Thinking Three Steps Ahead

“Does The Debt or Equity Funding You Accept Today Help or Hurt You Manage The Business Tomorrow”

I have often written that business managers and owners tend to leave the process of acquiring capital to the last minute and end up scrambling in many cases to get some type of financing in place before more costs are incurred or an opportunity is lost or some other dark consequence of not getting things done on schedule.

Not only does this very common approach to business financing create less than desirable results in the short term, but it also can wreck havoc on future business opportunities.

Let me explain.

The process of financing a business and managing a balance sheet is a lot about thinking three steps ahead as you try to proactively predict how things will unfold in the coming years and capital the business will require to operate within your predicted or desired path. And future predictions are not always going to be about growth. Sometimes the look ahead is going to be more on the gray or even dark side as you realistically or conservatively see a storm coming ahead and make a plan to deal with it that will hopefully lead to your long term survival.

Regardless of how you see the future, there is cause and effect in the field of view that needs to be factored into how you cash flow and fund your business.

This is why the decision making process of today can be so critical to what predictably is going to come next. Business financing done in haste most times creates a financing structure that will not easily allow for future moves without creating cost. In some cases, the capital acquired today will be a death sentence to the business if the future unfolds in a direction that is in congruent with what has been accepted or arranged.

An example of this would be an obsession with the cheapest sources of money. These sources not only can take an excessively long time to get into place, but they also demand close to extreme security positions and very stringent operating requirements that may or may not be met by expected future events. While cheaper money is always preferred over the alternative, the business has to be able to meet the requirements of the money, or be faced with demand to repay at likely an inopportune moment in time. And even if the business owner can comply with the demands of the money source, is there any flexibility left to allow for what comes next which might just require more outside money?

The process of thinking three steps a head requires that the business owner starts early and never stops looking for and understanding the available sources of business financing that are relevant to what he or she is trying to accomplish. The more pressed someone is with respect to securing capital, the less likely any capital required will properly allow for future moves.

Click Here To Speak With Business Financing Specialist Brent Finlay

Uncoventional Business Financing

“Sometimes, The Best Source Of Financing Available To You Is Not On Your Radar Screen”

The standard option most business owners and managers have is that any amount of business financing they are going to require over time is going to come from their bank or some other banking institution.

After all, banks and institutional lenders will regularly tell you that they want your business and can take care of all your business needs.

But the stark reality is that the Major banks and secondary lending institutions, especially the ones that are the most visible in the market place, are only looking for “A” deals and are frankly more interested in your investment portfolio, insurance policies, and any other financial service they can offer that tend to be far more lucrative and much less risky than almost any type of business loan.

And truth be told, the majority of small and medium sized business (SME) financing does not come from banks. Depending on whose numbers you choose to believe, the actual annual lending extended to SME’s is about 1/3 of what’s actually required by the market place.

But because the economy continues to go around and around, the money has to be coming from somewhere. And many times, these sources can be very unconventional compared to the formalized lending practices of a bank.

The key to any lending or debt financing arrangement is that the borrower has something of value to the lender than creates a basis for a loan to be made.

When the circumstances of a given business do not fit into the lending criteria of the primary or even secondary market sources, its time to look to more unconventional options.

Once again, the key is to understand the value you have to leverage and who would be interested in providing capital against specific assets you control. This can be anything. Patents, specialized equipment, strategically located property, etc. The possibilities are limitless. But unless what you have has a value to someone else, there is no business financing equation to work from.

As an example trade credit is a major form of capital provided by manufacturers and suppliers to move inventory through their systems. And while most trade credit is based on the financial strength of the customer, there are many variations to trade financing that come into play based on the value or opportunity available to the company providing it.

In most of these and other unconventional business financing scenarios, there is a steep walk away price to the borrower for not repaying the debt as written. The incentive of the lender is the opportunity to acquire something they consider as valuable at a discount or even at market price if its something that is exclusive or hard to come by.

Asset based lending is pretty much grounded on the premise that in the event of loan default, the borrower will either retain the security or knows how to liquidate it to get his or her money back.

But in reality, there are many, many unconventional loans provided every day from some of the most unlikely of sources.

So when you’re pushing rope up hill and have been turned down for the umpteenth time from the usual suspects, its time to think outside of the box and develop a business financing strategy that someone will be interested instead of continuing to push one that everyone clearly isn’t.

Click Here To Speak Directly To Business Financing Specialist Brent Finlay

The Business Financing Calendar

“Being Successful With a Business Financing Application Can Have A Lot To Do With The Time of Year”

If you’re going to apply for business financing from an institutional debt lender, the time of year can have more of an impact on your application that you may think.

