Posts Tagged ‘Business Financing’
The Ongoing Management Of Financial Leverage
June 3rd, 2010
While it is absolutely true that any type of long term, scalable business venture will utilize financial leverage to provide the necessary capital to operate as well as reduce the weight average cost of capital of the owners, leverage comes with costs and challenges that cannot always be directly quantified.
To depart into finance 101 for a second, when the after tax cost of debt is lower than the opportunity cost of equity, it only makes sense to utilize debt to bring down the overall or weighted cost of capital necessary to run a business.
Even if the business is debt free, operating strictly on its own cash reserves, the argument can be made that debt financing would allow the owner or owners to withdraw capital in order to investment in additional profit centers which in turn will make more money.
In theory it all sounds good and in practice, debt financing, especially at today’s rates, make a great deal of sense to take advantage of.
In practice, while leverage is almost always going to be necessary for some point in time, the ongoing management of third party debt or investment should not be underestimated either.
Put another way, any time someone else gives you money for a fee or return, they are someday going to want the money back. And while financing commitments and agreements may seem to place a certain amount of stability as to when money has to be repaid or refinanced, things can also change in a hurry, leaving the business scrambling for alternative sources of capital.
In the current recession, this sort of stuff happens everyday and its one of the more common calls I get from potential clients.
While each story is unique, the basic gist is that everything was rolling merrily along with the business when all of a sudden, for no reason, out of the blue, a source of third party business financing called their loans, cut back on credit lines, increased their rates, etc.
Most people believe this type of problem only happens to businesses that are scrambling for survival and/or are offside with their loan covenants.
Not true.
When the economy is on a nice growth trend, the unexpected is less likely to happen, but still can happen with no advanced warning. In more turbulent times, all bets are off with respect to financing stability for anyone leveraging their balance sheet.
So if leverage is going to be necessary, then management of same is also going to be required.
And prudent management would include things like 1) always keeping your commercial financing profile up to date and in order, 2) periodically assessing your alternatives in the market, 3) developing an emergency refinancing strategy that can be implemented quickly.
An alternative approach most commonly utilized is to do nothing and deal with things as they happen. And during the past few decades, this approach has worked pretty well for most businesses. When things do go a rye there can be some short term scrambling to develop an alternative course of action, but the outcome is rarely ever fatal.
It will be interesting to see how the passive approach works going forward. Capital markets are upside down globally. Each major financial incident sends shock waves through the market, potentially delivering financial leverage disarray to your door.
Ongoing management of leverage does take effort and consumes resources. In today’s capital markets its also becoming more of a necessary risk management activity that every business needs to consider.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Unpredictability Of Commercial Financing
May 29th, 2010
I got a call from a customer with not untypical cash flow management issues and was looking for more alternatives to try and solve his problem.
What I really liked about our discussion, is that this guy understood his business cold and could tell me instantly anything I asked during my qualifying process on the phone, providing the information off the top of his head.
After this type of discussion, I never have any doubt that the client is going to be successful in their business because they have clearly been able to quickly and effectively demonstrate their intimate knowledge of what’s important as well as the things they are doing to grow the business and protect cash flow.
The challenges in this case was rapid growth and how to properly cash flow more sales, which is not an uncommon problem by any stretch with small business owners.
The business owner had also been surveying and studying his financing options in the market and had an above average grasp of where the capital markets are at and what types of options and financing structure where available to him.
Yet despite his above average knowledge level with respect to business financing and how the market in general would view funding his business, he still hadn’t been able to get proper funding in place, even though he’d been working at it for about 6 months.
This is becoming a more and more common theme in the phone calls I get these days.
The commercial financing market is not only hard to understand at times, but right now its almost impossible to predict. And even when you have a business in a “finance-able” position with a totally on top of it business owner, there still can be a lot of art and science into the process of locating and securing financing that the business needs.
More specifically, deal positioning, deal timing, and financial support documentation are now much more critical to lenders than any time in recent memory.
And while I am confident that the caller is more than capable of figuring everything out on his own, how much more time can he invest in the process and how is that time investment impacting his growth strategy?
If you’re business is making money and the only thing blocking you from making more money is capital, the it makes a great deal of sense to pay for the expertise required to keep the business properly funded versus losing out on the future profits lost from mucking around with something that is not only difficult to understand at times, but almost impossible to predict.
