Thursday, May 31, 2007

How Did They Do That? Fearless Flying!

Yesterday, I had the opportunity to listen to John Shields, retired CEO of Trader Joe's, speak about some of the key changes that led to creating a successful growth company. For those of you who have never been to a Trader Joe's, describing it as a "unique grocery store" really doesn't it do it justice. At my house on Memorial Day, our party featured a number of Trader Joe's products including wine, cheese, crackers, Mediterranean style hummus, veggie chips and no pudge brownies. With the exception of the wine, each product was made for Trader Joe’s private label.

Beside from their great products, low prices, free samples and always cheerful employees, I'm amazed that this privately owned business has grown so rapidly and successfully to over $5 billion in revenues without borrowing a dime nor asking their owners for a further injection of capital. How many businesses can manage that feat?

Here’s just a few excerpts from his remarks and the follow up Q&A…
  • Successful companies have a long term vision and empower their employees with both the responsibility and authority to execute upon that vision.

  • Promote the growth of your employees understanding that they will sometimes make mistakes. The key is to learn from those mistakes.

  • Disruptive products, such as the wine commonly known as Two Buck Chuck, are vital to achieving success. Two Buck Chuck just enjoyed its fifth year anniversary!

  • Choose a mentor even if you never meet them in person. Shields chose Sam Walton and Herb Kelleher as his mentors for their vision, relentless drive and passion for their respective businesses. He never met either.

  • Choose good employees and take good care of them and they’ll do a great job for your customers. Same philosophy I was exposed to during my six and a half years in the finance & treasury groups at Federal Express. They’re no slouch company either!

A big thank you to Joel Fishman of the law firm Ropers Majeski Kohn Bentley for hosting yesterday’s business networking lunch and to John Thrasher of Management Resources Group for arranging to have Shields as guest speaker.

See you at Trader Joe’s.

Need help finding the right lender or telling your story the right way so you can grow to be as big and successful as Trader Joe’s? Read "Matchmaking for Business Loans" and give me a call!

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What's Up with the SBA?

Two articles in the NY Times about the SBA caught my eye this week. The first, Small Business Not as Usual, discussed some of the well known shortcomings about the SBA. The second, A Voice for Small Business, shares excerpts from an interview of SBA chief, Steven C. Preston.

Here's what I found interesting about these articles:

  • SBA loan volumes were flat in 2006 compared to 2005 at almost $20.3 billion while the average loan amount continues to drop steadily from $257 thousand in 2002 to $189 thousand in 2006. More businesses are getting loans is good news. Are they getting enough dollars to make a difference?
  • The SBA has proposed raising fees in its microloan program which is the exact opposite of what was reported in the LA Times this past February. Which one is it - are fees going down or up? I wish I could get this type of information from Fantasy Congress!

  • In the NY Times interview of Preston, he stated that he doesn't think that the SBA fees charged to borrowers are "an inhibitor to our getting capital in their hands". Who has Preston been talking to? My clients and prospects always focus on the up-front fees in deciding amongst business loan options.

Though clearly open for debate amongst business owners and politicians, I think the SBA can provide valuable assistance to small business. Sure wish they would make it easier.

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

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Saturday, May 26, 2007

Squeezed by the Competition

In the business section of Friday’s LA Times, E. Scott Reckard tells of how the Korean banks in Los Angeles are getting hammered by both the competition and perhaps their own poor credit judgment.

As a result, the four largest Korean banks in town – Hanmi Financial, Nara Bancorp, Wilshire Bancorp and Center Financial – have seen their stock prices decline up to 30% this year compared to a decline of less than 3% for all banks according to the MSCI US Investable Market Banks Index through April 30th.

So what’s going on? It could be that the Korean banks are just getting squeezed by the competition when other large and community banks felt that they should enter a market that is underserved and perhaps overpriced. Perhaps this market has reached the point where there’s too many banks and too much money. If the Korean banks were making an above market return for the risk incurred, free markets and stupid bankers will not permit that to continue for long.

It’s also possible that the Korean banks simply made poor credit decisions and that the bad loans are now coming home to roost. Whether in response to competition or sometimes just feeling smarter than everyone else, a few bank analysts have suggested that the Korean banks may have loosened credit standards in order to continue growing assets at the same explosive rates of the last few years. Good for borrowers – maybe not so good for the lenders and their shareholders.

Is this the tip of the iceberg? Or will we start to see banks and other lenders across the spectrum report an increase in bad loans and a subsequent tightening of credit standards. Stay tuned.

