Most business owners are too busy with their businesses to believe they need or have time for any of these activities. The assumption is that if they get in some sort of cash flow bind, they can borrow their way out of it.
The reality is that business financing for distressed cash flow is a hard ticket to come by these days and some of the forms it comes in if you can find it are very pricey.
The recession is far from over. Financial markets are basically in disarray and have become completely unpredictable.
Whether you get hit by the storm or not isn’t the issue.
Whether you can survive a hit or multiple hits is.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Business Financing Version of The Sub Debt Market Has Disappeared
March 13th, 2010
We hear so much about the collapse of the U.S. sub prime residential market, but we don’t hear a whole lot about what I refer to as the global business sub prime lending market.
For business financing, there are three basic levels of financing. The first level is for “A” credit and where corporate finance mostly lives. Then there is the “B” level or sub prime level for slightly higher risk situations followed by the “C” credit level which is asset based lending. There can be forms of asset based lending that are more A or B in nature, but for the most part asset based lenders lend strictly on the liquidation value of the assets.
In March of 2010, the “A” type lenders are still largely sitting on the fence and not lending out much money. Most of their time is being spent trying to figure out what to do with all the customers that are behind or offside with their financing covenants.
The C lenders are lending, but the rates are high, and because their is so much used equipment and real estate flooding the market, the assessment of liquidation value, upon which the amount of financing that can be provided is determined, is very low producing much lower amounts of capital than the business owner is expecting in most cases.
And then there’s the B, or Sub debt lenders, who have basically vanished from the scene.
So right now, if you’re a business that just come off a bad year, but have pretty good options ahead of you, the types of financing options available to you are going to be limited. In most cases, the only options that are actually lending money will be asset based lenders, and they will be taking a big bite out of your available equity with large debt service costs.
Business owners, for the most part, have not adjusted to this market shift and are still looking for cheaper money that isn’t available right now. It is a hard decision to take on higher priced debt, but if you can make the math work in your cash flow, 2010 may be more about survival than profitability.
If you are in need of business financing, give me a call and we can discuss your options in more detail.
Click Here To Speak With Business Finance Specialist Brent Finlay
Business FinancingDebt Financing Sources Are Like Shifting Sands
March 10th, 2010
We are conditioned to believe through our consumer credit experiences that there is a never ending source of money out there waiting for us to utilize.
And while there certainly is an almost infinite supply of money available, the actual sources that businesses rely on to supply it are collectively more like shifting sand than mass volume commodity suppliers.
There are a number of reason for this.
First, unlike consumer financing which is much more uniform, business financing is highly customized with every financing opportunity being somewhat different from the rest. A consumer has a job, a credit score, and a some amount of personal net worth. A business functions in an industry, providing a certain services and/or goods, has customers, suppliers, infrastructure, employees, pension plans, government remittances, and so on and so on.
Because human beings have to interpret all this data, there can be vast inconsistencies in lending decisions not only between lenders, but between underwriters that work for the same lender.
Second, debt lenders all have a financing portfolio of loans to manage. Each portfolio will be assessed for 1) overall portfolio risk and 2) industry and/or asset concentration. To maintain a balanced portfolio, lenders will change their application of their own lending criteria to strengthen the portfolio where ever possible. For instance, if their loan portfolio is too highly weighted towards the automotive industry, they could stop lending to this sector all together for a period of time regardless of how strong the overall application is.
And when this happens, its not like they put a sign up stating this change to their lending practices. Instead, the business applicant will get declined and typically will not know exactly why. This can be quite frustrating in that a similar application for financing made several months earlier could have been approved, once again attesting to the shifting sands.
Third, lenders also source the capital they provide other sources. Sometimes their own sources of supply dry up or cut them back, leaving less available funds for new loans.
Fourth, when economic down turns occur, lenders often will sit on the proverbial fence to see if their portfolio will become impacted by borrower defaults. While their portfolio may be very strong, the unknowns associated with how economic forces will impact their borrowers over the near term, cause them to slow down or stop lending money.
Locating and securing business financing is all about where you are located, what you plan to do with the money, at a given point in time.
Even if the “where you’re located” and the “what you plan to do with the money” parts stay the same, your results can still vary widely at different points in time for some combination of the reasons mentioned above.
This is probably the area where a business financing consultant provides the most value. As an individual that is working daily on business finance scenarios, financing consultants are able to see how the sands are shifting and build that intel into their process for finding the most relevant form of capital available to their client at the point in time its required.
If you have a business financing need you wish to discuss, please give me a call and I will give you a free assessment of what I believe to be the most relevant options available to you.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingSmall Business Startup Financing Is Personal Financing
February 24th, 2010
If you’re trying to start up a business or have been in business for less than one year, the acquisition of business financing is typically just personal financing in disguise.
