Keys To Bridge Loan Financing
“If You Need Money In a Hurray, Bridge Financing Could Very Well Be The Answer”
When a business owner or manager are under the gun trying to get financing in place for some need where there is some sort of official or self imposed time limit in place, one option to consider to get the capital you need is through bridge loan financing.
A bridge loan by definition is a loan for a specific purpose that will be repaid by a certain time or event in the future. The more predictable and verifiable the reliable the repayment plan, the more likely that a bridge loan can be arranged.
The most common use of bridge loan financing is when there is a gap between two ends of a transactional event with respect to time and capital is required to facilitate the transaction. In these cases, the capital is required to start the transaction and the completion of the transaction will pay back the bridge loan.
Regardless of how compelling or verifiable or predictable the exit strategy or repayment strategy for the bridge loan is, there is considerable risk of loss present in most of these situations.
As a result, the cost of financing can be much higher than what you would expect for traditional business financing. In fact, for some deals, the bridge financier may expect that you split the profit margin of the transaction with them as compensation for the money being advanced and the risk being taken.
While the effective financing rates in these scenarios may seem extreme as a result, the alternative may be to not do the deal at all at which point 50% of the potential profit is better than 0%.
A typical bridge financing arrangement that occurs every day is with the buying and selling of residential or commercial real estate. The borrower has purchased a new property and is trying to sell an old property at the same time, creating the need to utilize the equity in the old property to help finance the new property through a short term bridge loan. This is a very low risk transaction in most cases and as a result the relative cost is much lower than other bridge loan transactions.
The key to bridge loan financing though is the exit strategy. The more certain the repayment plan is, the more lenders will be interested in the deal and as a result, the lower the cost of borrowing will be.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
Business Financing Timing
“Acquiring Business Financing Can Be a Very Much Be a Point In Time Exercise”
I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.
So why were they looking for financing?
Their primary and only institutional lender could no longer underwrite the type of business they were in.
In the current economic climate, this is becoming a more and more common occurrence for even well established small businesses.
For this particular client, they were actually able to secure better business financing than the package they had.
But while you might think the debt financing could be easily replaced given the financial strength of the business, this is not always the case. For this particular client, while the end result was positive, there were not many interested lenders at the very point in time they required financing. And with the institutional lender they are working with now, there is no guarantee they would have done this deal 6 months ago, or would considering doing it at all 6 months from now.
The point here is that business financing can be all about timing where the needs of the business need to line up with the needs of a lender.
And even when everything lines up, there is no way to know how long that relationship will continue. As a business owner, you have to always be prepared with plan B in the event that a lender changes their business model or portfolio focus and leaves you as the odd man out, even though you’ve never missed a payment and have complied with all the lender requirements.
So the second takeaway from all of this is that as a small business owner, you always need to be on the look out for a better source of financing and an alternative source of financing. There is no true loyalty in this game, and for the most part it is a game in that both borrower and lender rarely disclose everything to each other in terms of their go forward business plans, leaving a certain amount of uncertainty in play.
Unfortunately, most business owners or managers only focus on business financing when they need money. Because of the “point in time” aspects of business finance, this can be a very dangerous and expensive approach to take.
Even for the most well established and profitable businesses out there, if they still rely on third party financing from lenders or investors, they always need to be asking themselves “what do we do if the lender or investor want their money back right now?”.
By proactively staying on top of the market and your relevant options, you stay ahead of the curve and ready to deal with the unexpected.
Click Here To Speak With Business Financing Specialist Brent Finlay
Buisness Structure For Acquisition Financing
“Try To Say Open To All Your Business Structure Options When Seeking Acquisition Financing”
When a buyer or existing business acquires or buys another existing business, there are basically two ways to go about it. You can purchase the shares of the company if its incorporated or you can purchase the assets of the company.
In either case, you will have to decide who the actual purchaser or buyer will be. For example, will you set up a New Co to purchase the shares or the assets? Will the shares or assets be acquired by your existing company, or by yourself personally?
There can be several different options that can be considered for tax purposes, estate planning, liability protection, and so one.
Unfortunately, one of the structure considerations that often times doesn’t get worked into the decision making process is what is the best structure for acquiring debt or equity financing to provide some or all the necessary capital to complete the transaction.
Lenders and investors are going to have their own take on this subject to allow themselves to better protect their risk and optimize their security position. Which is why its not a good idea to jump too quickly into what the post acquisition business structure will be before gaining a solid understanding that the business financing you will require will be available for both the go forward business opportunity and the manner in which you plan to structure the deal.
