Posts Tagged ‘business financing strategy’
Why Business Financing Strategy Is Important
June 27th, 2010
“A Proper Business Financing Strategy Will Cover A Period of Time Versus a Point in Time”
Assuming that you’re business requires a third party source of financing to provide the capital necessary to operate and drive your strategic plan, then a business financing strategy is definitely something that should be developed and kept up to date.
Most businesses operate on a point in time basis where they look for financing when they need it but don’t have a longer term picture of how the financing they accept today will impact their needs tomorrow.
A business financing strategy is more focused on making sure that any incremental commercial financing you secure will be congruent with what you already have in place and with what you expect to require in the near future.
Most lender models offer no help with this exercise either as lenders tend to work on a very narrow and highly static point of view. The ideal client for any debt lender is one that is very profitable, requires a relatively consistent level of capital to operate, and does not got any wild growth plans or ambitions that could upset the current stability of the business operations.
This is in direct conflict with businesses that are continually trying to grow and take on new opportunities or trying new approaches to gain market share. And when financing decisions are made in this fashion, the business owner or manager is constantly trying to fit round pegs into square holes.
Here’s an example.
A business owner wants to exit the business by selling his interest to a co owner for several million dollars. The business has a strong balance sheet and solid profitability so bank or institutional corporate financing should be able to be secured to accomplish the process.
But the owner wanting to exit has put a time limit on the transaction in terms of the price he’s prepared to sell his interest for. Because no senior lender relationship is in place, the remaining business owner has to start from scratch to secure financing.
Because the time available is not sufficient to get through a bank or institutional application and assessment process, a bridge financing solution will need to be entered into to meet the deadline.
Nothing wrong with bridge financing, other than its very expensive and may not be the best operational fit for the business in the interim with respect to how the financing is structured and monitored.
At the same time bridge financing is secured, the now sole owner will need to try and secure a longer term senior lender facility to pay out the bridge financier in order to save 50- 75% or higher, of the financing costs he’s paying.
Once the senior facility is in place, if the business has any plans for growth that require more capital in the near future, there is no guarantee that the new senior lender will be able to provide incremental funds as new opportunities present themselves, creating a new financing challenge.
An up to date business financing strategy could have not only avoided the whole bridge financing situation, but could have also made sure that future financing facilities were going to be congruent with future business plans.
While some of the leg work and modeling for a business strategy can be outsourced, it is the responsibility of the business owner or manager that a working version is in place and that it properly factors in 1) the present balance sheet; 2) potential future business financing requirements, 3) contingency planning such as management buyouts, shot gun clauses, etc.
A lack of a business financing strategy can destroy significant value in terms of 1) higher financing rates, 2) lost opportunities, 3) opportunity cost of time and the real cost of delays.
Click Here To Speak To Business Financing Specialist Brent Finlay
Business FinancingMore Reasons For Having A Business Financing Strategy
April 3rd, 2010
In my last post, I laid out why its become more important for business owners to have a more formalized business financing strategy in place on an ongoing basis for their business.
Here are some additional reasons why this has become more important in the current market.
- No Senior Lender Security. With the capital markets in major melt down, no senior lenders are guaranteed not to suffer significantly from the current recessionary process. As a result, no matter who you’re senior lender is or how long you’ve been with them, and whether you’re in covenant or out of covenant, there are no guarantees that your demand loans will not be called or reduced now or in the near future.This means that all businesses need to have their financing profile up to date at all times and they should also have an ongoing awareness of their primary and secondary options to finance their business if required. For many, many businesses, this is something that is beyond comprehension as several have gone decades without any senior lender related issues. But the world has changed, and its time to adjust or be left scrambling when circumstances move against you.
