Wednesday, September 27, 2006

Matchmaking for Business Loans

Part of the feedback I received from Brian Brown of the Pajama Market was to tell you how I help small business owners obtain business loans. A great idea!

I run a matchmaking service for borrowers. What exactly does that mean?

Who calls me and why?

The phone rings with calls from companies of all sizes across the United States and their trusted advisors when the bank says “NO” to a request for a business loan. Frustrated, anxious and unsure of which way to turn, they need someone who can identify the right funding source and can help them tell their story in the right way so a lender will say “YES”. And they usually need this done fast – as in yesterday!

What’s the first step?

Every deal receives a free, no obligation pre-screen. Feedback about lender interest and indicative terms is often provided to the borrower as little as 24 to 48 hours.

If there’s no interest by lenders or by the borrower, we bid one another adieu and move along. I won’t take a deal if I can’t identify interested lenders during the pre-screen process.

When do I have to hire you?

If the borrower likes what they hear about interested lenders and indicative rates, then the borrower signs a consulting agreement with me. The key term - no funding, no compensation. I typically get paid only a “success” fee at closing – however, in a few limited cases of a very risky deal involving significant amounts of my time, I may request a retainer that will be credited against any success fee. By the way, on purchase order financing, factoring and some leasing transactions, I may not charge a success fee at all.

What services do you provide?

After my contract is signed, I officially become your advocate in obtaining the best deal available for a business loan. As your advocate, I offer a variety of services including preparation of a written “request for money”, introduction to interested lenders, review of any proposals received from the lenders, support in the due diligence process and assistance in negotiation with the lenders.

How long does the entire process take?

The time to complete a business loan funding varies by the type of funding and how quickly the borrower can provide the information needed by the lender to complete due diligence. For example, a factoring facility can be completed in less than a week with subsequent fundings taking place same-day. A lease financing for less than $100 thousand can be completed in as little as 3-4 days. An SBA loan might be funded within three weeks. A hard money loan secured by real estate might close within 10 days. Larger, more complex deals can require up to 30 days and longer.

Who funds your deals?

My business loan transactions are all funded by rock solid, financial institutions including commercial banks, factors, purchase order financiers, asset based lenders, commercial finance companies, leasing companies and real estate lenders. I am not a direct lender!

These lenders are looking for deals of all sizes with companies from most industries. Many of these lenders will fund business loans for companies with less than perfect credit. A little risk doesn’t scare them as long as there is strong collateral to support the business loan. The best collateral includes purchase orders, accounts receivable, inventory, equipment and real estate (both personal and commercial). If you don’t have any collateral, I probably can’t help you.

What interest rates do your lenders charge?

The rates vary by deal, but each lender will charge a “market” rate based upon the risk profile of the proposed business loan transaction. I will discuss the rates with you during the pre-screen process.

What if I’m talking directly to a lender or with another broker?

If you’re already talking directly to a lender, keep talking and call me if they say “no” or if they don’t give you acceptable terms.

If you’re already working with another broker, keep working with them and call me if their funding sources say “no” or if they don’t give you acceptable terms. If they have funding sources that can give you a “market” deal, it’s unlikely I can beat it. Furthermore, lenders are often reluctant to put forth effort and resources on a deal when it’s not under the control of one broker or intermediary.

What guarantees do you provide?

I guarantee that you’ll get a great advocate for your business loan request and be quickly introduced to lenders who want to lend money to your business! The lender is the only party that can approve financing which is why I structure most of my assignments on a “success” fee only basis.

To find the best match for your business loan, feel free to call me at 310-371-4011!

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Tuesday, September 26, 2006

Lower Interest Rates? Not So Fast!

Two articles in today's LA Times highlight the issues that are driving the direction of interest rates.

In Problem Loans for US Banks Rise, regulatory agencies note that adversely rated credits — loans that are likely to result in some loss for the lender without corrective action — rose to 5.1% of all credits from 4.8% a year earlier.

In Cost of Corporate Debt on the Rise, Standard & Poor's says borrowers are paying about 50 basis points (one half of a percent) more for non-investment grade, or junk debt. Junk debt is debt ranked less than BBB-minus by Standard & Poor's or Baa3 by Moody's Investors Service.