Its not uncommon for a good solid acquisition to have trouble getting financing due to the manner in which the go forward ownership is structured on both a stand alone bases and in relationship to the existing business entities and/or personal holdings.
As an example, its a common practice on an asset purchase to complete the transaction through a New Co. But a new company will not have any established credit and without the backing of a sufficient corporate or personal guarantee or additional security pledge, the deal may not get approved and funded.
The working assumption that anything you can come up with respect to business structure and security for an acquisition can get financed for the terms and conditions you’re seeking is flawed.
The relevant lender and investor requirements at a given point in time for a certain type of acquisition scenario should also be factored in before any final papers are drawn up.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay
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
Securing Capital Takes Time You Can’t Image
“Getting Deals Funded and Closed Can Be Way Harder and Take Way Longer Than You Expect”
When working through business financing scenarios where a business needs to secure capital for some reason, there are a few things that tend to be extremely common from one situation to another.
First, the business owner is in a rush or pressed for time to get financing in place. This can be due to a number of reasons, but the most common would be that the process was started too late or the business owner spent too much time trying to secure business financing from the wrong type of lender before realizing they were wasting valuable time.
But even when you find the right lender and provide a good solid package of information, the amount of time it takes to get money advanced to complete your deal can be considerably more than you are anticipating.
Take one of my recent projects. The borrower had an immediate financing requirement that needed to be completed and funded in a matter of days. The nature of the transaction was that it typically would take two to four weeks to complete.
Why would it take so long?
Because of the number of steps that needed to be completed by different people. This is always a function of time you can expect a deal to take.
If everyone involved in the process does everything required when required, the deal could potentially get completed in less than a week.
But the moon and stars don’t typically align like that and the reality is that everyone is working on a number of things at any one time so the probability of each task getting done in the least amount of time seldom works.
From a lenders point of view, they are going to estimate more time than what is possible as the last thing they want to do is stick their neck out on a certain amount of time and then get yelled at when everything doesn’t get completed by that date.
From the borrower’s view point, someone in a hurry cannot possibly see how the outlined steps will take so long to complete.
In the recent project I’m referring, during the first five days of trying to get the deal closed, there was failed wire transfer, an email system that went down, and a main frame printing system that when down.
Each unplanned event added more time to the process and in almost every business financing scenario I’ve ever been involved with, something from the unexpected happens. It can be things like sickness, holidays, long waiting lists, people new in position, the weather, someone having a bad day, and just about anything else that Murphy’s law can offer up.
The key point here is that a business owner has to try and build in as much buffer into the process as possible and even development contingency plans if the unplanned delays are excessive. Failure to factor in more time than what you think should be necessary can cause a deal to blow up in your face, a contract to be terminated, or more costs being incurred.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business Finance Applicatons Have Three Parts
“When Putting Together a Business Finance Application, Make Sure You Including The Following Elements…”
When I was working in a large U.S. multinational, anytime I was drawn on the carpet to report on the business for whatever reason (the good, the bad, and the ugly), the boys and girls in charge of the ivory tower always wanted to know three things:
Where is the business at right now?
How did we get here?
What are you going to do next to either take things to the next level or fix the existing problem?
If there was any fancy graphs or charts that drew their attention away from the above, I was always quickly pulled back into the world of what was important to them, and needed to focus in on answering these questions before any other form of communication was going to take place.
While perhaps not exactly the same with business lenders, you should be taking a similar approach with your business financing application.
The first question, where is the business right now, is answered by an up to date balance sheet and interim income statement. The balance sheet will be supported by an aged accounts payable and accounts receivable, and a fixed asset ledger.
The second question, how did you get here, is answered by three to five years of historical financial statements prepared by an outside accounting firm.
The third question, where are we going, is answered by detailed financial projections including at least 12 months of monthly cash flow projections, two years of overall cash flow projections, two years projection income statements and balance sheets that reconcile to the cash flow projection and the current financial position. The projections will need to include detailed assumptions that explain how every (every) number is created and what its based on.
While this would appear intuitive on the surface to most, there are two key areas where the information is lacking.
First, business finance applications do not connect the different areas together. There can be significant in-congruence between past and present, and between present and future. Its extremely important that the story being told by the financial statements (and the narrative report that should be included to minimize assumptions and off base interpretations) is congruent, well balanced, and flows from one period to the other without being disjointed or inconsistent.
