Posts Tagged ‘Business Financing’
Term Structure of Commercial Debt Financing
October 11th, 2010
“Understanding Commercial Debt Financing Term Structures Can Be The Key To Optimal Leverage”
Commercial debt financing has a lot to do with figuring out the term structure jigsaw puzzle that relates to your business or the capital requirements of what you require funding for.
Each category of asset will command a different type of risk profile and will attract different lending programs. On the surface, that seems clear enough to most, but the challenge comes in trying to get the right amount of leverage at the lowest cost of borrowing.
For instance, many lenders will have primary and secondary financing options. They will provide you with their primary offering on a certain class of assets and a secondary offering on other assets you hold. Or they can bundle their offering whereby you can get the business financing you’re after from them, provided that you transfer personal financing requirements and investments to them.
For more established businesses, the challenge is to take what you have to leverage both commercially and personally to secure the best potential deal at any give point in time.
This may involve one lender or a number of lenders, each focusing on a different classification of asset and term structure of debt. While the single lender model may be preferred, it doesn’t always provide the amount of leverage required. For greater leverage, the different categories of assets (working capital – accounts receivable and inventory, equipment, real estate) need to be financed through lenders that specialize in that particular asset class. This can also drive up the overall weighted average cost of borrowing, but this may be a necessary trade off to secure the amount of capital required in the short term. Obviously there will need to be sufficient sales and margins to cover the cost of financing and over time the goal would be to reduce the cost of funds and take on a better term debt structure overall.
The challenge to any business owner is that their situation will always be somewhat unique to anyone else and therefore a customized solution is required whereby the business owner figures out the best lender offering or combination of lender offerings that best fit his or her business at a given point in time.
And once a financing structure is decided on and put into place, there is still going to be an ongoing requirement to stay ahead of the curve and either find better financing options that improves leverage and cost requirements or provide for alternative financing scenarios in the event that one or more lending partner changes their interest in financing your business.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingTrue Cost Of Capital
October 4th, 2010
“While There is Never Any Absolute Rules When It Comes To Pricing Money, Here Are Some Things To Consider When Trying To Understand The True Cost of Capital For Any Particular Application”
When seeking capital funding for any business venture, there can be a lot of different trade offs to consider with the different sources of capital that may be interested in funding a particular deal.
The most common forms of business capital come from debt and equity financing sources. And even though equity equates to ownership, there is still an implied cost of capital that needs to be factored in before accepting this type of money.
The most common problem business owners have when seeking capital is trying to locate money at a cost that does not likely exist. The second biggest problem is not properly comparing different forms of business capital when deciding on how to fund the business.
With problem #1, the business owner or manager does not understand the market and continually rejects potential offers to finance at rates above their target rate. There is nothing wrong with this approach provided that the target rate actually exists for the deal or will appear before the business runs out of time.
In order to avoid being in this situation, a more realistic perspective needs to be established. Remember that the cost of money always has to do with risk and supply with risk and supply typically being inversely related (as risk goes up, supply goes down).
As an example, its not uncommon for a business owner to seek unsecured business capital from private lenders at 10% interest or lower because they can’t secure anything from a bank and they have no assets to leverage. The proper perspective is that private lenders can lend their funds (and do) all day long on real estate and be fully secured and still lend at 10%+ interest rates. so why would they take on a higher risk (unsecured debt financing) for the same cost of capital?
With problem #2, the business fails to properly make an apples to apples comparison with different forms of business capital and defers instead to self created rules or assumptions.
For example, when a business requires business financing capital in a risk range that could be funded through debt or equity the costs and trade offs between the two forms need to be properly weighed.
Higher risk deals can command debt financing rates in the high teens. Most equity investments want a similar return or higher. Yet when a business owner sees an 18% interest rate as an example, many will immediately believe that’s too high and turn to an available equity solution that could actually be higher over time.
With debt, the best things about it is that you retain ownership and if you pay it back you retain control of the business. With equity, unless there is a buy out provision structured at the start, there may be no easy or cost effective way to pay out the investor as the business grows, creating a very expensive source of capital. Even with a structured buy out, the true cost of capital, if anyone spent the time to figure it out, could be substantially higher than the original debt financing solution.
If the cash flow is available to service the debt, the high interest rate loan option should not automatically be dismissed.
