Posts Tagged ‘Debt Financing’
Business 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 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 FinancingDestroying Your Ability To Borrow Money
June 10th, 2010
For businesses that are otherwise profitable, there are a number of ways that a business owner can destroy or dramatically limit their ability to borrow money.
If a business is generating a positive cash flow over time, then it should be able to get business financing from the cheaper sources of business capital without too much difficulty provided that there is a valid business application for the funds being sought.
However, this is not always going be the case due to the lack of attention paid to certain key requirement that most sources of business credit are going to require.
The most common way to destroy a businesses ability to borrow is poorly managed personal credit. Even when a business itself has strong credit, the personal credit rating of the business owner or owners can destroy certain financing options. Why? Because even though a business has a good balance sheet and cash flow, the lower cost sources of financing expect the person or people in charge to be responsible with all types of credit they have to manage. Many lenders believe that your credit score is a reflection of your character and your commitment to meet all your obligations in a timely fashion. Sloppy credit with a string of regular late payments can lead to automatic decline for a request that would otherwise be approved.
Another major way to limit credit availability is to not upgrade your accounting review as the business grows in size. For example, beyond lending a few hundred thousand dollars, there will be lower levels of commercial lender interest in larger requests when the business is only providing notice of assessment statements.
Taking the financial statement aspect one step further, many banks and other lending institutions will only make lending decisions on financial statements that are less than 6 months old. Because corporations don’t have to file returns until 6 months after the year end, as soon as they are available to provide to lender they will already be too old to support a request for financing to certain lenders.
Institutional lenders will also require financial statements to show repayment ability of future loans and credit obligations. If the business owner has taken an approach whereby the tax level of the company is reduced to near zero and the available cash is stripped out of the business on a regular basis, an otherwise strong company will have a hard time borrowing money based on these practices.
There are many other habits and practices that work against a business’s ability to access capital. Failure to manage all the relevant elements will destroy potential financing options, increase rates, and make timely acquisition of business capital very difficult to accomplish.
Click Here To Speak Business Financing Specialist Brent Finlay
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 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 FinancingBusiness Financing Is About Focusing On What You Can Secure In The Time Required
February 27th, 2010
In the world of business financing, everything is all about timing.
Too often business owners and managers get overly focused on their ideal form of financing versus what’s available to them in the time they have.
A good example is the current situation in 2010 where many businesses are starting to see a return to more normal business patterns as we get to the back side (hopefully) of the current recession, but they lack the working capital resources to take advantage of available opportunity.
But because last year was challenging, they not only have weak financial statements to work from but also potentially strained working capital and credit due to needing to cover cash flow short falls over the last 12 months.
And even though they may have never experienced an off year before, they still may not be able to secure incremental working capital from their bank or move to another bank to gain access to a different source of capital.
But what is likely versus what they are focused on can be two completely different things.
This is where having a basic understanding of how business financing works can be so critical to your business. In times when a dog won’t hunt, its better to not go hunting, or take a different approach.
Lately I’ve been getting a rash of very predictable phone calls for this time of year from business owners frantically getting nowhere trying to secure additional funding with a weakened financial profile.
Is it possible to secure incremental financing or refinancing at prime plus rates in a weakened financial position while we’re still within in this more conservative recessionary lending period?
Yes it is.
Is it probable.
No it’s not.
There’s the famous Albert Einstein quote that the definition of insanity is doing the same time over and over again and expecting different results, which could have been written about business owners not understanding how to go about securing business financing at any given point in time.
Taking it even one step further, even if it were possible to secure your ideal financing in less than optimal lending circumstances, can this be accomplished in the time you have?
What good will it do to get the optimal commercial financing in place if you’ve missed the boat on solid business that could have helped you get back on track or at least generate some positive cash flow during the last 6 months of unrealistic money shopping?
When there is no financing contingency in place, and additional cash is required sooner or later to take advantage of opportunities or keep the balance sheet from further deterioration, the best capital to go after is capital that can be secured in the time required.
Once you get into this mindset, its not about getting the best potential deal, its about minimizing the costs associated with the most probable deals. And the most probable deals are likely going to be asset based with higher costs. They will also be bridge loans in that you’re not going to want to pay higher financing rates any longer than you have to.
Once you get focused on financing options that work with your capital needs and time requirements, the exercise becomes picking an option that you’re going to be able to afford even if the best case scenario is breaking even.
Remember, this is a short term fix because you believe better days are ahead.
But if business owners refuse to adjust their financing expectations for any point in time, they may not only descend into madness, but insolvency as well.
Click Here To Speak With Me Directly About Your Business Financing Requirements.
