Posts Tagged ‘business loan’
Reducing 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 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 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 FinancingManaging The Needs of Your Senior Lender
January 27th, 2010
If you’ve been in business for awhile and you have a sizable line of credit with a major bank, say for at least $1,000,000, you may have been going merrily along with your business without ever having any real issues with your banking facility.
Every year, your making a profit, meeting your banking covenants, and having a game of golf or two with your bank manager. If there are a few bumps in the road, they are typically handled without much problem and you feel pretty secure in your banking relationship.
This tends to be a pretty common scenario for businesses in operation for more than ten years and generating $5.0M plus in annual sales.
Now comes a long the worst recession since WWII.
In fact, its the first real recession in 20 years.
Banks have slowed down and in many cases stopped lending all together. Bank portfolios that are weighted in some of the harder hit sectors have taken a beating. As a business, banks are inwardly focused and taking care of their own business.
Its at times like these that business owners can develop a false sense of security with their banking relationship and even believe they have some influence or clout with the bank based on many years of paying for bank services.
But in times of recession, all bets are off. Every man for himself and all the rest of that jazz.
Senior lenders, almost without exception, provide business financing for working capital and equipment on a demand basis. We don’t think much about the demand loan terminology until its actually applied.
If a banks portfolio is going in the wrong direction and your portion of the balance sheet is viewed to be higher risk, then your senior lender may decide to demand repayment of your loans …or… provide additional security to lower their risk.
Sound familiar? In North America, banks have choked the money supply and asked governments to help them better manage their risk through guarantees or pledges of assets.
Talk about having you over a barrel. And they do.
So when your senior lender calls you up and says they need to improve their security position or they will be forced to reduce your line of credit or call your loans on demand, what choice do you have?
You can try to move to another Senior, but in the middle of a recession it may be very difficult if impossible to accomplish.
You can move to an asset based lender, which may very well be possible to achieve, but likely at higher rates.
You can see if they are bluffing and refuse to sign off on what they’re asking for.
Or you can cave into their demands and hope they don’t call everything anyway once they are in a stronger security position.
This can be scary times for many business owners, especially if you’re offside on any of your bank covenants, in which case, there will surely be requests for additional security, reductions in facilities, higher rates of borrowing, demands for repayment, or some combination of the above.
This is part of what comes with cheap money. Senior bank facilities are traditionally the lowest cost source of financing a business can have. Security can be based on assets like inventory that really don’t have any security value to the bank, but are still leveraged based on the strength of the overall business and the overall economy.
When times tighten up, like they are right now, senior lenders tend to hold their cards close to their vest and can be very unpredictable.
The best way not to draw their attention in recessionary times is to keep a low profile, and above all else, make sure you understand and meet your bank covenants.
And if they start talking about changes required with your banking facility, take them very seriously and weigh the pros and cons carefully before making any decisions.
Business FinancingBusiness Loans Come In Many Forms
October 24th, 2009
What Are The Different Types And Forms of Business Loans?
First of all, what is our working definition of a business loan. For the purposes of this post, I will define it as a debt instrument with a stated rate of interest and defined period of repayment.
Any business loan is further defined by the purpose of its use, the security involved, and the timing of the related cash flow stream tagged for repayment of the principal and interest.
When the purpose is for working capital, business loans or debt instruments will come in forms that are short term in nature and are predominantly secured by short term assets like accounts receivable, inventory, and potentially equipment.
Working capital instruments for low leverage balance sheets and strong credit profiles will include lines of credit and term loans of 5 years of less. Lines of credit will rise and fall with the cash requirements of the business, while term loans will have a fixed repayment term, drawing money out of cash flow for structured principal repayment.
For higher leveraged balance sheets and/or weaker credit, working capital can be provided through asset based business loans, inventory financing, accounts receivable factoring, and purchase order financing.
While all of the above are technically asset based loans, lets discuss each one separately. The standard asset based loan provides working capital funds as a percentage of the liquidation value of accounts receivable, inventory, and equipment value, similar to a line of credit. Unlike a line of credit, the leverage tends to be higher and is more closely managed by the lender through the lender collecting all the customer proceeds due to business and then continually adjusting the loan outstanding according to the current security value. With a line of credit, there are balance sheet ratios that need to be maintained and reported on a monthly basis, but the cash is collected and managed by the business as long as the business owners and manager stay within the stated covenants.