Click Here To Speak With Business Financing Specialist Brent Finlay
customer called me to discuss options, had them figured out, but still didn’t know what to do
Business FinancingDebt Financing Has Become a Slow Walk
May 26th, 2010
It seemed that in 2009, business owners to a large extent were not in search for capital for projects or opportunities and were collectively weathering out the recession storm. Even when there was an opportunity to expand or get something done, willing lenders were difficult to come by.
In 2010, considerably more people are trying to get something done that requires debt financing, but lenders are still taking a very conservative approach to the market, bringing the process of business financing down to a slow walk or even a crawl in many cases.
What does this mean for business owners?
First of all, there is money available for business financing deals. But the process is likely going to take longer than you can imagine, so be prepared and start looking for financing sooner or further in advance.
Second, the devil is firmly in the details as money is flowing to those with business plans and commitments that are well ironed out and defend-able. So if putting together the deals is not your thing, then you should seriously look at getting third party assistance to not only develop a comprehensive proposal, but to also make sure that the positioning is appropriate in the current market place.
Third, forget about where the prime rate is at. Spending too much time chasing prime plus one money is likely not going to get you anywhere. If the only way your project will work is with prime plus funds, then make sure you’ve got lots of time to pursue the cheaper money. Even for solid projects right now, there is something of an economic risk premium added into most commercial rates.
Fourth, consider alternative financing sources. If there is sufficient margin in the project or business opportunity, then a joint venture or higher priced asset based loan may be what is the best fit in the short term. Cheaper money can always be pursued over time after the investment has been made.
Fifth, don’t expect any favors from your banker. Banks will tend to try and help their own customers first with expansion and growth plans, but it also doesn’t even remotely guarantee that they will be able to help you out.
If you want to increase your probability of debt financing success, then give me a call and we can discuss whatever strategies best pertain to your requirements.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Best Business Financing Deal May Very Well Be The One That’s Available
May 21st, 2010
When anyone looks for financing of any type, they are intuitively looking for the best deal with the best rates, the best terms, the best fit for what their doing.
And many business owners will start out with their own set of criteria of what they are looking for in terms of amount of money and what the related terms and conditions need to be.
The challenge is then how fast their perception of what’s available to them can be lined up to the reality of the capital markets at any given point in time.
Let me explain.
At any given time, a business may be eligible for certain types of financing rates and terms, but what lending source can provide it?
When the overall market is operating during a period of sustained economic growth, more lenders will be providing similar terms on similar deals most of the time.
When the market is operating during a period of uncertainty like the current recession, the same financing opportunities can still exist for a given business, but its likely that there are fewer lenders that will provide the best potential deal at any given point in time.
The reason is that economic uncertainty increases risk and losses for debt lenders just like any other business. And to protect themselves, some debt providers will leave the market all together for certain types of deals for a period of time, some will cut back, some will expand their criteria for approval, and so on.
The result of all this is that the ultimate best commercial financing deal can be very hard to find in times of greater economic uncertainty.
And when most financing requirements have some sort of time line that needs to be met, the best deal can very well be the one that can be approved and arranged in the time required.
This doesn’t mean what you can get a hold of is the best potential deal in all respects. It just means that its a source of money you can make work in the time you have.
Searching for a better deal is always an option, but there are two things to consider with looking elsewhere. First, you may run out of time and either miss out on the opportunity you’re looking at, or incur additional costs from the delay. Second, if you are unsuccessful finding something better, there is no guarantee the first deal is still going to be available to you later, especially in strained economic times where lenders are known to change their minds or lending direction quickly.
Its a bit like the old “bird in the hand is worth two in the bush” saying. Sometimes a deal that’s close enough to your requirements needs to be good enough, at least for the short term until more predictable options are available.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingBusiness Finance Contingency Planning
May 2nd, 2010
We are now in a time when there are no real predictable rules with respect to business financing and capital procurement, creating a greater need for business finance contingency planning.
There are two basic types of contingency planning business owners and managers need to be consider these days.
The first has to do with existing loans and debts on the balance sheet. Its not uncommon these days for lenders to cut back the limits on lines of credit and trade suppliers to reduce credit lines. So even if the economy in general is not providing a negative impact on the profitability of your business, the business cash flow management process can be turned upside down by things completely out of control of the business manager or owner.
Demand loans for equipment can also be called at any time without a formal reason or negative repayment action on the part of the business. This provides a stronger case for term loan products that do not provide the lender with such broad and subjective repayment options.
And in cases where a business has become late on payments or offside with debt facility covenants, it can’t be assumed that the lender is going to work with the owner or manager even if the cash flows are minor and expected to be rectified in the short term.