Like any business, a commercial lender has a budget, a fiscal year end, and financial reporting requirements.

As of this writing, we are currently in the October or the start of the fourth quarter of the calendar year which will be the fiscal year for many of the lenders out there. This means that banks, credit unions, trust companies, pension funds, etc., will be getting their books in order for their up coming year end.

For commercial lenders where the year has allowed them to already meet their targets, the last quarter is going to likely be characterized by a stiffer application of lending criteria with the intent to only take on additional loans that will lower the portfolio risk. Debt financing is a business and the people that run these organizations are going to be working hard to hit their targets to earn whatever bonuses may be available to them.

On the flip side, if a lending institution has not hit its budget by the fourth quarter and is even potentially a bit behind, there could be an opportunity to see a loosening of the credit criteria in order to get more business through the door before the clock strikes midnight on the year end.

For debt financing sources that don’t have fiscal years that match the calender year end, the same circumstances can apply.

At the beginning of the year, its not uncommon for lenders to start out with a more conservative approach to see how much low risk business will come their way. By the second quarter, if lending is below budget, the reins can once again be loosened in order to try and hit the lending numbers that will pay the bills and potentially those bonuses.

From a business owner’s point of view, it can be difficult to determine who is lending and who is less likely to lend based on the time of year.

Just keep in mind that money will tend to flow the most free in the second and third quarters, all other things being equal.

While there is no exact science to figuring out how this can impact your business financing efforts, it can be a good idea to stay connected to financial consultants and industry experts that have a better sense as to what the main players are doing at a given point of time based on whatever inside or quasi inside information they may have access to.

Here in 2010, the market in general appears to have slowed down going into the fourth quarter. While it may be too soon to draw conclusions as to what to expect from different lenders for the next few months, its definitely something to stay aware of, especially if capital is going to be required for your business in the near term.

Click Here To Speak To Business Financing Specialist Brent Finlay.

No Such Thing As Easy Money

“When Looking For Business Financing, There Is No Such Thing As An Easy Deal, A Simple Process, Or a Certain Approach To Getting Money”

Ok, so perhaps this is a slight exaggeration as I probably can recall a few business financing deals I’ve worked on over the years that went fairly smoothly, got closed on time, and provided the business owner with what they were looking for without any grief.

I can also easily count these situations on one hand and have some fingers left over.

The process for securing capital, especially since the most recent recession is gotten harder to achieve in most cases, most of the time. Its not that everything can’t fall into place with a funding process, its just not likely to happen and you need to plan for some challenges, costs, and time.

The basic adage is to prepare for the worst and be pleasantly surprised when everything comes together without a hitch.

This may seem like very pessimistic, the glass is half full kind of thinking and it is. But in all my years of working in this business, there is virtually no such thing as an easy deal. Easy deals or easy flowing money falls into the 1% probability category slightly ahead of your odds for winning the lottery.

The take away message here is not that is all gloom and doom and that you’re not going to get the capital you require.

No, that’s definitely not what I’m saying.

What I continuously tell business owners is to get committed to the process as early on as possible and then stay invested in it as long as required and provide the resources and time necessary to increase the probability of a positive result.

In many cases, the business financing process is grossly over simplified and under estimated by entrepreneurs who would rather stick needles in their eyes than have to develop a detailed financial knowledge about any financing request they need to make. Money is a necessary evil that shouldn’t be that hard to come by, or so the thought process goes.

Unfortunately, this thought process eventually leads to failure in many cases in that money that gets secured tends to come from the path of least resistance which is typically not the most ideal form of funding available which can start the business into a death spiral it may never recover from as it continually takes on poorly suited forms of capital that will only reduce the probability of profitable results.

And when I say you need to commit to the “process”, the process is whatever is required and however long it takes to get the right match of money and opportunity.

If you say you don’t have the time for what’s required, then start the process earlier, get farther ahead of when capital is required, avoid being backed into a corner and forced to take what you can get.

Finding easy money that fits your requirements when you need it is always possible. But is it probable?

Click Here To Speak With Business Financing Specialist Brent Finlay

Sharing Business Financing Risk

“Business Financing Risk Typically Needs To Be Shared”

Its not uncommon that business owners and managers in search of capital, especially those from businesses with sales under $1,000,000, seek a source of debt financing for their business that doesn’t require them to take any personal risk beyond their investment in the business.

While every business owner would prefer to minimize risk as much as possible, its unrealistic for new or developing businesses to expect lenders and sources of debt financing to take a disproportionate amount of the risk associated with a particular funding request.

In an attempt to avoid risk, owners can spend a lot of time looking for something that may not exist…that being debt financing without any form of a personal guarantee.  And while personal guarantees are not always required, they will most likely will be for cheaper sources of debt financing.