Too often, business owners provide all the information, but don’t reconcile the collective package to make sure the story being told is tight and accurate and seamless from beginning to end.
Second, most business finance applications do a very poor job documenting the assumptions in the projections and providing good logic and support for all the numbers being projected. Past, present, and future are all important elements to every applications … equally important. Unfortunately for many business owners, the glossing over of the projections can result in declines or less than optimal terms.
If you need help answering these questions when seeking business financing, give me a call and we’ll go through your business profile from beginning to end together.
Click Here To Speak To Business Financing Specialist Brent Finlay
Understanding Lending Models
“Different Business Lending Models Create Both Opportunity and Confusion”
Sometimes a particular financing opportunity, especially when there are hard assets involved, can have many different business lending models that apply to it.
Even within a single lender there can be multiple groups that could potentially consider your deal. As an example, a major bank can have a business financing group, a corporate banking group, a subordinate debt group, a leasing division, an asset based lending group, and so on.
While there are some demarcation lines between the different lending groups, there still is some over lap and many times confusion as to who you should be talking to or what you should be considering.
The reason this exists is that lending models tend to be very specific in terms of what they will consider and how deals can be structured. They are also rather inflexible so as to maintain a certain amount of integrity in the lending policies that have been established in the first place. Following the rules is a big part of effectively managing risk and straying outside of the lines is not.
So for each different business lending application, there tends to be a different business models that are going to apply to provide a frame work from which money can be advanced to customers.
The challenge to the business owner is that each business is somewhat unique to any other business in terms of size, age, credit, asset composition, management, etc.
So many times, the financial profile of a given business can attract interest from different lending models. The hard part is trying to figure out which ones apply and which ones would be the better fit for the business at a given point in time.
Remember that business lending models are also somewhat fluid in that they can be discontinued, or make changes to their lending policies and practices. For instance, if a business lender has made a large number of loans and placed a significant amount of dollars into certain assets of a certain industry or sector, the lender may stop issuing capital at some point in order to keep its overall portfolio in balance. So a lending program that was available last week is no longer available through the same lender this week for a similar application.
The same can be said for loss concentrations in a particular sector like we’ve recently seen in the automotive industry where business lending all but dried up for any one requiring capital from that business sector.
The best way to approach the market at any given time is to work with a business financing specialist who knows the lay of the land and can quickly apply your requirements to the market at a given point of time so that you’re always focusing on the most relevant options available and not wasting time on shifting sands.
Click Here to Speak To Business Financing Specialist Brent Finlay
Utilizing Asset Based Loans
“Asset Based Loans Can Be Applied To a Broad Spectrum of Business Financing Requirements”
While the category of asset based loans and asset based lending is continually growing in terms of application and money supply, the overall financing category remains confusing and misunderstood by many business owners.
The general idea is that an asset based lender is more focused on the market value of the underlying security being offered and its liquidation pathway in the event of loan default.
While this is a strong underlying theme, this financing category is goes much farther a field in almost every direction.
There are asset based lenders that only focus on one type of asset such as inventory lenders, purchase order financiers, accounts receivable factors, equipment lenders or leasing companies, real estate lenders, and so on.
By focusing on a particular classification of asset, the lender can more accurately assess the market, set up a predictable and efficient liquidation pathway, and attract investor or lender financing to fund their asset based loan model.
But there are also asset based lenders that work across categories such as working capital models that finance against accounts receivable, inventory, and potentially equipment. Or term lenders that focus more on equipment and real estate.
And there are also different slices to the market in terms of bank and institutional lenders versus private lending sources.
The more the lending decision is based on the value of the asset alone, the higher the rate is likely going to be. Because banks also participate in asset based lending, greater scrutiny is applied to lower cost forms of asset based loans.
While there is large variation in business loan size among lenders, there are once again slices of the market that service different levels of financing. In general, asset based loans are for commercial financing requirements above $500,000 in order to justify the work that goes into assessing them and the ongoing monitoring that may be required on a monthly basis.
The more an asset based facility is based on working capital cash flow, the more monitoring that will be required and the more control the lender will have with respect to the cash inflows and out flows.
Because there are so many types of asset based lenders that tend to overlap with respect to the deals they will look at, there can be several different types of options and related pricing to consider.
Unless the asset based financing is bank or institutionally based, its likely going to be short term in nature (one to two years) and is being used as a bridge loan to allow the borrower the capital and time to get into a better financing position which will allow refinancing into a lower cost institutional program.