Accounts receivable factoring is extended as a business loan on the strength of the customer that owes the receivable and provides the lender with rights against the receivable that’s outstanding. There are many different forms of factoring and the rates can vary tremendously.
Inventory financing provides a business loan for the purchase of inventory and uses the inventory for security. Some inventory financing models have the lender control the inventory in third party warehouses to protect their interest in the inventory while other inventory financing models will allow the inventory to remain on the business owner’s premise if the facilities and control systems can provide the lender with sufficient comfort.
Purchase order financing provides business loans based on an advance against the value of a customer purchase order. The credit rating of the customer, the nature of the order, and the time period required to complete the transaction will determine the amount of purchase order financing. For instance, most purchase orders are provided on the purchase of commodity goods that have an active market and can be readily liquidated by the lender to get their advanced funds back if required. Inventory financing is also primarily provided on commodity type goods for the same reasons. Both inventory financing and purchase order financing command higher rates of interest than traditional forms of working capital related business loans
Other forms of short term debt can be subordinate debt financing where a business loan is provided against assets that already have debt registered against them, but with sufficient security value available to secure additional capital in a second security position. Because of the second position, the cost of these funds will be higher than the first position debt.
For intermediate term lending on the acquisition of assets with a useful life of 2 to 10 years, business loans come in the form of term loans or demand loans for equipment. A demand loan can demand repayment at any time while a term loan cannot. Equipment can also be financed through leasing which is different from a business loan in that the lease company retains the ownership of the assets acquired and/or provided as security while in the case of a business loan, the assets are owned by the business with security registered to the lender.
Longer term business loans for longer term life assets such as buildings and real estate are typically financed by commercial mortgage instruments.
There are still other forms of business loans such as convertible debentures and mezzanine financing that are more elaborate in nature and tend to be utilized when loan amounts are in the millions of dollars and more complex business enterprises are involved.
There are so many variations around all these forms of business loans, that each would require a separate discussion.
The point here is to remember that if the business has something of value than can be readily sold or liquidated in the market place for a predictable amount, then there is potentially a form of business loan available to that particular business.
Business FinancingHow Important Is Personal Credit To Business Financing?
October 23rd, 2009
What Type Of Impact Does Business Credit And Personal Credit Have On Business Financing Decisions?
First of all, business financing decisions for debt capital tend to limit credit assessments to business credit if there are no personal guarantees required by business owners, shareholders, or third parties. However, this is not an absolute rule, and in many cases, personal credit still creeps into the decision making process.
Why?
Because personal credit is a form of character assessment, reflecting how an individual carries through on the commitments he or she makes.
There may be ample financial support for debt financing, but a poor personal credit track record of a major owner of a business can still lead to an application decline.
In cases where the security offered by a business and any required covenants are not sufficient to secure the lender, then personal credit becomes even more of a major factor in credit decisions.
The third scenario when personal credit comes into play with business financing is when the business itself has very little or no established credit. This can be very common with businesses under 3 years in existence and also in older businesses that work with smaller suppliers than don’t report their results to credit reporting agencies.
While I can follow the logic of utilizing personal credit reports when assessing business financing requests, the practice is far from reliable due to inaccuracies in personal credit reports. Remember that the personal credit reporting agencies do verify the information placed in your credit report, so any errors can potentially impact a business financing credit decision for a business loan you may apply for.
This is yet another reason to regularly check you credit report for errors and take the time to make it as accurate as possible.
Business FinancingTiming Can Be Everything When Seeking A Business Loan
October 16th, 2009
When Trying To Land A Business Loan, How Picky About Your Terms Should You Be?
When opportunity comes knocking on your business door, you want to answer as quickly as possible and try to take advantage of it, right?
I mean, you’ve done your diligence and have decided that you have an opportunity to go after. There’s just one problem…you need a business loan or some other form of business financing to make it happen.
No problem. You just go down to your bank and get a business loan, right?
That may very well be how it goes down. But before you even go ask, here are a few things to keep in mind.
The process of securing money is 9 times out of 10 time consuming, even when you go through well established relationships. And any inquiry to a new lender will likely take longer than to an existing lender, all things being equal.
