Destroying Your Ability To Borrow Money

For businesses that are otherwise profitable, there are a number of ways that a business owner can destroy or dramatically limit their ability to borrow money.

If a business is generating a positive cash flow over time, then it should be able to get business financing from the cheaper sources of business capital without too much difficulty provided that there is a valid business application for the funds being sought.

However, this is not always going be the case due to the lack of attention paid to certain key requirement that most sources of business credit are going to require.

The most common way to destroy a businesses ability to borrow is poorly managed personal credit.   Even when a business itself has strong credit, the personal credit rating of the business owner or owners can destroy certain  financing options.  Why?  Because even though a business has a good balance sheet and cash flow, the lower cost sources of financing expect the person or people in charge to be responsible with all types of credit they have to manage.  Many lenders believe that your credit score is a reflection of your character and your commitment to meet all your obligations in a timely fashion.  Sloppy credit with a string of regular late payments can lead to automatic decline for a request that would otherwise be approved.

Another major way to limit credit availability is to not upgrade your accounting review as the business grows in size.  For example, beyond lending a few hundred thousand dollars,  there will be lower levels of commercial lender interest in larger requests when the business is only providing notice of assessment statements.

Taking the financial statement aspect one step further, many banks and other lending institutions will only make lending decisions on financial statements that are less than 6 months old.  Because corporations don’t have to file returns until 6 months after the year end, as soon as they are available to provide to lender they will already be too old to support a request for financing to certain lenders.

Institutional lenders will also require financial statements to show repayment ability of future loans and credit obligations.  If the business owner has taken an approach whereby the tax level of the company is reduced to near zero and the available cash is stripped out of the business on a regular basis, an otherwise strong company will have a hard time borrowing money based on these practices.

There are many other habits and practices that work against a business’s ability to access capital.  Failure to manage all the relevant elements will destroy potential financing options, increase rates, and make timely acquisition of business capital very difficult to accomplish.

Click Here To Speak Business Financing Specialist Brent Finlay

Debt Financing Has Become a Slow Walk

It seemed that in 2009, business owners to a large extent were not in search for capital for projects or opportunities and were collectively weathering out the recession storm.  Even when there was an opportunity to expand or get something done, willing lenders were difficult to come by.

In 2010, considerably more people are trying to get something done that requires debt financing, but lenders are still taking a very conservative approach to the market, bringing the process of business financing down to a slow walk or even a crawl in many cases.

What does this mean for business owners?

First of all, there is money available for business financing deals.  But the process is likely going to take longer than you can imagine, so be prepared and start looking for financing sooner or further in advance.

Second, the devil is firmly in the details as money is flowing to those with business plans and commitments that are well ironed out and defend-able.  So if putting together the deals is not your thing, then you should seriously look at getting third party assistance to not only develop a comprehensive proposal, but to also make sure that the positioning is appropriate in the current market place.

Third, forget about where the prime rate is at.  Spending too much time chasing prime plus one money is likely not going to get you anywhere.  If the only way your project will work is with prime plus funds, then make sure you’ve got lots of time to pursue the cheaper money.  Even for solid projects right now,  there is something of an economic risk premium added into most commercial rates.

Fourth, consider alternative financing sources.  If there is sufficient margin in the project or business opportunity, then a joint venture or higher priced asset based loan may be what is the best fit in the short term.  Cheaper money can always be pursued over time after the investment has been made.

Fifth, don’t expect any favors from your banker.  Banks will tend to try and help their own customers first with expansion and growth plans, but it also doesn’t even remotely guarantee that they will be able to help you out.

If you want to increase your probability of debt financing success, then give me a call and we can discuss whatever strategies best pertain to your requirements.

Click Here To Speak With Business Financing Specialist Brent Finlay

Asset Based Lending In Vogue

Some would say that 2010 is the year of the asset based lender, or at least that can be what it looks like for a lot of businesses trying to locate and secure financing.

Just to be clear, when I talk about asset based lending, this can cover off a lot of territory including such things as inventory financing, factoring, purchase order financing, equipment financing, private real estate mortgages, and asset based loan facilities that take some combination of receivables, inventory, equipment, and real estate as security.

As compared with corporate finance provided through traditional lenders like banks, the asset based loan providers are much more in tune with how to liquidate assets in order to get loan principal repaid if required.

In a typical, non recessionary market place, there are essentially three different categories of business financing provided by the capital markets to small and medium sized businesses.  The first tier would comprise the corporate financing and small business lending programs provided by banks and larger financial institutions.  The second tier is the business version of the sub prime market that is still institutionally driven, but with a focus on subordinate debt lending and higher risk corporate finance scenarios.  The third tier is asset based lending where lending risk and the related rates are higher than traditional banking rates.

In the current market, the corporate and small business lending is slowly coming back, but remains very cautious.  The sub prime lending tier is pretty much non existent, leaving the asset based lenders as the predominant lending option in many situations.

