Wednesday, August 30, 2006

Hispanic Business - SBA's New Leader Faces Critics

I just finished reading the article "SBA's New Leader Faces Critics" on the website of Hispanic Business. Steven Preston, anointed the SBA's administrator in June, is dealing with the critics that always accompany leading a government agency inside the Beltway.

I found two items in the article more interesting than the criticism of the agency.

First, the statement that the default rate on SBA guaranteed loans ranges up to 7 percent in any given year, but that the SBA breaks even because of the fees it charges. I wonder if this reflects any recovery by the SBA or the lenders of collateral pledged in support of these loans which often includes the personal residences of the borrowers.

Second, the suggestion that the SBA is best known as the "financier of last resort" to small businesses. Frankly, I'm not sure I agree with this suggestion. The SBA may say "no" to providing a guarantee for reasons which don't prevent asset based lenders including purchase order financiers, factors and leasing companies from providing loans and financing to many small businesses.

What do you think?

Please feel free to contact me with questions or ideas for future articles!

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Are Your Customers a High Credit Risk? Act Like a Factor

I recently read the All Business posting which suggested that about 25 percent of companies are either very high or high credit risks. If you’re selling your product to other businesses, how should you decide how to extend open credit terms to those customers? Would your business survive if 25 percent of your customers didn’t pay its invoices?

Whether you’re borrowing from a bank or selling your accounts receivable to a factor, you need to act just like the lender in determining to which companies you’re going to provide open credit terms. Either funding source could declare your customer to be too risky and thus deny your ability to borrow against or sell that specific receivable potentially strangling your working capital.

So why should you act like a factor?

At the end of the day, a factor is the only funding source that bases its decisions primarily (if not solely) on the creditworthiness of your clients. If the factor won’t buy the receivable, you should think long and hard about extending open terms to that customer.

One factor that specializes in providing financing to companies needing up to $1 million line of credit told me that his decision to purchase your accounts receivable for a specific customer is an art and not a science. The decision will be based upon a variety of factors including the customer’s Dunn and Bradstreet scores, track record of paying other vendors, business acumen, and general integrity. This factor looks upon FICO scores as more of a character reference than as a key consideration.

If you factor your receivables, you can often work closely with your funding source to pre-screen which accounts receivable they are willing to buy. In effect, they can be your free outsourced credit department. By the way, this is a huge benefit of using factoring for those who think the cost is too high.

So if you can’t afford to not collect on 25 percent of your revenues, act like a factor!

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans"

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Tuesday, August 29, 2006

Why are Bankruptcy Filings Falling?

The LA Times reported a 2.6% decrease in businesses filing bankruptcy throughout the USA compared to a year ago. It seems counterintuitive given the softening of the economy, the rise in interest rates and the early signs of inflationary pressures.

Paul Shankman, an attorney with many years of experience in business bankruptcy law, believes that significant revisions to the bankruptcy laws in October 2005 may be a contributing factor for the decrease in business reorganization, or Chapter 11 filings. Shankman states that the new bankruptcy laws make it more difficult for a business to file for bankruptcy protection and more costly to exit. Some examples of the material changes include a reduction in the timeframes for making certain critical business decisions during the bankruptcy, such as lease rejections/assumptions and less time to propose and confirm an exit plan.

The bottom line - there's a reason for fewer bankruptcies and it may not be that businesses are experiencing fewer cash flow problems. But if your business is struggling with cash flow problems, don't wait till the last minute to understand the implications of obtaining asset based financing in lieu of a bankruptcy option! There may be financing options that can keep you filing for bankruptcy protection.

Please feel free to contact me with questions or ideas for future articles!

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Monday, August 28, 2006

Fire Your Customers – A Second Opinion

On August 14th, I wrote that firing your customers can lead to increased revenues and improved margins which in turn can lead to improving your odds of obtaining bank financing.

A few days later, Forbes magazine published an article on firing your customers. Customers who should be considered for this treatment are late payers, bona fide deadbeats, those who are a bad fit for your services and those you may have outgrown. I particularly like the scorecard at the end of article which helps a company creates a basis for the “firing” decision.

