Accessing Capital When Traditional Credit is Constrained

By Mike Semanco, President, Hennessey Capital

What is a borrower to do?  Although the traditional credit market is showing signs of life, businesses are still facing a challenging credit market.  Hard asset (equipment and real estate) collateral values have dropped dramatically so refinancing of loans requires more cash in each deal.  Younger companies still require a track record, typically 2 years, to qualify for traditional lending.  Because of constrained credit conditions, companies have to think outside the traditional box to finance their business. 

 

In our business, we have seen companies negotiate preferred payment terms with their customers.  Down payments, progress payments and shortened A/R terms are being pursued as viable alternatives.  Companies who have normally written off the notion of factoring receivables are now using it as a standalone financing product or using it in addition to current bank lines to fund incremental growth.  ABL lines of credit are now more mainstream since most ABL lenders are focused on collateral and not solely on cash flow. 

 

In addition to working capital alternatives, companies are looking at micro loan programs and seed funds to help with growth financing.  These loans are usually under $50,000 but can make a difference to a young, growing business.  State funded programs are constrained with lack of cash but could also be a source for creative financing.  PO Financing for distribution businesses remain a good source of capital but project financing for manufacturing companies is non-existent in the traditional market. 

 

Young companies are traditionally undercapitalized.  In a tightened credit market, this creates more stress when new opportunities become available.  Communication is always the key.  Ask your banker if options exist outside their world.  Do be afraid to ask customers what may be available.  If customers like your product or service, they may be open to concessions.  Ask your professional advisors to make introductions to funding sources.  They should be aware of various options and point you in new directions. 

 

Credit is available.  You may just need to look outside the traditional box to find it.

Commercial Finance Association Conference Recap

By Mike Semanco, President, Hennessey Capital

For those professionals involved with the commercial finance industry, the place to be in mid October this year was at our annual conference in downtown Chicago.  The weather was great and the time spent at Navy Pier for the opening reception was filled with talk about what a difference a year makes in the credit world.

The attendance was up and I am not sure if it was due to the keynote speech by President George W. Bush or that we had a wave of bankers who were in attendance this year who could not make it in 2009 for a whole host of reasons.

One common theme throughout the week was the discussion on how factoring and asset-based lending were the products used by small and midsized businesses to help them get through the credit crunch.  Even with the credit market showing a slight sign of easing, ABL and factoring is still the time tested way for businesses to finance their working capital needs, whether traditional means are available or not. 

Panel discussions included insight on the current state of the debt and equity markets, financing for entrepreneurial lenders, the impact of global economics and technology trends within the commercial finance industry.   It is apparent that credit remains very tight for small and medium sized companies, while there is a lot of money available to large corporations who have a broader choice of borrowing options.  To achieve long term success, lenders must stay disciplined in following their credit and process guidelines.  Technology is playing an increasingly important role in our industry, from marketing to sales management as well as in operational efficiency and customer service. 

An opening session with former President Bush and a lunch session on customer and employee loyalty by James Kane, were highlights to the event.

Everyone at the conference agreed the economy is still fragile.  The lending community is confident the worst is behind us and there will be opportunities to lend companies the money they need in this difficult environment.  There is no question factoring and asset-based lending will remain a critical solution for businesses needing working capital.  I have been in this industry for 17 years, which is a short period of time compared to other seasoned operators.  One thread we all share is the passion to help entrepreneurs obtain the financing they need to grow their business.  The convention provides a fabulous opportunity to renew acquaintances and make new ones.  Sharing stories of successes, challenges, and experiences that we meet along our journeys is what really helps us connect as an industry. What a great industry it is!

Your Bank Issued a Demand Letter: Now What?

 

 By Jeff Wright, Senior Vice President, Hennessey Capital

                       

The principal owner of the company is usually surprised and upset when receiving a demand letter from the bank requesting that he/she pay the loan in full in 10 days. Chances are that when a bank issues a demand letter, the owner has defaulted on the loan under the terms and conditions documented in the Loan and Security Agreement. Failure to make timely payments and violation of financial covenants are common reasons that trigger the issuance of a demand letter. Do not panic and assume the company must go out of business and close its doors. This is the traditional first step banks take to collect on a  loan.

 

Do not ignore the letter! The bank will take steps to protect its interest, which might be contrary to what you deem are the company’s best interest. Contact the loan officer and schedule a meeting to discuss what the bank’s intentions are with the loan relationship. There may be an opportunity to restructure the loan under new terms and conditions. If the bank presses to be paid off in full, it is unlikely you can obtain alternative financing on such short notice. This takes time and may require negotiating a Forbearance Agreement.