For the most part, asset based lending is used to finance growth, transition business ownership, and provide bridge funding for companies that have experienced a down turn in their financial performance and have hard asset equity to leverage to cash flow the business until financial results allow the business to return or acquire a lower cost corporate financing solution.

Major banks also have asset based divisions for medium sized businesses that are asset rich and require greater leverage than what traditional corporate financing can provide.  But for the most part, asset based lending is focused on higher risk  scenarios where some amount of operational uncertainty precludes traditional lenders from wanting to extend business capital.

In the current capital market, asset based lenders are seeing loan applications for lower risk scenarios than what they would typically be exposed to due to the lack of financing being provided by the other sources discussed above.

The result has been a considerable expansion of asset based loans particularly in the real estate market where private lenders continue to fill the void created by banks tightening up on their lending activities.

This is a hard transition for most business owners who feel that the economy is climbing out of the recession, but can’t get their bank or traditional lending sources to provide any new capital to their business operations.

For many, turning to a higher cost asset based lender is a hard pill to swallow as they feel their business should qualify for lower cost financing alternatives.  But in the current market, growth and even survival is going to cost more with respect to business capital for many small and medium sized businesses and the sooner business owners make the adjustment, the faster they will be able to get access to commercial financing.

This is not to say that asset based lending is the only solution or best solution, but the current reality is that these higher cost financing options may be the only option available in certain cases, making their consideration more critical to the business owner.

Click Here To Speak Directly With Business Finance Specialist Brent Finlay

Different Levels of Small Business Equipment Financing

There are basically four levels of small business equipment financing where the financing required is no greater than $250,000.

The first level is obviously provided by traditional banks through both loan and leasing programs.  In Canada, the chartered banks will make equipment loans via the small business loan program insured by the Federal government for total acquisition costs of no greater than $250,000.

These loans get financed at around 5.5% at the present time, or roughly prime plus 3%.  Because this is considered very low interest rate borrowing, even though the debt is partially insured by the government, there is a fair bit of qualifying required.  And even for those that do qualify, the amount of financing provided tends to range from 65% to 75% of the equipment acquisition and placement costs.

Some of the banks also have a leasing division that works outside of their commercial loan programs and administered at a head office level.  While banks can provide equipment leases for smaller ticket amounts more common with small business, these programs are more focused on larger ticket amounts where the objective is to use low cost, high ratio lease financing to attract new commercial clients to the bank.

The second level of equipment financing is still through institutional lenders and is typically between 6% to 10% interest range.  These are term loans that have similar qualifying requirements as the first level, but are more designed for larger value loans that don’t quite fit into the bank qualifications. These types of programs will also consider one off transactions in most cases.

The third level is equipment leasing from leasing companies where most financing requests considered are no greater than $150,000.  The best interest rates from this group range in the 9% to 14% range and while higher than traditional bank loans, can provide financing amounts in excess of 100% of the equipment, delivery, and installation costs for strong financial and credit profiles.  So for many small businesses, the higher costs of financing is a trade off for greater equipment financing and leasing leverage.

There is a second tier in this type of financing where weaker financing profiles will be considered in rate ranges from 15% to 20%.  The leasing decisions tend to be very subjective on the part of the leasing companies which can make it very difficult to predict which of these companies will be interested in any particular deal.

The fourth level of equipment financing and leasing is pure asset based lenders that are strictly focused on the liquidation value of the equipment and tend to provide equipment leasing rates in the 18% to 25% financing range.

While there are a number of financing sources in the small business equipment financing and leasing space, the individual lender criteria can change constantly, especially with companies that hold smaller portfolios that can easily be impacted by changes in rate or even slight increases in arrears accounts.

And being able to qualify for lower cost financing can be a very point in time event whereby at certain points in time, a business scenario can qualify for lower financing rates and at other times, the exact same scenario will not.

If you have an equipment financing or leasing requirement for small or large ticket items, please give me a call so I can quickly assess your requirements and provide relevant options for your consideration.

Click Here To Speak With Business Finance Specialist, Brent Finlay

Even Higher Priced Asset Based Loans Can Work In The Present Market

The present capital market is more asset based and risk averse than what business managers and owners have gotten used to in recent history.  And while a traditional asset based loan costs significantly more than what one would expect from a corporate financing program, the higher rates are something to seriously consider in the current market place.

The recession has created a lot of unfortunate circumstances for otherwise strong and well managed companies.  As a result of lower sales, lender demands for repayment of existing debt, or capital required for expansion or equipment upgrades, business owners and managers are now forced to consider options they would never of previously given a second thought to.

But in lieu of where the capital markets are sitting right now, the asset based lenders have become the best option for many businesses, whether the business owner likes it or not.

