A House of Cards

A "house of cards" is one description of the state of today's corporate debt markets according to "Sketchy Loans Abound" in today's Wall Street Journal (subscription required). This house of cards has been built by the commercial banks, the hedge funds, the mezzanine lenders and the Wall Street machine that carves these business loans into neatly sliced packaged of risk for sale in the secondary markets.

The lenders are stricken with a "don't worry, be happy" attitude because today's bonuses could suffer if someone tells the emperor he's wearing no clothes. Why worry as long as corporate defaults are at the lowest levels in more than 10 years? And why are corporate defaults so low? Is it strong cash flow by the borrowers or loan structuring techniques such as "covenant lite", "covenant holidays" and "payment-in-kind"?

In general, this market recap in The Wall Street Journal doesn't really surprise me as I've thought for quite some time that the business loan markets suffered from too much cash and perhaps too little good judgement. But from the perspective of a borrower, I say let the good times continue to roll!

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans", please give me a call!

Related Tags: Wall Street Journal, business loan, bank, hedge funds, mezzanine lender, lender

You Better Do This!

For a small business that has never before borrowed money in a significant way, it may come as a shock. But once you've outgrown the small, unsecured line of credit from the bank as a means of funding your business, you'll have to make some changes in how you run your business.

In this month's edition of Hispanic Business Magazine, Manuel Henriquez of Hercules Technology Partners says if you're bringing in outside investors (debt or equity), you need to develop a new discipline and rigor with respect to your financial record keeping and controls. Once you entertain financing from an outside investor, they will send in their accountants and auditors to confirm the accuracy and validity of your revenues and expenses. You'll also need to produce financial reports on a timely basis on accounts receivable, accounts payable, operating results and borrowing needs just to name a few.

Any hiccups in those numbers or your systems and it's "hasta la vista, baby"!

I'm currently working with a client facing this situation. They have been fortunate enough to have enjoyed tremendous growth that has outpaced their ability to fund their business without outsiders. To become the $100 million revenue company they envision, they are upgrading their skills, systems and controls to provide comfort to a funding source that the company can produce accurate and timely reports in support of the business loan.

If you intend to seek a lender or an investor in the future, make sure you know today what you will need in place with regards to financial reporting and control requirements. Find out if your lender will accept internal Quickbooks reports or if they'll need CPA prepared statements (compiled, reviewed or audited) as a condition of providing you with financing.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans" and give me a call.

Related Tags: CPA, financial statements, financial reporting, line of credit, Hispanic Business, Manuel Enriquez

The Carnival is Coming to Town!

Everybody loves a carnival and they'll come from all over the world if they know they're going to have a good time! That's why I have volunteered to once again host the weekly Carnival of the Capitalists during the week of April 9th. Carnival of the Capitalists offers a weekly review of some of the best business and economics postings in the blogosphere.

If you simply can't wait, the Carnival will be at the following sites until arriving at Show Me the Money.

• Week of March 26 - Political Calculations



• Week of April 2 - Business Pundit



• Week of April 9 - Show Me the Money

See you at the Carnival!

Related Tags: Carnival of the Capitalists, Business Pundit, Political Calculations, business, economics

Any Good Ideas Lately?

CFO Magazine's March edition provided a "state of the industry" overview for banking and finance. Not surprising, there's no shortage of money for deals of all risk profiles. Even for the more risky credits, it's just a matter of pricing. And there's no shortage of new products like remote deposit capture and other cash management techniques.

But when is the last time your banker brought you a new idea? Perhaps a mention of a possible acquisition candidate, a new product twist offered by your competition, or a possible introduction to another one of the bank's clients in a complementary business?

In the article, Eileen Kamericak, Executive Vice President and CFO of Heidrick & Struggles says "we continue to meet with our banks because they're a good source of ideas."

What ideas has your banker brought you lately? Or have you seen them lately?

Related Tags: CFO, business loan, banker

The Buzz in the Room

Tonight I attended a party celebrating the 40th year of operations for State Financial, a Los Angeles based lender which provides factoring and asset based loans to small and medium sized businesses in the Southern California marketplace and beyond. While a few of their clients were in attendance, I found many of the attendees were banks and other asset based lenders including factors.

Between bites of sushi and swigs of Pellegrino, I schmoozed with many of the funding sources and found the mood of the asset based lenders to be particularly upbeat. Why? They're seeing nice deal flow as many of the banks are no longer being as aggressive about pursuing marginal credits.

