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More On Canadian Inflation

“March Inflation Reports Show Inflation On The Rise Across The Country”

The March inflation numbers out showing a month to month increase in inflation for every province and territory.

Here’s all the specific statistics broken down by region

Time to break out Chicken Little…the sky is falling.  Or to the bank of Canada Governor, inflation is getting away on us, time to slam on the breaks and increase interest rates to slow the economy down.

Or not.

As I recall from economics class, there is real and perceived inflation.  Real inflation occurs when the available economic capacity of a country starts to deplete, causing pricing pressure on the available resources.

Perceived inflation is when people think inflation is present or think its rising, so they start increasing their prices to allow for what they perceive to be in effect, whether it is or not.

If there is too much continuous talk about inflation being on the rise, then perceived inflation effectively becomes real inflation as people’s actions cause it to happen.

I’m not saying this completely the case right now, but with all the press being directed towards inflation and interest rates these days, perceived inflation is definitely contributing to the rise in inflation to some degree.

The combination of real and perceived inflation would appear to be reaching critical mass in terms of something having to be done about it.

As more and more information is reported on the subject, the more inflation is likely to increase.

If someone wanted the interest rate to move in one direction or another and could control or significantly influence public opinion on the subject, they could potentially create the interest move they were looking for.

More likely this can happen on a follow the herd mentality where the topic gets enough short term press at the right time where everyone jumps on the bandwagon and causes their collective inflationary fears to come true through their actions.

Regardless of how you choose to look at it, it appears that interest rates are likely going to start moving upwards very shortly, potentially as early as May.

Hopefully the make up of the actual inflation is more real than perceived so that the corrective actions likely to be taken are appropriate and produce the desired result with the least amount of suppression to economic growth.

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Asset Based Loans

“Because There Are So Many Types of Asset Based Loans and Asset Based Lenders, It Can Be Hard To Determine Which One Is Best For A Given Situation At a Given Point In Time”

First of all, asset based lending is all about providing more lending against the available hard assets of a business. The more predictable the resale value of the assets pledged as security, the larger the amount of financing that can be provided by an asset based lender.

Just like all forms of business financing, there are different levels of asset based lending set up according to credit rating and business performance. At the lowest cost level, banks and institutional lenders have asset based lending divisions that focus on providing greater asset leverage to their higher end clients that have an asset intensive balance sheet and require more leverage than what the bank’s traditional corporate finance division can provide to run their business.

The more traditional form of asset based lender focuses on borrowers that do not quite fit the bank’s asset based lending requirements. Slipping into this realm of asset based loans can push the lending rate from prime plus interest into annual rates of 12% to 18%. The cornerstone of these asset based models is the businesses accounts receivable and the resulting cash flow they create.

Still higher priced asset based lending becomes more focused on individual assets , or groups of assets, such as accounts receivable, or accounts receivable and inventory, or inventory only, or equipment, or real estate, and so on.

Sometimes companies with significant assets in all major categories (accounts receivable, inventory, equipment, and real estate) will work with a combination of different asset based lenders to get the best overall leverage and repayment terms.

The challenge with all of this is to locate the most suitable asset based lenders that are relevant to your situation, assets, and needs at a given point of time. In certain cases, the variability among lenders providing asset based loans on certain types of assets can be considerable resulting in borrowers paying higher costs of financing than they need to.

But when time and money are short, its easy to take the first thing that’s available in order to keep the business going and then hope that there is going to continue to be sufficient margin available from sales to pay the higher interest costs and to get the business to a position of profitability that will allow it to return to a cheaper form of debt financing.

The best way to determine what you’re preferred options are at a given point of time is to work with a business financing specialist who understands the current market and lender underwriting.

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 Key To Successfully Buy or Sell A Business

How To Increase The Chances Of A Business Sale Being Completed

I’ve been on a roll lately talking about business acquisition financing and many of the things that need to be considered to secure this hard to pin down form of financing.

Even if business financing is not required and the buyer can pay in cash, there is still no guarantee the deal will be finalized, although its going to be significantly easier to close without having to worry about securing capital.

So putting sources of funds aside, what is the key to closing the purchase and sale of the shares or assets of an existing business?

In all the deals I have been involved in or observed, I can easily come up with what I believe is the #1 key to success, and that is for the buyer and seller to jointly project manage the deal to its successful completion.

While that may seem a tad obvious to some, here is a better way to describe what I’m trying to say.

The Buyer And Seller Have To Become Blood Brothers.

There I said it.  As corny as that may sound, its the best way I can describe not only how important their interaction is with each other, but also the degree of comfort and trust that needs to develop between them during the buy/sell process.

Once the Letter of Intent is signed, they need to get out the hunting knives, draw out a little blood on their palms, and bond the deal.

What this ritual symbolizes is the understanding that has now been forged between the two parties which can be summarized as follows:

  • Unless there are unforeseen issues or disclosures that materially impact the deal, both sides are committed to do what it takes to complete the process.
  • Both the buyer and seller will retain the decision making power throughout the deal.
  • Both buyer and seller agree to discuss the outstanding issues on a regular basis and get involved where necessary to assure progress is being made.

Putting aside issues related to financing or unforeseen events and disclosures, deals fall apart because there are too many cooks brewing the stew.