And from a lender’s point of view, its not that they are necessarily gaining a great deal of additional security from a personal guarantee, but what they are gaining (at least in their mind) is 150% commitment from the business owner to do whatever it takes to make the business work, versus throwing in the towel when things get tough and letting the lender take a bath.

As businesses grow in size and increase their financial stability through the accumulation of retained earnings, there will be less of a need for personal guarantees to balance off the risk scale.

Personal guarantees or covenants are also closely linked to the type of lender you’re dealing with as well.  When there is security pledged, lenders that are either good at liquidating assets or controlling them will be less concerned with personal guarantees compared with a lender taking an unsecured position or accepting security that they aren’t very adept or experienced at liquidating.

The key here is that the risk needs to be somewhat proportionate.  If a business owner is asking a lender to take 80%+ of the risk, then it stands to reason that a personal guarantee is going to be required.  In situations where there is more risk sharing between the business and the debt financing source then its more likely that a personal guarantee will not be required or at least a partial guarantee may be considered.

As I mentioned earlier, guarantees tend to be linked to the cheaper sources of money which relates to low risk positions for the lender.   Higher lender risk will almost always mean a higher cost of financing to offset the risk if the lender is going to be interested in extending funding at all.

While the goal should always be to reduce risk wherever possible, you also have to realistic in terms of taking on a reasonable share of the lending and borrowing risk being entered into.

Click Here To Speak to Business Financing Specialist Brent Finlay

Strategies For Reducing Risk

“Getting and Keeping Your Lenders and Investors Comfortable With Your Business Has a Lot To Do With Risk Management”

In the lending and investing world, the people providing the funds are always looking at how risk can be removed, reduced, or off loaded.

Most business financing requests, at least on the surface, propose a viable strategy that requires capital when applying for a business loan or approaching an investor.  What separates 90% of all applications (or more) is the failure of the applicant to identify risk and find a way to remove, minimize, or neutralize it from the business.

In the standard “field of dreams” application where you give me the money, everyone will come from all over to buy stuff from me, and nothing will go wrong along the way, only tends to work in the movies.

But in the real world, all deals have risks and the better you are at proactively identifying them and doing something to mitigate their occurrence or impact, the more likely you are of always being able to secure  the capital you require.

The larger, more established the business, the less intensive risk management overall needs to be as financial strength and equity in the business will provide the means to deal with things that can and do go wrong in most cases.

But when you’re smaller, or in a start up or growth mode, there can be many more things that can work against you that individually or collectively can put you out of business.

So lets get into more concrete examples to further make the point.

Anything that is new(er) and less established has more risk. The most obvious first area of concern is Sales.  The sales orders, defined letters of intent, contracts, etc., that you can procure or show are available to you when seeking money, the more attention you’re going to receive.

The same holds true for collecting the money once the sale is made.  If terms are required, is there a solid credit granting policy in place, does the business have any experience in collecting money, can the accounts receivable be insured or financed directly?

On the supplier side, is there well defined purchasing agreement for price and quantity?  Can the price be hedged in some fashion?  Is there more than one source of supply lined up?  What is the stability of the local suppliers and do you need to go further a field for better pricing and more certainty of supply?

These are all risks.  Established businesses get established because they have been able to figure out how to deal with all the relevant risks to them as they developed their business over time.  In many cases they were lucky that lurking risks did not impact them and as they went along, systems and processes and expertise were either developed or put into place to make sure key risk areas were kept under control.

For developing businesses who haven’t got everything figured out, the standard position is to push forward and figure things out as they go.  If that truly is the approach, then you’re going to need to have a fantastic opportunity in tow to offset risk, or enough of your own money to make things go as its highly unlikely that people with money are going to part with any for business proposals that are just as likely to lose it as pay the money back.

Click Here To Speak To Business Financing Specialist Brent Finlay

Business Financing Can Require Lots of Patience

“Any Attempt To Secure Business Financing Needs To Be Tempered With Patience”

Recently I was working on two different business financing deals. The first one was for a well established business with great cash flow, great credit, and a strong business model. The second financing scenario was refinancing a business that was struggling to cash flow growth and was trying to overcome many of the challenges that come with a start up business.

While on the surface they couldn’t be much different, the one thing they had in common was the amount of time it was taking to get the financing they needed into place.

And it wasn’t necessarily hard in either case to identify the potential source of business capital that could satisfy their needs. The challenges in both cases came from getting a final commitment in place and getting the funding advanced.

This is a very common occurrence these days post 2008 thru 2010 recession (which for many is still not over).

