The Business Financing Version of The Sub Debt Market Has Disappeared

We hear so much about the collapse of the U.S. sub prime residential market, but we don’t hear a whole lot about what I refer to as the global business sub prime lending market.

For business financing, there are three basic levels of financing.  The first level is for “A” credit and where corporate finance mostly lives.  Then there is the “B” level or sub prime level for slightly higher risk situations followed by the “C” credit level which is asset based lending.  There can be forms of asset based lending that are more A or B in nature, but for the most part asset based lenders lend strictly on the liquidation value of the assets.

In March of 2010, the “A” type lenders are still largely sitting on the fence and not lending out much money.  Most of their time is being spent trying to figure out what to do with all the customers that are behind or offside with their financing covenants.

The C lenders are lending, but the rates are high, and because their is so much used equipment and real estate flooding the market, the assessment of liquidation value, upon which the amount of financing that can be provided is determined, is very low producing much lower amounts of capital than the business owner is expecting in most cases.

And then there’s the B, or Sub debt lenders, who have basically vanished from the scene.

So right now, if you’re a business that just come off a bad year, but have pretty good options ahead of you, the types of financing options available to you are going to be limited.   In most cases, the only options that are actually lending money will be asset based lenders, and they will be taking a big bite out of your available equity with large debt service costs.

Business owners, for the most part, have not adjusted to this market shift and are still looking for cheaper money that isn’t available right now.  It is a hard decision to take on higher priced debt, but if you can make the math work in your cash flow, 2010 may be more about survival than profitability.

If you are in need of business financing, give me a call and we can discuss your options in more detail.

Click Here To Speak With Business Finance Specialist Brent Finlay

Debt Financing Sources Are Like Shifting Sands

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

Private Mortgage Property Financing Can Save Your Business

Predictably, the majority of calls I’m getting these days are from businesses that have been hit hardest by the current recessionary impacts.

Most of these financing requests are either for securing incremental capital for business operations or refinancing a banking relationship where the bank has demanded repayment of the outstanding facilities.

In both cases, the business financing challenges are significant to due to poor near term financial performance, high levels of unsecured debt, and strained overall credit.

Getting the bank to provide additional credit or to work with the business through a down turn can be difficult if not impossible.

In many cases, the long term business survival requires the use of alternative financing sources that will require higher financing costs that relate to higher levels of risk.

If the business owns real estate, the cheapest possible financing solution is private mortgage financing of commercial property.

By the time other financing sources are being considered, the business is already in a cash flow crunch and time is of the essence, which plays well with the private mortgage options as they tend to be able to be put into place much faster than conventional commercial real estate mortgages.

But private mortgages are also far from automatic for commercial property.  Unlike residential property that can predictably be resold within a certain value range within a certain time frame, commercial property can take years to sell if the lender was required to take action against the security to receive repayment of a mortgage.

So while private lenders are not going to be as fixated on all the near term financial red ink, they will be interested in the property value, the strength of the resale market, and the business’s prospect’s for a short term turn around.  Because private funds are typically only provided for one or two year terms, the lenders need to see that the potential exists for a viable exit strategy at the end of the mortgage term at which time the borrower would transition back to a conventional commercial property lender at lower rates.

Private mortgages do cost more money, but this is a trade off to assure that the business is not interrupted or shut down which can happen if the business owner is overly persistent seeking cheaper forms of financing that take longer to secure and are harder to get in place when the business is in a distressed or semi-distressed state.

If you find yourself in this position and would like to explore private mortgage financing options, give me a call so I can provide a free assessment of your most likely options.

Click Here To Speak With Business Finance Specialist Brent Finlay

Business Financing Is About Focusing On What You Can Secure In The Time Required

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.

Small Business Startup Financing Is Personal Financing

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

When Not To Look For Cash Flow Funding

If you’ve been in business for any length of time, I’m sure you’ve heard the expression, “I can only get financing if I don’t need it”.  You may have even said it yourself.

This is usually uttered out of frustration when business owners and managers are trying to get financing for cash flow deficiencies or debt consolidation actions to improve their cash flow funding.

And yes, at the time of financing is when the money is needed most, yet it can be so elusive to obtain, or if you can obtain it, the related cost is in the stratosphere.

