Debt Financing Has Become a Slow Walk

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

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

What does this mean for business owners?

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

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

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

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

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

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

Click Here To Speak With Business Financing Specialist Brent Finlay

Cash Flow Management Best Practices

Regardless of the type of business or business size, cash flow is going to be the life blood of the business.  So it stands to reason that cash flow management practices are going to also be important with respect to optimizing present and future business profits.

Its also safe to say that most businesses have room for improvement when it comes to managing cash flow as it tends to be looked at as a secondary activity to running the day to day business in many cases.

For a business that is highly profitable, cash flow improvements are focused on the money left on the table that could be used to increase profits.  For struggling businesses, better cash flow management can been the difference between survival and business financial failure.  And for the more middle of the road business scenario, having timely access to cash can have a profound impact on a company’s ability to take advantage of new opportunities when they are presented.

There are three basic elements to the cash flow management process.

First, there is the actual forecasting and tracking of all cash inflows and outflows that are expected or known to the business.

Second, there is having in place any debt or equity capital in place that is required to allow the business to operate in a solvent state.

Third, the profits generated by the business which result in an increase in cash require a strategy to optimize the return on this highly liquid asset.

Of the three elements, forecasting and tracking tends to be the one that requires the most attention and improvement.

Here are some best practices to consider for any going concern business.

• When developing a forecast, the time period needs to be relevant to all the various payment requirements the business has.  Because expenditures can be staggered all through the month, forecasting should be done on a weekly basis, not a monthly basis.  In some extreme cases where there is a high volume of daily transactions, it may need to be projected out by day of the week.
• The tighter the cash flow, the more it becomes necessary to  include everything in a cash flow forecast above what value you consider to be material.  For instance, materiality may be set at $500.
• Cash flow should be projected out at least 6 months and then maintained at that point over time.  For greater accuracy, cash forecasting can be done over a longer period of time by month, say at least one year, and then broken down into weekly increments for the next two months to provider a longer term view of expected future events.
• The ending weekly projected net cash flow balance can never be negative.  The whole point of the exercise is to develop a cash flow plan where inflows plus the opening balance cover outflows.
• The tighter the cash flow, the more attention it will require.  Regardless of the stress on cash in a business, cash flow projections should be updated at least once a week.
• Conservatism should be utilized to show outflows taking place when required, inflows being delayed, and a cash flow buffer or reserve in place for unplanned activities requiring cash or cash forecasting errors.
• The master cash flow should be prepared and monitored by one person to maintain its integrity and accuracy.  This person must be involved in decisions related to cash so that all trade offs can be properly considered by the decision maker.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

The Best Business Financing Deal May Very Well Be The One That’s Available

When anyone looks for financing of any type, they are intuitively looking for the best deal with the best rates, the best terms, the best fit for what their doing.

And many business owners will start out with their own set of criteria of what they are looking for in terms of amount of money and what the related terms and conditions need to be.

The challenge is then how fast their perception of what’s available to them can be lined up to the reality of the capital markets at any given point in time.

Let me explain.

At any given time, a business may be eligible for certain types of financing rates and terms, but what lending source can provide it?

When the overall market is operating during a period of sustained economic growth, more lenders will be providing similar terms on similar deals most of the time.

When the market is operating during a period of uncertainty like the current recession, the same financing opportunities can still exist for a given business, but its likely that there are fewer lenders that will provide the best potential deal at any given point in time.

The reason is that economic uncertainty increases risk and losses for debt lenders just like any other business.  And to protect themselves, some debt providers will leave the market all together for certain types of deals for a period of time, some will cut back, some will expand their criteria for approval, and so on.

The result of all this is that the ultimate best commercial financing deal can be very hard to find in times of greater economic uncertainty.

And when most financing requirements have some sort of time line that needs to be met, the best deal can very well be the one that can be approved and arranged in the time required.

This doesn’t mean what you can get a hold of is the best potential deal in all respects.  It just means that its a source of money you can make work in the time you have.

Searching for a better deal is always an option, but there are two things to consider with looking elsewhere.  First, you may run out of time and either miss out on the opportunity you’re looking at, or incur additional costs from the delay.  Second, if you are unsuccessful finding something better, there is no guarantee the first deal is still going to be available to you later, especially in strained economic times where lenders are known to change their minds or lending direction quickly.

Its a bit like the old “bird in the hand is worth two in the bush” saying.  Sometimes a deal that’s close enough to your requirements needs to be good enough, at least for the short term until more predictable options are available.

