Leveraging Available Equity
“How To Best Access The Capital Tied Up In Your Assets”
Business is and will always be about leverage. The ability to leverage both human and capital resources is the cornerstone to being able to grow and scale profitable business operations.
Yet the challenge with leverage is that its hard to stay on top of what balance sheet structure is best for your business at a given point in time. There is definitely a need to think ahead as what makes sense today may not work tomorrow.
For instance, if the business is going through a bit of a down turn and cash flow is or will be stretched, its far better to start working out how to leverage your available leverage early on even when its not completely clear as to how things will place out versus waiting until you have a problem.
Equity based financing under distress is not only going to be harder to come by, but its going to cost more as well. The worst part is that if you do hold good quality assets and the business does have a strong plan for improving financial performance, its easy to also overpay on equity financing due to the time constraints you could be under from leaving the process too long.
Even when everything is going well, the bank or institutional lender you’re working with today may not be interested in funding future growth which may come as a surprise when you least expect it.
The point here is that optimal financial leverage needs to be an endless pursuit on the part of the business owner and/or business manager. And leverage is always going to be based on the amount of debt financing you can secure against some combination of the paid in and market value of the equity in the business.
The second point is that regardless if your in a survival mode or a growth mode, its easy to pay too much for business financing due to a lack of time available to conduct the process.
And the third point is that today’s lender is not necessarily going to be tomorrows lender so you always have to be cultivating what will be the next best fit for the business as the business changes and the overall economy changes around it.
Click Here To Speak Directly 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
Equity Financing Considerations
“There Are Many Things To Consider When Looking Into Equity Financing Options”
When seeking equity financing for an existing or future business, its important to make sure you have a clear understanding of what you’re getting into.
Many times business owners are either in too much of a rush or pressed against a wall to consider the pros and cons of any equity financing options they are considering, being more inclined to take what they can get. Even if there is more time available to consider the “goodness of fit” of a potential investor into the business operation, the key issues and considerations can still be easily overlooked or glossed over.
The primary thing to remember is that taking on an investor is like marriage. You could be involved with this new person or person for a long time, and breaking up the relationship at a future point in time may not be very easy or even possible to accomplish under terms you can live with.
That being said, one of the first tenants when considering taking on an equity investor is start with the end in mind.
The reality is that anyone who gives you their money is going to want it back, so it only makes sense that the ending of any proposed investor marriage is clearly lined out from the outset in a manner that is acceptable for both parties.
From the business owners point of view, the goal may be to be able to buyout the investor at a specific point in time for a clear dollar amount, or at least for a dollar amount that is calculated by an acceptable formula.
This creates a structure where both sides can size up the value to each other of getting involved in a transaction in the first place as well as providing some level of protection to both parties.
Selling off part of your company without doing this is dangerous to say the least. Everything can seem nice and light at the start of the business relationship, but things can change radically in a very short period of time.
And regardless if the business is ahead or behind on its financial projections created at the time equity financing was secured, there is a defined process for either party to deal with any changes in circumstances or expectations.
Once the honeymoon is over, its hard to predict where the relationship will go so it only makes sense to provide both sides with a way out that doesn’t potentially kill the business in the process.
Click Here to Speak to Business Financing Specialist Brent Finlay
Asset Based Financing is Bridge Financing
“With Some Exceptions, Asset Based Financing Is Only A Temporary Source of Business Loans”
Unless you’re a fairly large company with substantial profitability and assets, its unlikely that an asset based lending solution is going to be a long term or even a medium term funding solution.
The reasoning is fairly simple. The cost of most asset based lending will either not be affordable long term or will substantially eat away at your profits.
The focus of an asset based lender is to finance assets that either they can control directly or that they can easily set up a clear liquidation pathway to get their money back from the liquidation of the assets.
This specialized form of lending charges a premium for the lenders ability to provide funding in situations where conventional or traditional lenders will not be interested. By becoming focused on a slice of the asset lending market, the lending competition can be very minimal in many locales, creating an opportunity for pricing that reflect the underlying risk to the lender.
