Posts Tagged ‘business loans’
Debt 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 Business Financing Prime Rate Is A Bit of An Illusion
March 24th, 2010
Most everything we here about the prime lending rates being kept at historically low levels by their respective country administrators to keep the global economy from stalling out during the recession is a bit of a farce for the small and medium sized business that contribute to driving the economy.
Yes, if you’re a well established company with a senior bank credit facility, your cost of operating has gone down due to historically low interest rates. But in many cases, the cost saving that are realized wouldn’t make or break established companies with the balance sheets to qualify for low interest rate debt.
If a company gets offside of their balance sheet and income statement covenants with a bank, they either get their interest rate jacked up nullifying any savings, or end up with a special loans tag which can lead to a forced payout that is even more expensive if not fatal in some cases.
For all other businesses that are looking to start, expand, grow, replace assets, and so on, interest rates near prime are mostly a myth.
Unfortunately, no one told business owners who are frantically in search of business capital right now, working off their long term conditioning of what should be available to them based on where the prime rate is sitting, that things are not what they seem.
Whether this is good or bad, fair or unfair isn’t really the issue. Prime plus rates are difficult to secure because the economic risk is higher and lenders are being more cautious until the recessionary impacts work themselves out.
The key learning is that things are not what they seem and as a result, business owners need to reassess their ability to access incremental capital and the related cost that comes with it.
Failure to adjust to the current environment can not only waste valuable time and money searching for something that isn’t there, but it can also put basic business operations and incremental sales opportunities at risk.
The solution may be to forgo expansion or new business endeavors in the short term, or focus on lower levels of potential profit to cash flow a higher cost of capital.
For businesses offside on their financial covenants that have received a demand for repayment from their senior lender, it could be very unlikely that a similar senior lender is going to be available to replace the existing one and an extended search for money that has a low probability of being there could run the business out of time for structured and civilized refinancing.
Adjusting financing expectations sooner than later can have a profound impact on the long term health of the business.
Click Here To Speak To Brent Finlay About Your Business Financing Requirements.
Business FinancingThe Business Financing Landscape Has Changed … Get Used To It.
March 21st, 2010
I’ve written a lot lately about many of the changes in the capital markets and many of the ways these changes have impacted the ability of small and medium sized businesses to locate and secure financing.
The hard part of these recession driven changes to the market is that there isn’t going to be a near term return to the market conditions we’ve basically gotten used to over the last two plus decades.
Let’s face it, the capital markets have not seen anything like this since the end of the second world war.
A large percentage of the capital markets were driven and built up over time by the long run health of the overall economy. Yes, there have been some significant bumps in the road over the last thirty or so years, but nothing as game changing as what we’re seeing right now.
Large parts of the market have disappeared all together as record numbers of bank and commercial financing company failures lead the headlines on an almost daily basis.
When the economy gets back to steady monthly growth, the crater in the market we now see isn’t going to fill up anytime soon.
This tells us that the go forward business financing market is going to take on a very different look for some time to come and it may take decades to get back to anything close to what has been in place in recent memory.
The biggest benefit to business owners with the old status quo was that there were numerous sources of capital all trying to carve out their own unique place in a market that seemed to be growing without end. Similar to the residential market, the commercial sub prime market exploded as companies raced to get their share of the market demand for more capital.
But when the economy slowed down, and highly leveraged companies started crashing all over the place, starting a domino effect like nothing we’ve ever seen and are still experiencing, collapsing the capital market structure that was created over several decades.
And while government bailouts have helped stabilize the money supply to some extent, its hard to know if the main beneficiaries are actually going to make structural changes to their practices or continue on overheating the economy once things get back on track, getting us all set up for another recession in the not too distant future.
Bottom line to all this is that things are going to be different from now on and may be significantly different for decades to come when it comes to locating and securing business capital that your going to be able to cash flow.
Business owners have been spoiled by the funding choices available to them, causing them to practice what I would call less that optimal business finance practices. In fact, in many cases, there is no business finance strategy at all.
The reality is that when you borrow money or take on an investor, the money belongs to someone else and they are going to want it back. The building up of debt over time without a plan to pay it down is good in theory from a weighted cost of capital point of view, but in reality sudden changes in the fortunes of your lender or investor can turn your business upside down in a hurry with no solution in sight.
Business owners need to get back to contingency planning, having some amount of capital buffer to weather financial market storms, and managing their balance sheets so that debt levels are kept in check.
The days of fast and loose money are gone for now and I’m not sure if and when they’ll be back.
