Financial Insights

Finding a reputable lender

Recently a business owner asked me how can you be sure you’ve found a reputable lender? The first thing I tell people is to do their research. Check the internet, library, financial reports, etc. to see if they are active members of chambers of commerce, Better Business Bureau, community charities. Ask for client references. Look for news articles about the company.

If it’s a bank, is it FDIC insured? Check their track record: history, stability, lending practices. If it’s an independent commercial lending company, get local references from banks. Find out who they use. Does the company have a physical office address? Are the fees reasonable to you? You should be charged only due diligence fees (professional service fees such as legal, appraisal, title, etc.).

Bottom line is there is still no guarantee. But chances are in your favor that you will find a lender you can work with.

Get Back to Basics: Need vs. Want

Times like these call for getting back to basics. We’ve had such amazing growth and abundance in recent years we may have drifted away from basic principles. Let’s start with your staff. Get current job descriptions from each employee and ask yourself: does my business need all these positions? Can positions be combined or eliminated without harming operations or customer service? Evaluate employee job performance and costs: salary vs. hourly; full-time vs. part-time. Compare employee benefits. Check providers, premium costs and participation options.

Next take a look at equipment. Will new equipment really improve my business? Can you buy a less expensive model and still achieve the same results? Can you wait 6 to 12 months until finances improve? Compare leasing rates to purchasing. Leasing may free up needed cash. Buy or lease equipment that will provide short-term results if that’s all you can afford.

This type of examination not only improves the way you do business, but may lead to greater profitability and other rewarding benefits.

Get Back to Basics: Improving Cash Flow

We all have a tendency to put off or avoid those things we don’t want to do. So let me encourage you to press on; don’t wait. Examine your budget: revenue and costs line by line. As you do this ask yourself: Where can I save money? Simple things like changing your thermostat setting, lighting, water flow cuts utility costs. Is there a cost savings by bundling my technology services? Can I reduce or change postal mailings to e-mailing, or website? Have I negotiated the best deals from my suppliers or vendors? Can I buy in bulk, or as part of a cooperative to receive a discount?

Give collections top priority. Look at changing your billing/collections cycle, to improve cash flow. Shorten your cycle from 30 days to 25. Offer discounts to customers who pay upfront. Look at penalties for slow or non-pays. Are there layaway options for you or your customers?

It goes without saying cash flow makes or breaks a business. We often assume there is nothing we can do when times get tough except to hope for things to turn around quickly. All we need is a little encouragement to realize there is much we can do to affect change.

Examining your banker relationship

With the economy as it is and the tightening of bank lending practices, it’s probably a good time to look at your banker lending relationship. Ask yourself: how much time do I spend with my banker? Does my banker contact me personally and regularly? Does my banker give me information that might help improve my business? How long does it take for the bank to process my loan application before I get an answer? Gauge your level of satisfaction vs. level of frustration: number of phone calls, response time, availability, etc.. How many times has your business been turned down for a loan?

If you depend on just one bank or commercial lender, what happens when policies change and funding is not available, particularly in an emergency situation? By establishing relationships with several lenders—at least two—you are prepared if the time comes when one can’t fund you perhaps the other can.

Take the Bull by the Horns!

While others are hunkered down in the Bear Market, take the bull by the horns! This may sound crazy or the rantings of a “raging bull”, but read further to see the logic in this.

Change your attitude. See the marketplace as a land of opportunity. If you have the cash flow, bargains are out there. If you can free up cash, buy used or new equipment at discount prices to increase or develop new products. Buy real estate at discount prices. Hire staff with specific skills to take your business in a new direction. Buy supplies in bulk to take advantage of deep discounts. Improve technology so that you can improve production speed, quality, and delivery.

With a slowing economy it gives business owners time to brainstorm, examine, evaluate the way you do business, your products and services. When you’re blowin’ and goin’ in a fast-paced economy you don’t have this luxury. Now is the time to do some creative thinking. What can I do to improve my product(s) or service(s) to make it more appealing, more marketable? Are there other products or services I could easily offer to create new revenue streams for my company? Should I take my business in a whole new direction? Should I consider acquiring or merging with another company? It’s a great time to get those creative juices flowing again!

The K.I.S.S. Budget

Budgeting. Yuck! Most people think of it as a four-letter word and avoid it like the plague. When revenue is growing and cash is flowing, it’s easy to slack off the line by line budget, and just shoot for general margins and percentage of profitability. Here’s a simple general category budget to get back to basics, back on track. Or if you prefer, you can start by jotting down all your monthly expenses, and place them in the appropriate categories. This is a very basic expense budget so add any categories not included to customize it to your particular business.

  • Salary/wages
  • Office supplies
  • Mailing costs
  • Equipment
  • Utilities
  • Lease/mortgage
  • Marketing/Advertising
  • Technology (cable, internet)
  • Insurance
  • Transportation (vehicles, gas)
  • Interest (loans)

Look at each expense as you list it, and ask yourself: Is it a necessary expense? Can it be reduced? Should it be increased? Is there another way to do something that would save money?