If you ask an asset based lender why their pricing may be substantially higher than a conventional financing source, the lender will regularly offer back that you’re renting equity due to the fact that the business does not have sufficient retained earnings from profitable operations or paid in capital to secure cheaper forms of money.
While some may feel this is a bit of a cheeky answer to the question, there is a lot of truth and merit in it as well.
First of all, the next option for financing if an asset based loan is secured will likely be an equity investor or equity injection from the current owners. Any investor will require a return on capital at or above what an asset based lender will be charging.
Second, by acquiring capital in the form of a loan, it can be acquired without diluting ownership and paid back according to an agreed upon repayment schedule.
Which leads us back to bridge financing. Outside of institutional asset based lenders that are priced off of the prime rate, the next best pricing options will need to get comfortable with how they are going to get paid back in one or two years or they won’t fund the deal.
Why? Because they know the cash flow will not be able to handle the higher cost of financing for an extended period of time and that without some realistic transition plan to cheaper money in the future, they will likely pass on the financing opportunity. This will then lead to even more expensive asset based loans that are more closely aligned with liquidation and price their financing accordingly, knowing full well that may of the borrowers will fail to turn the business around or find an exit strategy that will repay the debt.
That’s why its important to only enter into an asset based deal if you can clearly see the other side of the bridge or the probability of getting something in place is pretty high.
Otherwise you’ll on a bridge to nowhere fast when the cash flow can no longer service the debt.
Click Here To Speak To 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
Mississauga Asset Based Loans
“Mississauga Asset Based Loan Options Are Plentiful And Potentially Very Confusing”
If you’re seeking a Mississauga asset based loan for your local area business, you will definitely have some options to consider in this locale.
In Canada, the asset based lender world revolves around downtown Toronto, which many asset based lenders not prepared to wander beyond the boundaries of the Greater Toronto Area more or less to conduct business.
So being in Mississauga affords your business access to just about any type of asset based loan that is available in Canada from both Canadian and U.S. asset based lenders.
This is both a good and bad thing in some respects.
Its a good thing in that if you have good assets that can be pledged for security, regardless of what those assets are, you will likely find some form of Mississauga asset based loan to consider.
The bad thing is that there are so many different types of asset based lending models out there, which can overlap across asset classification and industry, it can be hard to figure out which financing facility is going to be the best fit for your business.
A good example of this problem is when a well established business is operating very profitably, but needs a higher ratio of debt to equity business financing to fuel additional growth. Virtually any type of asset based lender would be interested in this type of scenario, provided that the assets being offered as security fall within their program structure.
The challenge comes from the fact that there can be enormous differences in rates and principal repayment options. From an interest rate perspective, you could see potential Mississauga asset based proposals ranging from prime plus two or three to an offer at two percent a month and anywhere in between.
Asset based lending has long been associated with higher interest rates due to the higher leverage position the lender is taking, resulting in the lender holding more of a quasi equity position, which drives up the rate of return.
But for the larger, well established companies, major banks have jumped into the market and are offering prime plus asset based lending to companies that traditionally would be paying 12% to 18% per annum on a similar asset based facility.
Certain asset based lenders can provide better leverage to one group of assets over another, so if you utilize them across all available assets, your weighted average cost of capital may end up being high than if you split asset type by relevant asset based lending source.
If you’re in need of a Mississauga asset base loan, I suggest that you give me a call so we can go through your requirements together and discuss different asset based financing strategies and options available to you.
Click Here To Speak With Business Financing Specialist Brent Finlay
Toronto Asset Based Lenders
“There Are A Wide Variety Of Toronto Asset Based Lenders In The Market Place”
Toronto asset based lenders come in a wide variety of shapes and sizes, each focused on a particular slice of the market. The bases of asset based lending is a clear understanding of the underlying assets being financed and the means to secure and take action to reclaim value in the event of default.