Unless this cash flow crunch is fueled by an abundance of extra work or orders that came out of left field, then this is definitely the wrong time to apply for financing.

Why?

Several reasons.

First, you’re presenting your business to lenders or investors at a point of weakness.  You need to be marketing a business opportunity where they can make money.  It can’t look like you’re asking them for a favor that would put them into an uncomfortable position.

Second, if the debt didn’t accumulate over night, what were all the company’s financing decisions that led up to this point, and why were they made prior to looking for more financing?  If recent history shows more of an I will take anything I can get financing strategy that includes several sets of arrears payments that are months behind, then there is nothing to inspire lender confidence.

When you get into these types of situations, additional capital is going to be very hard to come by and the key to survival will lie in the ability to simplify the business, work with existing creditors, and manage within the cash flow you have to work with already.  If additional capital must be acquired to make anything work, then you may have to take on higher priced debt that will further erode your equity.  Just make sure there is a cash flow plan that can work with any new debt additions, or its not likely going to be worth signing up for.

Seeking business financing is about working from a position of strength, or relative strength.  It also means looking ahead to see what the near future is going to be like and being realistic with yourself about how things may unfold with respect to your cash flow.

Even if you are only suspicious of more challenging times being ahead, then start at that point to build your financing contingency plan by either accessing more debt or equity capital, or start cost cutting to build a cash reverse out of your monthly cash flow.

From a lender’s point of view, especially lower cost lenders, when you need more money for cash flow is a future event that has been planned for versus an unplanned event that has been ignored or avoided leading up to the current cash flow problems.

The harsh reality is that lower cost financing is for lower risk situations.  If you’re already in the soup to some degree with your cash flow, the business risk is higher and as a result the interest for helping you will be less and also more ruthless because the lender or investor is in a much stronger position to dictate terms.

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Funding Cash Flow and Other Business Financing Topics of Interest.

What Type of Business Financing Can You Secure To Payout Your Special Loans?

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

Buying a Business Requires Time, Money, and Patience

If you ever start going down the road to business acquisition or buying a business, where third party debt or equity is required, then there are some things you should likely be aware of.

First, outside of a start up, the financing of a business purchase is arguably the most difficult type of business related financing there is.  Why?  Because there can be lots of moving parts to try to understand each of which can have either a positive or negative impact on the business.  The goal of the buyer and third party financier is to accurately assess the current health of the business to make sure it has the ability to grow and prosper in the years ahead, versus being on a steep decline with little hope for the future.

Second, because each situation is somewhat unique, any financing secured will be customized in some manner to fit the situation.  Customization always takes longer than something you just pull off the shelf which means you’re going to have to allow for probably more time than you anticipated to get business financing in place.

Third, while its possible to secure debt or equity financing with little or no money down, its not highly probable in most situations.  Statistics will show that unless the buyer has a significant financial risk, there is a greater likelihood of business failure due to the fact that when the going gets tough someone with less to lose personally is also less likely to fight through the adversity to achieve a better result.  With little to no down payment in the deal, the walk away costs are not very high, creating the opportunity for the buyer and now new business owner to fold the tent quickly if things are not going well with the business.

Fourth, when goodwill is involved, there is an expectation by lenders and investors that the vendor will cover all or part of the sale price pertaining to goodwill.  Without this involvement by the vendor it will be much harder and perhaps impossible to secure third party financing of any sort.

Fifth, because capital may be required from a third party source, the vendor, and the buyer, it can be quite difficult to come up with a comprehensive financing plan that works for all parties.  Lots of patience is typically required to work through everyone’s requirements and manage through the trade offs and compromises that will inevitably be required to complete the deal.

Also, many times things just won’t be a good match among parties, so you also need to access the goodness of fit quickly and if its not likely going to be present, then cut off negotiations and move on to the next potential deal.  This is another form of patience whereby the buyer needs to never get hung up on any one deal, but focus on their buying criteria and the deal quality for all parties.

This may require looking at several deals over a period of time, working through them one at a time in order to get a good result.

Click Here For Help With Buying a Business and Getting it Financed

The Dangers of Shopping For Business Financing

There is quite a difference between searching for residential mortgage financing and different forms of commercial or business financing.

