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
How To Secure Business Loans
“Business Loans For Small and Medium Sized Business Are Secured By Preparation and Presentation”
There is an abundance of information on the web telling you how to game the system to secure a business loan or business credit, or how if you buy this book or pay this fee in advance, even the most clueless business person, or wannabe business owner, with the worst credit can secure business financing in no time flat.
Come on!
Yes, there are certainly ways to game the system. And you can get away with some sneaky credit application strategies that can get you lines of credit and term loans.
But like any loan, if you don’t have a solid plan to pay it back, you’re going to go into default on your repayment obligations and then what?
The path to financing a new or existing business starts with preparation. All businesses carry risk, and the people who lend out money want it back plus a return. So the inherent risks associated with any venture need to be understood and managed or why would anyone in their right mind issue a business loan?
For those that do issue questionable business loans, they don’t tend to do it for very long as risk catches up to the borrowers and the lenders portfolio turns to dust supporting the saying that a fool and his money are soon parted.
Preparation also helps the borrower better understand what he or she is getting into and perhaps may end up talking themselves out of getting a loan once they stand at a place where a truly informed decision is being made.
Unfortunately for many, preparation takes work and its far easier to plow ahead with an idea versus a well thought out strategy and tactical execution plan, find any source of money that can be had, and give it a go.
Good luck with that approach.
The other side of preparation is presentation. A lender or investor not only want to see that you thoroughly understand your own business or business opportunity, they also want you to convey the information in a form that they understand and can easily relate to.
Too often presentations provide excessive opportunities for lenders or investors to make assumptions or draw conclusions that may not be accurate or valid. This is a great way for an otherwise “finance-able” business loan request to get turned down.
Business loans aren’t easy to secure most of the time. There is art and science involved in the process of business financing procurement. Short cuts tend to lead to disaster more often than to success.
If you’re planning to be in business for the long haul, then its important to learn about, and constantly become better at, business loan preparation and presentation.
Click Here To Speak To Business Financing Specialist Brent Finlay
Why Business Financing Strategy Is Important
“A Proper Business Financing Strategy Will Cover A Period of Time Versus a Point in Time”
Assuming that you’re business requires a third party source of financing to provide the capital necessary to operate and drive your strategic plan, then a business financing strategy is definitely something that should be developed and kept up to date.
Most businesses operate on a point in time basis where they look for financing when they need it but don’t have a longer term picture of how the financing they accept today will impact their needs tomorrow.
A business financing strategy is more focused on making sure that any incremental commercial financing you secure will be congruent with what you already have in place and with what you expect to require in the near future.
Most lender models offer no help with this exercise either as lenders tend to work on a very narrow and highly static point of view. The ideal client for any debt lender is one that is very profitable, requires a relatively consistent level of capital to operate, and does not got any wild growth plans or ambitions that could upset the current stability of the business operations.
This is in direct conflict with businesses that are continually trying to grow and take on new opportunities or trying new approaches to gain market share. And when financing decisions are made in this fashion, the business owner or manager is constantly trying to fit round pegs into square holes.
Here’s an example.
A business owner wants to exit the business by selling his interest to a co owner for several million dollars. The business has a strong balance sheet and solid profitability so bank or institutional corporate financing should be able to be secured to accomplish the process.
But the owner wanting to exit has put a time limit on the transaction in terms of the price he’s prepared to sell his interest for. Because no senior lender relationship is in place, the remaining business owner has to start from scratch to secure financing.
Because the time available is not sufficient to get through a bank or institutional application and assessment process, a bridge financing solution will need to be entered into to meet the deadline.
Nothing wrong with bridge financing, other than its very expensive and may not be the best operational fit for the business in the interim with respect to how the financing is structured and monitored.
At the same time bridge financing is secured, the now sole owner will need to try and secure a longer term senior lender facility to pay out the bridge financier in order to save 50- 75% or higher, of the financing costs he’s paying.
Once the senior facility is in place, if the business has any plans for growth that require more capital in the near future, there is no guarantee that the new senior lender will be able to provide incremental funds as new opportunities present themselves, creating a new financing challenge.
An up to date business financing strategy could have not only avoided the whole bridge financing situation, but could have also made sure that future financing facilities were going to be congruent with future business plans.
While some of the leg work and modeling for a business strategy can be outsourced, it is the responsibility of the business owner or manager that a working version is in place and that it properly factors in 1) the present balance sheet; 2) potential future business financing requirements, 3) contingency planning such as management buyouts, shot gun clauses, etc.