- Source of Contingency Funds. The term contingency planning is often brought up but seldom put into any type of practice for most business operations. With the tightening up of capital markets and the unpredictability related to securing incremental business capital, its become more important to have a capital contingency plan in place. This can involve working towards reducing the amount of leverage as a percentage of equity on your balance sheet, creating credit reserves in your cash or debt financed lines of credit to allow for short term down turns in business, developing emergency funding plans and sources of financing that can be injected into the business if required on short notice.
- Lower Risk Growth Plans. While all businesses have the ultimate desire to grow and enhance profits, the strategic process for planning and implementing growth strategies need to take capital requirements into consideration to a greater extent that what we’ve typically seen in the last decade or more. Strategic plans need to be more closely reconciled to more conservative capital availability predictions so that the business does not get over extended during a tough to predict and manage external capital environment. This can be a major departure for aggressive business owners who are used to always being able to fund whatever projects they want to undertake whenever they want to undertake them.
This speaks to a more conservative approach to third party financing, whether it be debt or equity, until some reasonable amount of stability returns to the capital markets.
Click Here To Speak With Business Finance Specialist Brent Finlay
Business FinancingHaving An Up To Date Business Financing Strategy Is Becoming More and More Important
March 31st, 2010
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
Business FinancingBusiness Financing Strategy
January 7th, 2010
Do You Have A Business Financing Strategy?
When a business starts out, many times it will take whatever financing it can get. But over time, a business financing strategy becomes more necessary not only to secure the best terms and rates, but also to access and secure capital on a timely basis.
With business growth comes more complexity, perhaps more business entities, and more capital requirements. Business finance facilities will come due, need to replaced, or added to. So it becomes more and more important to understand the different ways you can leverage your assets and cash flow.
As an example, say an individual owns three different businesses and wants to start a four one, but requires capital to do so. One strategy could be to utilize the borrowing power of one or more of the other companies. But for this strategy to work, the additional financing being sought can only be secured if there are no terms and conditions or covenants attached to the existing businesses that would preclude this from happening.
This comes back to having a semi conscious financing strategy and always considers the needs of today and the needs of tomorrow versus signing up for anything you can get your hands on and worry about the details later.
Business financing can be a very tricky animal in this regard as lenders are always going to take as much security and provide as much restriction as they think they can get away with in order to protect their interests. If you’ve planned ahead, then there should be enough time to negotiate terms and security structures that will secure the lender but not unnecessarily restrict future financing options and flexibility to arrange financing.
Unfortunately, most financing activities are undertaken with some time pressure or business duress in place, resulting in the business owner settling for a sub optimal capital structure in order to complete the deal on the table or take advantage of an opportunity where time is of the essence which most are.
A business financing strategy is all about maintaining a solid understanding of the different ways your assets and cash flow can be leveraged as well as having your financial statements, contracts, and customer accounts up to date and in good order to withstand lender due diligence if and when required.
A lack of a business financing plan for a growing business can result in a balance sheet that looks like a patch work quilt of financing facilities cobbled together over time that don’t collectively provide any incremental flexibility to acquire capital if the need arises.
In many cases, especially when there are different types of assets involved, there can be many different financing approaches that can be considered, provided that the existing financing structure will allow for their consideration.
For example, is a business owner better off leaving his or her senior lender in place and securing subordinated debt financing, or seeking out a new senior lender that will provide greater leverage? Is it possible to secure incremental asset based lending on a priority basis? Can greater leverage be achieved by refinancing certain assets or combination of assets? Is there more opportunity to cross collateralize the other business entities, or will their existing debt financing facilities permit greater leverage and/or other lenders in a secondary or tertiary position?
And so on and so on.
A solid business financing strategy can allows you to 1) expand your business on a timely basis, 2) take advantage of acquisition opportunities, 3) generate the necessary capital to deal with down cycles or even cash flow losses in a timely manner, etc.
Lack of one can leave you scrambling for money and may result in lost opportunity or even business failure when economic circumstances work against you.
To find more about how to develop a sound financing strategy for your business, please sent me an email or give me a call.
Business Financing