 

Under a Forbearance Agreement, the bank agrees to forbear from taking any actions to collect the loan for a period of time, usually one to six months, provided you meet defined hurdles in operating performance, reducing the bank’s loan exposure, improving its collateral position, and/or providing evidence that alternative financing is being sought. The agreement will also ask you to acknowledge the default, confirm the balance owed, reaffirm your  guaranty, and waive any claims you  may have against the bank.  You can also expect the bank to increase your  interest rate, charge additional fees, ask for additional collateral, and/or reduce advance rates. It does, however, buy you time to find another lender.

 

Prior to meeting the bank, review your documents, preferably with your attorney, to determine what rights you have. Many bank documents allow a “cure period,” which allows you time to mend the default. Also have the attorney or advisor with you when you meet with the bank. Many business owners do not understand this process and it is critical to have a trusted advisor there to represent you and protect your interests. Be prepared to provide the lender with financial and collateral information that supports your plan to pay off the bank in a timely manner, with proof the company is viable and that the bank’s loan exposure will improve in the interim.

 

Bring a current financial statement, receivable and payable agings, inventory numbers, and operating and cash flow projections, supported by open purchase orders and backlog reports that support projected revenues and overhead cuts made to improve cash flow. Understand what your cash needs are over the short term. Cash is king at this point. Having access to capital is key to the company’s survival. Use your trusted advisors, i.e. attorney or consultant, to help in preparing your plan and in negotiations. They also have resources that can assist you in finding alternative financing if that becomes necessary.

 

During the forbearance period, the bank will be monitoring the company’s performance and will take more aggressive action if they believe their loan loss exposure has increased. This will be evident if there is a default in the Forbearance Agreement or troublesome information is obtained through their due diligence. Be honest and up front with the bank and don’t be afraid to communicate bad news. Hiding information from the bank can result in broken trust and the bank’s unwillingness to cooperate in the future. They may take action to have a third party involved to protect their interest.

 

As a last resort, consider filing for bankruptcy protection. Bankruptcy will allow you time to reorganize the company with less debt. Unsecured creditors and some secured creditors debt can be negotiated at a discount and paid over time. Do so only after considering the consequences. Will you have the support of key vendors and customers going forward? Who will fund operations while you are in bankruptcy? Can you retain key employees to assist in the turnaround? Will there be sufficient cash flow to continue as a going concern and pay bankruptcy costs? 

 

This process can be emotionally draining and costly, but is necessary if the company is to survive. The ultimate goals are for the company’s operating performance to  turnaround and have the bank retain you as a client.

 

Effective Networking: Do’s & Don’ts

By Mike Semanco, President, Hennessey Capital

The key is just showing up.  This rings true in daily life events as well as networking.  Networking can be stressful to some and to others it is like riding a bike.  The problem is if you do not show up, you may miss meeting a great new contact, developing a new relationship or having a chance at a new opportunity at some point in the future.  There have been numerous times where it would have been easy to skip a scheduled event.  But once you are there and strike up a conversation with people in the room, the reason for attending becomes very clear.

The attitude and strategy I bring to a networking event is to figure out how I can help others succeed.  If you have the mindset of helping others, you take a genuine interest in listening to the conversation and it takes you out of “sales mode”.  Making a sale during a networking event should be the last thing on your mind. Creating relationships with like-minded people and those you enjoy speaking with is first and foremost.  People do business with people they like and trust.  Building a relationship is the first step to developing trust with someone. 

So once you convinced yourself to attend an event, use the following do’s and don’ts to make it time well spent.

Do’s

• Show up- you never know who you will meet.
• Have a goal on how many new people you want to meet.   
• Smile at everyone, make contact and say hello- remember first impression.
• Listen with genuine interest and offer to help.
• Address the person by name- helps you remember their name in the future.
• Ask for a business card and ask if the person would like yours.
• Develop a concise message if you are asked to explain your business.
• Follow up after the event to say thanks or schedule a follow up meeting to continue the discussion and build the relationship.

Don’ts

• Don’t attend with the expectation of landing a new opportunity.
• Use it as bar night.  Manage alcohol consumption or do not drink at all.
• Don’t be afraid to start a conversation and try not to start with “So what do you do”?
• Focus on quantity of contacts, focus on quality.
• Don’t dominate the conversation. Remember to ask questions.

Payroll Funding: Avoiding the Cash Crunch

By Joe Romeo, Senior Business Development Representative, Hennessey Capital

Are you pulling your hair out each time Payroll Check Date approaches?   Maybe a review of your working capital resources is in order.