It doesn’t matter how thick or fancy your business plan is, or how many letters of intent you have signed, or your wealth of industry experience, if you trying to start a small business and require capital to do so, you are basically limited to what you’re personal financing profile can provide.
Take a look at banks for instance.
Unless they can get you approved through a government backed loan program for equipment, leaseholds, or real estate purchases, they are not going to extend you a business loan. And even for the government supported programs, if you have below average credit and no personal net worth, you won’t qualify for that either.
Whether we like it or not, start up financing is equity driven, not debt driven. If you’re looking for debt financing of any kind, it will be based highly on your personal credit, personal net worth, and sources of personal income.
The reasoning for this is quite simple. Depending on whose statistics you read, over 40% of start up’s will fail in 5 years. From a lender’s point of view, if 4 out of 10 loans don’t get paid back, the lender will be out of business themselves.
So to get started, you need your own money or the equity investment of others to fund the business.
The business financing side is a bit bizarre in that if you apply for a business loan and are approved on the strength of your personal credit, earnings, and guarantee, you’re still going to be charged a business rate. If you were able to secure the same amount of borrowing through a personal financing program that relies on the same personal factors and security features, the rate would likely be lower.
In many cases it makes far more sense to secure the personal financing available to you from secured and unsecured loans, and then lend the funds acquired to the business as a shareholder loan. This will immediately save you money in lower interest costs.
But because entrepreneurs have their mind set on getting a business loan, lenders are more than happy to provide a personal loan in disguise at a higher rate.
Take a look at the trucking industry. Many leasing companies require owner operators to own a home and have at least an average level of personal credit. The trucker may think he’s applying for business financing, but the lending or leasing decision is mostly based on personal financial and credit factors.
I’m not saying this is right or wrong, good or bad; it just is.
For anyone starting up a business, the sooner they understand the above, the sooner they will stop beating their head against the wall trying to find something that doesn’t exist.
The key take away is that when you have a new business, you need to focus on leveraging your personal credit attributes to gain the best financing deal possible, regardless of what type of lipstick a lender puts on it.
Click Here To Speak To Me Directly About Business Financing
Business FinancingInaccurate Disclosure Kills Busines Financing Opportunities
February 4th, 2010
There is the temptation when applying for business financing to omit things that are negative and gloss over other things you personally don’t consider to be important.
The result is this semi-complete story of what you need financing for and the justification as to why it should be granted to you.
And while you could be well justified in not wanting to provide all available information, here are few things to consider when putting an application package together.
First, never purposely lie or exaggerate anything you put forward to a lender or investor. If you ever get caught in a lie, regardless of the size, the game at that point is typically over as the lender or investor may no long view you as credible.
Second, never hold back information that would be considered material to the business or the financing facility being requested. If something is material, then by definition it’s important and can cause an impact to other parties like providers of capital.
Third, provide what is requested as completely, accurately, and neatly as possible. You can make judgment calls as to whether or not you wish to provide certain items, but this is also one of the fastest ways to get declined. Remember that especially in the case of debt lenders, their financing requirements tend to be quite rigid. If you can’t provide what they ask, then they will just pass on the opportunity.
Fourth, proactively explain all negatives that are most likely to be detected during due diligence anyway. The best examples are negatives in business and personal credit reports. The first thing a debt lender will do after receiving an application for financing is pull the applicant’s credit profile. If there is no proactive explanation of any negative items that may appear, then the lender is left to draw their own conclusions.
Fifth, be conservative in your go forward estimates and have as much back up as possible to support your assumptions. Too many times the application is lost at the point of proforma financial statements that don’t reconcile or are too “pie in the sky” for the lender’s or investor’s liking.
Nothing is worse than to be 90% of the way through a business financing process where the finish line is in sight, only to be declined close to the end due to some non disclosure or inaccuracy that could have been dealt with in the application without impacting the financing decision.
Making assumptions of what you think is important or germane, versus what the capital provider wants to review, can be suicide to a deal. Providing near full disclosure, if at all possible, avoids this from being a problem.
And remember that even if you do manage to secure funding through what I’ll call creative disclosure, the longer you have the relationship with the lender or investor, the more likely the truth will be found out anyway.
If the capital provider has the ability to demand repayment, they likely will, potentially putting you into a major bind.
Recently I was working on a client’s financing request and had a business financing solution arranged twice, but got blinded sided both times when the lender’s due diligence turned up non and/or incorrect disclosure issues.
Not only was the whole process a big waste of time, but if full disclosure was provided from the start, completely different sources of financing would have been approached that were more relevant to the whole story.
Securing capital is all about the story. But nonfiction is preferred over the alternative.
