Why Business Financing Strategy Is Important

“A Proper Business Financing Strategy Will Cover A Period of Time Versus a Point in Time”

Assuming that you’re business requires a third party source of financing to provide the capital necessary to operate and drive your strategic plan, then a business financing strategy is definitely something that should be developed and kept up to date.

Most businesses operate on a point in time basis where they look for financing when they need it but don’t have a longer term picture of how the financing they accept today will impact their needs tomorrow.

A business financing strategy is more focused on making sure that any incremental commercial financing you secure will be congruent with what you already have in place and with what you expect to require in the near future.

Most lender models offer no help with this exercise either as lenders tend to work on a very narrow and highly static point of view. The ideal client for any debt lender is one that is very profitable, requires a relatively consistent level of capital to operate, and does not got any wild growth plans or ambitions that could upset the current stability of the business operations.

This is in direct conflict with businesses that are continually trying to grow and take on new opportunities or trying new approaches to gain market share. And when financing decisions are made in this fashion, the business owner or manager is constantly trying to fit round pegs into square holes.

Here’s an example.

A business owner wants to exit the business by selling his interest to a co owner for several million dollars. The business has a strong balance sheet and solid profitability so bank or institutional corporate financing should be able to be secured to accomplish the process.

But the owner wanting to exit has put a time limit on the transaction in terms of the price he’s prepared to sell his interest for. Because no senior lender relationship is in place, the remaining business owner has to start from scratch to secure financing.

Because the time available is not sufficient to get through a bank or institutional application and assessment process, a bridge financing solution will need to be entered into to meet the deadline.

Nothing wrong with bridge financing, other than its very expensive and may not be the best operational fit for the business in the interim with respect to how the financing is structured and monitored.

At the same time bridge financing is secured, the now sole owner will need to try and secure a longer term senior lender facility to pay out the bridge financier in order to save 50- 75% or higher, of the financing costs he’s paying.

Once the senior facility is in place, if the business has any plans for growth that require more capital in the near future, there is no guarantee that the new senior lender will be able to provide incremental funds as new opportunities present themselves, creating a new financing challenge.

An up to date business financing strategy could have not only avoided the whole bridge financing situation, but could have also made sure that future financing facilities were going to be congruent with future business plans.

While some of the leg work and modeling for a business strategy can be outsourced, it is the responsibility of the business owner or manager that a working version is in place and that it properly factors in 1) the present balance sheet; 2) potential future business financing requirements, 3) contingency planning such as management buyouts, shot gun clauses, etc.

A lack of a business financing strategy can destroy significant value in terms of 1) higher financing rates, 2) lost opportunities, 3) opportunity cost of time and the real cost of delays.

Click Here To Speak To Business Financing Specialist Brent Finlay

Business Financing Toronto Ontario

“Do You Have a Toronto Based Business That Requires Business  Financing?”

One thing about operating a business and having a business financing requirement in Toronto, there are no shortage of commercial financing options available to you.

The Big smoke is the center of the Canadian financing universe with several lenders present in virtually every conceivable business financing classification.

Because of the population concentration within 50 miles of down town Toronto, many sources of business loans, leases, and equity investment don’t even consider deals immediately outside of the Greater Toronto Area and prefer to only work on projects in their own back yard.

As a result, the physical location of the business, especially for anything that is asset intensive, will have significantly more financing options within the GTA area than even a short distance beyond its boundaries.

Because many sources of biz financing come from what we refer to as boutique lenders (niche focused sources of financing with typically one physical location and limited staff), there is a need for the business to be close enough for the lender to do a sight visit in the application stage of the process as well as to be able to easily come out to the location to monitor the account or work through issues that may arise.

Of course all the national lenders are also going to be present in the Toronto area. But the presence of this higher concentration of niche lenders compared to other areas of the country can provide many more short term and long term financing options to a business that would not otherwise be available if they were located even a 100 miles away from the GTA.

These expanded lender options also extend to private mortgage lenders that have a much higher concentration in Toronto than anywhere else in the country. Because of the woes of the stock market over the last decade, there are more and more people becoming private mortgage lenders to gain a more predictable and secure return, especially those in the baby boomer category that are at or near retirement and have a desire to reduce the overall risk level of their investment portfolio.