The search for capital often times tends to be left too long so business owners are forced into taking what they can get. But when choices are available, being realistic on your expectations, and crunching the numbers to better understand the true cost, can mean a tremendous saving in the long run.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingNo Such Thing As Easy Money
October 1st, 2010
“When Looking For Business Financing, There Is No Such Thing As An Easy Deal, A Simple Process, Or a Certain Approach To Getting Money”
Ok, so perhaps this is a slight exaggeration as I probably can recall a few business financing deals I’ve worked on over the years that went fairly smoothly, got closed on time, and provided the business owner with what they were looking for without any grief.
I can also easily count these situations on one hand and have some fingers left over.
The process for securing capital, especially since the most recent recession is gotten harder to achieve in most cases, most of the time. Its not that everything can’t fall into place with a funding process, its just not likely to happen and you need to plan for some challenges, costs, and time.
The basic adage is to prepare for the worst and be pleasantly surprised when everything comes together without a hitch.
This may seem like very pessimistic, the glass is half full kind of thinking and it is. But in all my years of working in this business, there is virtually no such thing as an easy deal. Easy deals or easy flowing money falls into the 1% probability category slightly ahead of your odds for winning the lottery.
The take away message here is not that is all gloom and doom and that you’re not going to get the capital you require.
No, that’s definitely not what I’m saying.
What I continuously tell business owners is to get committed to the process as early on as possible and then stay invested in it as long as required and provide the resources and time necessary to increase the probability of a positive result.
In many cases, the business financing process is grossly over simplified and under estimated by entrepreneurs who would rather stick needles in their eyes than have to develop a detailed financial knowledge about any financing request they need to make. Money is a necessary evil that shouldn’t be that hard to come by, or so the thought process goes.
Unfortunately, this thought process eventually leads to failure in many cases in that money that gets secured tends to come from the path of least resistance which is typically not the most ideal form of funding available which can start the business into a death spiral it may never recover from as it continually takes on poorly suited forms of capital that will only reduce the probability of profitable results.
And when I say you need to commit to the “process”, the process is whatever is required and however long it takes to get the right match of money and opportunity.
If you say you don’t have the time for what’s required, then start the process earlier, get farther ahead of when capital is required, avoid being backed into a corner and forced to take what you can get.
Finding easy money that fits your requirements when you need it is always possible. But is it probable?
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingLeveraging Available Equity
September 14th, 2010
“How To Best Access The Capital Tied Up In Your Assets”
Business is and will always be about leverage. The ability to leverage both human and capital resources is the cornerstone to being able to grow and scale profitable business operations.
Yet the challenge with leverage is that its hard to stay on top of what balance sheet structure is best for your business at a given point in time. There is definitely a need to think ahead as what makes sense today may not work tomorrow.
For instance, if the business is going through a bit of a down turn and cash flow is or will be stretched, its far better to start working out how to leverage your available leverage early on even when its not completely clear as to how things will place out versus waiting until you have a problem.
Equity based financing under distress is not only going to be harder to come by, but its going to cost more as well. The worst part is that if you do hold good quality assets and the business does have a strong plan for improving financial performance, its easy to also overpay on equity financing due to the time constraints you could be under from leaving the process too long.
Even when everything is going well, the bank or institutional lender you’re working with today may not be interested in funding future growth which may come as a surprise when you least expect it.
The point here is that optimal financial leverage needs to be an endless pursuit on the part of the business owner and/or business manager. And leverage is always going to be based on the amount of debt financing you can secure against some combination of the paid in and market value of the equity in the business.
The second point is that regardless if your in a survival mode or a growth mode, its easy to pay too much for business financing due to a lack of time available to conduct the process.
And the third point is that today’s lender is not necessarily going to be tomorrows lender so you always have to be cultivating what will be the next best fit for the business as the business changes and the overall economy changes around it.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business FinancingBusiness Financing Can Require Lots of Patience
September 10th, 2010
“Any Attempt To Secure Business Financing Needs To Be Tempered With Patience”
Recently I was working on two different business financing deals. The first one was for a well established business with great cash flow, great credit, and a strong business model. The second financing scenario was refinancing a business that was struggling to cash flow growth and was trying to overcome many of the challenges that come with a start up business.
While on the surface they couldn’t be much different, the one thing they had in common was the amount of time it was taking to get the financing they needed into place.
And it wasn’t necessarily hard in either case to identify the potential source of business capital that could satisfy their needs. The challenges in both cases came from getting a final commitment in place and getting the funding advanced.
This is a very common occurrence these days post 2008 thru 2010 recession (which for many is still not over).
