Working In The Right Direction

“Getting Into The Details Early On Will Result In Better Business Financing Results More Often Than Not”

When you’re in the process of trying to locate secure business financing, make sure that you’re prepared to get into the details related to your request right off the bat in order.

The reason is simple.

Because the business financing market can be fairly fragmented, its important to be spending your energy and time working with lenders or investors that can actually help you.

Too often, business owners will gloss over the details thinking that they may not be required to get the financing they are looking for.

Well here’s a news flash… the details are going to be required 95% of the time. And of the 5% of the time they aren’t required, most of the time you’re looking at some sort of financing scam that is more promise than substance.

When I speak of the details, I’m taking about full disclosure of what exactly you’re looking for and the credit and financial profile of your business.

Too often, little details will be missed on purpose because a business owner is trying to hit the warts of the business. But in the end, these items will come to the surface and can kill the deal after considerable time has been already spent.

This is also a problem when working with business financing consultants.

A business owner may gravitate to the financing consultant or broker that is asking for the least amount of information in the hope that he has some sort of special access to funds that can avoid having to do the Full Monty on business.

This is a tactic by some brokers to get you working with them. Later in the process, when you get annoyed with their false promises, you may likely just stick it out and go through the real process with them instead of starting over with someone new. And because business financing placements are usually one off transactions, the broker or financing consultant doesn’t have to worry about losing out on repeat business that likely wouldn’t happen anyway.

Banks and institutional lenders can also be guilty of asking you for bits of information at a time, pretending that they’re not going to ask for everything eventually in order to get you going with their application process.

And when I talk about asking for everything, I mean at least three years of completed accountant prepared financial statements, the current year interim statement supported by A/R, A/P, Inventory, and Equipment sub ledgers, transactional details to support margin levels, two to three years of financial projections, income tax statements, notices of assessment, government remittance histories, personal net worth and credit profile, and so on, and so on.

Even though its a bit of a pain to go through the details a number of times, its far more fruitful most of the time to sit down with someone and spend an hour providing a very detailed picture of what you want and what you have, so that they can provide you with more honest and immediate feedback as to the potential that they can help you or not.

Unfortunately, most business owners AND sources of financing do this onion peeling approach where the information is revealed bit by bit.

If you’re talking to the wrong source of financing, this can be death by a thousand cuts. If you’re talking to the right source, late disclosure of certain things can cause problems getting funding completed later on in the process.

The investment in time in the beginning of the process is a may me now or pay me later type of thing.

By investing time up front, the overall process is likely going to be more efficient because you’ll be working with the most relevant sources of business financing sooner versus starting the process over and over again with unsuitable dance partners.

Click Here To Speak To A Business Financing Specialist For All Your Business Financing Requirements

Challenges With Financing Growth

“What’s The Best Way To Finance Growth For The Greatest Economic Return?”

The best approach to business financing growth is a short term vs long term type answer.

That is, do you focus on short term profitability or long term profitability or both?

If you have unlimited access to a cheap source of capital, then an optimal profit focus in the short term and the long term is going to be preferred with an emphasis on accurately managing margins to gain market share as fast as possible without eroding profits.

But most small to medium sized businesses in a growth period do not have an unlimited supply of cheap money, so there is a couple of different ways to look at the best approach to financing growth.

On the one hand, you could argue that its better to grow at the speed at which you’re low cost supply of money will allow you, even if this is not as fast as you could penetrate the market.

On the other hand, you could also argue that the cost of capital you’re prepared to pay should be dictated by the margin you generate in the market and that as long as you’re covering your cost and believe you can gain and keep share in the mid to longer term, that the speed more capital provides you is desirable as long as you can afford it.

This is where many SME’s struggle with using asset based lending compared to bank margining during a period of growth.

Bank financing is going to be cheaper on the surface, but may not be as cheap or as flexible as you may think.

For instance, if you’re talking about a margining facility in the millions of dollars, you’re going to have to provide audited financial statements on an annual basis and some pretty detailed monthly reporting and potentially third party measurement services as well. The incremental cost of these requirements can push up the effective rate considerably.

But the cost is the cost, and is bank margining is cheaper, then it should be used, provided that its also readily available and flexible enough to deal with your growth curve.

This is where bank or institutional margining in the short term can be very inefficient and costly to growth, even at a lower cost of borrowing plus the incremental administrative costs.