As a result of all the new entrants into the market, private mortgage financing has gotten more and more competitive, especially for small and medium sized commercial properties where private mortgage lenders can come close to rivaling bank interest rates in some cases.

All of this provides more choices for Toronto based businesses which can allow business owners and managers to consider different business financing strategies to meet their capital needs.

Click Here To Speak With Business Financing Specialist Brent Finlay

The Unpredictability Of Commercial Financing

I  got a call from a customer with not untypical cash flow management issues and was looking for more alternatives to try and solve his problem.

What I really liked about our discussion, is that this guy understood his business cold and could tell me instantly anything I asked during  my qualifying process on the phone, providing the information off the top of his head.

After this type of discussion, I never have any doubt that the client is going to be successful in their business because they have clearly been able to quickly and effectively demonstrate their intimate knowledge of what’s important as well as the things they are doing to grow the business and protect cash flow.

The challenges in this case was rapid growth and how to properly cash flow more sales, which is not an uncommon problem by any stretch with small business owners.

The business owner had also been surveying and studying his financing options in the market and had an above average grasp of where the capital markets are at and what types of options and financing structure where available to him.

Yet despite his above average knowledge level with respect to business financing and how the market in general would view funding his business, he still hadn’t been able to get proper funding in place, even though he’d been working at it for about 6 months.

This is becoming a more and more common theme in the phone calls I get these days.

The commercial financing market is not only hard to understand at times, but right now its almost impossible to predict.  And even when you have a business in a “finance-able” position with a totally on top of it business owner, there still can be a lot of art and science into the process of locating and securing financing that the business needs.

More specifically, deal positioning, deal timing, and financial support documentation are now much more critical to lenders than any time in recent memory.

And while I am confident that the caller is more than capable of figuring everything out on his own, how much more time can he invest in the process and how is that time investment impacting his growth strategy?

If you’re business is making money and the only thing blocking you from making more money is capital, the it makes a great deal of sense to pay for the expertise required to keep the business properly funded versus losing out on the future profits lost from mucking around with something that is not only difficult to understand at times, but almost impossible to predict.

Click Here To Speak With Business Financing Specialist Brent Finlay

customer called me to discuss options, had them figured out, but still didn’t know what to do

The Best Business Financing Deal May Very Well Be The One That’s Available

When anyone looks for financing of any type, they are intuitively looking for the best deal with the best rates, the best terms, the best fit for what their doing.

And many business owners will start out with their own set of criteria of what they are looking for in terms of amount of money and what the related terms and conditions need to be.

The challenge is then how fast their perception of what’s available to them can be lined up to the reality of the capital markets at any given point in time.

Let me explain.

At any given time, a business may be eligible for certain types of financing rates and terms, but what lending source can provide it?

When the overall market is operating during a period of sustained economic growth, more lenders will be providing similar terms on similar deals most of the time.

When the market is operating during a period of uncertainty like the current recession, the same financing opportunities can still exist for a given business, but its likely that there are fewer lenders that will provide the best potential deal at any given point in time.

The reason is that economic uncertainty increases risk and losses for debt lenders just like any other business.  And to protect themselves, some debt providers will leave the market all together for certain types of deals for a period of time, some will cut back, some will expand their criteria for approval, and so on.

The result of all this is that the ultimate best commercial financing deal can be very hard to find in times of greater economic uncertainty.

And when most financing requirements have some sort of time line that needs to be met, the best deal can very well be the one that can be approved and arranged in the time required.

This doesn’t mean what you can get a hold of is the best potential deal in all respects.  It just means that its a source of money you can make work in the time you have.

Searching for a better deal is always an option, but there are two things to consider with looking elsewhere.  First, you may run out of time and either miss out on the opportunity you’re looking at, or incur additional costs from the delay.  Second, if you are unsuccessful finding something better, there is no guarantee the first deal is still going to be available to you later, especially in strained economic times where lenders are known to change their minds or lending direction quickly.

Its a bit like the old “bird in the hand is worth two in the bush” saying.  Sometimes a deal that’s close enough to your requirements needs to be good enough, at least for the short term until more predictable options are available.