The interest rate charged by lenders is comprised of both a benchmark rate and a risk premium. The benchmark rate is typically the fed funds rate, a treasury note, LIBOR or some other financial instrument in which the lender believes it can alternatively invest its money without incurring any risk. The risk premium is the increment the lender charges to compensate itself for the risk of whether or not the borrower will re-pay the loan.

These two stories tell us that the lenders are experiencing greater risk in their loan portfolios and are charging a higher premium as compensation for this risk. Notwithstanding the pundits belief that short term benchmark interest rates may decrease in early 2007, the interest rates paid by borrowers may still increase for the foreseeable future.

Click here to read "Matchmaking for Business Loans"

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Sunday, September 24, 2006

How do You Measure Working Capital?

In my September 17th posting I offered a simple definition of working capital – the difference between current assets and current liabilities. Money tied up in working capital is money not available to grow the company.

The benchmarks that many companies (and their lenders) use to evaluate how efficient a company is with its working capital includes days sales outstanding, days payables outstanding, days inventory outstanding and days working capital. Here are the calculations of these definitions as shown in the September issue of CFO Magazine .

How Working Capital Works

Days Sales Outstanding: AR/(net sales/365)
Year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by net sales per day.

A decrease in DSO represents an improvement, an increase a deterioration. Companies marked with an asterisk have securitized receivables, which can artificially improve DSO without changing actual customer-to-cash processes. The survey eliminates this distortion by adding receivables back on the balance sheet before calculating DSO.

Days Payables Outstanding: AP/(net sales/365)

Year-end trade payables divided by sales per day.* An increase in DPO is an improvement, a decrease a deterioration. For purposes of the survey, payables exclude accrued expenses.

Days Inventory Outstanding: inventory/(net sales/365)

Year-end inventories divided by sales per day.* A decrease is an improvement, an increase a deterioration.

Days Working Capital: (AR + inventory - AP)/(net sales/365)

Year-end net working capital (trade receivables plus inventory, minus AP) divided by sales per day. The lower the number of days, the better. In the charts, a DWC change of -X% represents an improvement (even if DWC itself is negative), while a DWC change of +X% represents a deterioration. The percent change is marked NA (Not Applicable) if DWC moved from a positive to a negative number or vice versa.

*Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DIO. The Hackett-REL methodology reflected on the working-capital charts uses net sales across each working-cap component to allow a balanced comparison across each DWC element and provide true comparison between industries. Reported sales have been adjusted for acquisitions and disposals during the year.

Does your company use these or similar calculations in measuring working capital?

Click here to read "Matchmaking for Business Loans" or to read "Interest Expense Reduced by Over 50%!"

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Thursday, September 21, 2006

Interest Rates - What's the Impact?

Last night, I attended a meeting for the networking group PNG to which I belong. This month's discussion topic was the impact on our respective clients of the Federal Reserve's decision not to raise interest rates.

In attendance were approximately twenty professionals who all serve small and middle market businesses in the manufacturing and distribution sectors. My fellow attendees work for investment and commercial banks, insurance brokers, marketing consultants and operations consultants to name a few. Each works closely with top level executives at their clients.

Surprisingly, most, though not all, believed that rising interest rates were not having a significant impact on their customers relative to engaging their services. A few of the consultants were seeing increased requests from clients to help them become more efficient, but didn't attribute this surge to interest rates. The insurance brokers were mixed on how the general rise in interest rates were impacting premiums and guaranteed returns offered on certain policies. The money guys, myself included, claimed the rise in interest rates has not decreased the amount of money chasing deals, but transactions are being funded by different sources than six months ago as chief credit officers are adjusting their appetites for perceived increases in risk.

CFO Magazine noted today that optimism levels of CFOs are at a 5 year low due to concerns about weak consumer demand. Worried about the U.S. economy and that a recession is imminent, these CFOs also singled out labor costs and interest rates as two of their top concerns.

How are interest rates impacting your business? Let me know.

Click here to read "Matchmaking for Business Loans"

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Wednesday, September 20, 2006

L.A. Times - Boot Camp Preps Firms for Public Work

In today’s Los Angeles Times, Cyndia Zwahlen writes in the Small Business Report that Los Angeles Unified School District (LAUSD) is offering a free eight week boot camp to help more small business contractors capture a larger slice of the $19 billion of contracts the agency will issue in the next six years.