From the borrower’s point of view, the lending rates between 1.5% and 2.5% per month can seem to be outrageous.  But from the lender’s point of view, the rates reflect the risk in the market and are based more on an equity return than a debt return, which relates to the saying that with asset based loans, you’re renting equity as there are no other lower priced debt options.

From a cash flow perspective, the cash based loans tend to be interest only and are short term in nature, not intending to be in place for more than one or two years.  So even though there is no principal pay down, the actual debt servicing requirement in the cash flow may actually be less that a lower priced corporate financing deal that requires an amortized repayment.

This is what can make the asset based solution affordable for many companies with asset equity and limited debt financing options.  By being able to cash flow the debt service, even at higher interest rates, the business can potentially draw on the capital necessary to main or grow operations until things settle down and better financing options become available.

This is still a better option than selling off part of the company in that the owner has the ability to repay the debt at any time and retain full ownership and control.  So like I said, its a lot like renting equity.

Click Here To Speak With Business Financing Specialist Brent Finlay About Your Business Financing Needs

Commercial Financing Applications Need To Take A Different Approach

With all the changes going on in the capital markets these days, business owners and managers need to reconsider how they go about applying for commercial financing.

The typical approach taken over the last several decades by small and medium sized business owners when applying for business financing was to start the process late and provide basic information including cursory business plans and thinly supported projections.  Because of the strength of the overall economy, lenders and investors were comfortable with making lending or investing decisions from basic information.

This is not to say that considerable effort didn’t have to go into the process, but compared to today’s market, the overall lending requirements and demands for information have significantly increased.

The direction of greater focus is on management of business risk and the lender or investor protection against funding loss.  For debt financing in particular, lenders are more focused on asset security and less interested on primarily cash flow based lending.

This is a significant departure to what businesses have gotten used and its a change that many still have not made when seeking financing.   And the reality is that failing to change the positioning of a commercial financing application so that it aligns more closely to market requirements will likely result in no new capital coming into the business.

This is a real problem not only for dealing with short term cash flow deficiencies that directly impact operations, but also for all the time and effort that can go into long range planning that may not align with securing the capital required to bring things into fruition.

A better approach for debt financing needs to become more focused on hard security, details on customer and supplier financial profiles, projections that cover a longer period of time and have well supported variables,  projections that include balance sheet, income statement, and cash flows, and a business plan that provides more tactical details and less theoretical potential.

Financing strategies are now going to have to be developed farther in advance to accommodate a very unpredictable and picky  capital market focused on good deals where the risks are clearly mitigated.

Leaving things to the end of a transaction or waiting to close to the time when money is required is going to be a dangerous practice as the probability of getting anything of significant size into place quickly is low.

For More Information On How To Better Position An Application For Business Financing, Click Here To Contact 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

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

Construction Financing Trap

Do You Have An Exit Plan For Your Construction Financing?

All construction financing projects have a definite beginning and end.  The beginning is marked by the approval of a construction loan or mortgage to secure capital for building costs.  The end is marked by the retirement of the construction mortgage through another source of capital.

If you plan to keep the property after construction is completed, then you’re going to have to “take out” the construction financing in place with a long term mortgage instrument that will amortize the cost of construction over a long period of time.

When construction mortgages are arranged at the same time as the long term funding, the construction costs will flow from the short term construction financing facility to the longer term property mortgage at the successful completion of the construction project.

However, its also not uncommon that a financed construction project can be well underway without any long term funding lined up.

Many times there is an urgency to get a project started, and once construction funds have been arranged, the project will begin with the thinking that the term out mortgage will be easily acquired towards the end of the project.

But this is not always the case.

When term financing can’t be secured on schedule, the consequences can become rather costly.

Construction loan interest rates tend to be significantly higher than long term mortgage rates.  So at the very least, the cost of the project will go up as the financing costs of the construction mortgage will stay in affect until it can be paid out.

But if term financing proves to be elusive months after successful completion, the borrower can also run the risk of the lender taking action against the property to recover the construction costs.

Construction lenders understand the risks associated with this type of funding and while its not likely their preference to take an action against a borrower to get repaid, they are more than prepared to do so if required.

Not pre-arranging a take out mortgage can be a well calculated risk by a borrower such as a builder who has experience with the process and has  several long term property lenders in the immediate area that would be interested in the finished project.

But in situations where the project takes place in a remote area and the use is somewhat specialized where there is not a highly active reseller market for the property type, term mortgages can be hard to find at times.

Obviously, the best way to avoid the risk is to not commence the project until both the front end and back end funding have been secured.  But if that’s not possible without delaying the project, and the probability of term financing appears to be high,  you may still chose to get started on construction (depending on your risk tolerance of course),  but there should be a continual focus on getting the long term funding pinned down sooner than later.

One of the key reasons problems do occur is that once the project starts, all the attention gets focused on project management, and the efforts related to finding and securing long term financing are redirected or put on hold.   If this activity is delayed too long, there can be serious timing issues at the end of the project.