On the residential and even consumer side, it is a well accepted practice that borrowers will shop for the best deal and could contact several different lenders during their search for financing.  And if a broker is involved, an application for financing can be quickly distributed to a large list of lenders for their individual consideration.

The same is not true with most forms of commercial financing, especially when the transaction value gets into the millions of dollars.

Unlike residential and consumer financing deals, commercial financing is much more difficult to put in place due to the higher degree of risk associated with business financing as well as all the relevant information that may have to be reviewed for any one application.

So when a business owner or manager goes on a shopping spree, sending out their information to anyone they can find that may be potentially interested in their deal, there are several problems that can occur.

First, if several brokers are involved and end up applying to the same lenders, the lenders are going to know that the deal is being broadly shopped around and may decline their interest almost immediately.

Why?

Because they’re not prepared to consume resources on a deal review that has a low probability of giving them any type of return.  Because there is so much work involved compared to consumer financing, they may instead focus their efforts on applications that appear to be more focused on their services.

Second, aggressive shopping is likely going to generate a lot of term sheets from the lenders that are trying to “take you out of the market”.  Terms sheets can provide a basic overview of what is possible, but are no means binding in any way, and there may be a major difference between the best case scenario provided and the more typical rates and terms approved for similar deals.

And even though the borrower is in search of the best deal, these initial term sheets can get them going in the totally wrong direction, by passing the best available options in the process without the borrower being any the wiser.

Third, whether its a term sheet or exaggerated promise, marketing managers and brokers will also overstate what is possible to try and secure the interest of the borrower, knowing full well that it will be highly unlikely that they can deliver in the long run.

Part of this is the lender or broker telling the borrower what they want to hear and part of this is to gain a competitive advantage.

The strategy here is to get the borrower far enough along in the process that there won’t be enough time to go anywhere else and even if a forthcoming commitment delivers less than expected, there may be no choice but to accept it.  But what’s even worse for the prospective borrower is if the application ends up getting declined.  Now they may be out of time with no financing solution, and the shopping process that made so much sense at the beginning has ended in potential disaster.

Shopping for business financing needs to be done with a rifle not a shot gun.  It requires a certain amount of knowledge of the market and the current lending criteria of relevant lenders.  If the business owner or manager does not have time to develop this intelligence, they would be well advised to find someone who does.

As a business financing specialist, this is what I do every day for my clients.  Its all about focusing attention on relevant lenders and working with them to get the deal done.

Click Here To Speak With Me Directly About Shopping For Money.

Cash Flow Management Trade Offs

As we continue through the current recessionary impacts still being experienced in 2010, there are going to be periods of time where a cash flow crunch will impact many businesses regardless of size.

So when there is less cash to go around and choices are going to have to be made as to who gets paid and who doesn’t, here are some things to consider.

First, build out a cash flow plan that identifies the available amount of money you are likely going to have to work with once you allow for all essential expenses including your payroll.

Next, proactively talk to your trade creditors and outline to them your plan to get them paid.  They may not like what you have to say, but they’re going to be more likely to work with you if you ask versus just surprising them by not paying without an proactive explanation.

Third, think twice about getting behind with your government remittances, especially payroll deductions.  Government agencies have the right to seize your bank account and contact your customers for repayment of accounts receivables.

While it may seem like the obvious choice to short pay government agencies, be careful with this tactic because of the power to collect these agencies have.

Fourth, update your cash flow projections on a regular (at least weekly basis) and make adjustments to your plan as required.  Nothing ever goes according to plan, especially when it depends on the actions of others, so continually develop a new base line to work from, make adjustments to your plan, and communicate any changes as required to parties you owe money to.

Fifth, if you need to dip into personal credit cards, at least make the minimum payments to minimize the damage to your credit rating.  High credit utilization will bring down your credit, but it will quickly bounce back once your balances are paid down.  Late payments of greater than 30 days on the other hand, can have a devastating impact on your credit that can last for years.  If you eventually need to refinance, keeping your credit in tact will become important to avoid the lowest forms of credit.

Most payment trade offs are judgment calls that are better made and managed when you develop intimate knowledge of your cash flow and maintain close communication with your creditors.

Here’s where you can go to get more information on business financing.