Click Here To Speak With Business Financing Specialist Brent Finlay

Business Financing Application Faux Pas

If your business is technically not eligible for a certain type of financing, no amount of detail provided in your application is likely going to help swing the lender in your favor.

There is no question that a well prepared application package that is well organized, informative, and visually appealing can help you impress a lender and for marginal deals that are just on the bubble, perhaps this can put you over the top.

But the bigger concern with business applications is to not talk yourself out of biz financing that you would be otherwise eligible for, but still get declined due to poor, inconsistent, inaccurate, misleading, or even false presentations.

The application package you submit should be designed to present the specifics of the business as accurately and clearly as possible.  And while this is the intention most business managers and owners, they cross themselves up by not making sure that all the information provide is consistent and relevant to the case for business financing they are trying to build.

Here are some examples of what I call business financing application Faux Pas.

• Lenders will be interested in historical and future financial statements for the business.  Its not uncommon for the lender requirements to state the same information more than once or provide it in different forms.  Its also not uncommon for borrowers to provide different numbers or answers to the same question or requirement, leaving the lender unsure of what the information is trying to tell them.

Key takeaway:   Reconcile your numbers.  Go through your draft submission and make sure there are no inconsistencies from one set of statements or forms to another and that the information is consistently described and presented accurately.

• When asked to provide business plans, applicants tend to default to some template for writing or outsource the whole requirement all together.  While most business plans contain a wealth of information, they tend to fall down in one key area … market analysis  and the related business forecasting that works off of the market assumptions.   The typical market description falls along the lines of “the market is really big and we are only after a small percent, so it shouldn’t be hard to get”.   Remember that there are only three ways to get more sales:  1) market growth, 2) steal share from competitors, 3) combination of the first two.  The more specific as to where your future business is going to come from and how you’re going to get it is one of the weakest areas of most business applications.

Key takeaway.   Make sure you answer the following questions: what is your plan to market your business and what is it based on?  Customer or prospect letters of intent, conditional purchase orders, and market research clearly stating what certain segments of your market want make your projections and assumptions more believable as well.    And all income and expense assumptions should be supported by unique and clear logic that can be substantiated if required.

Many business owners feel like spending too much time on a business application is a waste of time, and that can be true if the business case is easily supported.  On the flip side, a poorly prepared application package or one that is thin on pertinent information is not likely to get you anywhere, even if the actual business can support the debt being requested.

A business financing application is also a reflection of how you attend to business and the level of detail you invest in managing the business and managing risk.

For a new financing source, its also the one chance to make a first impression that could be lasting.

Click Here To Speak With Business Financing Specialist Brent Finlay

Bad Business Financing Assumptions To Avoid

Bad assumptions are a common reason for many of the problems small and medium sized business owners have  locating and securing business financing when they need it.

Here are some of the more typical bad assumptions that get made on a regular basis and either inhibit capital from being acquired or cause a business to face serious short term repayment demands from lenders and creditors.

• Using government remittances to cover off cash flow deficiencies is an acceptable practice that the related government agencies will understand and work with.

• New business loans can be used to pay off arrears related to government accounts.

• Personal credit of business owners or major shareholders of small business corporations does not have a large part to play in the making of business financing .

• The process for acquiring business financing is relatively straight forward and predictable.

• Trade credit can easily be acquired for companies that have been in business for several years even if business credit still hasn’t been established or if the business has overdue trade payables on its books.

• Your business bank will be able to provide you’re financing requirements, even if you’ve just been through a rough period where the business has generated financial losses.

• Business financing decisions can be be based primarily on the long term potential business opportunities in the future versus historical result

• The industry and geographic location where the business is located does not have any bearing on the ability to secure commercial capital.

• Prime plus interest rates are available to all businesses regardless of the level of potential risk to the lender.

• Once business financing is provided, as long as the business owner meets all the requirements of the financing facility, there is no risk that the lender will call the loans or restructure future repayment to the detriment of the business.

• If a lender does not want to continue providing your business with capital that there will be another similar lender prepared to provide refinancing quickly and with similar terms.

• Its not typically a problem to leave a financing requirement to the last minute or near the time when funds will be required as there are lots of sources of financing available.

• Shopping around a commercial financing request is the same as shopping around for the best residential mortgage interest rate.