Many companies face a recurring cash crunch when it’s time to pay their most valuable assets, their employees. Next to the fixed costs associated with buying inventory, building products or creating deliverable services, making payroll is often one of the biggest consumers of cash.

 

Typical scenario:  Your business is going pretty well resulting in a good amount of A/R, but your customers continue to defer payment to or beyond terms.   These are some of your best customers so you are caught in the delicate trap of “collections versus managing the customer relationship.”

 

There is a sound and simple solution for this scenario – working capital financing.   Services like factoring can give you access to immediate cash to provide gap financing and reducing the stress around meeting payroll.

 

Factoring advances of up to 85% of your A/R immediately, when you invoice your customers giving you the working capital you need to run your business and make payroll.  As a bonus, factoring is completely discretionary - you utilize it when you need it.

 

While we are on the subject of payroll, there are some other things you should consider.

 

Paying your employees and satisfying your payroll tax requirements are an essential part of running a successful business.  Many organizations outsource this service.  Outsourcing will save time and expense by not having to perform this work in-house, allowing the business owner to focus on running the business and managing the bottom line. 

 

You can also combine a factoring facility with Hennessey Capital Payroll Solutions – a single point to handle all your human capital management needs.

 

Steering clear of the many pitfalls associated with the regulations involved with payroll is often difficult.  Outsourcing this function to a third party can be an effective remedy. Solutions can include general payroll administration as well as reporting and depositing your taxes with the proper State/Federal authorities. 

 

This involves:

• Accurately calculating and submitting payroll taxes to the state and federal agencies.
• Selecting the proper options available to pay employees and submit payroll.
• Making sure data that is stored or transmitted electronically is secure.
• Ensuring your data is protected from unexpected circumstance such as a fire, hurricane, snow storm, flood or power outage, etc. Optimal disaster recovery plans continuously back up all client data in different locations, so that even in the event of an unforeseen circumstance (weather-related delays, power outages, etc.) all clients’, employees’ and any corporate sensitive information is protected and secure.

As your business grows, you will likely need to hire more employees and add staff to manage those employees. As a company’s employee size increases, more attention needs to be given to Human Capital Management issues. 

Utilizing an Advisory Board to Guide Your Business

By Mike Semanco, President, Hennessey Capital

The importance of an advisory board to an entrepreneur and business owner is invaluable.  Entrepreneurs thrive on developing ideas, products and strategies on their own terms and at their own pace.  The “charge ahead”, “get it done” mentality is second nature to this group of individuals.  Entrepreneurs come in many shapes and sizes- sole practitioner, division managers or even CEO.   Whatever the title or responsibility, surrounding yourself with a group of professionals you can rely on for sound advice and direction will only improve your chances of success and keep you sane.

An advisory board is different than a board of directors or managers, who hold fiduciary responsibilities of the business.  Advisory boards can take many forms ranging from formal CEO roundtables and annual retreats to informal gatherings over coffee, lunch, or golf.  Having a sounding board to share ideas and challenges help entrepreneurs feel they are not tackling the world alone.  You can have a great internal management team or partner but there are times when outside influence is needed.  A different perspective from a trusted advisor who has encountered the same issue helps you see the challenge or opportunity in a new light.

Advisory board members can consist of professional advisors (your CPA, attorney, banker or consultant), friends or associates who may or may not own their own business, or even a current staff member.  The key is to surround yourself with people who have diverse backgrounds, are willing to challenge the status quo and who you like to be around. Start by selecting two or three contacts you feel could be strategic to your business and can fill the gaps you determine are needed.  Meet with them and discuss your plans and ask them of their interest to meet on a regular basis.  This could be once a month, quarterly or as needed depending on how critical your needs. 

Daily business decisions are not easy so having a group you can turn to for renewed perspectives and friendly banter is refreshing.

Reprioritize Your Continuous Improvement Efforts to Maximize Profitability

By Mike Pircer, President, MAP Business Solutions

As companies constantly reduce resources in this tough economic environment, continuous improvement initiatives are being thrown by the wayside. Many businesses are still doing the same things with fewer employees but then find themselves coping with poor morale, disconnected processes, shrinking margins, and dissatisfied customers. Continuous improvement initiatives are either not being implemented or being executed poorly in which there are no improvements at all. Those that are being worked on have a tendency to be knee‐jerk reactions that are not well‐planned, do not involve all the key stakeholders and do not connect to the organization’s overall strategy.
Companies need to recognize business processes as value streams. These streams represent all value‐adding and non‐value‐adding activities that are required to deliver a product (good or service) from request to delivery (and ultimately, to receipt of payment from the customer). Knowing what the customer values and is willing to pay for helps differentiate which activities are truly required.
In order to put continuous improvement back in play, these are the priorities in which an organization must focus on:

 
Priority #1: Eliminate unnecessary non‐value adding activities. An organization can uncover the unnecessary non‐value‐adding activities through a myriad of tools such as:

• Value Stream Mapping
• Customer Surveys/Interviews
• Warranty Claims
• Customer Complaints

Once an organization identifies the unnecessary non‐value‐adding activities, then the required resources can focus on the elimination of these activities. These are usually “low‐hanging fruit” and can be done quickly and cheaply.