Now multiply your monthly expenses by 12 and you have an annual expense budget. Take your annual revenue, subtract your costs, and you have a quick snapshot of your business viability. Revisit your budget monthly to track your progress against goals.

What are my financing options? Part One

Generally speaking few business owners know all the funding options available to them because most lenders don’t take the time to explain them. It’s often easier and quicker to fit the business into one of their standard packages. But one size doesn’t fit all as the saying goes. Each business is unique. A reputable commercial lender will guide you through all of the options available and help you select the best option for your current need. There is such a variety of funding options it would be easier to digest in two swallows. I’ll give you a brief explanation of some today, and the rest in our next segment:

  • Accounts-Receivable (AR) financing
    The lender purchases your receivables for cash. You get cash quickly without giving up equity in your business.
  • Asset-based Loan
    Any corporate loan backed by solid collateral is an asset-based loan. Assets are accounts receivable, inventory, real estate, and machinery & equipment.
  • Bridge Financing
    A "Bridge Loan" is a loan for a short period of time that is used until more permanent financing can be secured.
  • Equipment leasing
    Nearly any equipment that can be purchased can be leased, yet few businesses realize the benefits.
  • Export Accounts-Receivable Loans
    If you're shipping to good credit-worthy customers overseas, this may be an option.

More financing options…

Last time we looked at Accounts-Receivable (AR) financing, Asset-based loans, Bridge Loans, Equipment Leasing, and Export Accounts-Receivable Loans. Here are some other options and a brief description of each. A reputable lender will help you sort through all of these to determine the best fit for your business and situation.

Factoring

Selling all or part of a company’s receivables at a discounted value to a third party for cash.

Purchase Order Financing

A bit like Import Letter of Credit Financing, but without the Letter of Credit.

Suppliers Guarantee—Import Letter of Credit

A guarantee assures suppliers that they will be paid even if your business runs short of working capital.

Bank Mortgage Loans

They require solid net income and well-maintained building. May be tough to get with current economy.

Corporate Bank Line of Credit

A "blanket-lien loan," may be difficult to obtain or with stiff requirements with current economy.

Venture Capital – Private Equity

Difficult to find, and generally want 25% to 65% of your company

Some of these options are better than others when you need emergency funding.

I need cash now. Where do I turn?

When you need cash now, a quick infusion of capital through a bridge loan may be the best option. These loans are for clients that need a temporary solution, giving them a window of time to sell or acquire a piece of property, or to improve cash flow.It is an asset/equity-based, short term loan, not only for real estate financing but for other types of projects or problem solving. Assets are used as collateral in exchange for immediate funding. It may be the best solution when a commercial property or borrowers are in a financial pinch because a property is incomplete or not marketable due to permitting delays or economic conditions. Unlike other types of financing, a bridge loan is not based solely on income or credit score. The loan is based on value of the holdings.

When is a bridge loan right for me?

Last time we discussed what is meant by a bridge loan, and the requirements for this type of asset/equity-based, short term loan. To make this more understandable, I thought I could jot down some of the situations where we’ve used bridge loans to assist our clients.

  • For business acquisitions or mergers
  • To take advantage of bargain priced commercial property
  • When capital is needed to satisfy taxes or pay fees
  • To stabilize a company in a temporary cash crunch
  • To sustain the business until a permanent solution can be secured
  • To fend off business buyout, hostile takeover
  • When bank financing is not available due to credit problems
  • To save commercial property from foreclosure
  • To manage debt, appease creditors during bankruptcy restructure

Although this not an exhaustive list it gives you a general scope of situations where a bridge loan may be the most appropriate solution.

Information you will need to provide a commercial lender – Part I.

The best thing you can do to help yourself and a prospective lender is to get all your ducks in a row in advance. Even if you don’t need a lender right now, but may in the future, you can at least put together a history and description of your business, property and assets, and current financing. Why? Because it will greatly increase the speed from application to approval to funding. It also shows the lender that you know your business, your needs and have a plan. Hit the highlights:

  • Briefly explain the situation: Describe the company before the problem; how the problem developed; why a loan is needed. If you’ve tried to get other financing, what kind, from whom, results. Be honest. Disclose as much as possible.
  • The request: Loan amount and how the money will be used. Be specific. Provide a financial statement (P&L): operating income, expenses, debt, assets, liabilities, liens, reasonable funding solution, and fiscal management to recover from this temporary setback. Prepare a personal financial statement as well.

Loan Request documentation Part II.

Last time we wrote a brief paragraph about the situation, the money requested and how it will be used. To complete the documentation we need to address the following. Just as before we need to be brief and hit the key points:

  • Description of the Property and/or Assets: List all the assets, describe the property (square footage, units, property enhancements/amenities, etc.). Include appraised or estimated value based on comparables, and photos. Provide rent rolls, monthly/gross income from building if it’s an income producing property.
  • Historical data/Equity in the business: Provide a history of the business: when it was founded, purchase price, and funding? Disclose owner investment, and the equity in the company. List current investors, Board of Directors, management team, and number of employees.
  • Repayment/Restructure plan: What is the plan to pay down the loan? Can monthly payments be made? Can income be produced? What is the term of the loan requested? Disclose the exit strategy-- Sell the business, or property, or refinance?