While many banks can be very cautious with extending credit limits, and sometimes even putting the brakes on their financing position, regardless of what their initial commitment may have indicated, asset based lender tend to follow more of a linear path and as long as you fall within their lending ratios and maintain the quality of assets, capital availability can growth at the right speed.

Once again, the key measuring stick is the collective profitability over both the short and long term.

The source of capital you use at any given point in your growth cycle should provide you with the capital required to growth the market as fast as you can manage at the least amount of cost, provided that you can cover the cost with the cash flow being generated.

This can also mean changing from one source of capital to another over time.

For instance, a business may start out with a bank or institutional working capital facility, move through one or more traditional asset based lenders as capital demands increase and then make a final transition to bank or institutional asset based lender that can provide the best rates versus leverage, but only tend to become interested when your monthly sales levels are at $5,000,000 or higher.

There can be tremendous challenges in figuring this out, but figure it out and stay ahead of the growth curve you must, otherwise you may loose momentum or be overtaken by someone else in the market that has figured out how to finance their growth.

Click Here To Speak To A Business Financing Specialist About Financing Growth At Different Stages

Interest Rate Perception

“The Current Low Bank Of Canada Rates Can Create Certain Interest Rate Perceptions And Expectations”

Yesterday, the Bank of Canada announced that is overnight lending rate would stay put at 1%.

On the surface this would appear to be good news, but for whom?

If you’re a consumer with a variable interest rate mortgage, this is very good news as your mortgage rate is not likely going up.

If you’re a business owner that can qualify for low risk credit, your cost of going business isn’t going to increase due to more financing costs.

But for most sources of consumer or business financing, a change in the rate doesn’t really make a whole lot of difference which is where the perception issue comes in.

Because individuals read and hear about the low levels of the prime lending rate, they automatically believe in many cases that this represents the average cost of money or somehow reflects the cost of capital that would relate to them.

The prime lending rate posted by banks is basically a low risk lending rate where there is very little chance of the bank losing their money on a loan in the event of default.

If this is not the case, then the cost of money is appreciably higher to compensate for the relative risk.

So on the surface, a business owner may somehow feel entitled to a lower cost of financing than he or she can find on the market.  But in reality, interest rate perception should be more about your cost of doing business and how to reduce it over time.

Let’s take credit cards.

While there are a wide range of credit cards on the market, most carry a pretty healthy, and some would even consider obscene interest rate.  And while we all grumble about this, its pretty much accepted as the way things are and unless we are carrying balances month to month, it doesn’t really matter.

But from a business owner’s point of view, certain credit cards charge the vendor a fee for processing their customer transactions, which is a big part of the their profit stream.  And this cost isn’t cheap.  It can range from 1.5% to upwards of 3.0% of the value of the transaction.

If customers expect to use certain credit cards that charge a vendor fee, then its a cost of doing business which either needs to be built into the price, or paid from the existing margin.  If you can’t do that, then you can’t provide the option to the customer.

Similar with asset based financing, most notably factoring, or invoice discounting, where the business can be paying anywhere from 1% to 3% a month on invoices they finance in order to generate more working capital to purchase inventory, pay supplier bills and so on.

If the cost of financing can’t be reduced by some combination of early payments to suppliers, purchase discounts, price increases, then its a permanent cost of doing business that either can or can’t be covered by your margins.

Over time, as your business builds financial strength, cheaper forms of money will likely come available, at which time your cost of doing business will go down.

The key for any business owner is to understand the relative cost of financing for his or her business and then decide whether or not they can compete in the market place with that cost and grow to a size and level of efficiency that can qualify for cheaper credit.

The cost of money is a true barrier to entry as well as business killer if you don’t understand it properly and manage it well.

If the prime rate is relevant to your business, then pay attention to it.  If its not, don’t waste valuable time chasing something that you’re not going to be able to get a hold of in the near term.

The prime rate being low is good for the economy as a whole which is likely going to be at least an indirect benefit to most businesses.  But that doesn’t mean it going to reflect your personal cost of capital.

Click Here To Speak With A Business Financing Specialist

Business Financing Decision Making

“Who Is Going To Make The Business Financing Decision After You Apply For Business Financing?”

Not too long ago, most of the major lenders still worked under a regional financial model where the bank manager had a significant amount of lending authority and decision making.

Overtime, this proved to be a very dangerous way to operate as individual bias and relationships could skew the decision making process and could ultimately lead to loans being made that were not in the best interest of the lender and the lender’s owners or shareholders.

Similar to most major companies, there is now a clear separation of duties in the organizational and decision making hierarchy of the marketing/sales group, and finance/underwriting group.