For existing debt or credit reliance, the business needs to develop contingency plans that will identify alternative sources of credit that can be secured and the related cost. This has to be continually explored on a regular basis as alternative financing options will change as time goes by as well. And the process can’t start when you have a financing problem as it can take more time than you may have before the business is negatively impacted.
For new business financing, the contingency plan that I would recommend is to start the process sooner even to the point when any new strategic direction is being contemplated. The typical planning approach is to do what’s best for the business and then look for the money that’s required to administer the plan when required. But the probability of finding and locating the desired capital has gone down on average, so it makes a great deal more sense to scope out the capital markets first and then adjust the strategic plan accordingly if required. This is far more strategic than just assuming funding will appear when required.
Business finance contingency planning needs to take on a greater importance with all businesses that are serious about their ability to survive the current recession and profit into the future.
Click Here To Speak To Business Finance Specialist Brent Finlay
Business FinancingHave You Made Adjustments To Your Business Financing Positioning?
April 30th, 2010
With all the changes that have taken place in the capital markets over the last 18 months, there is now a need to change the way that requests for capital are positioned with lenders and investors.
In the recent past, applications were primarily based on historical financial statements and a decent attempt at cash flow projections to support the request for additional or new business capital coming into the business.
But things have changed whereby there is a much greater demand by lenders and investors for the business owner and manager to put forth commercial financing requests that are more thoroughly supported by source documentation and spend more time on risk management than forward thinking marketing strategies.
From a lender point of view, we have moved into a commercial lending era of loan security, lender mitigation, and business risk management. While there still is money available in the market for businesses to acquire, there is a great deal more work involved in convincing someone that you’ve thought through all the major risks that could impact the business going forward and have a plan to mitigate the risks either in a proactive or reactive sense.
In the past, a lot of the details which have always been important to a business financing deal were glossed over by lenders or investors due to the strength of the economy and the unlikelihood of many types of risk to be of an issue or concern to many business owners. This saved on the due diligence process and was supported by decades of portfolio analysis that identified what areas of risk a lender or investor needed to focus on the most.
With the impact of the current deep running recession, most of that logic is thrown out the window as its a little more of an every man for himself type of world where the business owner now has to actually think about all the things that could go wrong in advance of asking for money.
In my opinion, it the financing world had taken more of this type of security and risk first approach years ago, the current recession would not have run so deep. But in better economic times, everyone wants to get in on the lucrative capital financing markets so lenders develop more aggressive portfolios to get their share of the growing pie.
But things are different now. Lenders and investors have made the necessary adjustments, which are akin to their survival as viable business organizations.
Unfortunately, for the most part, business owners have not adjusted the way they manage their business from a financial risk point of view and as a result their business financing positioning when asking for new capital can be way off the mark.
Its really a return to good solid business fundamentals that we are seeing in the market. Over the long run, this should be a good thing. In the short run, it looks more like pain and confusion to those trying to locate and secure business capital.
Click Here To Speak With Business Finance Specialist Brent Finlay
Business FinancingBad Business Financing Assumptions To Avoid
April 25th, 2010
Bad assumptions are a common reason for many of the problems small and medium sized business owners have locating and securing business financing when they need it.
Here are some of the more typical bad assumptions that get made on a regular basis and either inhibit capital from being acquired or cause a business to face serious short term repayment demands from lenders and creditors.
- Using government remittances to cover off cash flow deficiencies is an acceptable practice that the related government agencies will understand and work with.
- New business loans can be used to pay off arrears related to government accounts.
- Personal credit of business owners or major shareholders of small business corporations does not have a large part to play in the making of business financing .
- The process for acquiring business financing is relatively straight forward and predictable.
- Trade credit can easily be acquired for companies that have been in business for several years even if business credit still hasn’t been established or if the business has overdue trade payables on its books.
- Your business bank will be able to provide you’re financing requirements, even if you’ve just been through a rough period where the business has generated financial losses.
- Business financing decisions can be be based primarily on the long term potential business opportunities in the future versus historical result
- The industry and geographic location where the business is located does not have any bearing on the ability to secure commercial capital.
- Prime plus interest rates are available to all businesses regardless of the level of potential risk to the lender.
- Once business financing is provided, as long as the business owner meets all the requirements of the financing facility, there is no risk that the lender will call the loans or restructure future repayment to the detriment of the business.
- If a lender does not want to continue providing your business with capital that there will be another similar lender prepared to provide refinancing quickly and with similar terms.