Veronica Soto, Director of Contractor Relations & Small Business Program for LAUSD, has taken the lead in creating the boot camp for small contractors. Included in the boot camp curriculum is a program called Contractor MoneyWorks to give contractors the tools to acquire bonding and working capital, two key barriers for most small construction businesses wanting to work with a public agency.

While the details of Contractor MoneyWorks are not available on the website, one can expect to learn about bank financing, SBA loans, and other publicly supported financing programs.

If you don’t qualify, don’t throw in the towel on finding the working capital you need to participate in contracts issued by government. Here’s a brief excerpt from my posting of August 27th on Government Contracts Funding and Katrina.

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.

Purchase order financing, factoring and equipment leasing may also be viable options in providing you with the working capital to pursue contracts with the government or public agencies.

One last thing – regardless of what type of financing you utilize, don’t forget about the cost of working capital when you prepare your bid or proposal. If you forget about any interest expense you may incur, then your profit margins will not be what you projected.

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

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Sunday, September 17, 2006

Money to Grow Your Business

Money tied up in working capital (defined as the difference between current assets and current liabilities) often results in decreased cash flow and increased borrowing costs for companies of all sizes. It is money that is not available to grow the business. So chief financial officers strive to keep working capital to the lowest level appropriate for their respective industry.

The September issue of CFO Magazine shows that chief financial officers for the largest 1,000 publicly traded companies in the United States have reduced the amount of cash tied up in working capital for the fourth consecutive year. Yet despite the improvement, these same companies have over $450 billion of cash unnecessarily tied up in working capital in the form of past-due receivables, vendor invoices that were paid too early and excess inventory.

Stephen Payne of Hackett-REL, a consulting firm which advises companies on reducing working capital, claims that more progress is being made in the reduction of receivables than in inventory levels for two reasons.

First, chief financial officers can make more of an impact on receivables far more directly than on inventory. It’s tough to tell the head of operations to cut back on inventory when your own team is doing a sub-par job of collecting the cash.

Second, as more companies embrace offshore manufacturing, they sometimes need bigger inventory buffers to account for the sheer that goods must be moved, particularly during periods of unexpected demand.

Over the next few days, I plan to create a few more postings on the subject of working capital. I’ll highlight a few more items from the CFO magazine article and tell you about a discussion I had with a provider of business process outsourcing (BPO) on a fast growing tool which is reducing working capital.

How are you keeping working capital to a minimum in your company?

Click here to read "Matchmaking for Business Loans"

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Wednesday, September 13, 2006

Credit is Tighter and Rates are Higher

According to the National Federation of Independent Business (NFIB), the nation's normally upbeat entrepreneurs turned decidedly downbeat in August, forcing the NFIB Small-Business Optimism Index to fall more than two points to 95.9 (1986 = 100), the lowest reading recorded since March, 2003. Eight of the 10 Index components posted declines.

What I found quite interesting was the section of the report discussing business loans and current borrowing trends. Here are a couple of excerpts...

Borrowing levels are up: Regular borrowing activity was reported by 46 percent of owners, up eight points from July and the highest level recorded in the history of the monthly surveys (started in 1986). Regular borrowing activity last peaked when the prime rate was over 20 percent. This time the prime rate is only around eight percent and borrowing activity is not nearly as high, the peak being 53 percent.

Credit is getting tighter: The net percent of owners reporting loans harder to get in recent months rose a point to a net eight percent (nine percent said “harder,” one percent said “easier”), the highest reading since 2000. It looks like the tightening in monetary policy is starting to bite.

Rates are higher: Owners reported that the actual rate paid on short term loans has risen to 9.0 percent in August 2006 compared to 7.6 percent in August 2005.

What has your business experienced in the world of financing? If your business is facing cash flow challenges, don't hesitate to give me a call.

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

Click here to read "Matchmaking for Business Loans"

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Tuesday, September 12, 2006

The Tipping Point - When Will Credit Tighten?

The front page of the September issue of Business Credit and Collections discusses the Turnaround Management Association's (TMA) 2006 Trend Watch Poll on credit availability.