Fired any customers lately?

Please feel free to contact me with questions or ideas for future articles!

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Sunday, August 27, 2006

Government Contracts Funding and Katrina

It's been a year since Hurricane Katrina ravaged New Orleans and the Gulf Coast. Today's LA Times offers a look at the slow progress being made injecting government funding into rebuilding the area. With reports that disbursement of recovery loans from the SBA has been marred by "significant delays", obtaining the financing needed to complete the rebuilding effort may also create roadblocks along the way.

Small and medium sized businesses will be at the forefront of rebuilding New Orleans and the surrounding area. Much of that rebuilding over the next few years will likely be completed under contracts with federal, state or municipal government agencies. Many of those contracts will involve payment only upon reaching certain milestones and may include retention clauses holding back a small percentage of the payment until the job is fully completed.

No doubt the employees and vendors providing the materials and labor will not be interested in the timing of those government disbursements which could extend for eight weeks and more. Particularly employees who like to be paid every week.

If you're not able to access funding from your bank, there are funding sources that specialize in providing financing when your customer is a government agency or a prime contractor fulfilling a government contract. The funding is structured as a revolving line of credit or a term loan and is secured on a senior basis by the contract, accounts receivable and other appropriate collateral. In some cases, a business can borrow up to 90 percent of eligible accounts receivable. Rates will be a bit higher than bank interest rates, but can be much less expensive than factoring.

So if you're providing products or services to the government or to a prime contractor fulfilling a government contract, don't get caught in a working capital squeeze. Financing is available - feel free to give me a call and see if I can help.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans"

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Tuesday, August 15, 2006

VEDC Capital Access Center for Business Loan Assistance

If you're a small business located in Los Angeles County in need of working capital or a business loan, then a quick trip to the Valley Economic Development Center may be an excellent use of your time.

Also known as the VEDC, the organization will soon be celebrating its 30th year of providing a variety of technical and financing assistance to over 6,000 entrepreneurs and clients annually.

The VEDC's Access to Capital program not only organizes "Where's the Money" expos (the next one is in October), but also provides debt advisory services and helps arrange financing through the Revolving Loan Fund, the California State Loan Guarantee Program and a variety of SBA loan programs including SBA 504, SBA 7(a), Microloan and SBA Community Express. These programs can be used to access loans in amounts ranging from $1 thousand to $2 million.

For those of you outside the greater Los Angeles area, the SBA website is a great place to start your search to find your local equivalent.

Please feel free to contact me with questions or ideas for future articles!

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Monday, August 14, 2006

Cash Flow is Everything - Hispanic Business Magazine

In the August edition of Hispanic Business Magazine, CEO Anthony Terrazas of TerraHealth states that “cash flow is everything” and is one of the two biggest challenges a business will face. TerraHealth should be an expert on cash flow having been ranked the top company on the 2006 Hispanic Business 100 Fastest Growing Companies List. Providing medical staffing, consulting and IT support for hospitals and other healthcare providers, Terra Health has experienced a 203% compound annual growth rate since 2001.

Speaking of cash flow, access to capital is a continued challenge to minority owned businesses as discussed in the Hispanic Business Magazine article (subscription required) entitled “On the Winding Road to Capital Success”. The article discusses the role of pension funds in increasing the flow of private equity to Hispanic owned companies.

Don’t forget, cash flow comes first when it comes to access to capital. Limited cash flow and you still need money? Financing is still available if you have assets like purchase orders, accounts receivable and equipment to offer as collateral.

Please feel free to contact me with questions or ideas for future articles!

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Accelerating Cash Flow Through Remote Deposit Capture

Finance 101 teaches that profits and cash flow are not the same thing. If you’re a business of any size, a key to survival and growth is accelerating cash flow and getting the money into your bank account as soon as it comes in the door.

Matt Olsen of Alliance Bank says that thanks to recent changes in banking laws, remote deposit capture is fast becoming the industry standard that will free a business from the demands of deposit slips, endorsement stamps and other banking tools which prevent a business from meeting deposit deadlines.