For the last three years, banks were funding deals beyond their standard risk profile chasing asset growth. When the prime rate is at 4.0%, a lot of sub-prime credits can still service the debt and meet covenants. Now that the prime rate is 8.25%, a lot of those sub-prime credits are starting to experience stress in their cash flows. This economic cycle is coming to an end and the banks are finally starting to tighten up a bit to stay ahead of the curve on bad loans. So the asset based lenders are no longer seeing as much competition from the banks with their lower cost funding.

Whether wishful thinking or reality, that was the buzz in the room.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans" and give me a call.


Related Tags: factoring, accounts receivable, p.o. financing, purchase order financing, bank loans, equipment leasing, working capital, cash flow

Growth Trumping Profits…Again

Yesterday’s Wall Street Journal reported that for the first time since the 1999 high tech boom, more and more unprofitable tech companies are going public. Is history repeating itself? It may be according to statistics provided by Thomson Financial which show that 85% of tech companies that went public in 1999 had no profits. If you owned any tech stocks in 2001, you know how that party ended.

Since the beginning of 2006, the percentage is once again growing steadily. Of the tech companies going public in the fourth quarter of 2006, almost 50% were unprofitable. Each of the three tech companies in the current IPO pipeline are also in the red.

Investors once again are turning a blind eye toward profits for tech companies displaying soaring revenues. The Wall Street Journal suggests this trend resembles speculation more than disciplined investing. It seems that everyone is chasing the opportunities associated with growth accompanied by the assumption that profits will follow – someday. The big question is when will someday occur? And if it doesn’t, who will be left holding the bag?

So how might this impact the small or medium sized business trying to raise money? Well, if you’re not experiencing hyper-growth, then keep minding your p’s and c’s. That’s profits and cash flow. Focus on running your business to maximize cash flow and find a lender that understands your business and won’t head for the hills the minute your business (or theirs) hits a bump in the road.

It’s my opinion that banks will, if they haven’t started already, tighten up their credit criterion for lending money to small and medium businesses. The days of Prime flat pricing for marginal credits will be coming to an end – well at least for this economic cycle.

Get to know your lender – look closer at the quality of the relationship and less at the cheaper rate that the bank down the street has been offering. Make sure your banker knows that you have control over his (or her) three sources of repayment.

If you need help finding the right lender or telling your story the right way, feel free to give me a call!

Related Tags: Wall Street Journal, IPO, high tech, profits, cash flow, prime rate

We Needed A Lot of Money and Fast

In 2001, when Anthony Terrazas needed funding to grow his services company, Terra Health, he turned to the bank. Not surprisingly, the bank turned him down because his company was new and had no assets.

As he describes it, Terrazas "stumbled on" factoring to meet the capital requirements of his growing business. Factoring was able to provide him access to funding without jumping through a lot of hoops, without incurring any debt and without giving up control of his business.

Today, TerraHealth employs over 450 people, generates over $25 million of revenue and tops the 2006 Hispanic Business 100 Fastest Growing Companies list . Debt free, the company still utilizes factoring.

Need a lot of money and need it fast? Give me a call and let's discuss whether or not a factoring solution is your best financing option!

Related Tags: Hispanic Business, Anthony Terrazas, TerraHealth, accounts receivable, factoring, working capital, business loan

Real Estate Loans and the Capital Crunch

The headlines for the last couple of weeks have been filled with stories about the fallout resulting from the collapse of the sub-prime real estate loan markets. After the shutdown of Fremont General's sub-prime group and the possibility of a bankruptcy filing by New Century, don't expect the news on real estate loans to get better any time soon.

Why not? For the last six months, I have been talking about the changing dynamics in the availability of capital for businesses tied to real estate loans.

First: On July 19th, I discussed that businesses seeking to borrow money against their personal residences might soon find that the liquidity in that marketplace was drying up. Don't expect to see leverage on home loans at 100% and more - in fact, expect leverage on home loans to drop toward 90% and likely much less. Also, don't count on funding your business by borrowing against the growing equity in your home. Depending upon the region of the country, home values are dropping like lead balloons.

Second: On September 11th, I warned that an impending clash between regulators and banks might result in a decrease in loans to businesses secured by commercial real estate. On December 7th, new, tighter guidelines for business loans secured by commercial real estate were released. The impact of these new guidelines will be seen over the next few months.

The bottom line - don't wait any longer to wean your business from raising capital solely tied to your real estate.

If your business needs capital to grow, you should investigate business loans secured by the other assets in your business - receivables, inventory and equipment. These loans are available from banks, commercial finance companies and a number of legitimate institutional lenders. Pricing? The companies with the least credit risk pay the lowest rates. Everyone else will pay a rate that is "market" for the risk profile.

And if you need help finding the right asset based lender or telling your story the right way, give me a call.

Related Tags: real estate loans, Fremont General, New Century Mortgage, business loans, interest rates, working capital