The lending process and related bureaucracy can be totally maddening to any business owner and manager who is used to taking charge of a situation and getting everything covered off that is required, within a certain time frame.
When it comes to business financing, the process can only be followed, not forced. As soon as you put pressure on a lender or a provider of capital, it will also inevitably lead to a no or decline of an application for funding that may have otherwise gone in your favor.
This is where patience comes in.
Once you have a source of financing lined up that you are comfortable with, its time to gear down and start moving at the speed of the lending process, which can be delayed or slowed down for any number of reasons, most of which you have no control over.
And when you start running out of time on a deal or funding requirement and the financing is still not either approved or available for funding, the tension and pressure of the moment can push you over the edge.
But if you want the options you’re working on to remain options, you’re going to have to create whatever contingency plans are necessary to get you through to the other side of the process where the money is.
Remember that the more people that are involved in getting everything covered off for a lending approval and disbursement (appraisers, accountants, lawyers, consultants, credit committees, customers, suppliers, etc.), the higher the probability that the process will take more time than less.
Sure, everything can come together quickly and be in place ahead of your expectation. But most of the time it won’t, and without a healthy dose of patience, good options can quickly be destroyed, putting you right back at square one.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingBusiness Debt Financing Approval Process
August 16th, 2010
“Why Does It Take So Darn Long To Get A Debt Financing Request Approved?”
In the present commercial lending environment, it can be more than a little difficult to get a loan request of almost any sort approved and funded within what most would consider a reasonable amount of time.
Here as some of my observations into some of the current challenges debt lenders are having in the market.
First, the recent recessionary forces have eliminated a significant number of lenders from the market at large or from some of the country markets that multinational lenders service. The result has been more applications being directed at fewer lenders creating an instant back log.
Second, while economic growth would suggest we are climbing out of the recession, the capital markets are still trying to stabilize from all the fall out, causing debt lenders and equity investors on average to be more cautious in their approach to lending or investing new capital.
Third, many business owners and managers will make several applications for the same capital requirement to multiple lenders in order to try and get the best available deal. This also increases the application burden on the system, further contributing to the slowed down response time.
In an attempt to reduce the back log and get focused faster on deals that can actually be completed, more lenders have gone to requiring the borrower to pay a deposit after the initial deal assessment process is complete. For the most part, the deposit is used to cover third party costs incurred for assessing a deal such as appraisals, credit reports, etc. If the deal can’t be approved, the deposit is returned less third party costs incurred. If the deal can be approved and the applicant does not choose to take it, the deposit will likely be lost.
Outside of covering lender and investor costs of assessment, the deposit serves as a commitment to the borrower to continue with the business financing process and risk the deposit if they don’t take a commitment that follows the initial lending proposal provided.
There are pros and cons to this approach. From the lender side, the required deposit at a certain stage of the process gets rid of their back log as only those seriously interested in what the lender has to offer will proceed. On the other side of the coin, borrowers are concerned about the integrity of the deposit in that does it truly relate to third party costs required to complete the commitment process, or is it just an easy way for a lender or investor to grab fees without having any real intention or ability to issue loans for all the deposits received.
The answer to getting the overall system working better is likely some mix of the old and newer ways of doing things. But until there is a significant overall change, expect the time lines for acquiring capital to be considerable.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business FinancingBusiness Financing Timing
August 1st, 2010
“Acquiring Business Financing Can Be a Very Much Be a Point In Time Exercise”
I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.
So why were they looking for financing?
Their primary and only institutional lender could no longer underwrite the type of business they were in.
In the current economic climate, this is becoming a more and more common occurrence for even well established small businesses.
For this particular client, they were actually able to secure better business financing than the package they had.
But while you might think the debt financing could be easily replaced given the financial strength of the business, this is not always the case. For this particular client, while the end result was positive, there were not many interested lenders at the very point in time they required financing. And with the institutional lender they are working with now, there is no guarantee they would have done this deal 6 months ago, or would considering doing it at all 6 months from now.
The point here is that business financing can be all about timing where the needs of the business need to line up with the needs of a lender.
And even when everything lines up, there is no way to know how long that relationship will continue. As a business owner, you have to always be prepared with plan B in the event that a lender changes their business model or portfolio focus and leaves you as the odd man out, even though you’ve never missed a payment and have complied with all the lender requirements.