 
Priority #2: Reduce necessary non‐value‐adding activities. Necessary non‐value adding activities are recognized as processes that the customer doesn’t care about, but they are necessary to keep the operation going. These types of activities could include:

• Invoicing the customer
• Sales calls
• Material handling

For example, a salesperson for a computer repair company may be out in the field making face to face calls on prospects and clients. While the client doesn’t value (or pay for) this activity, it is necessary in order to generate more business for the organization. An improvement initiative may be to reduce the amount of travel time for the face to face meetings and incorporate more internet marketing processes. In these areas, the goal becomes to reduce the effort required to assure compliance and proper operation of the business.

 
Priority #3: Optimize value‐adding activities. These are considered the organization’s “bread and butter” processes. Improvement activities could include projects that focus on reduction of cycle time, reduction of defects, and/or reduction of downtime. Improvements in this area are generally more time and resource consuming and could be more costly.
While optimizing value‐adding activities is important, lean thinking shows that faster and more dramatic results occur by first eliminating NVA activities. The outcomes from eliminating NVA are measurable and wide ranging, including faster delivery, improved quality, freed capacity, and reduced inventory – all of which lead to greater customer loyalty, market share and reduced expenses. Collateral benefits that result from eliminating non‐value‐adding work include improved interdepartmental and interpersonal relationships, safer working conditions, and reduced workforce frustration – all of which create a work environment that attracts and retains a talented workforce, which, in turn, leads to further business growth.1
1 Value Stream Management for the Lean Office, Don Tapping and Tom Shuker

5 Ways Factoring Can Help Your Business Grow

By Toby Dahm, Senior Vice President, Hennessey Capital 

 

As businesses across the country slowly emerge from the worst economic crisis since the Great Depression, a stark reality is hitting many of them.  That reality is that even though sales are rebounding and they are even showing positive earnings, they are starved for cash.  What is going on?  The problem is they are experiencing working capital pressure.  After stretching vendors as far as they can, as orders pick up, so must inventory and accounts receivable, which increases the cash that companies have tied up in working capital.  For many companies that do not carry inventory, or have become lean managers of inventory, this pressure is solely the result of the growth in accounts receivable that comes with the uptick in sales.

 

What can a business owner do to relieve this pressure and to continue to seize opportunity?  One excellent tool for growth financing, which is often overlooked, is factoring.  Quite simply, factoring is the sale of an invoice (account receivable) to a lender (called the factor) in exchange for a fee.  The factor will advance up to 85% of the invoice value and will provide the remainder of the invoice value, less a small fee, to the client when the invoice is paid.  This frees up cash that would otherwise be tied up in accounts receivable for 45 days or more.  There are many benefits to using factoring as a liquidity tool.  We will explore five of them.

 

Quick and Inexpensive Closing Process:

Unlike applying for and closing on a loan, the process of closing on a factoring agreement is simple, quick, and inexpensive.  The application is brief, and the information required to close is focused on the accounts receivable to be financed, the strength of the paying customer (account debtor) and the ability of the factor to confirm the validity of the invoices.  It can usually be accomplished in less than one week and at a nominal cost to close.  Also, numerous factoring companies will not require a minimum financing volume commitment or term obligation which means that the client is free to try factoring and terminate the agreement if they find that it is not advantageous.

 

Accommodates Rapid Growth:

Traditional lenders are looking for highly creditworthy and stable companies, which is often not compatible with rapid growth.  Such high growth companies often have financing needs that are well in excess of what a bank is willing to lend, due to the focus of traditional lending on past results and financial strength.  Factoring, on the other hand, is focused on the current opportunities that a client has and the quality of the accounts receivable they generate.  Most factors will provide unfettered growth financing to a client as long as the client demonstrates that it is a viable business that generates high quality accounts receivable. 

 

Complementing a Bank Line of Credit:

A borrower does not necessarily have to choose between a bank loan and factoring.  Banks and factors often work together to form a mutually beneficial financing arrangement that enables the client to maintain the low cost bank loan and use the factor to provide the incremental growth financing it needs.  This is most often implemented by identifying certain accounts that the factor will finance, with an understanding by all parties that the factor has the first claim on those accounts while the bank enjoys a senior collateral position in all the other assets it formerly held as collateral.  This also enables the borrower to grow at a much faster rate than without factoring.