A lack of a business financing strategy can destroy significant value in terms of 1) higher financing rates, 2) lost opportunities, 3) opportunity cost of time and the real cost of delays.
Click Here To Speak To Business Financing Specialist Brent Finlay
Acquistion Financing Madness
“Vendors Distorted Sense of Business Acquisition Financing Reality Kills Deals”
Ok, so perhaps a descent into madness is a bit harsh, but when I see some of the things vendors do to sabotage their own deals, it truly makes me cringe.
Here’s an example.
A buyer calls me up this week and he’s trying to get a business purchase finalized. The company to be purchased is service based with a high percentage of goodwill in the purchase price. Typical of these types of deals, the buyer is putting in money, a lender is prepared to put in money, and the vendor NEEDS to put in money.
All parties are in agreement with the deal, except for one thing. The lender does not want the seller to get paid out too quickly and drain the available cash out of the company and is asking for a delay in vendor principal and interest payments for 1 year.
This is hardly an unreasonable request as no lender (or buyer) wants to be left with a cash strapped company within a year of the loan being issued. Because there is so much goodwill in the deal, there is very little real tangible security, so if there are any cash flow hiccups, both the buyer and lender are going to be … in the soup.
But in this particular cash, the vendor is prepared to kill the deal over this, so the buyer is calling me up trying to locate another source of acquisition financing.
News flash to vendors of the world
This is a good deal.
In this case, the vendor would get 70% of the purchase price on closing, and start getting repaid on the remaining 30% in 12 months.
While this is also a typical deal structure for this type of deal, in many cases the vendor will not consent to any amount of vendor financing, especially anything that will place them in a security position behind the primary lender entering the picture.
Usually a vendor will have to go through two or three potential buyers before they realize that 1) likely no one is going to purchase their business for cash (everyone wants to leverage their investment) and 2) no lender wants to take the majority of risk, especially for a thinly secured deal.
Once reality starts to sink in several months later, after a number of false starts, the vendor starts becoming a partner to the deal and considers taking on some financing risk.
In the mean time, money has been wasted on accountants, lawyers, and other advisory costs, not to mention lost opportunity for potentially both buyers and the seller.
So my advise to the caller was to go talk to the vendor and work it out. Any new lender I could bring to the table would offer a similar deal. And if they were to realize the current offer was on the table, they wouldn’t consider the financing request at all based on the strength of the loan commitment already offered.
Next to start up financing, acquisition financing is the hardest to arrange. So when you’ve got this type of deal in hand, grab it hard and don’t let go.
Why?
Because the likelihood of a better deal being out there, right at the moment you need it, is slim. And if you take too long deciding, the lender may pull the deal off the table leaving you with nothing, leaving you to start the process all over again with the next buyer.
Madness
Click Here To Speak To Business Financing Specialist Brent Finlay
Business Financing Toronto Ontario
“Do You Have a Toronto Based Business That Requires Business Financing?”
One thing about operating a business and having a business financing requirement in Toronto, there are no shortage of commercial financing options available to you.
The Big smoke is the center of the Canadian financing universe with several lenders present in virtually every conceivable business financing classification.
Because of the population concentration within 50 miles of down town Toronto, many sources of business loans, leases, and equity investment don’t even consider deals immediately outside of the Greater Toronto Area and prefer to only work on projects in their own back yard.
As a result, the physical location of the business, especially for anything that is asset intensive, will have significantly more financing options within the GTA area than even a short distance beyond its boundaries.
Because many sources of biz financing come from what we refer to as boutique lenders (niche focused sources of financing with typically one physical location and limited staff), there is a need for the business to be close enough for the lender to do a sight visit in the application stage of the process as well as to be able to easily come out to the location to monitor the account or work through issues that may arise.
Of course all the national lenders are also going to be present in the Toronto area. But the presence of this higher concentration of niche lenders compared to other areas of the country can provide many more short term and long term financing options to a business that would not otherwise be available if they were located even a 100 miles away from the GTA.
These expanded lender options also extend to private mortgage lenders that have a much higher concentration in Toronto than anywhere else in the country. Because of the woes of the stock market over the last decade, there are more and more people becoming private mortgage lenders to gain a more predictable and secure return, especially those in the baby boomer category that are at or near retirement and have a desire to reduce the overall risk level of their investment portfolio.