Taking it even one step further, while marketing and sales can recommend loans, only underwriting can actually approve or put them forward for approval if a board or higher level of signing authority is required.

Yet, despite this well defined operating structure that has been the standard for close to ten years in the lending world, most business owners still think that their local branch or even regional manager can pull a few strings and get their application approved.

Sorry folks, but that’s not going to happen.

What’s even more confusing to anyone looking for a business loan or business financing facility is that the people you speak to at the bank (marketing and sales folks) will almost always be very interested in speaking with you about your requirements and are prepared to spend time collecting your information, even if there is very little hope of the deal ever getting funded.

Sometimes this is a function of the front line sales team not keeping up to date with what the underwriters are approving, sometimes this due to too much turnover at the sales position where you’re almost always dealing with someone new or fairly green, and sometimes its because the sales force has an incentive to collect applications, regardless of how irrelevant they may be.

So how’s this relevant to today’s post?

As a business owner, you need to be more well aware of the financial parameters of a given lending institution. You may not be able to know exactly what they’re approving at any given time, but its not to hard to get a grasp of their basic lending criteria that is always in place.

Taking any amount of time to “sell” a deal to lender where the fundamentals of the deal do not fit their lending criteria is going to be a waste of time 99% of the time.

Its easy to get caught up in a false reality of who can help you when everyone you come in contact with at a given lending organization appears to be very interested in your deal. But lets not forget, the front line folks can’t lend you money. In fact, its not uncommon that during a business financing application process that the applicant never meets or even speaks to the real decision maker or makers.

And spending too much time barking up the wrong tree can take months and months of time before you realize nothing is likely going to happen, which is another problem in the lending world and that’s a failure to get to “NO” quickly.

When seeking business financing, its important to thoroughly understand the fundamentals of your business financing request and then making your application for financing to a lending source that’s going to be able to lend against those fundamentals.

Spending too much time trying to convince front line individuals how great your planned use of funds is when they work for lenders that aren’t likely to be interested is likely going to be a waste of time.

Click Here To Speak With A Business Financing Specialist

Federal Election Weighin

“Election Results Could Have A Dramatic Impact on Interest Rates”

For the most part I try to keep my comments to strictly financial and financing topics and I will today, sort of, although I plan to go on a bit of tangent.

Even thought the dollar is 5 points above parity today, it should actually be higher right now as the U.S. currency continues to depreciate against all other major currencies at a faster rate.

Why should the Loonie be even higher?

Because the potential outcome of the May 2, 2011 federal election is making the rest of the world nervous, present company included.

Anything less than a conservative majority will likely have some negative impact on the dollar and will also increase the bank of Canada’s intervention with monetary policy to offset the expected increase in fiscal spending if any type of alliance forms among the NDP, Liberals, and Bloc.

Here’s some additional information on the topic as well http://business.financialpost.com/2011/04/28/ndp-gains-might-sink-loonie-or-not/

When we are talking about monetary policy, the only real lever the bank of Canada has is interest rates, and they will be pulling it much harder if required to maintain the status of the currency.

The result will be higher than expected business financing rates.

Any scenario where the NDP would come into power would as the article I’ve linked to states …”could cause the dollar to Wobble”.

The NDP had some well documented disasters trying to run the provincial governments of B.C. and Ontario, and to think they have the expertise available to manage the fiscal policies of the entire country is laughable.

I understand that everyone may not like how the conservatives go about their business and I don’t agree with all the things they do or say either.

But this is the only party capable right now of keeping us going in the right direction.

Hopefully people can see through all the pie in the sky promises that political parties make to try and get into power.

If not, and we get a Conservative minority, or heaven forbid, a NDP minority government, then we are turning the ship into the financial abyss that most of the rest of the world is in right now.

Selecting governance should not be a popularity contest where the unqualified get to be contestants.

Canada is currently held up as one of the strongest economies in the world, period.

Let’s not do anything next week that is going to jeopardize that status, regardless of what you think about Mr. Harper and some of his soldiers.

I’m all for change … if there is a better option.  But there’s not.

We can continue to stay ahead of the financial cloud of dust darkening most countries these days, or we can fall back into it like everyone else.

It is a choice and now is the time to pick the party that has the best chance to keep the country on a solid economic track.

Vote Conservative.

Click Here To Speak To Business Financing Specialist Brent Finlay

Other Sources Of Business Financing

I wrote last week about the fact that over 50% of all business financing does not come from banks in direct contradiction to popular belief.