Business FinancingWhat Type of Business Financing Can You Secure To Payout Your Special Loans?
February 17th, 2010
If you find yourself in special loans with a major bank for whatever reason, there is going to be some urgency to get them paid out before they start realizing on security.
There are a whole number of ways you can get into special loans, the most common is when you’re offside with one or more of your loan covenants. But even if you’re onside with everything, the bank doesn’t have to have a reason as these loans are typically made on the condition that repayment can be demanded at any time.
So, regardless of how you got there, the bank has stamped special loans on your forehead and are either trying to squeeze the cash out of you drop by drop, or have set some sort of deadline (typically between 30 and 90 days) for repayment to occur before they start realizing on security.
So what are you’re options?
If you’re truly not offside or only marginally offside on your covenants, you could potentially go to a competitive bank that is currently interested in your business profile and industry.
The first challenge with that approach is that other banks are going to think there is something more seriously wrong to warrant the special loans tag, so they may not give your request any serious attention.
The second challenge is that even if they are interested, they may not be able to move fast enough to assess your application and get financing in place before your bank starts trying to realize on security.
A bank refinancing request for several million dollars can take 60 to 90 days, or more to complete, depending on the assessment process required and the conditions that need to be met.
So, when pressed for time, and requiring a higher probability of success, many businesses turn to asset based lenders.
For service companies that may only have accounts receivable to offer up as security, factoring becomes the only viable option in terms of speed and predictability. But to even make this work, there will need to be enough margin to cover the higher cost of financing. While a bank line of credit can be right around prime, factoring will run at 1.5% to 2.5% per month.
For businesses that have physical assets, there are more options to consider.
With real estate, it still may be possible to get an institutional lender to provide financing at similar rates to the ones being paid out, provided that there is a recent appraisal and environmental audit completed.
If time is of the essence, then private real estate financing may be arranged at 65% loan to value and interest rates around 10%. There typically is only one year terms on this type of money, so you’re basically signing up for a one year bridge loan before refinancing will be required again.
Equipment refinancing will likely be based on a percentage of forced liquidation value with rates in the lower to mid teens.
If the business has a high investment in accounts receivable, inventory, and equipment, then a working capital form of asset based loan can be arranged utilizing all short term assets as security at rates from 18% per year to 30% per year.
And for any asset based solution, there are likely going to be lender fees to pay as well, making the exercise more costly.
If you spend too much time trying to secure a cheaper financing solution for refinancing, you could run out of time and potentially be out of business.
Bottom line, you want to avoid the special loans tag at all costs. A fast refinancing, if possible, is going to be expensive, and destroy a lot of value in the process.
Yes, every one wants the lowest cost financing, but lower cost financing is not only low risk, but very fickle as well, especially during economic down turns. And everything is set up so the plug can be pulled at any time.
Click Here To speak to me directly about business financing
Business FinancingThe Balance Between Borrowing Money and Saving Taxes
November 10th, 2009
Are You Saving Taxes And Destroying Your Borrowing Potential At The Same Time?
Business finance covers a lot of ground including accounting, taxation, foreign exchange, business analysis, and business financing to name the main groupings.
And while all these areas fall under the same umbrella, they don’t necessarily work in harmony, especially when some of these activities are outsourced to a third party accounting practice.
For small and medium sized businesses, a common example of this is the impact of annual financial statements and business tax returns on a businesses ability to borrow money.
Many business lenders follow fairly rigid criteria related to financial ratios including balance sheet leverage and payment coverage. These ratios and others can be directly impacted by the decisions business owners and managers make with their accountants with respect to tax strategies.
Most business owners and managers don’t necessarily understand the connection between taxation and financing and in some cases, believe it or not, neither does their accountant. The primary goal is to reduce taxes and therefore improve cash flow.
There is nothing wrong with this approach as long as you don’t require business financing to operate your business. If you do, then here’s a couple of things to be mindful of.
First, if you have a senior financing facility in place with a debt lender, there are likely financial covenants in place that require you to main certain ongoing levels of balance sheet leverage and income profitability that are relative to the amount you’re borrowing. Aggressive tax savings strategies can put you off side of these covenants which at the worst will get your loans called in and at the least will increase your cost of borrowing.
Second, if you try to secure new business financing capital with financial statements that are over leveraged and/or do not show enough debt servicing ability, there’s a very good chance that funding will not be available, or if it is, it will come at a higher cost.
Bottom line, there is a balance between minimizing business taxes and maximizing borrowing capacity. Failure to maintain or keep track of this balance can be very costly in the long run.
Business Financing