Because there are several different types of assets that can be deployed in a given business, there can be several different asset based lenders providing business financing solutions that can be relevant to your requirements.
The other key aspect of asset based lenders is the risk level they service. Risk levels are assigned by business financial performance and asset type. For instance, there are working capital asset based programs that are provided by major banks as a way to provide greater financial leverage to their large corporate clients that can’t fit into the leverage limits of the banks traditional corporate lending programs. These programs come at prime plus and are typically limited to financing facilities with a minimum working capital requirement of $10,000,000.
When a business does not qualify for big bank working capital asset based financing, the next level of asset based lending that provides similar levels of leverage can see the rates shoot up to between 12% and 18% requiring certain margins and cash flow turnover ratios to make the cost of financing work.
Toronto asset based lenders exist for different specific assets and asset combinations. Each lendng model is based on the lenders ability to monitor higher ratio and/or higher risk lending from a cash flow perspective and to predictably liquidate assets held as security in the event of loan default.
Like with any lending model, the greater the risk and the more unique the lending application, the higher the related interest rate you can expect. Many Toronto asset based lenders will also work within a certain loan size range with larger loan amounts being provided by fewer lenders for each type of asset based requirement.
In situations where a business has considerable amounts of receivables, inventory, equipment, and real estate, there can be several different Toronto asset based lender options to consider, each with its own potential unique pricing and terms of use.
Business Debt Financing Approval Process
“Why Does It Take So Darn Long To Get A Debt Financing Request Approved?”
In the present commercial lending environment, it can be more than a little difficult to get a loan request of almost any sort approved and funded within what most would consider a reasonable amount of time.
Here as some of my observations into some of the current challenges debt lenders are having in the market.
First, the recent recessionary forces have eliminated a significant number of lenders from the market at large or from some of the country markets that multinational lenders service. The result has been more applications being directed at fewer lenders creating an instant back log.
Second, while economic growth would suggest we are climbing out of the recession, the capital markets are still trying to stabilize from all the fall out, causing debt lenders and equity investors on average to be more cautious in their approach to lending or investing new capital.
Third, many business owners and managers will make several applications for the same capital requirement to multiple lenders in order to try and get the best available deal. This also increases the application burden on the system, further contributing to the slowed down response time.
In an attempt to reduce the back log and get focused faster on deals that can actually be completed, more lenders have gone to requiring the borrower to pay a deposit after the initial deal assessment process is complete. For the most part, the deposit is used to cover third party costs incurred for assessing a deal such as appraisals, credit reports, etc. If the deal can’t be approved, the deposit is returned less third party costs incurred. If the deal can be approved and the applicant does not choose to take it, the deposit will likely be lost.
Outside of covering lender and investor costs of assessment, the deposit serves as a commitment to the borrower to continue with the business financing process and risk the deposit if they don’t take a commitment that follows the initial lending proposal provided.
There are pros and cons to this approach. From the lender side, the required deposit at a certain stage of the process gets rid of their back log as only those seriously interested in what the lender has to offer will proceed. On the other side of the coin, borrowers are concerned about the integrity of the deposit in that does it truly relate to third party costs required to complete the commitment process, or is it just an easy way for a lender or investor to grab fees without having any real intention or ability to issue loans for all the deposits received.
The answer to getting the overall system working better is likely some mix of the old and newer ways of doing things. But until there is a significant overall change, expect the time lines for acquiring capital to be considerable.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Direct Lender Definition
“How Do You Define A Direct Lender and Why Is This Important?”
When looking for capital for their business operations or opportunities, business owners and managers will try to determine if who they are working with to source money is a direct or indirect lender.
The basic premise is that its better to work with a direct lender than an intermediary such as some form of broker.
But while this can appear to be logical on the surface, the term direct lender can be very misleading.
The truth of the matter is that all lenders, outside of private mortgage lenders, are utilizing someone else’s money to help fund their deals.
Business financing is about leverage for all those involved and many of the wholesale financing strategies that fuel larger transactions are far beyond the scope of this discussion.