Business financing has more to do with the creativity and ingenuity of the entrepreneur and business owner seeking out sources of financing that can get value above and beyond an interest rate on a loan.

And guess what?

Banks also fall into this category.

There is virtually no bank or lending institution out there that wants to just make loans to you.  Their objective in giving  you a loan is to help maintain the investments, insurance, and services they have with you which tend to be far more lucrative than any potential loan profits.

But by saying that business financing comes from non bank sources, I’m continually asked for more examples of this.

Here’s an article the talks about one additional source of capital for business which has been coined “crowd funding”.    http://www.theglobeandmail.com/report-on-business/your-business/start/financing/need-financing-join-the-crowd/article1974748/&/

Crowd funding is an off shoot of the social network movement where entrepreneurs and business owners can ask for “donations” to fund a very specific project outline.

All proceeds provided to the business are done through donation to stay within the requirements for investing governed by the securities and exchange commissions in different geographies.

In order to entice donations, an applicant for funding can provide other non monetary rewards such as fresh baking, acknowlegement of contribution on a product, etc.

The donation amounts can range from a couple of dollars to hundreds and thousands of dollars.

The growing success of this type of funding method has a lot to do with the donator getting hooked on the business owner’s story and wanting to be a part of it.

All that being said, there are also those in crowd funding that do want a monetary return.

For these individuals, territory licensing agreements are just one example of what they are receiving for the money they may put in.

While this is not likely going to be able to raise $100,000’s of dollar for a project, in many cases people are looking for $5,000 to $50,000 which can’t be secured from any type of bank financing option.

I’ll pass more real world examples of non bank funding as I come across them.

If you need any help with your business financing requirements, click here and send me a note

Business Loans From Peer To Peer Networks

As I’ve mentioned several times in the past, only a fraction of the capital that is provided to small and medium sized businesses actually comes from banks and other institutional lenders.

Depending on who’s numbers you want to believe, I personally peg the amount somewhere around 40%.

So where does the rest of the money come from?

Boutique lenders, angels, venture capital groups, joint ventures, licensing agreements, and so on.

One of the sources that is getting some press these days are peer to peer lenders where businesses with case are basically providing loans to other businesses that qualify under certain criteria.

Here’s an article that goes into more detail of peer to peer networks in the U.S.

http://www.rwbpress.com/2011/04/08/small-business-loans-from-peer-to-peer-networks-alternative-borrowing-options-may-bring-funds-outside-of-bank-loans/

For me, this type of lending makes a great deal of sense for a number of reasons of which I’ll name a few.

First, if you’re a business with excesss cash and nothing internally to invest it in, what are you going to do with it?

Why not put your cash into businesses that are in your industry or a similar industry whereby you know how to qualify their business plans and monitor their performance and manage your risk?

If the loan goes bad, perhaps you’ve just acquired some assets that are very useful to yourself for pennies on the dollar, or you end up taking on partner that can add greater value to you in the long run.

There’s lots of other potential reasons for being a peer lender, but I’ll leave the rest for another day.

Business financing should always be about creating economic value from capital being utilized, regardless of the purpose. Period

As a business owner seeking capital, the more valuable your intended economic benefits are to more people with money, the sooner you’re going to find the capital you’re looking for

Click Here To get Assistance With Your Business Financing Requirements

BMO Getting More Serious About Business Financing

A market wire news release came out this week about BMO’s 2010 business financing lending.

Here is an excerpt from the article…

BMO Study Finds 80 per cent of Small Business Owners in Ontario Consider Access to Credit as an Important Determinant Choosing Their Bank

BMO to Add 150 New Small Business Banking Experts Across Canada in 2011.

….

Here’s a link to the full article …http://www.marketwire.com/press-release/BMO-Small-Business-Lending-in-Ontario-Reached-More-Than-11-Billion-in-2010-TSX-BMO-1423285.htm

The first point is more than a bit obvious. I don’t need a survey to tell me that at least 80% of small business owners may want access to credit at some point from their bank.

The second point is more interesting and telling.

During the recession, the major banks and other institutional lenders were laying people off and coming up with new and creative ways to decline requests for business financing.

Now BMO is telling us about all the money they lent out last year, survey results that speak to businesses looking for capital, and an announcement that they are going to hire a bunch of new people to work on business financing requests.

I’d say this is definitely a strong signal that the business lending market is getting back to what we may consider more normal operations in the Canadian market.