Both sides will have advisers such as accountants, lawyers, financial advisers, business consultants, insurance agents, etc.  The larger the team, the less likely the deal will close without the buyer and seller staying engaged in the process.

Both sides will likely have to deal with a certain number of outside parties dictated by the composition of the deal.  This can include licensing agencies, bonding companies, appraisers, environmental consultants, suppliers, customers, employees, unions, and so on and so on.  As the number goes up, probability of success goes down.

In essence, the buyer and seller need to project manage their deal to completion.  Too often one or both sides do not appreciate what this can entail and the result is the deal can get away from them.

By definition, a project manager understands all the tasks required, how they inter relate, any interdependency among tasks or events, time lines, and so on.  Unfortunately for many deals, buyer, seller or both do not get very involved after the initial negotiations have been completed and if anything tend to step back and let the advisers take over.

Aside from project management, both sides also need to remain the decision makers.  Deals tend to have a certain amount of twists and turns as the details get pounded out.  With every curve in the road, there may require an adjustment or compromise on one side or the other.  Advisers can be very good at providing their opinions for issue resolution, but their advise may also end up killing the deal.

As decision makers, the buyer and seller need to receive all valid input regarding various issues and decide if any particular issue is something that can be worked through or an outright deal breaker.

A good example of this is during the drafting of purchase and sale agreements.  Each side’s lawyer’s job is to protect their client and get them the best deal possible.  When the lawyers from both sides are taking a win/lose approach, trying to out due the other side with clever clauses and demands, the deal tends to go back and forth until the eventual impasse is created.

Its at this point where the buyer and seller have to look at the areas of disagreement, consider all advise, and make their own decision as to how an issue or issues will be resolved.

I’ve seen sellers overly disconnected with the process through up their hands and say, “I’m not a lawyer, so if my lawyer says it has to be this way or that, I have to go along with what he says”, basically making the lawyer the decision maker.

A blood brother to the deal would seriously consider what their lawyer has to say, talk to the other side if appropriate as well as other advisers that could add value to the situation, and then make their own decision whether to proceed or not.

If buyer or seller agrees to proceed against an adviser’s advise, the adviser involved must then find a way to make the deal work (be a deal maker) in keeping with the wishes of the person paying their bill.

This is one of the more common points where deals blow up, but there can be many others.  As the number of people involved goes up, so do the levels of inaccuracies and misunderstandings that occur not to mention the lengthening of time lines.

And remember, most if not all the advisers are getting paid whether the deal gets done or not, so it truly is in both the buyer’s and seller’s interests to stay on top of what’s going on.

Obviously no amount of involvement can guarantee success, but the odds are greatly increased when the coordination of the overall project details are being well managed, the misunderstandings are kept to a minimum, and the advisers are directed to find ways to make the deal work versus blowing it up.

Business Finance Considerations For Year End

Business Finance Planning Involves More Than Taxation At Year End

Being that we are now in the first week of December,  many business owners with December 31st year ends will be or should be projecting what their financial statements will look by the end of the month in order to have the opportunity to improve the final results in the coming weeks.

Traditionally, a year end planning process is for taxation, and taxation purposes only.  While tax planning is definitely something that should be seriously looked at this time of year if you have a December year end, there is another aspect of business finance that is mostly overlooked in the process by both business owners and their accountants.

The year end financial statement that typically gets prepared up to 6 months past the end of the actual year end, is a very important and arguably the most important element of a business financing package for an existing business.

Sometimes in the pursuit of reducing income taxes at any cost, business owners create other problems for themselves in the areas of securing capital or maintaining the capital they now have access to.

For an oversimplified example, business financing problems can be created by income statements that show no or low profitability and balance sheets that show no or low retained earnings.

In many cases, year end tax planning activities will occur to either spend more on future needs to reduce the net tax position at year end or move profits out of the company to optimize both the business and personal income tax positions of the owner(s).

While these types of actions may very well result in considerable taxation savings, they also end up painting a less than flattering financial picture for the business for the period just completed.

Logically, one could argue that lender or investor would be able to understand these actions and take them into consideration when reviewing the financial statements.  Unfortunately, logic doesn’t have much to do with it.  The financial statements are in almost all cases related to business financing, taken at face value.

As a result, two potentially negative outcomes can occur.

First, for the business that currently has business financing facilities in place that require specific financial covenants to be upheld, the year end tax planning activities can potentially cause a business not to meet some of the covenants which could result in the lender calling in the loans or taking some type of corrective action.

Second, for a business trying to secure incremental capital, the year end financial statements may not show the ability to repay the debt or show a debt to equity position that can support a greater level of borrowing.

Both of the above scenarios can be disastrous to a business, where at the least significant opportunity is forgone, or at the worst, the business cannot cash flow its operations and ends up closing down or going bankrupt.

To avoid both scenarios, the year end planning process, either for a December 31st year end, or for any other year end date, needs to take into account how the final version of the financial statements will impact all business finance aspects of the business (taxation, cash flow management, ability to secure capital, and so on)

To some degree, taxation can actually be looked at as a financing cost, as failure to pay taxes or have taxable earnings, may limit or restrict the business from acquiring and maintaining business capital, especially lower cost debt instruments.