Click Here To Speak To Brent Finlay For Your Business Financing Needs.
Business FinancingDebt Financing Sources Are Like Shifting Sands
March 10th, 2010
We are conditioned to believe through our consumer credit experiences that there is a never ending source of money out there waiting for us to utilize.
And while there certainly is an almost infinite supply of money available, the actual sources that businesses rely on to supply it are collectively more like shifting sand than mass volume commodity suppliers.
There are a number of reason for this.
First, unlike consumer financing which is much more uniform, business financing is highly customized with every financing opportunity being somewhat different from the rest. A consumer has a job, a credit score, and a some amount of personal net worth. A business functions in an industry, providing a certain services and/or goods, has customers, suppliers, infrastructure, employees, pension plans, government remittances, and so on and so on.
Because human beings have to interpret all this data, there can be vast inconsistencies in lending decisions not only between lenders, but between underwriters that work for the same lender.
Second, debt lenders all have a financing portfolio of loans to manage. Each portfolio will be assessed for 1) overall portfolio risk and 2) industry and/or asset concentration. To maintain a balanced portfolio, lenders will change their application of their own lending criteria to strengthen the portfolio where ever possible. For instance, if their loan portfolio is too highly weighted towards the automotive industry, they could stop lending to this sector all together for a period of time regardless of how strong the overall application is.
And when this happens, its not like they put a sign up stating this change to their lending practices. Instead, the business applicant will get declined and typically will not know exactly why. This can be quite frustrating in that a similar application for financing made several months earlier could have been approved, once again attesting to the shifting sands.
Third, lenders also source the capital they provide other sources. Sometimes their own sources of supply dry up or cut them back, leaving less available funds for new loans.
Fourth, when economic down turns occur, lenders often will sit on the proverbial fence to see if their portfolio will become impacted by borrower defaults. While their portfolio may be very strong, the unknowns associated with how economic forces will impact their borrowers over the near term, cause them to slow down or stop lending money.
Locating and securing business financing is all about where you are located, what you plan to do with the money, at a given point in time.
Even if the “where you’re located” and the “what you plan to do with the money” parts stay the same, your results can still vary widely at different points in time for some combination of the reasons mentioned above.
This is probably the area where a business financing consultant provides the most value. As an individual that is working daily on business finance scenarios, financing consultants are able to see how the sands are shifting and build that intel into their process for finding the most relevant form of capital available to their client at the point in time its required.
If you have a business financing need you wish to discuss, please give me a call and I will give you a free assessment of what I believe to be the most relevant options available to you.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingSmall Business Startup Financing Is Personal Financing
February 24th, 2010
If you’re trying to start up a business or have been in business for less than one year, the acquisition of business financing is typically just personal financing in disguise.
It doesn’t matter how thick or fancy your business plan is, or how many letters of intent you have signed, or your wealth of industry experience, if you trying to start a small business and require capital to do so, you are basically limited to what you’re personal financing profile can provide.
Take a look at banks for instance.
Unless they can get you approved through a government backed loan program for equipment, leaseholds, or real estate purchases, they are not going to extend you a business loan. And even for the government supported programs, if you have below average credit and no personal net worth, you won’t qualify for that either.
Whether we like it or not, start up financing is equity driven, not debt driven. If you’re looking for debt financing of any kind, it will be based highly on your personal credit, personal net worth, and sources of personal income.
The reasoning for this is quite simple. Depending on whose statistics you read, over 40% of start up’s will fail in 5 years. From a lender’s point of view, if 4 out of 10 loans don’t get paid back, the lender will be out of business themselves.
So to get started, you need your own money or the equity investment of others to fund the business.
The business financing side is a bit bizarre in that if you apply for a business loan and are approved on the strength of your personal credit, earnings, and guarantee, you’re still going to be charged a business rate. If you were able to secure the same amount of borrowing through a personal financing program that relies on the same personal factors and security features, the rate would likely be lower.
In many cases it makes far more sense to secure the personal financing available to you from secured and unsecured loans, and then lend the funds acquired to the business as a shareholder loan. This will immediately save you money in lower interest costs.
But because entrepreneurs have their mind set on getting a business loan, lenders are more than happy to provide a personal loan in disguise at a higher rate.
Take a look at the trucking industry. Many leasing companies require owner operators to own a home and have at least an average level of personal credit. The trucker may think he’s applying for business financing, but the lending or leasing decision is mostly based on personal financial and credit factors.
I’m not saying this is right or wrong, good or bad; it just is.
For anyone starting up a business, the sooner they understand the above, the sooner they will stop beating their head against the wall trying to find something that doesn’t exist.