• Once a commitment for financing has been provided, the closing process will be quick and there is very little risk that financing won’t be provided.

• Lenders will typically be understanding if you can’t make all your payments on time.

• The economy is currently improving and coming out of the current recession and the capital markets will follow closely behind.

The key point I’m trying to make is that the process of business financing is not easy by any stretch, especially if you want to secure a financing facility that best meets your requirements.  Significant lead times should be built into the process of locating and securing business capital, especially in the current recessionary environment.  Proper cash flow management and credit responsibility are also very important aspects of any lender decision making process.

Click Here To Speak Directly With A Business Financing Specialist

Business Financing Hypocrisy

From both a borrower and lender point of view, we are seeing more of what I call business financing hypocrisy.

Lenders are interested in your business until they’re not interested in your business at which time they will call demand loans, cut back on lines of credit, term out lines of credit, increase interest rates, and invoke whatever get out of jail free cards they may have build into their funding commitment to the business.

Borrowers are just as bad in that they at times will promise everything but the moon and the stars to make the lender comfortable with a capital request, but when things don’t go according to plan and loan obligations can’t be met, the borrower calls his or her lawyer and tries to come up with a legal strategy to basically get around having to honor his or her promises.

When the economy is going well, these types of scenarios are played out very infrequently.  But when a recession hits, as it has for the past two years, business financing hypocrisy is everywhere and its every man or woman for themselves.

The net result of this type of two way hypocritical behavior is that the financing markets are slowly down to a crawl in many sectors and geographic regions.

Lenders are asking a lot more to protect themselves with most commercial financing decisions now focused on asset based security and risk management.

Borrowers try to protect them selves by constantly looking for a better deal as they don’t like the changes in lender requirements and search for someone who is more in line with their expectations.

To say there is a lack of  trust from both sides overall would be an understatement.  In tougher economic times, most people tend to take a more conservative approach.

For the desperate borrower, its basically a take it or leave it market with the lender setting out what they are prepared to do without really any flexibility.

For better deals, borrowers have become more patient as lenders are having trouble hitting their borrowing targets which is the way they make money.  So for good deals, there is a high level of competition and as a result, a patient borrower can find some pretty good deals as lenders cut margins to only secure solid opportunities.

But regardless of who is in a position of strength or weakness, promises made by either side are very weak.  Business financing has become a game where borrowers have to become better players to keep up with the changes in the capital markets.

If you have a business financing requirement or problem you need assistance with, give me a call and we can go through it together.

Click Here To Speak With Business Finance Specialist Brent Finlay

More Reasons For Having A Business Financing Strategy

In my last post, I laid out why its become more important for business owners to have a more formalized business financing strategy in place on an ongoing basis for their business.

Here are some additional reasons why this has become more important in the current market.

• No Senior Lender Security.  With the capital markets in major melt down, no senior lenders are guaranteed not to suffer significantly from the current recessionary process.  As a result, no matter who you’re senior lender is or how long you’ve been with them, and whether you’re in covenant or out of covenant, there are no guarantees that your demand loans will not be called or reduced now or in the near future.This means that all businesses need to have their financing profile up to date at all times and they should also have an ongoing awareness of their primary and secondary options to finance their business if required.  For many, many businesses, this is something that is beyond comprehension as several have gone decades without any senior lender related issues.  But the world has changed, and its time to adjust or be left scrambling when circumstances move against you.
• Source of Contingency Funds.  The term contingency planning is often brought up but seldom put into any type of practice for most business operations.  With the tightening up of capital markets and the unpredictability related to securing incremental business capital, its become more important to have a capital contingency plan in place.  This can involve working towards reducing the amount of leverage as a percentage of equity on your balance sheet, creating credit reserves in your cash or debt financed lines of credit to allow for short term down turns in business, developing emergency funding plans and sources of financing that can be injected into the business if required on short notice.
• Lower Risk Growth Plans.  While all businesses have the ultimate desire to grow and enhance profits, the strategic process for planning and implementing growth strategies need to take capital requirements into consideration to a greater extent that what we’ve typically seen in the last decade or more.  Strategic plans need to be more closely reconciled to more conservative capital availability predictions so that the business does not get over extended during a tough to predict and manage external capital environment.  This can be a major departure for aggressive business owners who are used to always being able to fund whatever projects they want to undertake whenever they want to undertake them.