Click Here To Speak With Me Directly About Business Financing
Business FinancingThe Right And The Wrong Way To Look For Money
January 31st, 2010
As I have mentioned many times previously, the process of seeking capital for a business is largely an unplanned event in that 1) it is assumed that the process for securing business financing will be easy, and 2) that it won’t take long.
When reality sets in, then there can be an all out panic to try and locate financing sources before time runs out on a particular deal. If this occurs, then the business owner or manager may start working with multiple lenders and multiple agents all trying to find money in time.
This would be the wrong approach for a number of reasons:
First, commercial business financing deals can be a lot of work, and if relevant lenders find out that everyone and his uncle is being asked for financing, some of the better options will immediately decline from the party as they are not interested in doing a whole bunch of work for a small chance of reward. There can be considerable due diligence that goes into a commercial deal as compared with buying a house or a car and as a result, market shopping is frowned upon by lenders.
Second, to get a deal done in a compressed period of time can require a great deal of attention and effort on the part of the borrower to get everything lined up for lenders, lawyers, accountants, insurance providers, appraisers, consultants, and so on. If a borrower’s efforts are diluted among various scenarios, the probability of success is going to go down.
Third, there are likely only a hand full of lender options that are even relevant to any particular deal. Critical time can be wasted on chasing the wrong options due to the business owners lack of understanding of who can provide what in the time required.
Lets look at the right way.
If you have a significant sized deal at stake and you’re under a time pressure, your best bet is to first go to your primary lender to see if they can provide what you need. If that isn’t possible, then you should spend your energy locating a suitable business financing specialist who can quickly zero in on the best available options for your particular deal at that particular point in time.
Lenders and investors are always changing their level of interest for different types of deals based on changes to their portfolio or the economy. A lender that was relevant to a certain type of deal in a certain location 6 months ago is not guaranteed to be interested in the same deal today.
Talk to a few different financing consultants to see which one can best address your needs and then pick one and only one to work with. Working with multiple consultants and brokers is just as bad as contacting all the lenders in the phone book yourself for the same reasons mentioned above.
After going over your options with a financing expert, pick a strategy and stick to it so that your efforts are not diluted by too many different lending or investing scenarios. Once chosen, manage the heck out of your best option and keep you fingers crossed. Many times success is in the details and providing all your efforts into a solid option can be the difference maker in getting financing in place in the time required.
Keep in mind that hunting for money with a rifle is usually more effective than a shot gun.
For more information, go to Brent Finlay’s guide to business financing.
Managing The Needs of Your Senior Lender
January 27th, 2010
If you’ve been in business for awhile and you have a sizable line of credit with a major bank, say for at least $1,000,000, you may have been going merrily along with your business without ever having any real issues with your banking facility.
Every year, your making a profit, meeting your banking covenants, and having a game of golf or two with your bank manager. If there are a few bumps in the road, they are typically handled without much problem and you feel pretty secure in your banking relationship.
This tends to be a pretty common scenario for businesses in operation for more than ten years and generating $5.0M plus in annual sales.
Now comes a long the worst recession since WWII.
In fact, its the first real recession in 20 years.
Banks have slowed down and in many cases stopped lending all together. Bank portfolios that are weighted in some of the harder hit sectors have taken a beating. As a business, banks are inwardly focused and taking care of their own business.
Its at times like these that business owners can develop a false sense of security with their banking relationship and even believe they have some influence or clout with the bank based on many years of paying for bank services.
But in times of recession, all bets are off. Every man for himself and all the rest of that jazz.
Senior lenders, almost without exception, provide business financing for working capital and equipment on a demand basis. We don’t think much about the demand loan terminology until its actually applied.
If a banks portfolio is going in the wrong direction and your portion of the balance sheet is viewed to be higher risk, then your senior lender may decide to demand repayment of your loans …or… provide additional security to lower their risk.
Sound familiar? In North America, banks have choked the money supply and asked governments to help them better manage their risk through guarantees or pledges of assets.
Talk about having you over a barrel. And they do.
So when your senior lender calls you up and says they need to improve their security position or they will be forced to reduce your line of credit or call your loans on demand, what choice do you have?
You can try to move to another Senior, but in the middle of a recession it may be very difficult if impossible to accomplish.
You can move to an asset based lender, which may very well be possible to achieve, but likely at higher rates.
You can see if they are bluffing and refuse to sign off on what they’re asking for.
Or you can cave into their demands and hope they don’t call everything anyway once they are in a stronger security position.
This can be scary times for many business owners, especially if you’re offside on any of your bank covenants, in which case, there will surely be requests for additional security, reductions in facilities, higher rates of borrowing, demands for repayment, or some combination of the above.
This is part of what comes with cheap money. Senior bank facilities are traditionally the lowest cost source of financing a business can have. Security can be based on assets like inventory that really don’t have any security value to the bank, but are still leveraged based on the strength of the overall business and the overall economy.
