Posts Tagged ‘Business Financing’
Equity Financing Application
November 14th, 2011
“When Should Equity Financing Be Considered As A Source Of
Business Capital”
First of all, lets get clear as to what we mean by equity financing.
Equity financing occurs when ownership in a company is sold in exchange for an agreed upon purchase price.
The purchase price becomes new capital in the business and is recorded as such on the balance sheet.
In the business financing world, there are basically three general forms of financing…debt financing, equity financing, and some combination of debt and equity.
Equity financing, in many situations, occurs when a business or company can not qualify for debt financing.
Part of the reason for not being able to qualify for debt financing may be a lack of equity on the corporate balance sheet. Once this has been corrected through an equity investment, the business entity may immediately be eligible for different types of debt financing programs.
When a business is in a startup and development mode and has not generated revenues nor is cash flow positive on a monthly basis, then an equity investor is typically required to provide the cash flow necessary to complete the development process and get to a cash flow positive position.
Higher rate forms of asset based lending that provide financing debt to equity ratios higher than conventional lenders, will say that they are renting equity to the business due to the high level of debt and risk that the business is covering.
All things being equal, most business owners will prefer to debt finance their business needs as it comes at a lower cost than and equity investment in most cases, and the business owner retains ownership and control of the company.
That being said, debt financing can be difficult to manage, especially when you are working with more than one lender where the risk of being offside with some lender covenant is going to be that much higher. Debt financing sources can also demand repayment at times for no reason or wrong doing on the part of the business, potentially leaving the business owner or manager scrambling to manage cash flow.
Because equity financing is connected to ownership, its typically not always straightforward how an owner will be able to sell their shares and exit the business. Most corporations have shareholder’s agreements that outline this process, but it can still take considerable amount of time to exit and there is no guarantee that the initial investment will be reclaimed.
Equity financing in many cases is considered to be a more patient form of capital as its placement is usually connected to the future earnings potential of a given business versus existing financial returns.
The higher risk associated with speculating on future returns also demands a higher risk which is going to be expected by most any equity investor.
More and more often, we are seeing business financing solutions with both debt and equity elements where the investor/borrower is only looking to be in place for a period of three to five years, exit the business, and make a high rate of return on the capital provided upon exit.
For most start up business situations, the entrepreneur is first utilizing their own equity to get the business going, leverage debt to grow the business, and then use third party equity financing to scale out the business in order for it to reach it market potential.
So depending on where you are at in your business cycle, there can be different debt and/or equity financing solutions that are going to be more relevant to you.
The key point here is that each situation is unique and as a result most business financing solutions are customized towards available sources of debt and equity that are available and relevant at the time of need.
Click Here To Speak With A Business Financing Specialist For All Your Equity Financing Requirements
Business FinancingEquipment Financing Activity Higher in Q1 of 2011
March 25th, 2011
According to a recent study by a Washington based equipment leasing and finance association, equipment leasing activity in on the rise in 2011 on a couple of fronts
Here’s the link to the full article… http://www.bizjournals.com/washington/news/2011/03/23/leasing-activity-on-the-rise.html
As with any information derived from an association that potentially benefits from positive reports, I will take the findings with a grain of salt.
The report basically tells us that 1) more businesses are applying for equipment financing and 2) more lenders are approving deals than at this time last year.
On both fronts, this could indicate that things are turning around in the general economy and that lenders are starting to get back to issuing loans and leases.
The last two years have been very difficult to say the least for small businesses and equipment financing companies.
For small business, many of the equipment leasing and financing sources disappeared from the landscape due to some combination of portfolio default and funding supply constraints.
For the financing companies, there was not a ton of applications to sift from, and from the ones they did receive, the underwriters were being very picky about who they wanted to take on.
But through the first quarter of 2011, things appear to be moving in the right direction, at least according to this report.
If you’d like to get assistance with equipment leasing and financing requirements in including purchase and debt financing, contact the business financing specialist.
Business FinancingHow Superbowl Preparation Relates To Business Financing
February 7th, 2011
“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 FinancingMeeting Lender Expectations
December 18th, 2010
“In Order To Secure Debt Financing, Make Sure You’re Able To Put Your Best Foot Forward”
In any business, there are basically three parts that need to be working in balance for the business to grow and prosper.
The three parts are Marketing/Sales, Operations/Administration, and Accounting/Finance.
For smaller businesses that are on the come, it can be hard at times to have all three areas firing on all cylinders.