As a result of all the new entrants into the market, private mortgage financing has gotten more and more competitive, especially for small and medium sized commercial properties where private mortgage lenders can come close to rivaling bank interest rates in some cases.
All of this provides more choices for Toronto based businesses which can allow business owners and managers to consider different business financing strategies to meet their capital needs.
Click Here To Speak With Business Financing Specialist Brent Finlay
When Should You Start Planning Your Business Exit Strategy?
The essence of any for profit business enterprise is to generate a positive net cash flow over time from business operations for the benefit of the owner or owners.
If the above would be considered the primary goal, then the secondary goal would be to increase the businesses ability to produce more profits and cash flow over time. The more consistently the business can produce positive returns, the more valuable the underlying business is to others.
Ultimately, the strength of the businesses ability to create profits, value, and cash flow is the essence of any profitable and successful business exit strategy.
The most successful business exits will occur when the market is most interested in what the business has to offer and the business itself has demonstrated a strong business model that has taken advantage of the opportunity in the market.
So while the best business exit strategies have a lot to do with a point in time or the right timing when market opportunity and business performance come together, most business exit strategies are more focused on how to sell the business or liquidate the business assets at the retirement age of the business owners.
The odds that this selected point of exit is going to create optional or even above average results is slim.
There are two main reasons for this.
I’ve already talked about the first reason and that being the timing of peak market interest will exist when it exists. While it may be possible in some situations to create the demand for the business during the owner preferred time period, its more likely that larger market forces in play like the state of competition and customer demand at any point in time will significantly determine the potential success of a business sale.
The second reason is that at the point of business sale, the business is not properly set up for sale. There are a number of things that go into getting a business into a sale-able position. Financial statements need to show solid business returns and hopefully growth over the last 3 to 5 year period. The financial statements need to be prepared under a higher level of review than most businesses would typically undertake. There needs to be systems in place that will allow others to believe they can take over the business without a large risk of business transition failure. Core staff and management will not only need to be trained and committed to the ongoing business, but also be prepared to continue on in the event of business sale. Basically, the business needs to clearly demonstrate its value to interested parties through clear and acceptable representation of all critical aspects of the business including marketing, operation, and financial structure.
So when should you start planning your business exit strategy?
If you haven’t already started, right now is a good time, especially if you have any interest in having a successful and profitable business exit.
For an optimal business sale, the business needs to always be in a sales position to take advantage of the opportunities as they arise.
For those businesses where the business owner is committed to exit at a certain time period in the future, its perhaps even more important to create and maintain a sell-able position versus scrambling to make the business look more appealing near the end of the owner’s working life. Once a state of business decay creeps into a company, it can take a tremendous amount of business capital and effort to return the operations to an optimal level of performance and repair.
Click Here To Speak With Business Financing Specialist Brent Finlay
Action is Based On Urgency
It seems that in about 95% of the business financing cases I work on with business owners and managers, there is no action to secure a business finance solution without a certain amount of urgency being present.
On one hand, we can say that’s just human nature, that people in general require a sense of urgency or immediate need to take action.
But in the world of business financing, this is becoming more and more of a problem as lenders continue to take a more conservative approach in 2010 out the backside of the current recession.
The result is that debt financing is not getting secured in time to close deals, shore up cash flow, finance growth, and so on. None of this is good for business owners or the economy in general.
Business owners and business managers have been conditioned to believe that getting a business loan of any size or structure can be done in matter of days or weeks. So the process for even applying for financing has typically been delayed until the 11th hour.
The need for urgency is pretty much always required in that once someone makes the decision to pursue some amount of business capital for their company, there is a need to focus in on the process and stay dialed in until its completed. Making a half hearted effort towards putting an information package together, not studying the financial metrics to demonstrate your business knowledge, and poor follow up and follow through on all requests for additional information can dramatically reduce the chances of success.
So while urgency and focus is a good thing, the timing of the action needs to be adjusted to achieve better results more often.
If we go back to the analogy of a clock and time left until money is required, business owners and managers have to reset their timing mechanism to not take action at the 11th hour, but at the 9th or 10th hour instead.
Perhaps its psychologically difficult for many to develop a sense of urgency earlier on in the process of seeking financing, but this behavioral correction needs to take place in order to avoid greater financial distress when an appropriate source of funding cannot be located and secured in the time required.
Those that start earlier, with a sense of urgency, will get rewarded more times than not.