Plus, the nature of business financing decision related to business loans can be influenced by the lenders portfolio at a given point of time, their policies, staffing, the weather, and who knows what else.
The point here is that its hardly ever easy and fast to get your hands on business financing of any type. Yes, it happens, but its not what you can expect on average.
So time is money when you’re trying to take advantage of an opportunity that may very well have a shelf life.
The second point to remember is that the first business loan terms you secure might not be the best that you could secure at a given point in time. This really can be a profit killing brain buster.
Many times business owners and managers will not accept a business loan believing they can do better, which they very well could, but end up putting off the opportunity for 6 months or more searching for the best business financing deal.
Ugh!
What would you rather do, make an extra $100,000 a year or save yourself $5,000 in interest costs?
I personally hate the term no brainer as something can always go wrong with anything whether you have a brain or not, but this is as close to one as you’re going to get.
Of course you don’t want to accept anything with crazy terms that are going to back you into a corner or cause other problems. I’m talking about simple stuff like interest cost, which can add up to large dollars, but don’t impact your ability to get going and take advantage of your opportunity.
It may seem ridiculous that you can’t always secure business loan terms you should qualify for in the time period you want, but that’s the way the commercial money system can work.
Bottom line, if you can get reasonably close to your expected terms for a business loan and get making money faster, you will likely be miles a head of the game versus holding off making money as you search for cheaper and/or better term money.
At the end of the day, when you’re sitting on some beach, enjoying the benefits of the money you’ve been able to make by moving fast on opportunities that presented themselves, are you really going to look back on things and think, boy I paid $20,000 too much on interest on that deal that made me over $1,000,000 10 years ago?
I don’t think so.
Business FinancingWhen’s The Best Time To Secure Business Financing?
October 15th, 2009
When Exactly Should You Apply For Business Financing?
Typically, a need for business financing is triggered by some event or string of events. So the timing of when its actually required is not always readily determinable.
Then there’s the classic line you hear from frustrated business owners or managers that the only time they can get a business loan is when they don’t need it.
Combine these first two points with my own observation that 80% of all of business financing requests are unplanned events, and you have a lot of business owners and managers scratching their heads regarding how and when to secure capital.
So here’s a couple of things to keep in mind to increase your odds.
First, because financial statements tend to play a very important role in most types of business financing applications, you need to factor in when and how they are prepared.
In terms of when, financial statements need to filed within 6 months of your year end. If you don’t file until the six month mark, then the results are already 6 months old. And, depending on the lender and how much money you’re after, most lenders will require the last recently completed financial period to be less than 6 months ago. So if your year end is in December and you’re applying for financing in July, many times the lender will require you to get an accountant prepared interim statement for the first 6 months of the current year, or put off further consideration of your financing request until the financial statements are completed for the next year end.
All that being said, one of the takeaways here is to plan as best as you can to apply for business financing in the first 6 months of the year and make sure your accountant is on pace to get them completed well before the 6 month mark. Oh and by the way, the lender will also like an interim financial statement for whatever period is not covered off from the last completed statements to the time of application, but in most cases the interim can be prepared by the business.
In terms of how the statements are prepared, financial statements are done under an accountant statement indicating how much work was preformed to verify the accuracy of the records provided by the business to the accountant. The lowest level of review is a notice to reader, then review engagement, and finally an audit.
If you’re looking for $200,000 or less in business financing, then you may get away with a notice of assessment. Better odds with a review engagement. If you’re looking for financing over $1,000,000, then an audit will eventually come into play.
The higher levels of review cost more money, but without the verification it can be tough to secure business financing, especially lower cost financing.
Bottom line, your completed financial statements are a definite asset that is important to your financing efforts and they have a freshness date that comes into play to some extent.
So when planning out your business over the next year, make sure you take the above into consideration.
To further emphasize this point, say you have a seasonal business that has a year end of December and a peak season of August. If you’re having an off year, which can happen with any business, you may need financing in December or January to carry you though to the next peak. Good luck trying to secure financing with 12 to 13 month old financial statements and an interim statement that may be bleeding red.
Especially for seasonal businesses, you have to apply for business financing after a good year so you can leverage that result. Therefore, if you want some cushion in your available capital going into a season you’re not sure of, you’d better apply for financing before hand.
Business Financing