Wednesday, July 22, 2009

Forecast Your Cash

I’m struggling with a manufacturing client that is not able to generate a financial model which can provide comfort to a bank that the company can repay its debts. Without a forecast which is based upon solid and defensible assumptions, this manufacturing company could be forced to obtain capital at much higher interest rates than a bank would charge.

By hiring a third party resource to create a robust, dynamic financial model, the manufacturer could generate multi-period reports that would help the company and its lenders answer such questions as:

· How much capital will I need?
· How long will my cash last under various scenarios?
· How will I be able to repay my loans?

But the client is hesitant to spend the money even though it could potentially save over $150 thousand of annual interest expense. The cost to hire an expert to create the financial model? In this case, less than 5 percent of the savings.

I recently spoke with Daniel Feiman of Build It Backwards, a management consulting and training services firm, which develops financial models for businesses ranging from start-ups to established firms with annual revenues exceeding billions of dollars. Feiman just published “What Everyone Needs to Know About Financial Modeling” and here’s one portion of our discussion I found particularly compelling.

"A common mistake in financial models is not having a solid understanding of what CASH is and is not. Revenues are not cash. Gross margins are not cash. Profits are not cash. Only cash is cash. Slight changes in the timing between cash receipt and disbursement - even just a couple of weeks - can bankrupt your business. Therefore, a good model will reflect not only cash flows generated by your firm but also their timing."

From your lender's perspective, a good financial model understands cash and can answer the three questions shown above. If you cannot answer these cash flow questions for your banker, the teller’s window will be closed.

If you would like a copy of “What Everyone Needs to Know About Financial Modeling”, click here. Daniel Feiman can be reached at 310-540-6717.

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

Tags : Financial Models , cash flow , bank loans , Daniel Feiman , Build It Backwards

Monday, July 13, 2009

Bankruptcy for CIT?

The $60 billion finance company, CIT, is negotiating for a government rescue while also having retained bankruptcy counsel.

The outcome is unclear as various press sources report that the US government does not feel that CIT's failure would create a systemic risk to the financial markets. Same conclusion that was reached with Lehman Brothers last fall and the outcome wasn't pretty.

CIT is a major asset based lender to small and medium size businesses offering products including factoring, accounts receivable lending, equipment finance, SBA loans and cash flow loans to a wide variety of industries. Its factoring and accounts receivable loans have been available to companies with revenues as little as $5 million.

Many of these borrowers are probably quite nervous at the moment. While the government may reach the opinion that J.P. Morgan Chase, Wells Fargo and Bank of America can replace CIT in the marketplace in the long run, the short term chaos in the meantime could be significant. These and other asset based lenders could be overwhelmed if the curtain came down on CIT and borrowers had to find replacement lenders on short notice.

Are you a current CIT borrower and worried about your options? Read "Matchmaking for Business Loans" and give me a call!

Tags : CIT Group , CIT , bankruptcy , factoring , accounts receivable loans

Friday, July 10, 2009

Los Angeles Commercial Real Estate Struggling

As reported in the Los Angeles Times, research firm Real Capital Analytics found that 263 Los Angeles commercial real estate properties totaling $4.5 billion were in default, foreclosure or bankruptcy at the end of June.

Nationwide, troubled commercial real estate properties number over 5,300 properties valued at more than $108 billion.

What's to blame? Excessive leverage. When will it get better? No time soon - this could be the early stages of a decline.

These troubled properties will continue to impact both new financings and re-financings of commercial real estate for a while. Commercial real estate bridge loan lenders are having a field day and opportunistic investors with hordes of cash are overwhelming distressed owners having to sell.

As for the banks holding some of these properties in their workout departments or as REOs, it is impacting their ability to make business loans for working capital. Banks are still saying "no" to new business loan opportunities and in some cases, saying "go" to existing companies on maturing lines of credit.

Need help finding the right lender for your commercial real estate bridge loans or for business working capital loans? Read "Matchmaking for Business Loans" and give me a call!

Tags : commercial real estate loans , commercial real estate , California , Los Angeles , real estate bridge loans , private money loans

Thursday, July 09, 2009

Factoring for California IOUs

One of my factoring sources has told me they are providing emergency funding of California IOUs. This could be a huge assist to many small and medium sized businesses who conduct business with California but may not be able to collect on their invoices for months given the current budget stalemate in Sacramento.

The factor will buy the IOUs for 90% of the face value - you can sell as much or as few of your California IOUs as you need to support your working capital requirements. There are no minimum contract periods. The spot factoring is non recourse to the borrower - if California doesn't pay the IOUs, the factor will not require the borrower to make them whole.

If you already have a lender which has a senior lien on your accounts receivable, it doesn't matter. As the funding source is buying the IOU, it will not be subject to the senior lender's lien position.

Got that? Any questions on how to sell your California IOUs, give me a call at 310-371-4011 ASAP!

Wednesday, July 08, 2009

Clean Up the Balance Sheet

Seven Steps to Improving Cash Flow and Profitability in a Turnaround is one of the articles in the most current edition of the CapitalEyes e-Newsletter from Bank of America Business Capital.

Clean up the balance sheet is the step which caught my eye.

Businesses are encouraged to generate as much liquidity as possible from receivables and inventories. Why? Money tied up in working capital is money not available to grow the company.

All lenders are focused on borrower liquidity in this market. Lenders want to know that borrowers are sending out invoices in a timely manner, if you are taking appropriate steps to implement leading edge credit and collection policies and if you are collecting your accounts receivable in a timely manner. Watch your receivables like a hawk!

Inventory is another hot button. Fewer lenders are willing to advance funds against inventory which may be slow moving or obsolete. I am finding that overly aggressive lending against inventory by incumbent lenders is one of the key reasons that borrowers are unable to find new lenders when the bank says "go"! More conservative lenders are limiting inventory advances to only 25-33% of the accounts receivable advance and only for profitable borrowers.

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

Tags : accounts receivable , Bank of America , CapitalEyes , working capital , business loans

Thursday, July 02, 2009

Will California IOUs Impact Your Cash Flow?

The deadline for California to approve an annual budget has passed once again without a final budget. How and when the California legislature and Governator Schwarzenegger will fashion a resolution for the now projected $24 billion deficit are unknown.

Once again, businesses conducting commerce with California that rely on borrowing against their accounts receivable for their cash flow are at risk.

The IOUs that the state may issue in lieu of payment to vendors may not be deemed acceptable for those borrowing against accounts receivable.

If your business is using factoring or a formula driven, asset based line of credit to accelerate cash flow, it is best to check quickly with your funding source and find out their stance on California IOUs. Decisions to accept the California IOUs as collateral will likely be done on a lender-by-lender basis.

By the way, six other states failed to meet July 1 budget deadlines including Arizona, Illinois, Ohio, Pennsylvania, Connecticut and North Carolina.

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

Tags : California IOUs , accounts receivable , factoring , asset based line of credit , cash flow