Click Here To Speak With Business Financing Specialist Brent Finlay

Business Financing Application Faux Pas

If your business is technically not eligible for a certain type of financing, no amount of detail provided in your application is likely going to help swing the lender in your favor.

There is no question that a well prepared application package that is well organized, informative, and visually appealing can help you impress a lender and for marginal deals that are just on the bubble, perhaps this can put you over the top.

But the bigger concern with business applications is to not talk yourself out of biz financing that you would be otherwise eligible for, but still get declined due to poor, inconsistent, inaccurate, misleading, or even false presentations.

The application package you submit should be designed to present the specifics of the business as accurately and clearly as possible.  And while this is the intention most business managers and owners, they cross themselves up by not making sure that all the information provide is consistent and relevant to the case for business financing they are trying to build.

Here are some examples of what I call business financing application Faux Pas.

• Lenders will be interested in historical and future financial statements for the business.  Its not uncommon for the lender requirements to state the same information more than once or provide it in different forms.  Its also not uncommon for borrowers to provide different numbers or answers to the same question or requirement, leaving the lender unsure of what the information is trying to tell them.

Key takeaway:   Reconcile your numbers.  Go through your draft submission and make sure there are no inconsistencies from one set of statements or forms to another and that the information is consistently described and presented accurately.

• When asked to provide business plans, applicants tend to default to some template for writing or outsource the whole requirement all together.  While most business plans contain a wealth of information, they tend to fall down in one key area … market analysis  and the related business forecasting that works off of the market assumptions.   The typical market description falls along the lines of “the market is really big and we are only after a small percent, so it shouldn’t be hard to get”.   Remember that there are only three ways to get more sales:  1) market growth, 2) steal share from competitors, 3) combination of the first two.  The more specific as to where your future business is going to come from and how you’re going to get it is one of the weakest areas of most business applications.

Key takeaway.   Make sure you answer the following questions: what is your plan to market your business and what is it based on?  Customer or prospect letters of intent, conditional purchase orders, and market research clearly stating what certain segments of your market want make your projections and assumptions more believable as well.    And all income and expense assumptions should be supported by unique and clear logic that can be substantiated if required.

Many business owners feel like spending too much time on a business application is a waste of time, and that can be true if the business case is easily supported.  On the flip side, a poorly prepared application package or one that is thin on pertinent information is not likely to get you anywhere, even if the actual business can support the debt being requested.

A business financing application is also a reflection of how you attend to business and the level of detail you invest in managing the business and managing risk.

For a new financing source, its also the one chance to make a first impression that could be lasting.

Click Here To Speak With Business Financing Specialist Brent Finlay

Asset Based Lending In Vogue

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

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

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

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

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

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

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

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

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

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

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

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

Click Here To Speak Directly With Business Finance Specialist Brent Finlay

Business Finance Contingency Planning

We are now in a time when there are no real predictable rules with respect to business financing and capital procurement, creating a greater need for business finance contingency planning.

There are two basic types of contingency planning business owners and managers need to be consider these days.

The first has to do with existing loans and debts on the balance sheet.  Its not uncommon these days for lenders to cut back the limits on lines of credit and trade suppliers to reduce credit lines.  So even if the economy in general is not providing a negative impact on the profitability of your business, the business cash flow management process can be turned upside down by things completely out of control of the business manager or owner.

Demand loans for equipment can also be called at any time without a formal reason or negative repayment action on the part of the business.  This provides a stronger case for term loan products that do not provide the lender with such broad and subjective repayment options.

And in cases where a business has become late on payments or offside with debt facility covenants, it can’t be assumed that the lender is going to work with the owner or manager even if the cash flows are minor and expected to be rectified in the short term.

For existing debt or credit reliance, the business needs to develop contingency plans that will identify alternative sources of credit that can be secured and the related cost.  This has to be continually explored on a regular basis as alternative financing options will change as time goes by as well.  And the process can’t start when you have a financing problem as it can take more time than you may have before the business is negatively impacted.

For new business financing, the contingency plan that I would recommend is to start the process sooner even to the point when any new strategic direction is being contemplated.  The typical planning approach is to do what’s best for the business and then look for the money that’s required to administer the plan when required.  But the probability of finding and locating the desired capital has gone down on average, so it makes a great deal more sense to scope out the capital markets first and then adjust the strategic plan accordingly if required.  This is far more strategic than just assuming funding will appear when required.