Its not uncommon for any particular debt lender to have several different funding options to consider to fund the deals they are putting out to small and medium sized business owners. But are they lending all their own money? Again, unless they are a private mortgage lender or a certain type of equity investor, not a chance.
This is where people get confused.
The goal many business owners have is to work directly with someone who is lending out all their own money, but virtually no one is doing that.
And there’s a good reason why. If you look at your own expected return on capital for the money you hold, are you prepared to give it to someone else for a three or four percent return that may be secured, but hardly guaranteed?
The answer in most cases is absolutely not.
So why would lending organizations be prepared to do that on a very large scale when they could get a better return doing something else with their money?
The answer is they don’t.
When pressed on this issue by a client, I asked them to name me someone they considered to be a direct lender. After the client provided a name of a well know international lender, I went online and accessed their balance sheet as the company was publicaly traded.
The balance sheet showed total assets of over $500 billion and equity of slightly more than $50 billion, leaving the difference of $450 billion as debt financing, clearly showing that they were lending out someone else’s money, just like most everyone else.
Private mortgage lenders provide financing at higher rates, which reflects their desired cost of capital as the money they’re lending out is their money.
For lower cost sources of capital, the lender is providing a combination of equity and debt, with the debt portion getting above 90% in some cases.
Even the largest of the large may employ several different forms of financing for the deals they do. They may have their own pre-approved lines of credit they can draw against, provided the deal to be funded fits the underwriting requirements of the lending source, they may syndicate deals with other lenders to share the overall risk, they may outsource the deal to a strategic partner who has a funding source more closely aligned with the deal requirements. There are other potential funding methods and practices as well.
The key point is that the lower the cost of financing, the less likely you’re actually going to be working with someone sticking 100% of their own money into the deal.
Click Here To Speak With Business Financing Specialist Brent Finlay
Estimating Business Financing Timelines
“How Long Does It Take To Get A Business Financing Facility in Place?”
Almost every time I work on a business financing assignment, the business owner or business manager is pressed for time to get capital secured and funded.
And almost every single time I get asked the question, how long is it going to take?
If you’ve ever worked on any type of business financing request, you know that this is the ultimate loaded question. Lenders have a process they are going to follow and when the process is complete, that’s when everything will be done. To put an exact time line on that at the beginning is basically a waste of time.
I’ve worked on business financing cases where it took several years to complete the process. This is not to say that the lending or investing sources are slow. This is to say that it took that long to complete the process.
The biggest challenge in estimating time for the overall process comes in not knowing how fast everyone will do their part. The more people that are required to provide information to support a financing decision, the more likely its going to take an above average amount of time.
I’ve written about this subject before, but its one that never gets old and continually needs to be explained to business owners.
Just the other day I had a client press me for a time line for a transaction that had to get done in a few weeks. The initial time prediction was that if there was no wasted time in getting information sent back and forth, the deal should be completed in 2 to 3 weeks.
After wasting 3 days debating why it would take so long, the client agreed to get moving on the process. The financing process was outlined and three weeks later, the client still had not completed the requirements for step one.
This is far from an unusual situation.
The point is simply this.
All you can do is commit to the process and get everything done that is required, when its required, completed as fast as possible. That and a little luck here and there will get your business financing requirements satisfied in above average time.
If you’re focus every day is on making sure that you’re not holding up the process in any way and are communicating effectively with other parties (lawyers, accountants, appraisers, etc.) that may be contributing information or services to the process, then you’re doing everything you can.
If you’re lined up to the wrong type of money, no amount of effort or commitment to any process will yield the result you’re looking for.
And trying to apply brute force to the process or attempt to bully someone into taking action on your behalf isn’t likely going to get you very far either.
When pressed for time, the best thing to do is develop your short term contingency plans to address any delays that may occur in getting business financing in place.
Finesse and forward thinking tend to out preform brute force and out right panic most of the time.
Click Here To Speak With Business Financing Specialist Brent Finlay