The importance of this when it comes to securing debt financing can be significant as no matter how well you can present the business, its opportunities, and what you’ve been able to accomplish so far, a debt financing source or lender is going to want to be sure that everything is going to hold together as you move towards warp speed in your business plan.
Increasing size means more people, more transactions, more stuff to keep track of and manage. Without some amount of stability in each of the three areas, the brilliant up front presentation requesting growth capital can be quickly dismissed if a lender discovers that one or more of the key business areas is under developed or lagging behind the others.
And in many cases, the weakest link in the chain is the area of Finance.
Here’s a typical example.
A business has successfully got off the ground, been operating for a couple of years, made some profits, and is well positioned in the market to start taking greater chunks of market share from competitors with inferior business models or offerings. The only thing the business owner believes they need is more capital.
But when interested debt lenders start pealing back the covers, they discover that the score keeping system is a total mess and information tracking for management purposes is mostly done on scratch pads outside of the accounting system.
This is not an uncommon occurrence that typically is trivialized by the owner as their main focus is market and sales (which it should be) with a secondary focus on operations, and limited to no focus on finance.
But from a lender’s point of view, not maintaining an up to date bookkeeping system is a big deal, especially if you’re planning to double or triple the size of the business in a relatively short period of time. And its not just about not having the historical bookkeeping completed. It’s about the business not knowing exactly where its at all the time and flying a little bit blind. This type of unbalanced approach can lead to customer bad debts, loss of supplier credit, government arrears, cash flow shortages, debt covenant failures, and so on.
In most cases, one or two weeks of intensive work utilizing some outside resources can fix the problems and get the finance function up to an acceptable level to support the other areas of the business. And this is not just to satisfy a banker. Getting the finance and accounting systems in place and up to date are essential if the business ever intends to reach its goals.
Failure to meet the lender expectations in this regard is going to make it hard to secure business financing, especially lower cost forms of capital.
Being able to demonstrate the financial aspects of your business on command is expected. The sooner a business owner comes to this conclusion, the faster the business is going to be able to grow and easier it will become to secure the capital required.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingReducing Lender Risk Increases Business Lending
November 18th, 2010
“What Can You Do To Reduce Risk In Your Business Financing Application To Get A Lender To Say Yes”
In order to acquire any amount of business financing, the lender, investor, or funding source needs to be able to be comfortable with the risk of loss versus opportunity for profitable return. Clearly the latter must out weigh the former, or no business loan or other form of capital is coming your way any time soon.
Especially these days as we continue to crawl out of the recession, lenders are much less likely to take on any level of risk than they were two or three years ago. Which has created a considerable problem with business owners in that they don’t generally know that the bar has been raised on lending applications and if they want to secure financing of any sort, they are going to have to not only show a debt lender or investor that the risk of loss is low, they are going to have to proactively put things into place to protect the source of capital from losing money.
In taking from some marketing vernacular I heard the other day, its all about “stacking the cool”. This refers to marketers giving you so many features and benefits, many times above and beyond the core product, that you become strongly motivated to make a buying decision in their favor.
Same goes with business financing folks.
If you’re looking to secure money, you’re wearing your marketing hat as much as your finance hat. And its not just about accurately telling a good story about why someone should give you money. Its also about how you are going to make sure they get paid back with their expected return, or how are you going to stack the cool?
Obviously my analogy is somewhat of a stretch for the stuffy world of finance, but bear with me.
I was recently working on a rather tough deal that provided enough lender risk that we weren’t getting any where with relevant financing sources. So we started to stack up ways to reduce the lender risk…Corporate guarantees, personal guarantees, higher down payment, vendor repurchasing agreement for a portion of the asset value, etc.
Of course all these things are trade offs and can provide greater risk to the borrower. But if you need the money and no one is prepared to give it to you at any price, then its time to start taking on more of the risk or finding other ways to generate the capital your business needs.
After weeks of coming up with different risk reduction strategies, a financing commitment was provided that otherwise was never going to happen in the current market in the time the borrower had to work with. In better times, the process may not have been so hard and the borrower may not have had to take on as much risk as they ended up taking. But then again it may have been very similar, even in better times.
Point is that you need to be prepared to off load lender risk by taking on more yourself or finding someone else to participate. As I mentioned above, sellers may be interested in helping reduce risk to sell their products. Insurance companies may have programs that can reduce certain types of risks the lender is uncomfortable with. The more you strengthen the deal, the better your odds of getting funded.