Business finance contingency planning needs to take on a greater importance with all businesses that are serious about their ability to survive the current recession and profit into the future.

Click Here To Speak To Business Finance Specialist Brent Finlay

Have You Made Adjustments To Your Business Financing Positioning?

With all the changes that have taken place in the capital markets over the last 18 months, there is now a need to change the way that requests for capital are positioned with lenders and investors.

In the recent past, applications were primarily based on historical financial statements and a decent attempt at cash flow projections to support the request for additional or new business capital coming into the business.

But things have changed whereby there is a much greater demand by lenders and investors for the business owner and manager to put forth commercial financing requests that are more thoroughly supported by source documentation and spend more time on risk management than forward thinking marketing strategies.

From a lender point of view, we have moved into a commercial lending era of loan security, lender mitigation, and business risk management.  While there still is money available in the market for businesses to acquire, there is a great deal more work involved in convincing someone that you’ve thought through all the major risks that could impact the business going forward and have a plan to mitigate the risks either in a proactive or reactive sense.

In the past, a lot of the details which have always been important to a business financing deal were glossed over by lenders or investors due to the strength of the economy and the unlikelihood of many types of risk to be of an issue or concern to many business owners.  This saved on the due diligence process and was supported by decades of portfolio analysis that identified what areas of risk a lender or investor needed to focus on the most.

With the impact of the current deep running recession, most of that logic is thrown out the window as its a little more of an every man for himself type of world where the business owner now has to actually think about all the things that could go wrong in advance of asking for money.

In my opinion, it the financing world had taken more of this type of security and risk first approach years ago, the current recession would not have run so deep.  But in better economic times, everyone wants to get in on the lucrative capital financing markets so lenders develop more aggressive portfolios to get their share of the growing pie.

But things are different now.  Lenders and investors have made the necessary adjustments, which are akin to their survival as viable business organizations.

Unfortunately, for the most part, business owners have not adjusted the way they manage their business from a financial risk point of view and as a result their business financing positioning when asking for new capital can be way off the mark.

Its really a return to good solid business fundamentals that we are seeing in the market.  Over the long run, this should be a good thing.  In the short run, it looks more like pain and confusion to those trying to locate and secure business capital.

Click Here To Speak With Business Finance Specialist Brent Finlay

Bad Business Financing Assumptions To Avoid

Bad assumptions are a common reason for many of the problems small and medium sized business owners have  locating and securing business financing when they need it.

Here are some of the more typical bad assumptions that get made on a regular basis and either inhibit capital from being acquired or cause a business to face serious short term repayment demands from lenders and creditors.

• Using government remittances to cover off cash flow deficiencies is an acceptable practice that the related government agencies will understand and work with.

• New business loans can be used to pay off arrears related to government accounts.

• Personal credit of business owners or major shareholders of small business corporations does not have a large part to play in the making of business financing .

• The process for acquiring business financing is relatively straight forward and predictable.

• Trade credit can easily be acquired for companies that have been in business for several years even if business credit still hasn’t been established or if the business has overdue trade payables on its books.

• Your business bank will be able to provide you’re financing requirements, even if you’ve just been through a rough period where the business has generated financial losses.

• Business financing decisions can be be based primarily on the long term potential business opportunities in the future versus historical result

• The industry and geographic location where the business is located does not have any bearing on the ability to secure commercial capital.

• Prime plus interest rates are available to all businesses regardless of the level of potential risk to the lender.

• Once business financing is provided, as long as the business owner meets all the requirements of the financing facility, there is no risk that the lender will call the loans or restructure future repayment to the detriment of the business.

• If a lender does not want to continue providing your business with capital that there will be another similar lender prepared to provide refinancing quickly and with similar terms.

• Its not typically a problem to leave a financing requirement to the last minute or near the time when funds will be required as there are lots of sources of financing available.

• Shopping around a commercial financing request is the same as shopping around for the best residential mortgage interest rate.

• Once a commitment for financing has been provided, the closing process will be quick and there is very little risk that financing won’t be provided.

• Lenders will typically be understanding if you can’t make all your payments on time.

• The economy is currently improving and coming out of the current recession and the capital markets will follow closely behind.

The key point I’m trying to make is that the process of business financing is not easy by any stretch, especially if you want to secure a financing facility that best meets your requirements.  Significant lead times should be built into the process of locating and securing business capital, especially in the current recessionary environment.  Proper cash flow management and credit responsibility are also very important aspects of any lender decision making process.