- Its not typically a problem to leave a financing requirement to the last minute or near the time when funds will be required as there are lots of sources of financing available.
- Shopping around a commercial financing request is the same as shopping around for the best residential mortgage interest rate.
- Once a commitment for financing has been provided, the closing process will be quick and there is very little risk that financing won’t be provided.
- Lenders will typically be understanding if you can’t make all your payments on time.
- The economy is currently improving and coming out of the current recession and the capital markets will follow closely behind.
The key point I’m trying to make is that the process of business financing is not easy by any stretch, especially if you want to secure a financing facility that best meets your requirements. Significant lead times should be built into the process of locating and securing business capital, especially in the current recessionary environment. Proper cash flow management and credit responsibility are also very important aspects of any lender decision making process.
Click Here To Speak Directly With A Business Financing Specialist
Business FinancingBusiness Financing Hypocrisy
April 23rd, 2010
From both a borrower and lender point of view, we are seeing more of what I call business financing hypocrisy.
Lenders are interested in your business until they’re not interested in your business at which time they will call demand loans, cut back on lines of credit, term out lines of credit, increase interest rates, and invoke whatever get out of jail free cards they may have build into their funding commitment to the business.
Borrowers are just as bad in that they at times will promise everything but the moon and the stars to make the lender comfortable with a capital request, but when things don’t go according to plan and loan obligations can’t be met, the borrower calls his or her lawyer and tries to come up with a legal strategy to basically get around having to honor his or her promises.
When the economy is going well, these types of scenarios are played out very infrequently. But when a recession hits, as it has for the past two years, business financing hypocrisy is everywhere and its every man or woman for themselves.
The net result of this type of two way hypocritical behavior is that the financing markets are slowly down to a crawl in many sectors and geographic regions.
Lenders are asking a lot more to protect themselves with most commercial financing decisions now focused on asset based security and risk management.
Borrowers try to protect them selves by constantly looking for a better deal as they don’t like the changes in lender requirements and search for someone who is more in line with their expectations.
To say there is a lack of trust from both sides overall would be an understatement. In tougher economic times, most people tend to take a more conservative approach.
For the desperate borrower, its basically a take it or leave it market with the lender setting out what they are prepared to do without really any flexibility.
For better deals, borrowers have become more patient as lenders are having trouble hitting their borrowing targets which is the way they make money. So for good deals, there is a high level of competition and as a result, a patient borrower can find some pretty good deals as lenders cut margins to only secure solid opportunities.
But regardless of who is in a position of strength or weakness, promises made by either side are very weak. Business financing has become a game where borrowers have to become better players to keep up with the changes in the capital markets.
If you have a business financing requirement or problem you need assistance with, give me a call and we can go through it together.
Click Here To Speak With Business Finance Specialist Brent Finlay
Business FinancingEven Higher Priced Asset Based Loans Can Work In The Present Market
April 7th, 2010
The present capital market is more asset based and risk averse than what business managers and owners have gotten used to in recent history. And while a traditional asset based loan costs significantly more than what one would expect from a corporate financing program, the higher rates are something to seriously consider in the current market place.
The recession has created a lot of unfortunate circumstances for otherwise strong and well managed companies. As a result of lower sales, lender demands for repayment of existing debt, or capital required for expansion or equipment upgrades, business owners and managers are now forced to consider options they would never of previously given a second thought to.
But in lieu of where the capital markets are sitting right now, the asset based lenders have become the best option for many businesses, whether the business owner likes it or not.
From the borrower’s point of view, the lending rates between 1.5% and 2.5% per month can seem to be outrageous. But from the lender’s point of view, the rates reflect the risk in the market and are based more on an equity return than a debt return, which relates to the saying that with asset based loans, you’re renting equity as there are no other lower priced debt options.
From a cash flow perspective, the cash based loans tend to be interest only and are short term in nature, not intending to be in place for more than one or two years. So even though there is no principal pay down, the actual debt servicing requirement in the cash flow may actually be less that a lower priced corporate financing deal that requires an amortized repayment.
This is what can make the asset based solution affordable for many companies with asset equity and limited debt financing options. By being able to cash flow the debt service, even at higher interest rates, the business can potentially draw on the capital necessary to main or grow operations until things settle down and better financing options become available.
This is still a better option than selling off part of the company in that the owner has the ability to repay the debt at any time and retain full ownership and control. So like I said, its a lot like renting equity.
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 Financing