That being said, I still believe that the major lenders’ credit policies are going to still be tighter than they were a couple of years ago, but at least they are actually getting back to lending money.

If you require assistance with locating and securing business financing for your company, click here to get in touch with us.

Mega Loans A Sign That Commercial Lenders Are Loosening Up

The first quarter of 2011 has been highilighted by some larger commercial financing deals in both Canada and the U.S.

And while lending levels have not completely returned to the pre-recession period, things have greatly improved over the most recent months.

To further make the point, here is an article from the CTV news that talks about mega loans being used for financing takeovers.

http://www.ctv.ca/generic/generated/static/business/article1969220.html

This draws us to a couple of interesting observations.

First, the article talks about how commercial lenders have been getting more aggressive in providing short term bridge loans for acquisition and take over targets.  This type of business financing is put into place to close the deal and by time until the long term funding can be arranged.  But there is lots that can go wrong in the interim which could delay or even prevent the long term take out from happening, so in and of itself, this is a farily risky form of business financing.

That being said, business financing sources are making these types of deals, speaking to their comfort level in where the economy is at and their need to get back in the game to a larger extent to increase their profits.

These type of mega short term loans are also potentially a major boost to the economy in a number of other ways.  The nature of a recession is that there is going to be industry consolidation and restructuring.  But this can’t happen if there isn’t any money available to finance consolidating type activities.

As commercial financing starts to flow more freely, more of the ineffeciency in the market is going to get cleaned up faster and move towards positive production and job creation.

And even though we are talking about mega loans here, this does likely have a trickle down effect to small and medium sized businesses whom have had a hard time securing reasonably priced capital during the last two years.

If you’d like more information about your business financing options, then click here to go to our main website

Business Financing Realities

“Proper Expectation, Process, and Focus Are Keys To the New World Of Business Financing”

I had two very similar calls this week from business owners in search of business financing for a project in their respective companies.

The individuals had applied for financing at a financial institution and had spent months now trying to get an approval so that funding could be put into place.

Both were now at the point where they were starting to run out of time and were now frantically looking around on the internet for either a replacement solution or a bridge financing solution that would buy them enough time to get the desired funding in place.

I also get similar versions of this call all the time and I don’t expect much to change in the near future.

The problem starts with a fundamental lack of understanding of where we are at in the financial and capital markets these days and how debt financing sources and equity investors approach opportunities.

Sources of money are more particular these days as to what they will provide money for and how long it will take to make a decision and get funds in place.

Business owners still believe that if they have a good plan and a good story that they will be able to locate and secure funding without much trouble. Their basic mindset is “how hard can be be…or…how long can it really take?”

While there are times that the process of business financing can go fairly smoothly, My standard advise to anyone that will listen is that the its going to take longer than you think and its going to be more difficult that you imagine. If its easier than what I have described, then that’s a bonus, and you’ll be much further ahead of schedule, but just don’t plan for easy.

In order to get success, the approach you take and the process you follow is going to be very important. If you don’t understand what that means, then you’re going to need to invest in some help from those that do.

As far as focus goes, this was the main point I made to both callers.

Both individuals sounded like they had a workable situation underway. The key at this point was to focus in on what was required to get an approval in place and do whatever was necessary to buy time and comply with the lender requirements.

Starting a new funding request with a new series of lenders where time was already short would likely only serve to divert time and energy from the deal they needed to try and complete.

Yes, it most certainly is frustrating when a lender or investor takes their time getting back to you, or continually asks for more information or third party work to be done to complete their funding assessment. When the people you initially spoke with that were so keen to receive your application for financing and to assist your business now seem to be taking an inordinate amount of time working through their own requirements, it can be excruciating, especially if you’re on the clock.

And sometimes you also have to know when things are not going anywhere and then make a course correction. But typically when things don’t go anywhere in the world of finance is due to some combination of 1) talking to the wrong financing sources in the first place; 2) not properly presenting the information in a format and level of completeness acceptable to the lender or investor; 3) not having proper risk management in place to secure the deal; 4) not having enough time for financing process to be completed; 5) not staying on top of all the individuals that need to contribute to the application.

Unfortunately for my two callers, as soon as they hung up the phone with me, they probably called the next listing they found and put in a call. In most cases they will be greeted by a marketing person who wants to take a look at their file and see what can be done. In both of these cases, based on the information I was provided, this would only serve to take precise time away from trying to make what they already had going work…even more so if they make a few additional calls.

Click Here To Get In Contact With Business Financing Specialist Brent Finlay