This speaks to a more conservative approach to third party financing, whether it be debt or equity, until some reasonable amount of stability returns to the capital markets.

Click Here To Speak With Business Finance Specialist Brent Finlay

Having An Up To Date Business Financing Strategy Is Becoming More and More Important

Does Your Business Have a Business Financing Strategy?

If you’re like most business owners, the answer to the question of having an actual formal business financing strategy is likely No.

The status quo for decades for most businesses has been to focus on what generates cash flow and deal with business financing as a short term project, whenever its required.

This typically has some form of time pressure associated with it, and because there is no regular attention spent to how to properly go about getting financing arranged, brute force tends to be employed to get through the process, get the required money in place, and then get back to work.

This has been the “business financing strategy” for many small and medium sized business largely because it worked.

Leaving things to the last minute and scrambling around to get funding in place has been an effective strategy for many. Yes, it can be a pretty stressful process to go through, but its not required very often, the results get achieved, and the pain generated quickly dissipates due to small time box everything is forced into.

The challenge going forward is that the world, at least for the foreseeable future, has changed. The probability of leaving business financing needs to the last minute and then depending on brute force and will power to muscle things through has gone way down for a number of reasons.

First, there are significantly less business lenders now than 2 years ago, and the number continues to decline on an almost daily basis as the recession continues to unfold.

Second, many of the surviving lenders aren’t lending money as they scramble to collect the accounts they already have. Even if they wanted to lend money, many of them are having a hard time finding sources of funds to finance new business loans.

Third, the more established lenders are taking a more cautious approach to the market and are being more selective with opportunities and taking their time with deal assessment, not being particularly interested with anyone in a flaming rush.

And based on the current state of the capital markets, things are not going back to the status quo any time soon, effectively changing the status quo.

So now is the time to move to a more formalized business financing strategy and approach. This is something that all businesses require. Obviously smaller businesses are less capital intensive, but they still have cash flow and have to be able to fund it if they want to stay in business.

In my next post, I’m going to get into even more specifics as to why a business financing strategy is something that business owners are going to have to start investing time in to either stay in business or grow their business.

Click Here To Speak With Business Financing Specialist Brent Finlay

The Business Financing Prime Rate Is A Bit of An Illusion

Most everything we here about the prime lending rates being kept at historically low levels by their respective country administrators to keep the global economy from stalling out during the recession is a bit of a farce for the small and medium sized business that contribute to driving the economy.

Yes, if you’re a well established company with a senior bank credit facility, your cost of operating has gone down due to historically low interest rates.  But in many cases, the cost saving that are realized wouldn’t make or break established companies with the balance sheets to qualify for low interest rate debt.

If a company gets offside of their balance sheet and income statement covenants with a bank, they either get their interest rate jacked up nullifying any savings, or end up with a special loans tag which can  lead to a forced payout that is even more expensive if not fatal in some cases.

For all other businesses that are looking to start, expand, grow, replace assets, and so on, interest rates near prime are mostly a myth.

Unfortunately, no one told business owners who are frantically in search of business capital right now, working off their long term conditioning of what should be available to them based on where the prime rate is sitting, that things are not what they seem.

Whether this is good or bad, fair or unfair isn’t really the issue.  Prime plus rates are difficult to secure because the economic risk is higher and lenders are being more cautious until the recessionary impacts work themselves out.

The key learning is that things are not what they seem and as a result, business owners need to reassess their ability to access incremental capital and the related cost that comes with it.

Failure to adjust to the current environment can not only waste valuable time and money searching for something that isn’t there, but it can also put basic business operations and incremental sales opportunities at risk.

The solution may be to forgo expansion or new business endeavors in the short term, or focus on lower levels of potential profit to cash flow a higher cost of capital.

For businesses offside on their financial covenants that have received a demand for repayment from their senior lender, it could be very unlikely that a similar senior lender is going to be available to replace the existing one and an extended search for money that has a low probability of being there could run the business out of time for structured and civilized refinancing.

Adjusting financing expectations sooner than later can have a profound impact on the long term health of the business.

Click Here To Speak To Brent Finlay About Your Business Financing Requirements.