Click Here To Speak With Business Financing Specialist Brent Finlay
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
Managing Through a Cash Flow Crisis
It’s not unusual for a small or medium sized business to go through a cash flow crisis at some time or another over their life of operation. In fact, for many businesses, survival of the bad times when cash is thin can even be considered a right of passage towards greater loan term success.
Why?
Because going through a very tough period when its hard to make ends meet can be mentally and emotionally draining, leaving a permanent imprint in your brain that 1) you never want to go through that again, 2) you have a much better understanding of how to manage cash flow due to the intensive focus that was required, and 3) you will not likely take cash flow management for granted any time soon.
The biggest challenge of dealing with a shortage of cash where there is less money coming in versus the demands for payment is being realistic with yourself as to what you’re working towards.
A cash flow crisis has to become an internal bridge financing scenario or you’re just putting off the enviable which is business failure.
If you aren’t trying to survive to get to a certain point where events will occur that will correct the problem, you may very well just be destroying your equity and throwing good money after bad.
So no matter how well you count the beans or negotiate with creditors, you can’t play musical chairs for a prolonged period of time with the people you owe money to. There has to be a defined turnaround point that you’re working towards otherwise how do you make cash flow trade offs or negotiate extended repayment terms.
Lack of a turnaround point somewhere on the near horizon will destroy your credit and credibility, both which are very hard to get back.
The key to managing through a cash flow is project far enough a head to a point where inflows are going to be able to meet or exceed outflows on an ongoing basis and work back from that point to figure out how you’re going to manage through with the funds available and any incremental funds you may be able to acquire.
By doing this, you now have a plan you can sell to your creditors. If you manage the heck out of weekly cash flow during the crisis, there is a good chance you can get to the otherside.
Just make sure you know where the other side versus staying alive long enough while hoping for something positive to happen.
Click Here To Speak With Business Financing Specialist Brent Finlay
The Ongoing Management Of Financial Leverage
While it is absolutely true that any type of long term, scalable business venture will utilize financial leverage to provide the necessary capital to operate as well as reduce the weight average cost of capital of the owners, leverage comes with costs and challenges that cannot always be directly quantified.
To depart into finance 101 for a second, when the after tax cost of debt is lower than the opportunity cost of equity, it only makes sense to utilize debt to bring down the overall or weighted cost of capital necessary to run a business.
Even if the business is debt free, operating strictly on its own cash reserves, the argument can be made that debt financing would allow the owner or owners to withdraw capital in order to investment in additional profit centers which in turn will make more money.
In theory it all sounds good and in practice, debt financing, especially at today’s rates, make a great deal of sense to take advantage of.
In practice, while leverage is almost always going to be necessary for some point in time, the ongoing management of third party debt or investment should not be underestimated either.
Put another way, any time someone else gives you money for a fee or return, they are someday going to want the money back. And while financing commitments and agreements may seem to place a certain amount of stability as to when money has to be repaid or refinanced, things can also change in a hurry, leaving the business scrambling for alternative sources of capital.
In the current recession, this sort of stuff happens everyday and its one of the more common calls I get from potential clients.
While each story is unique, the basic gist is that everything was rolling merrily along with the business when all of a sudden, for no reason, out of the blue, a source of third party business financing called their loans, cut back on credit lines, increased their rates, etc.
Most people believe this type of problem only happens to businesses that are scrambling for survival and/or are offside with their loan covenants.
Not true.
When the economy is on a nice growth trend, the unexpected is less likely to happen, but still can happen with no advanced warning. In more turbulent times, all bets are off with respect to financing stability for anyone leveraging their balance sheet.
So if leverage is going to be necessary, then management of same is also going to be required.
And prudent management would include things like 1) always keeping your commercial financing profile up to date and in order, 2) periodically assessing your alternatives in the market, 3) developing an emergency refinancing strategy that can be implemented quickly.
An alternative approach most commonly utilized is to do nothing and deal with things as they happen. And during the past few decades, this approach has worked pretty well for most businesses. When things do go a rye there can be some short term scrambling to develop an alternative course of action, but the outcome is rarely ever fatal.
It will be interesting to see how the passive approach works going forward. Capital markets are upside down globally. Each major financial incident sends shock waves through the market, potentially delivering financial leverage disarray to your door.
Ongoing management of leverage does take effort and consumes resources. In today’s capital markets its also becoming more of a necessary risk management activity that every business needs to consider.
Click Here To Speak With Business Financing Specialist Brent Finlay