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

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Monday, May 21, 2007

Trail Mix, Pigs and Cash Flow

Trail mix, pigs and cash flow. Who would have guessed that this combination would be on the front page of today's Wall Street Journal (subscription required).

The basic story is one that CFOs of all size companies and industries have to deal with everyday. How does a company control its cost of goods sold so that the rising prices of raw materials and labor don't shrink gross margins?

In the case of trail mix, pigs and cash flow, hog farmers are facing a significant increase in the cost of feed due to the rising price of corn resulting from the explosive growth in demand for ethanol. Protecting profit margins without diminishing the quality of its end product has resulted in hog farmers feeding their livestock by adding items like trail mix, tater tots, popcorn, pretzels and licorice to its feed.

The CFO must be able to accurately track and report costs, quickly gauge trends and forecast the impact of those trends on cash flow. The minute the CFO falls behind in this challenge, a company increases the chance it will become less bankworthy and unable to attract the most cost effective bank loans and other sources of capital.

Is your cash flow suffering and making it difficult for your business to attract financing? Read "Matchmaking for Business Loans" and give me a call.

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Friday, May 18, 2007

7 Things I Heard at LA Capital Marketplace

This morning I ate breakfast with about 45 other professionals active in the capital markets in the greater Los Angeles area. The group meets monthly to swap business cards, deals and market intelligence on the latest in financing transactions. In addition to commercial bankers, asset based lenders and factors, the hot coffee and bagels attracted international trade finance experts, business attorneys, investment bankers, CPAs, valuation professionals and commercial real estate brokers to name a few.

The topic of discussion was the question "what business trends are you seeing in the capital markets?" Of the many responses, here are seven things that caught my attention.
  1. I started the ball rolling by discussing the fears of stupid bankers and the thought voiced by some bankers that sanity will return to the capital markets only after a few large loan defaults.
  2. There's too much money chasing too few good deals.

  3. It's getting hard to find good acquisition targets. To keep from missing out, private equity is moving faster with less due diligence.

  4. The price of commodities is rising and profit margins are shrinking.

  5. Sellers of smaller companies are seeing the high price to EBITDA multiples of larger deals and are holding out longer waiting for the same.

  6. Too many people built their businesses by borrowing against the equity in their homes which is no longer available.

  7. Margin compression is causing the mezzanine debt markets to disappear.

Interesting insights to say the least.

One more that I left out. According to Joel Bagelman of Fidelity Mortgage Lenders, financial statements are only needed by lenders who are "sissies".

If you're in need of insight into the capital markets for small businesses, need help finding the right lender or telling your story the right way, then give me a call.

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Wednesday, May 16, 2007

Access to Capital for African American Businesses

There was an interesting article in today's Los Angeles Times about access to capital for the African-American small business community.

The article points out that African American-owned businesses represent the fastest-growing segment of minority-owned businesses in the U.S., according to the latest census data. African American-owned firms grew 45% from 1999 to 2002, about six times the national average.

So where's the money to help these minority-owned businesses grow?

The article points to two African American owned banks, OneUnited Bank and Broadway Federal Bank, in the Los Angeles area - both have websites which indicate a willingness to lend to small businesses with real estate collateral.

What if your small business doesn't have real estate to offer as collateral?

The Los Angeles Times article suggests one might check out the Pacific Coast Regional Small Business Development Corporation (PCR). PCR is a private, non-profit corporation founded in 1977 to provide financial, educational and consulting services to small business owners in Southern California. PCR offers a number of small business financing solutions and administers the state's flagship loan guarantee program. All asset classes (accounts receivable, inventory, equipment and real estate) are taken into consideration as collateral for these loan programs.

Looking for a list of the top African American owned banks in the United States? Check out Black Enterprise's Top Bank List.

Still can't find a loan program directed at African Americans or other minorities? Check out my earlier blog postings for other resources!

Friday, May 11, 2007

Stupid Bankers

Stupid Bankers! That's not my description, but the title of an article from the column in today's Wall Street Journal.

The title is an eye catcher because it is based upon a quote attributed to Ken Lewis, CEO of one of the world's largest banks - Bank of America. Here's the quote - "we are close to a time when we'll look back and say we did some stupid things".

Mr. Lewis' quote sounds very similar to one I've heard before from bankers - "the best deals are done in the worst of times and the worst deals are done in the best of times".

We've been in the best of times for some time now - the economy has been steady and growing and the capital markets are throwing money at deals so fast and at rates so cheap it will make your head spin.

Just a few weeks ago, I wrote about the "House of Cards" being created by the flood of capital being invested by private equity, hedge funds and lenders. Add that to a mix of "covenant lite" and "payment in kind" for interest and it becomes more and more clear that the good times may soon come to an end.