This combined hardware and software “solution” is changing the ways businesses deposit funds into their accounts. This process will provide a company almost the entire business day to submit a check for deposit through an on-site scanning device and receive same-day credit while minimizing the paperwork and time required by your staff. No more frantic rush jobs when the bank courier has shown up before the mail.

How do you know if remote deposit capture is right for your business?

Olsen suggests that businesses large and small can benefit from remote deposit capture. If you’re expending a lot of time to process deposits for either a courier or one of your own employees to take to the bank, then remote deposit capture may help your business accelerate its cash flow. When taking into consideration the time of your employees or the bank courier fees, you may find that you’ve reduced your expenses as well. If you’re already using a lockbox for all of your accounts receivable, remote deposit capture may not offer any benefits.

Remote deposit capture is already in place nationwide with a select group of banks of all sizes though it may not be available at all branches. Olsen points out that this service also entails an element of credit risk for banks so the service may be offered primarily to bank customers that already have a credit facility in place and can demonstrate a certain level of technological sophistication.

If your business could benefit from acceleration of its cash flow, then give your banker a call to ask about remote deposit capture. Don’t let your competition beat you to the punch on this one!

Please feel free to contact me with questions or ideas for future articles!

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Trouble Getting A Loan? Fire Your Customers!

Don’t think for a moment that your banker won’t turn down your loan request if you’re generating poor profit margins. Why should a bank give you a loan if you’re not going to use the money to produce strong cash flow?

According to Earl Williams, a chief financial officer for a nationwide provider of information management solutions, not every customer is one worth having. Williams recounts that soon after being hired he gave a list of the five lowest margin customers to the company president and recommended to either “fix them or fire them”. These customers produced low margins because either pricing was too low or they weren’t paying in a timely manner. The president took his advice and fixed some and fired others. The company’s profit margins and cash flow doubled the following year.

I’ve spoken to a few companies that go through this exercise on an annual basis and fire low margin customers. Not a bad idea. Why wait until your company needs financing and the bank says “no”?

Please feel free to contact me with questions or ideas for future articles!

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Wednesday, August 09, 2006

Fed Rate Pause - What's the Impact on Bank Loans?

So the Fed's Open Market Committee decided to take a breather in raising interest rates. Does that mean that bank borrowing rates will stabilize, increase or decrease?

According to today's Wall Street Journal (you'll need a subscription) column "Tracking the Numbers", the Fed rate pause may not help banks. For those banks who have been paying higher and higher rates to obtain deposits, the hiatus in the Fed's interest rate boosts doesn't provide an opportunity to reprice some of its loans. Classic case of increasing costs and flat revenues - not a good thing for the bank's bottom line.

What about your bottom line as a borrower? You can relax until September 20th.

Please feel free to contact me with questions or ideas for future articles!

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Tuesday, August 08, 2006

New Funding Source – Equipment Leasing

From time to time, I’ll tell you about a new financing source that I’ve met. It could be for bank loans or any type of asset based financing including purchase order financing or factoring. Today, I spent some time getting to know a new source of equipment leasing.

This source of leasing is run by an individual with over 25 years in the equipment finance industry. Operated with a lean staff, they are seeking deals ranging from as little as $500 thousand into the tens of millions. Their “sweet” spot is a transaction in the $1 million to $5 million range.

So what’s the big deal about this source? This equipment leasing source works with borrowers when the bank says “no” but there’s still a viable business operation and good people running the business. They look for transactions with a group of borrowers I call “the weak, the weary and the sub-prime”. Deals with a bit of hair. Companies with less-than-perfect credit. Prior bankruptcies or current restructuring candidates are not reason for an automatic rejection. Their attitude is “if it’s an easy deal, go see your banker”.

They can structure equipment leases, term loans and sale-leasebacks and will fund throughout the United States. All asset types and industries will be considered, but long lived assets work best including transportation, manufacturing and materials handling equipment. The equipment can be new or used.