In the poll, 90 percent set the tipping point for some tightening of credit when the prime rate hits 9.5 percent. At a prime rate of 10 percent, 65 percent of respondents thought a substantial credit tightening would occur.

TMA members also see debt default rates increasing in the near term for underperforming, highly leveraged companies. Ninety percent of respondents expect default rates to climb by the end of 2007 with 60 percent believing a blow-up could occur as early as mid 2007.

It's never a bad time to re-focus on improving your company's cash flow and doing those things which can make you more bankworthy! Don't be one of those companies that feels the pain when the tipping point occurs!

In your opinion, what's the tipping point for when credit will tighten? How will it affect your company?

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

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Monday, September 11, 2006

Will Real Estate Loans to Business Dry Up?

Today's Wall Street Journal (subscription required) reported on the front page that a clash between bankers and regulators may result in a decrease in loans issued to small businesses secured by their commercial property. This report comes less than two months after I wrote that home equity loans may be drying up as a source of financing for business as the residential market experiences a drop in home values.

Regulators are concerned about the rapid growth of commercial real estate loans and how this growth has impacted not only bank loan portfolio concentration (too many eggs in the real estate basket), but also whether banks are sufficiently capitalized (is the basket strong enough). If a new draft for "guidance" is formally issued on real estate lending for banks as anticipated, the availability of bank loans secured by commercial real estate will likely be reduced.

So is the message the same as back in July? Yes!

If you have borrowed money for your business and used the equity in your residence or commercial property as collateral, your banker may a little less flexible in granting your next request for an increase in financing. If your business has receivables, inventory or equipment, now is a good time to evaluate other sources of potential financing. Don’t wait till it’s too late!

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

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Sunday, September 10, 2006

Ten Commandments for Selling a Business

It’s my opinion that if you want to make it easier to obtain financing for your business, run your business as if it’s about to be sold. According to Jim Biedenbender of BizValPlus, you don’t just wake up one morning and decide to sell your business. Here are Jim's thoughts…

Business owners often wait until the last possible minute before they consider what they need to do when it is time to sell their business. As a result, it is common for surprises to occur when due diligence starts. To minimize these surprises, I recommend that business owners consider these Ten Commandments for preparing a business for sale.

1) It is never too early to start thinking about selling the business. This gives you time to deal with issues such as possibly weaning family members off the payroll.

2) Make sure you have a good management team in place. Many potential buyers will not invest if they are uncomfortable about how the business will run with you gone. A CEO, a strong controller and someone in sales should be a minimum. They will be vital to a smooth transaction.

3) Clean up your financial reporting act. Three years before a sale is a good time to have audited financial statements prepared to uncover potential charges or reserves that a buyer will demand for warranties, vacation pay or other unrecorded liabilities.

4) Credibility is paramount. A buyer will be more inclined to believe that your revenues and cash flow are real when they are reflected on a tax return. Telling a potential buyer “these are the real books” that do not tie to the returns can scare an institutional or fund investor into running.

5) Have a valuation prepared by someone qualified and familiar with your industry. Do not start a transaction with a false expectation of what your business may be worth.

6) Simplify your business structure and process to the extent possible. The simpler the structure and process, the easier it is for a buyer to get a true picture of the business.

7) Consider efficient tax structures or elections early in the process. An S election may provide additional flexibility in structuring the deal. Can you do a stock deal or will any buyer insist on an asset deal?

8) You may need to upgrade or bring in additional professional assistance for the transaction. Can your attorney draft a definitive agreement covering all of the necessary representations and warranties? Is your tax advisor able to discuss reorganizations?

9) Do you need an investment banker or business broker to sell your business? The best buyer may be already known to you, such as your management team. Some bankers specialize in specific industries. Pick one who knows the players in yours.

10) Be ready to sell. Some owners get close to closing a deal and then worry what they will do afterwards.

By following the above “Ten Commandments” and focusing on the big picture, you will be better prepared to deal with the uncertainties and the roller coaster of emotional highs and lows that will naturally occur during the process of selling your business.

With over 20 years of experience working with companies of all sizes on tax planning and selling their businesses, Jim Biedenbender of BizValPlus can be reached at 310-850-5014.