So the second takeaway from all of this is that as a small business owner, you always need to be on the look out for a better source of financing and an alternative source of financing. There is no true loyalty in this game, and for the most part it is a game in that both borrower and lender rarely disclose everything to each other in terms of their go forward business plans, leaving a certain amount of uncertainty in play.
Unfortunately, most business owners or managers only focus on business financing when they need money. Because of the “point in time” aspects of business finance, this can be a very dangerous and expensive approach to take.
Even for the most well established and profitable businesses out there, if they still rely on third party financing from lenders or investors, they always need to be asking themselves “what do we do if the lender or investor want their money back right now?”.
By proactively staying on top of the market and your relevant options, you stay ahead of the curve and ready to deal with the unexpected.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingSecuring Capital Takes Time You Can’t Image
July 23rd, 2010
“Getting Deals Funded and Closed Can Be Way Harder and Take Way Longer Than You Expect”
When working through business financing scenarios where a business needs to secure capital for some reason, there are a few things that tend to be extremely common from one situation to another.
First, the business owner is in a rush or pressed for time to get financing in place. This can be due to a number of reasons, but the most common would be that the process was started too late or the business owner spent too much time trying to secure business financing from the wrong type of lender before realizing they were wasting valuable time.
But even when you find the right lender and provide a good solid package of information, the amount of time it takes to get money advanced to complete your deal can be considerably more than you are anticipating.
Take one of my recent projects. The borrower had an immediate financing requirement that needed to be completed and funded in a matter of days. The nature of the transaction was that it typically would take two to four weeks to complete.
Why would it take so long?
Because of the number of steps that needed to be completed by different people. This is always a function of time you can expect a deal to take.
If everyone involved in the process does everything required when required, the deal could potentially get completed in less than a week.
But the moon and stars don’t typically align like that and the reality is that everyone is working on a number of things at any one time so the probability of each task getting done in the least amount of time seldom works.
From a lenders point of view, they are going to estimate more time than what is possible as the last thing they want to do is stick their neck out on a certain amount of time and then get yelled at when everything doesn’t get completed by that date.
From the borrower’s view point, someone in a hurry cannot possibly see how the outlined steps will take so long to complete.
In the recent project I’m referring, during the first five days of trying to get the deal closed, there was failed wire transfer, an email system that went down, and a main frame printing system that when down.
Each unplanned event added more time to the process and in almost every business financing scenario I’ve ever been involved with, something from the unexpected happens. It can be things like sickness, holidays, long waiting lists, people new in position, the weather, someone having a bad day, and just about anything else that Murphy’s law can offer up.
The key point here is that a business owner has to try and build in as much buffer into the process as possible and even development contingency plans if the unplanned delays are excessive. Failure to factor in more time than what you think should be necessary can cause a deal to blow up in your face, a contract to be terminated, or more costs being incurred.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingWhy 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 FinancingAction is Based On Urgency
June 13th, 2010
It seems that in about 95% of the business financing cases I work on with business owners and managers, there is no action to secure a business finance solution without a certain amount of urgency being present.
On one hand, we can say that’s just human nature, that people in general require a sense of urgency or immediate need to take action.
But in the world of business financing, this is becoming more and more of a problem as lenders continue to take a more conservative approach in 2010 out the backside of the current recession.
The result is that debt financing is not getting secured in time to close deals, shore up cash flow, finance growth, and so on. None of this is good for business owners or the economy in general.
Business owners and business managers have been conditioned to believe that getting a business loan of any size or structure can be done in matter of days or weeks. So the process for even applying for financing has typically been delayed until the 11th hour.
The need for urgency is pretty much always required in that once someone makes the decision to pursue some amount of business capital for their company, there is a need to focus in on the process and stay dialed in until its completed. Making a half hearted effort towards putting an information package together, not studying the financial metrics to demonstrate your business knowledge, and poor follow up and follow through on all requests for additional information can dramatically reduce the chances of success.
So while urgency and focus is a good thing, the timing of the action needs to be adjusted to achieve better results more often.
If we go back to the analogy of a clock and time left until money is required, business owners and managers have to reset their timing mechanism to not take action at the 11th hour, but at the 9th or 10th hour instead.
Perhaps its psychologically difficult for many to develop a sense of urgency earlier on in the process of seeking financing, but this behavioral correction needs to take place in order to avoid greater financial distress when an appropriate source of funding cannot be located and secured in the time required.
Those that start earlier, with a sense of urgency, will get rewarded more times than not.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business Financing