Now that would be cool.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingGuide To Debt Consolidation
November 15th, 2010
“Here Are Some Things To Consider Before Going Through a Debt Consolidation Exercise”
While there can be many reasons to undertake a debt consolidation in your business, the single biggest reason, most of the time, is to improve cash flow.
And while cash flow can be constrained due to rapid and profitable growth, the majority of the time it is constrained by some down turn in the business or failure of the business to develop to a level of sustained profitability.
For these types of situations, here are some basic guidelines to consider before entering into a business financing debt consolidation action.
First, start the process as soon as you have consecutive months of cash flow deficits. Nothing about business financing is fast these days, so the more time you have to work through the problem, the more likely you’re going to end up with a workable outcome. And just because you started the process doesn’t mean that you’ll end up completing a consolidation action as things may change in your business for the positive before the process is completed.
Second, cash flow out your business for at least the next 6 months. If the ship is taking on water so to speak, at what point in time is monthly cash flow going to be positive again and how much money is going to be required to get you from here to there? For cash flow shortfalls, debt consolidation typically means refinancing existing debts that have fallen behind or are building up plus adding additional cash to the business to service the new loan until things turn around. There is no point getting a consolidation loan only to immediately fall into arrears with a new lender.
Third, factor in a higher cost of capital than what you’re already paying or not paying. Part of the cash flow exercise is to make sure that the go forward cash flow, post debt consolidation, is going to be positive. If the new cost of capital is significantly higher than what you were budgeting, your whole cash flow plan may go out the window.
There are two ways to do debt consolidation to improve cash flow. The first is to find a refinancing solution that will buy you more time and hope things work out before you run into cash flow problems again. The second way is to figure out a plan to get things corrected in the business and acquire incremental funds through refinancing to make the plan work plus some margin for error. In most cases, debt consolidation is a form of bridge financing that will allow you to get through a certain period of time of financial down turn. When things get better, you may choose to refinance again to accelerate debt pay down and/or acquire a cheaper source of financing.
While no plan is fool proof, having a plan is going to give you a better chance to improve the fortunes of the business and provide greater credibility in the eyes of lenders that are prepared to provide a debt consolidation loan in the first place.
The keys are to start early and be realistic of what the near future is going to look like. Being overly optimistic with respect to near term improvements in cash flow can lead to further problems.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Person With The Gold Makes The Rules
November 10th, 2010
“When It Comes To Debt or Equity Financing, The Business Owner Seeking Money Has To Not Only Be Patient But Submissive At Times”
One of the most frustrating aspects of trying to locate and secure business financing from private debt or equity sources is that the process hardly follows any type of formula. The people with the money entertain offers from people that want to utilize the money and sometimes deals are worked out.
Sorry, but that’s about as scientific as it gets.
The people that either own or control the gold make the rules, make them up on the fly, or change them whenever they want. If you don’t like their approach, don’t try to work with them. The problem, however, is that most sources of private financing are going to act in a similar fashion.
And as I have been told on more than one occasion when I got into a discussion as to how a financing deal could or should be structured…”Its my money and I’ll do whatever I like with it”.
Obviously if private funding sources were always completely unreasonable and unpredictable they would never lend or invest much of anything. So for the most part, there is a method to their madness. But that doesn’t stop weird and unpredictable things to happen from time to time.
As a business owner seeking capital, you need to be prepared for this type of experience and temper your ego and tolerance level at times to allow for funding opportunities to eventually unfold in your favor. The passive and patient approach isn’t always going to work, but its going to score more results than a frustrated and demanding demeanor will.
Since 2008, there are arguably less active sources of higher risk capital reviewing more potential requests for capital. So for venture capital, angel investing, and hard money lending they basically have their pick of deals and tend to take their time in order to make the best potential choices.
Another challenge with private funding sources is that these are typically not large organizations and usually are operated and controlled by a handful of people. So when they are in the middle of one or more deals, it can be hard to get their attention until some time in the future. They will also have finite resources so its also a case of having a deal they like at a time when they have money available to put out into the market.
And if a better deal comes along when they’re 90% along with your deal and they don’t have enough money for both, guess who’s going to lose out.
Acquiring private capital is both art and science, can require great patience and perseverance, and has a lot to do with timing.
Keep these points in mind before starting on your quest for capital.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingCost of Capital
November 2nd, 2010
“When Is The Cost of Money You Can Borrow, Rent, or Receive As Proceeds Become Too High?”
What the right cost of funds should be for any given deal is always an interesting question to ponder. Business owners will get a certain interest rate or rate of return locked into their mind and won’t settle for anything less. If they have properly gauged the market, this can be a good strategy, provided you have time to beat the bushes for the best deal.