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

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Wednesday, September 06, 2006

Trade Shows and Vendor Financing

Each day, All sends me its "Ten-second tip of the day for business success". Today's tip of the day was how to prepare for a trade show and was pretty good.

If you are going to exhibit at a trade show, make sure you sweat the details before you arrive. Select the right people to staff your booth. Conduct preshow meetings to identify goals and objectives. Agree on guidelines for interacting with visitors and qualifying customers. Place company literature and giveaways at the back of your booth so interested attendees will have to come inside to get them.

One more thing I would add to the list - financing!

If you're selling machinery or equipment, be prepared to offer vendor financing options. Vendor financing may provide you not only with a competitive advantage, but may result in faster selling cycles, improved cash flow and the ability to open up new markets.

If you're selling any product that may involve offering open credit terms, remember to act like a factor! There's no law that says you have to give open credit terms or the same credit terms to all customers. Don't forget to take into consideration the margin you'll make on the sale and the likelihood that your customer will pay you when the invoice is due.

Good luck at the trade show!

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

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Tuesday, September 05, 2006

Nurses Strike, Hospitals Scramble – Factoring to the Rescue

The Wall Street Journal reported today that increased strikes at hospitals and a shortage of nurses has resulted in a supply crunch. Some, but not all, of this nurse shortage has been alleviated by the staffing industry – in particular those agencies which specialize in replacement and travel nurses. To attract more nurses to their agencies, many healthcare staffing firms are wooing nurses with special bonuses and premium wages.

Like many staffing firms, the agencies focused on nurses will be faced with a working capital challenge. The nurses and other healthcare workers will want to be paid every week. The clients (the hospitals) will want to pay on a much less frequent basis. Collection from the hospitals may occur as little as once a month.

The healthcare staffing industry is one of the biggest users of factoring as a way to accelerate cash flow and overcome working capital challenges. Within the last few months, I have successfully arranged a factoring facility for two firms who provide travel nurses to the healthcare industry. As a result, each firm is focused on growing their company rather than making payroll.

Regardless of your industry, if you’re interested in learning more about using factoring to improve your cash flow, please give me a call!

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

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Monday, September 04, 2006

Pajama Market Chooses Show Me the Money

A big shout out to Brian Brown whose blog, the Pajama Market, recently featured “Show Me the Money” as its Small Business Blog of the Day. Brian is a website designer and blogging enthusiast who features 5 blogs a week on his site and offers feedback on how to create a better blog and improve the blogging experience for the readers. The Pajama Market has been recognized by USA Today, MSNBC, Build a Better Blog and Typepad.

There’s nothing better than feedback from your peers and I’ll be incorporating some of Brian’s suggestions into my future design enhancements.

Thanks, Brian!

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Factoring – A $1 Trillion Industry

One of the most common concerns I hear about using factoring (or accounts receivable funding) as a way to accelerate cash flow is that “my customers will think I’m having problems”. Well, if that’s the case, why would worldwide factoring volumes have exceeded $1 trillion in 2005? Statistics from Factors Chain International (FCI) indicate that total world volume for factoring increased in 2005 by more than 18 percent to almost $1.2 trillion.

Companies using factoring should not be concerned about negative perceptions by their customers. Factoring is a widely accepted mechanism for accelerating cash flow – businesses who have sold their products to companies as large as Walmart, General Electric and Albertson’s have factored those accounts receivable for years. That hasn’t stopped Walmart, General Electric and Albertson’s from conducting businesses with these vendors.

It’s not only small companies who utilize factoring. One of my contacts at one of the largest factors in the United States tells me that their portfolio includes a number of companies with revenues over $100 million who use factoring as a way to accelerate cash flow. For companies whose factoring volumes achieve certain levels, the cost of factoring is comparable to a bank borrowing facility. Also, those companies benefit from the credit and collection services offered by the factor.

The top three countries for factoring volume in 2005 were the United Kingdom, Italy and the United States. The countries where factoring has just been introduced include Peru, Egypt, the United Arab Emirates and Vietnam bringing the total of countries using factoring to over 60.

If your company needs to accelerate its cash flow in order to pay employees and vendors in a timely manner, give me a call and let’s talk about factoring.

Click here to read "Matchmaking for Business Loans"

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