And the right choice is not always the lowest cost. Some programs have very restrictive operating requirements that may not provide you with the flexibility you need to operate properly. Others may require high repayment penalties if you have the opportunity to refinance them before the term is up.
Regardless of the application, you will likely have a list of options to consider that can be hard to locate and harder to secure.
Because asset based loans will typically be one step in a multiple step financing process, you would be well advised to work with a business financing specialist who can help you map out a financing strategy that will work the best with the most relevant asset based loan sources available to you.
Click Here To Speak To Business Financing Specialist Brent Finlay
Asset Based Lending Grows In Importance
“Asset Based Lending Has Become a Necessity For Many Small And Medium Sized Businesses”
The recent recession has elevated the importance of the asset based lending market, creating both higher supply and demand in the process.
Asset based lending has a number of different slices, but essentially we’re talking about lenders that have a primary focus on the asset resale or liquidation value for determining loan amounts and security ratios.
Surprisingly to some, major banks also house asset based lending divisions to focus on providing higher leverage to companies with well established cash flows. The bank version of asset based loans are also priced off of the prime rate, making them very rate attractive compared to more conventional asset based lenders.
The growth of this business financing segment has been built on the ultra conservative approach being taken by banks and other institutional lenders. A large chunk of debt financing has traditionally come from small business and corporate banking where the strength and steady advancement of the economy were factored into the lending equation.
But when things turn bad, banks tend to have a harder time realizing on security and getting full loan repayment from asset liquidation. Banks are also not set up to monitor business operations as closely as asset based lenders tend to monitor transactions versus collecting periodic financial reporting.
The extra steps taken by asset based lenders to manage lending risk creates additional cost which is another reason why traditional asset based lending is more expensive.
But even with a higher cost of financing across the board for most asset based loans, business owners are lining up to pay more for their debt financing requirements. And the reason is quite simple. In many cases an asset based loan is all that’s available at the present time.
From a lender point of view, there are more asset based sources entering the market, especially in terms of private mortgage lenders. As the affluent baby boomers grow older, asset based lending provides an alternative to the stock market with solid potential returns and underlying security to protect the investment.
Because corporate or bank financing has contracted for the time being, asset based lenders are also getting a higher quality deal flow than they would normally expect to see, creating competition among lenders for the better deals.
This has resulted in better pricing for the better deals with asset based rates getting close to bank rates in some cases.
Asset based loans have also become a transition step to the future as well. Any business that has suffered through the recent down turn, is trying to expand for growth, or going through ownership transition is likely going to have to look to an asset based loan in the short term. Once earnings stability can be established, they will look to move to lower cost traditional options.
But in the mean time, even at a higher cost, asset based loans are providing essential capital for business operations.
Click Here To Speak To Business Financing Specialist Brent Finlay
Market Opportunities For Business Lenders
“The Recent Turmoil In The Capital Markets Has Created Opportunities for Business Lenders”
Not only have we been witness to a large number of global bank failures in the last two years, but there have also been a number of high profile lenders that have downsized their operations in certain areas and completely pulled out of some jurisdictions all together.
The resulting shifts in the business financing sands have created both holes in the market and opportunities. The business lenders that remain now are presented with additional opportunities to expand their portfolios, provided they can adapt their services and risk management towards a new opportunity.
For the business owner or business manager, this has created new commercial financing options in the market to replace what has recently disappeared. Although the level of overall financing competition in all slices of the market is still down overall, the expansion by existing players is a welcome improvement.
At the same time, don’t expect these new programs to hit the market with any great force. While the lenders involved are going to be serious about exploring the identified opportunities, they are most likely to start by wading into the shallow end of the pool as they take their time getting used to water of a new market or niche.
So while it may be very much worth your while to explore these new options that could now be available in your back yard, you’re going to have to have some patience as market expansion in the world of business financing is more of turtle versus hare approach.
But as time goes by, positive experience will also lead to program expansion and more aggressive lending practices. And as the economy continues to turn around, more changes can be expected in terms of the lender mix and offerings in any market.
This will also have a dramatic impact on supply, rates and terms in certain locales where the dominant lender in a category has completely disappeared and competitors decide on their interest in filling the void that remains.
In a time when lending markets continue to trend through uncertainty its good to see some of the participants prepared to venture out into new areas where opportunity has become available.
Hopefully this will soon become more of the norm versus the exception.
Click Here To Speak To Business Financing Specialist Brent Finlay