When times tighten up, like they are right now, senior lenders tend to hold their cards close to their vest and can be very unpredictable.
The best way not to draw their attention in recessionary times is to keep a low profile, and above all else, make sure you understand and meet your bank covenants.
And if they start talking about changes required with your banking facility, take them very seriously and weigh the pros and cons carefully before making any decisions.
Business FinancingBeware of Business Financing Scams
January 23rd, 2010
Not that business financing scams are anything new, but the scammers are getting more and more creative with their approaches.
Document forgeries are harder to detect, pitchmen are becoming more polished, and the story lines the draw you in are more convincing.
But regardless of the approach, the same basic tenant always applies… You are being offered something that sounds too good to be true and most likely is.
Scammers tend to pray on people that have reached higher levels of desperation in their search for capital and and can easily lure people in with the promise to provide what no one else is prepared to, for lower cost, and less strings attached.
Here are some early warning signs to a potential scam that you can watch out for.
First, you’re asked to provide an upfront fee of some kind to give you access to the source. Many times, this is an attempt to test out the mark’s level of desperation and amount of available resources. Soon after the first payment is made, there will be other requests for money.
Second, the front man cannot disclose the source of the financing and provides some elaborate story as to why the lender or investor need to remain anonymous.
Third, when asked for references from projects already funded, there will none be forth coming.
Fourth, the financing source talks about liking your project for its humanitarian, health, green energy, or other popular subjects that attempt to create greater credibility or social proof of the authenticity of the financing souce.
Fifth, 100% of the required financing is being offered up for the project with very reasonable or even no repayment terms applicable. In the world of business financing, there is rarely such a thing as 100% financing, or at least not for anything that wants to have a solid chance of success. If the borrowers or business owners don’t have something significant at risk, the motivation is not going to exist to work through any major problems or challenges that can arise.
100% financing can definitely fall into the too good to be true category, especially if there are several other unknowns or mysterious aspects to grapple with.
Sixth, the financing source creates a structure that they claim is for tax planning purposes, or tax avoidance purposes. This can involve other tax jurisdictions, other legal jurisdictions, and so on. The path can be very convoluted and even if you have a high priced law firm review everything, there can still be a trap door hidden in the mix that can suddenly open up and cost you money.
Seventh, you are asked to raise money to support the tax scheme and that there will be no risk exposure to anyone that puts up capital but a promise of a solid return on investment.
This list could truly be endless, but the above is a taste of what to look for.
The key is to not let desperation get in the way of common sense.
Business FinancingBusiness Financing Is Primarily An Unplanned Event
January 16th, 2010
It drives me crazy and never fails to surprise me as to how business owners and managers approach securing business financing for their companies.
The thought process tends to leave the search for capital too long into the business planning process and when it’s finally begun the expectation is that it will be a relatively simple and straight forward process.
Some advise to consider would be starting the search for money sooner and even managing it into a path parallel to the business planning process its connected to. The reason for this approach is that locating and securing the right capital can many times prove to be the most difficult element of any potential project. Furthermore, as potential financing sources are uncovered, their related terms and conditions may require actual revisions to the business plan and the sooner this is known the more likely it can be allowed for in the planning process.
The standard assumption for not doing the above is that any financing source will be flexible enough to adapt the lender or investor program and criteria to suit the business.
In many, many, many cases, this assumption could not be more wrong.
The second problem business owners come across is assuming the process will be timely. I’ve personally worked on deals that took over a year to complete and dramatically delayed the business plans that were draw up. Business financing applications are not like applying for standardized things like a credit card, car, or even house. Each application is really unique in some way and therefore takes more time to evaluate.
Obviously requests for small amounts of capital, say under $250,000, can be more timely and predictable most of the time. But as the amount of business financing required increases, so does the degree of difficulty finding the financing source that wants to do the deal, and then actually securing the funds and getting them disbursed.
This is why I call the process of business financing an unplanned event. Its just supposed to happen on cue and doesn’t need to be planned for ahead of time. This could not be further from the truth.
And in all my years of working on financing projects, I’ve come to expect that there will be a strong sense of urgency when someone is looking for financing (due largely to the fact that s been left too late) and that the process is going to be difficult to manage.
While it doesn’t have to be that way, it almost always is.
Perhaps the problem stems from the lack of basic financing education we get in school or because the process of business financing tends to be infrequently required, so there’s no real need to learn how to properly go about it. When the need exists, just scramble through it somehow and move on (or something like that).
For companies that are on a growth path and plan to be there for a long time, there is definite value in gaining a greater understanding of how to best approach locating and securing the capital they need to effectively manage their growth.
Time has proven over and over again that business financing doesn’t have to be planned, but it sure can help if it is.
Business Financing