When will sanity return to the marketplace? Mr. Lewis of Bank of America believes "we need a deal to go bad, as long as we're not in it." Until there is penalty for making a bad loan, no one will step back for fear of missing out on the fees.

Funny, that's the same sentiment I've been hearing on the street from small business lenders and wrote about in "The Expected Storm of Turnarounds". More and more lenders think a shakeout is coming and a little spilt milk (loan losses) would be a good thing. Just don't spill their milk, thank you.

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

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Thursday, May 03, 2007

Where's the Money?

I was a panelist for the Access to Capital session at the first Small Business Success Conference. Our objective was to give small business owners a bit of insight into the financing options available for business loans and equity investments. As the moderator pointed out, just because one door is closed to a small business owner doesn’t mean that all doors are closed. Each lender and investor has its own set of criterion – which can change from day to day.

In addition to me, the panel included a representative from the SBA, a commercial banker and a factor.

My role on the panel was to help the attendees understand a little bit about the world of angel investing given my alliance with Angel Strategies, an angel capital firm that invests worldwide in a variety of early stage companies.

So here’s a few highlights from the presentation…

The banker confirmed the obvious. We’ve got lots of money to lend at very reasonable rates. But be prepared when you ask for money because we’re not in the business of taking significant risks.

The SBA representative said we’ll step up to provide the bank comfort if all you need is a lender to take a teeny, tiny little more risk than usual. And don’t worry if the bank says no because we’ve found that credit unions have quite the appetite these days for originating SBA loans. But even with their loan guarantee, the borrower still needs to find a way to show they have skin in the game. Having a home to offer as collateral and a FICO score over 640 sure helps.

The factor (who by the way, has done a great job with a few of my clients) told the crowd that his firm can provide a small business with lots of money secured by accounts receivable and purchase orders in less than a week once you complete a simple one page application. He’s also provided a number of business loans through his minority loan program.

Unlike a business loan, the world of equity entails giving up a piece of your company in exchange for money. Finding the right angel investor is akin to looking for a needle in a haystack. Almost 60 percent of the $25 billion of angel money invested in the US in 2006 went into the technology, software and healthcare sectors. The average investment in 2006 was less than $500 thousand. While the lender wants to know how they’re going to be repaid principal and interest, the angel investor wants to know your exit plan - how you’re going to give them a very healthy return on their investment in three to five years time.

So the overall message is as follows – there’s lots of money out there. Lots of money. Who gets it depends upon how good of a job the small business owner does of finding the lenders and investors that are a good fit with their needs and objectives and how well they tell their story.

See you at the next Small Business Success Conference in October!

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

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Wednesday, May 02, 2007

The Expected Storm of Turnarounds

Today's Wall Street Journal (subscription required) reported that turnaround firms are beefing up their staffs as a result of increasing demand for their services from hedge funds. Two of the biggest turnaround firms, Alix Partners LLC and FTI Consulting Inc., has either significantly increased its staff or has plans to in the coming year.

The increase in business bankruptcies and corporate default rates has been predicted for some time, but just hasn't seem to materialize. Why? There's simply too much debt and equity available on easy terms.

I have spoken to a couple of lenders in the last 24 hours - each complained about capital markets awash in liquidity that have caused them to lose deals to other sources of debt willing to take more risk at a lower cost. One mentioned to me that the private equity sources are aggressively trying to reduce their equity investments in leveraged buyouts giving him reason to pause about pursuing those loan opportunities. Another lender mentioned he lost a deal to a competitor who was willing to fore go any collateral requirements for a company experiencing losses. There's no shortage of anecdotal evidence. All agreed that the only thing that may bring some sanity to the capital markets is a short recession with a few good loan defaults!

My advice - run your business to maximize value and don't overextend yourself. And make sure you know your lender - it's relationship that counts most when the chips are down.

If your business is undergoing a turnaround and you need help finding the right lender or telling your story the right way, read "Matchmaking for Business Loans" and give me a call.

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Tuesday, May 01, 2007

The CFO - Financial Guardian and Strategic Leader

What role does your CFO play in running your business?

According to Capital Eyes, a publication of Bank of America Business Capital, the best CFOs frequently serves as guardian of the company's finances and as a strategic leader. These two roles require different skill sets - a strong CFO has got to be able to see both the forest and the trees.

The article suggests four tips to CFOs in their efforts to be both financial guardian and strategic leader:

  1. Invest in people

  2. Simplify and standardize processes

  3. Embrace technology

  4. Engage outside counsel periodically

Excellent tips for the CFO or the small business owner filling that role.

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