The key take away is that when you have a new business, you need to focus on leveraging your personal credit attributes to gain the best financing deal possible, regardless of what type of lipstick a lender puts on it.
Click Here To Speak To Me Directly About Business Financing
Business FinancingBusiness Financing Tradeoff – Lower Taxes Versus More Borrowing Power
January 14th, 2010
I’ve written a fair bit lately about the importance of financial statements and their importance to business financing activities, especially after the year end.
One of the biggest challenges with getting the most financing power out of your financial statements is to have a tax planning strategy that is in line with your business financing strategy.
Too often, accountants will go through tax planning strategies in a bit of a vacuum, not having any knowledge or appreciation of what the business will require for capital or what if any refinancing will need to take place in the year ahead. Even if there isn’t an immediate capital need that’s planned, there still is the consideration of things that could unfold and allowing for their potential capital requirements.
And when financial statements are optimized for tax purposes only, they can reduce and potentially destroy your ability to borrow incremental capital in the process.
Effective tax strategies can lower net income which is required for debt servicing and lower retained earnings, which will reduce the amount of equity on the balance sheet available for financial leverage.
What confounds the whole process even further is that each lender will have their own series of add backs and adjustments to income and cash flow that may or may not be impacted by certain tax strategies.
In reality, paying taxes can be viewed as a cost of borrowing in that if the business is not in a taxable position, it won’t have the financial results necessary to acquire and service debt.
So how do you optimize the financial statements for both taxation and financing at the same time? This is a bit of a difficult question to answer due to all the unknown variables involved on the business financing side.
One approach to consider when the business is actively seeking capital prior to the completion of the year end financial statements is for the accountants to prepare a draft version based on the collective best guess work of the business owner and their third party accountant as to what level of earnings would be acceptable to the target lender or investor.
The draft version can be put forth with the financing application and if an approval can be secured based on these numbers, the statements can be finalized as written. If financing can’t be obtained for the sought after terms and condition, the draft financials can be further adjusted to optimize the tax position of the business if appropriate and finalized via a revision.
There are other approaches to consider. Just keep in mind that in order to get the best result for both taxation and capital procurement potential, the business owner and manager need to make sure that they provide their taxation expert with their forward looking plans and capital requirements so that some effort can be made to allow for both requirements if necessary.
For more information on business financing, click here.
Business FinancingThe Business Financing Benefits Of Year End Financial Statements
January 11th, 2010
While not everyone has a December 31st year end, most small and medium businesses do, and with the middle of January quickly approaching, here are some things to consider with respect to business financing and year end financial statement preparation.
Keep in mind that this advise applies to any fiscal year end.
Whether we like it or not, the process to secure capital is largely driven by the historical financial statements of the business. And financial statements that are less than 6 months old have more lending value than those greater than 6 months since the end of the last completed fiscal period.
And while the required filing of corporate income tax and the related financial statements is typically not required until 6 months after the year end is completed, there may be significant reason to get this completed sooner. Here are two reasons in particular to consider. You need incremental financing for your business or you’re planning on requiring more business financing in the near future.
The first thing to consider is the profitability of the income statement and the leverage of the balance sheet. If the income statement shows profit capable of servicing incremental debt and the balance sheet has enough equity to support additional debt acquisition, the you will have a powerful asset to assist with securing capital once the financial statements are completed.
Here’s some other things to consider.
If you’re applying for financing after year end but before the year end financial statements are completed, then its highly likely that a lending facility will not be put into place until the accountant gets the statements finalized and filed.
If you plan to wait until the financial statements are completed 6 month after the year end before applying, remember that the financial statements are now effectively 6 months old. If the lender’s assessment process takes some time to complete, the lender may turn around and ask you to get a 6 month interim financial statement completed, creating what could be a significant delay to your plans while increasing your accounting costs.
Even if you have no immediate need for incremental financing, you may want to consider how to best utilize a strong financial performance of the year past in terms of business finance and the relate costs.
For one example, you could utilize a strong year end to help leverage better terms at your bank by shopping around to the competition. Rarely will you have better leverage to secure better rates and terms that when you have strong financial statements. And you may even be surprised at the competitive offers that come back which may prompt you to make a move. With out freshly prepared financial statements from a strong year of operating performance, this possibility is going to be a lot less likely.
Another situation to consider is leveraging a set of strong financial statements to increase your credit limits or add credit lines. You would be basically trying to secure financing you don’t need or are not planning to use but may end up using if you’re having an off year. For a seasonal business, this scenario can play out more often than not over a long enough period of time.