In reality, however, every business financing scenario where a debt lender or investor extend money to a business for some application is a customized solution. No two are the same and at any given point in time there can be radical departures among what is available in the market for otherwise seemingly similar deals.
Sometimes you get lucky and step into a rate that would not typically be available to your business and the desired application of funds. Sometimes you’re not so lucky and its hard to find anything where the cost of funds is what you would consider reasonable.
So what is the right answer in terms of when is the cost of capital too high?
Assuming you have properly approached the market with your financing requirements, the appropriate cost of funds, at a given point in time, is what you cash flow.
If you must have money right now for operations, expansion, survival, etc., then you need to determine if you can cash flow the best available deal in the market. If you can’t, don’t take the dough. And when I say cash flow, I don’t mean come up with a forecast based on some low probability assumptions. If you can’t debt service the financing proposal on a cash flow projection with at least a 70% probability of success, then the cost of money has gotten too high.
No one wants to pay more than they need to at any time. But business financing is very fickle and even more unpredictable, so some times the deal is better than others.
The main objective is to make decisions that will allow you to fight another day versus the alternative.
If you’re too focused on securing a low cost of financing, you could run out of time and blow a good deal. If you take on financing that can’t be cash flowed within reasonable certainty, you may very well have sold the farm.
The point here is don’t get hung up on interest rates or rates of return, get hung up on cash flow and time lines. The longer you stay in business, the more often the cost of money will be in your favor and allow you to bank good returns. Its just not always going be that way, so get used to it and make the best decision today to assure better future opportunities.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Hypocrasy Of Lenders And Borrowers
October 29th, 2010
“Who Exactly Will Honor Their Commitments In The Debt Financing Process?”
When it comes to business financing, the whole process is an interesting study on promise, commitment, and follow through on both the side of the borrower and the lender.
When lenders are prepared to issue a commitment, they provide a piece of boiler plat, pounded out by their lawyers, that a borrower can’t possibly comply with in an absolute sense with more out clauses built in than most hollywood prenups. The lender words everything in their favor and basically provides you with a take it or leave it proposal on all the crafted wording. Even if they are open to make changes, do you have the 30 to 60 days to wait to deal with the back and forth process between their legal counsel, head office and your lawyer?
Probably not. So are lenders hypocrites, preaching loan defaults on one hand and then causing them to happen on the other? Sure they are.
But what about the other side of the equation?
Many business owners will say just about anything to get the capital they’re looking for, especially if their in a real pinch. The prospects of things not working out are not an option and if things do go sideways sometime in the future, the business owner will deal with the problem when required.
Yet, when things do go south, the first thing the borrower does is to try and think up every conceivable strategy to get out from paying back the debt or having to go bankrupt or needing to liquidate other assets to repay the lender that was promised to be repaid… in writing.
Basically, both sides both talk out of both sides of their mouth.
Which is one of the main reasons the current financial markets are in such a mess.
The lesson here if any is that the process of borrowing and lending is very much a game where the rules can be changed by both sides all the time. Its also not for the faint of heart. So if you want to be a borrower or a lender, make sure you’re up for the risk that goes with it.
Sure, as individuals we are conditioned to take on debt to drive the economy…homes, cars, credit cards. But business credit takes risk to a different level, requiring much more savy and fortitude to properly play the game.
The old expression, “neither a borrower or lender be” has been around for a long time for good reason.
But the reality of business is that leverage is required to make the economy go round. So if you’re in business, you’re in this game.
The challenge right now is that most business owners don’t realize that this is a game due to the fact that we have had an unprecedented good run over the last few decades and they haven’t previously had to deal with things not going so well for an extended period of time.
So regardless of your personal moral fiber and commitment to do the right thing, understand that from the impact of the current recession the financial world has now changed and the probability of you as a business owner or lender being on the wrong side of someone else’s agenda are much higher.
Business financing is definitely both art and science. Its also a mix of good intentions and bad, unfortunate circumstances and fateful occurrence.
In the words of Andrew Grove, “only the paranoid survive”. its not about whether or not you’re a hypocrite or not any more regardless if you’re a borrower or lender. Its about how well you play the game.
As far as morals and ethics go, you should always be prepared to play fair… as long as everyone else does.
Click Here To Speak To Business Financing Specialist Brent Finlay
Business FinancingThinking Three Steps Ahead
October 26th, 2010
“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
Business Financing