Obviously, pricing, advance rates and other terms will be determined by the facts of the deal.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans"

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Guia Para Obtener Prestamos - ABCs of Borrowing

If you are a Hispanic business owner or target that marketplace, you need to know about the launching of Hispanic SMB Online, the first online community dedicated exclusively to the 1.6 million plus Hispanic owned small businesses in the United States. The new portal provides free resources, content, news and community features designed to help the growing number of Latino small and medium sized enterprises. The website offers a section on cash flow, bank loans and other financing issues as well as an online forum to promote discussions of these topics.

Please feel free to contact me with questions or ideas for future articles!

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Monday, August 07, 2006

You Heard it Here First!

Check out the posting "Why You Don't You Want One Customer to Become Too Big" in USA Today's Small Business Connection!

Please feel free to contact me with questions or ideas for future articles!

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Interest Rates - Will They Go Higher?

The Federal Reserve's Open Market Committee meets on Tuesday and one of the topics of discussion will be its next move on interest rates. The last 17 meetings have resulted in increases in the fed funds rate to its current 5.25 percent. As a result, commercial banks have raised the prime rate to 8.25 percent.

The prime rate effects many types of commercial lending including bank loans, SBA loans, leasing, factoring and real estate mortgages - specifically variable rate loans. Businesses that depend on these loans could be paying higher interest costs if the Fed can't resist one more increase in attempt to keep the lid on inflation.

The financial markets seem to be betting that the Fed will take a breather. What do you think?

Please feel free to contact me with questions or ideas for future articles!

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Thursday, August 03, 2006

Too much of a good thing? Use Factoring!

For any size business, too much revenue from one customer can lead to difficulty in obtaining a business loan to provide the working capital necessary to compete for another day. As Laurel-Ann Dooley points out in The Startup Journal, just because you can land a big fish, doesn’t mean that you necessarily want one.

Of Dooley’s “Three Don’ts for Small Businesses with Big Customers”, the most critical one in my opinion is “don’t always expect speedy payment”. It can be difficult to meet weekly payroll when a big customer doesn’t pay you within 30 days.

In the eyes of the bank, once your revenues from a single customer exceed 10 percent of total sales, you become less bankworthy. In many cases, factoring of your accounts receivable is the best solution to accelerate a company’s cash flow to meet working capital requirements. A factor won’t care if you have customer concentrations in your accounts receivable as long as that customer pays its bills within a reasonable timeframe.

So if you need working capital after landing that big fish, consider factoring as a fast and easy solution.

Please feel free to contact me with questions or ideas for future articles!

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Wednesday, August 02, 2006

When the Bank Says No, Ask a Credit Union

In today's LA Times Small Business Report, Cyndia Zwahlen tells of a San Diego borrower who found a credit union to provide a small business loan secured by real estate after being declined by a bank.

The article discusses a possible paradigm shift with credit unions moving into small business lending. Zwahlen notes that banking industry consolidation has left some small business owners without the local banker with whom they might have been used to working. Plus, some business owners want loans that are too small to be practical for many commercial lenders.

Expect to initially see credit unions primarily compete with smaller community banks for loans under $150,000. Don't expect the underwriting criterion to be significantly different from a bank - one credit union alliance is still rejecting about 70 percent of business loan applications. That tells me they've got a long way to go before being serious providers of small business loans.

Please feel free to contact me with questions or ideas for future articles!

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Tuesday, August 01, 2006

M&A Markets at Record Levels

According to the investment banking firm of Green Manning & Bunch, activity in the mergers and acquisitions market is at record levels. The availability of private equity for is a key factor. Also, despite the continued rise in interest rates, debt markets remain accommodative, with dealmakers able to source various classes of debt. Lenders continue to be very aggressive when offering acquisition financing.

The complete second quarter newsletter provides the latest stats on EBITDA price multiples. The newsletter is careful to point out that these multiples may vary depending upon the size of the company and whether the buyer is a strategic or financial buyer.

For more information, contact Tom Fencl at 602-240-2753.

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