Click Here To Speak Directly With A Business Financing Specialist

Business Financing Hypocrisy

From both a borrower and lender point of view, we are seeing more of what I call business financing hypocrisy.

Lenders are interested in your business until they’re not interested in your business at which time they will call demand loans, cut back on lines of credit, term out lines of credit, increase interest rates, and invoke whatever get out of jail free cards they may have build into their funding commitment to the business.

Borrowers are just as bad in that they at times will promise everything but the moon and the stars to make the lender comfortable with a capital request, but when things don’t go according to plan and loan obligations can’t be met, the borrower calls his or her lawyer and tries to come up with a legal strategy to basically get around having to honor his or her promises.

When the economy is going well, these types of scenarios are played out very infrequently.  But when a recession hits, as it has for the past two years, business financing hypocrisy is everywhere and its every man or woman for themselves.

The net result of this type of two way hypocritical behavior is that the financing markets are slowly down to a crawl in many sectors and geographic regions.

Lenders are asking a lot more to protect themselves with most commercial financing decisions now focused on asset based security and risk management.

Borrowers try to protect them selves by constantly looking for a better deal as they don’t like the changes in lender requirements and search for someone who is more in line with their expectations.

To say there is a lack of  trust from both sides overall would be an understatement.  In tougher economic times, most people tend to take a more conservative approach.

For the desperate borrower, its basically a take it or leave it market with the lender setting out what they are prepared to do without really any flexibility.

For better deals, borrowers have become more patient as lenders are having trouble hitting their borrowing targets which is the way they make money.  So for good deals, there is a high level of competition and as a result, a patient borrower can find some pretty good deals as lenders cut margins to only secure solid opportunities.

But regardless of who is in a position of strength or weakness, promises made by either side are very weak.  Business financing has become a game where borrowers have to become better players to keep up with the changes in the capital markets.

If you have a business financing requirement or problem you need assistance with, give me a call and we can go through it together.

Click Here To Speak With Business Finance Specialist Brent Finlay

For Acquisition Financing, Historical Financial Statements Are a Valuable Asset

Most buyers who are looking to acquire a business will need or want to secure third party debt financing to maximize the leverage of the business assets and cash flow and minimize their down payment.

Put it another way, all cash purchases are fairly rare with respect to business acquisitions.  Even if an individual or company could pay cash, they will likely want to cover off some of the purchase price with debt capital in order to reduce their weight cost of capital.

But business acquisitions can be very difficult to finance with third party debt, even if the required business loan amount is only a small portion of the total funds required.

There are several reasons for the high degree of difficulty securing business loans, far too many in fact to effectively cover off here.  Instead, we’re going to focus on one of the key things that kill many business acquisition financing applications and that’s the historical financial statements provided by the vendor.

First, a lender will want to go back at least 3 years, but would prefer a longer view of historical performance.  The longer term view of the business may not support the repayment analysis, especially if the near term results are stronger than those 3 or 4 years ago.

Second, especially with smaller businesses, the historical financial statements are done under a notice to reader accounting statement, providing very little if any third party verification of the results shown.  For acquisition loan requests, especially those based highly on cash flow, lenders will not rely on notice to read statements.

Third, its not uncommon for the vendor to pull out all the stops the last year prior to sale to make the statements appear as good as possible which can also distort them compared to long term results, creating a lack of lender confidence in the financing opportunity.

Fourth, vendor’s may have several strategies to withdraw cash out of the business to save on both business and personal taxes.  These strategies may not be easily identified in the historical results and while the vendor can disclose them so a lender can add them back, vendor’s tend to only focus on what was actually reported.

Fifth, if the business has some amount of cash sale component, its not uncommon for the vendor to not report all sales.  The result is that the financial statements understate the real financial performance of the business.

While the buyer is the one trying to secure the financing, the ability to do so will correspond directly to how much the vendor has invested in the historical financial statements.  And the ability for the vendor to secure the highest possible sale price is going to likely depend on debt financing which will once again be influenced by the historical financial statements and the accompanying support information.

The key take away is that spending money on a higher level of accounting opinion and bookkeeping  that can be more easily verified by the buyer and third party lenders should be considered an asset that can generate a substantial return by allowing the buyer to not only secure debt for the purchase, but a higher level of debt so the down payment does not have to be as substantial and higher purchase prices can be considered.

Click Here to Speak Directly With A Business Financing Specialist For All Your Business Acquisition Financing Needs.