The lending process and related bureaucracy can be totally maddening to any business owner and manager who is used to taking charge of a situation and getting everything covered off that is required, within a certain time frame.

When it comes to business financing, the process can only be followed, not forced. As soon as you put pressure on a lender or a provider of capital, it will also inevitably lead to a no or decline of an application for funding that may have otherwise gone in your favor.

This is where patience comes in.

Once you have a source of financing lined up that you are comfortable with, its time to gear down and start moving at the speed of the lending process, which can be delayed or slowed down for any number of reasons, most of which you have no control over.

And when you start running out of time on a deal or funding requirement and the financing is still not either approved or available for funding, the tension and pressure of the moment can push you over the edge.

But if you want the options you’re working on to remain options, you’re going to have to create whatever contingency plans are necessary to get you through to the other side of the process where the money is.

Remember that the more people that are involved in getting everything covered off for a lending approval and disbursement (appraisers, accountants, lawyers, consultants, credit committees, customers, suppliers, etc.), the higher the probability that the process will take more time than less.

Sure, everything can come together quickly and be in place ahead of your expectation. But most of the time it won’t, and without a healthy dose of patience, good options can quickly be destroyed, putting you right back at square one.

Click Here To Speak With Business Financing Specialist Brent Finlay

Business Financing Application – Key Components

“Here Are Three Key Components That Should Be Present In Every Business Financing Application”

I’ve written before how a business financing application has everything to do with the story.

Today I’m going to take that one step further and talk about the three main components of the story and how they collectively wrap and tie all the other information together.

When I worked in the corporate world, any time I had to report on the overall health of the business at a given point in time, the higher ups always wanted to know three things:

Where are we at right now?
How did we get here?
Where are we going?

These are the same three questions that any serious lender or investor is going to want answered as well. So instead of just throwing a bunch of paper at them in the hope they get what they need, the process is a lot more effective if every element of a business financing application package is linked into the answer to one of these three questions.

For instance, the answer to “where are we at right now” is centered in the current financial statements, appraisals, estimates, quotations, bank statements, and so on that reflect the here and now.

“How did we get there” is partially answered by the historical financial statements of periods past. And “where are we going” is partially covered off by financial projections.

All the numerical reporting and projections are tied together from past, present, and future by the overall story.

Like any good story, the information has to flow from beginning and lead the reader in the right direction versus confusing the heck out of them or causing them to become frustrated with inconsistent information that leaves them unsure of what’s really going on.

But to really make the overall business financing story holds water, it must address all three questions and make sure the answers to any one do not contradict the answers to the others.

A well written business financing application is not going to assure that you’re getting the capital you’re after, but it will increase the probability of the lender or investor clearly understanding not only your request but the supporting information, which can be a major challenge in and of itself.

Next time you’re putting a business financing application together, take a few minutes to review it when you’re finished and see if you’ve answered each of the three questions. If you haven’t covered them off sufficiently you should consider taking a bit more time and tying up all the loose ends before submitting your request.

Click Here To Speak To Business Financing Specialist Brent Finlay

Business Financing Timing

“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

Market Opportunities For Business Lenders

“The Recent Turmoil In The Capital Markets Has Created Opportunities for Business Lenders”

Not only have we been witness to a large number of global bank failures in the last two years, but there have also been a number of high profile lenders that have downsized their operations in certain areas and completely pulled out of some jurisdictions all together.

The resulting shifts in the business financing sands have created both holes in the market and opportunities. The business lenders that remain now are presented with additional opportunities to expand their portfolios, provided they can adapt their services and risk management towards a new opportunity.

For the business owner or business manager, this has created new commercial financing options in the market to replace what has recently disappeared. Although the level of overall financing competition in all slices of the market is still down overall, the expansion by existing players is a welcome improvement.

At the same time, don’t expect these new programs to hit the market with any great force. While the lenders involved are going to be serious about exploring the identified opportunities, they are most likely to start by wading into the shallow end of the pool as they take their time getting used to water of a new market or niche.

So while it may be very much worth your while to explore these new options that could now be available in your back yard, you’re going to have to have some patience as market expansion in the world of business financing is more of turtle versus hare approach.

But as time goes by, positive experience will also lead to program expansion and more aggressive lending practices. And as the economy continues to turn around, more changes can be expected in terms of the lender mix and offerings in any market.

This will also have a dramatic impact on supply, rates and terms in certain locales where the dominant lender in a category has completely disappeared and competitors decide on their interest in filling the void that remains.

In a time when lending markets continue to trend through uncertainty its good to see some of the participants prepared to venture out into new areas where opportunity has become available.

Hopefully this will soon become more of the norm versus the exception.

Click Here To Speak To Business Financing Specialist Brent Finlay