I had a client with a seasonal business that was highly profitable and dependent on winter weather. They had great credit and had very well established short term and long term financing with a chartered bank. Then one year there wasn’t severe enough winter weather for their business to operate (first time in over 20 years of business history). At that moment of cash flow crisis, it was not possible to borrower more money and everything that was built up over the years was put in jeopordy.
You’d think that a bank or any lending partner could see past this anomaly in financial performance. In most cases they can’t or won’t, so its up to you to create your contingency ahead of time and one way to do so is by increasing your available credit when the opportunity presents itself.
On the flip side, if the financial statements are not going to be profitable, there is likely no rush in getting them completed sooner than later. And if the bank requires copies, you may want to wait as long as you can so that the business results can improve prior to providing the historical results.
Business FinancingBusiness Financing | Why Special Loans Aren’t So Special
December 28th, 2009
Things To Consider About Having A Special Loan Status
In Canada, banks call business loans that are not meeting their required financial covenants as “special loans”. I’m not sure what they’re called in other parts of the world, but the implications are the same.
When a loan falls into the special loan category, the bank must now decide what their course of action is with the account. In 2009, word has it that there are large numbers of special loans on the books due largely to the impacts of the current recession. And unlike past recessions, the banks appear to be a bit more patient with borrowers or at least they have been to this point.
In the past, when borrowers would fall out of covenant, the special loan officers jobs were to help get the loan back on side, or figure out an exit strategy for the bank to get their money back. In most cases, the latter tended to occur both frequently and quickly. This time around, the banks have been going to greater lengths to work with clients, especially those that are marginally offside with their requirements.
And perhaps this has been a good strategy to maintain bank revenues. With recessionary forces in affect basically all of 2009, lending is way down with much of the decline directly attributable to lenders being more cautious with new lending approvals. So working with special loan accounts, at higher interest rates due to the higher inherent risk, has created a new source of earnings. So you get a double win… fewer loan right downs and higher net average earnings (in theory anyway).
But is this likely to continue in 2010.
Its hard to say.
As recessionary forces subside, new lending will be more prevalent, perhaps creating the opportunity for lenders to return to past practices of getting their money out of special loans as fast as possible.
But if there is any type of government support available to lenders to offset the higher risk they’re carrying in their portfolio, then perhaps this “working with the client” strategy will continue.
Regardless of what does transpire, one should always be concerned with carrying the special loan (or its equivalent) tag. Lender policies can change quickly and just because they have been working with you in 2009, there is no guarantee that this goodwill at higher rates will continue into next year.
For any business owner classified with a special loan status, they would be well advised to thoroughly assess their refinancing options with other sources of capital and repeat the exercise every quarter to make sure they are on top of what plan B and C may look like if the banks choose to go in another direction.
Things can change quickly and refinancing a business can be very time consuming, so its best to spent time not only trying to get the lending covenants back in line but also to build out a contingency plan to keep the business a float in the event of a change in lender strategy.
Business FinancingSmall Business Financing Is Mostly Personal Financing
December 2nd, 2009
What’s The Difference Between Business & Personal Financing
For small businesses, there isn’t much if any difference between the two.
There are a couple of key reasons for this.
From a credit point of view, small businesses, especially new ones, don’t have much in the way of business credit established. So lenders will rely on personal credit scores and histories to make business financing decisions.
Even if a small business has been in existence for several years, there still is no guarantee that any amount of business credit will have been established due to the fact that a business credit history is developed by transacting with companies that not only offer credit terms, but also report outstanding credit to credit reporting agencies. Many small businesses either don’t utilize much supplier credit, or way only work with suppliers that are too small to be actively reporting to credit agencies. The result in both cases is that business credit does not build much over time.
From a guarantee point of view, most small business financing facilities will require a guarantee from either the business itself or the owners of the business. If the business itself does not have sufficient retained earnings to provide meaningful value to a guarantee, then a personal guarantee will be required.
Many business owners get frustrated with the fact that even though they are incorporated, they still have to open themselves up to liability personally by having to provide personal guarantees to secure business loans. Unfortunately, incorporation can be more important for tax reasons than liability protection, especially when it comes to securing business capital.
Over time, as the business earns profits and grows its retained earnings, then personal covenants and guarantees may not be required and can even be removed from existing financing facilities.
The key though is to increase the value of the businesses ability to repay debt obligations. If the owners are always striping out the available cash from the business, then the personal guarantees will likely continue to be required due to the fact that the personal side is where all the equity value is being held.
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 Financing