 

Small Relative Cost:

There is a misconception that factoring is prohibitively expensive, which is not the case.  For a growing company with a decent gross profit margin, factoring is a very smart form of financing as opposed to missing a sales opportunity or giving up equity to increase the capital base.  It comes down to margin. Often the cost of saying “no” to a prospective client is far more detrimental than having the ability to say “yes” to an opportunity that grows the relationship and can lead to increased business. Sacrificing a small percentage of profit margin and executing the new order or job effectively, may pave the way for enhanced business with your client in the future.  

 

Gaining an Experienced Partner

Many factors have decades of business experience, often as entrepreneurs themselves.  They can bring this experience to bear in many areas, including evaluation of credit extension to customers, advice as to the structuring of payment terms, collection assistance, accounting assistance relating to accounts receivable, as well as more general business advice and support, such as introduction to new sales opportunities they become aware of.  Most factors view their success as being linked to the success of their clients.  A positive relationship with a factor can be a valuable asset to your business.

 

It is a little known fact that factoring is a centuries old form of finance.  It was initially used to finance trade between England and the thirteen colonies.  There is good reason that it has persevered, and is gaining popularity today….it makes great business sense!

Business Plan Basics

By Joe Romeo, Senior Business Development Representative, Hennessey Capital

Any entrepreneur knows that writing a business plan can be a daunting task. How is it possible to cram all of your aspirations for your company into one document? Challenging as it may be, a solid business plan is paramount when seeking financial support for your business. Here are a few concepts to keep in mind as you build or update the business plan for your new business venture.

SCALABLE PLAN:
One multi-level plan that is scalable for different audiences is best. A full blown business plan with all of the details in every section offers a deep dive for owners, strategic partners and trusted advisors. It is also critical to demonstrate how you, the business owner, are assuming some level of risk. Investors want to know that you have “skin in the game,” thus creating a vested interest in the company’s success. Make sure your plan includes a thorough explanation of your personal investment in the venture.

This fully developed and detailed version can offer a comprehensive review of the entire business and can be abbreviated into a brief overview for others.  

Most important will be a skeletal version with all but the essentials removed, referred to as an executive summary. This will be needed for your most important audience - outside investors.

This group (Venture Capitalists, Angel Investors, Private Equity investors, etc) won’t spend more than a couple of minutes on the initial review of any plan.  These individuals review a myriad of  investment opportunities every day so providing a basic overview that is succinct is key.

REASONABLE PROJECTIONS:
Avoid any ‘blue sky” projections. This market space is full of them and you can put all of the businesses that hit their outlandish projections in a thimble. Be realistic with your financial projections.

There are two essential projections you should include as part of your plan.  1) a conservative projection that you are very confident you can attain.  This should be used as the basis for all of your cost and expense budgeting. Remember to keep your projections S.M.A.R.T. - Specific
Measurable, Attainable, Realistic and Timely. The other is a less conservative projection that should be the realistic target or goal the business is working to achieve, otherwise known as a “stretch” goal.  Be sure to include ROI projections for your most important audience.

SELF STRESS TEST:
This is not something to include in the business plan, but you should be ready to address questions about the worse case scenario.  Pre-perform a stress test for your business. 

Have a contingency plan to adjust for unforeseen market conditions.  This lets potential partners know you are savvy enough to have considered “all” of the scenarios…good and bad…you’ve identified and evaluated the down side.   Investors view this as a rare dose of reality amongst the over-ambitious entrepreneurs.

END GAME / EXIT PLAN:
Although this is often premature for start up businesses and entrepreneurs, it is best to have an exit strategy or succession plan in place.  Capital investors hold this part of the process sacred and always have an exit strategy in mind.  It is the one true affirmation of their investment and the final step that determines the actual risk or reward of their decisions. Ultimately, investors will want to know how they can recoup their investment and exit the business.

There is a plethora of online resources focused on preparing and building a business plan. Here are just a few I would recommend:
www.automationalley.com
www.sba.gov
www.techtownwsu.org
www.oakland.edu/ouinc
www.oakland.edu/macombouinc
www.annarborusa.org

Tips for Staffing Companies: How to Increase Working Capital

By Jeff Wright, Senior Vice President, Hennessey Capital

As we continue to see signs of an economic recovery, the strength and duration of it remains uncertain. As a result, companies are reluctant to hire permanent employees. Instead, they are turning to temporary staffing companies to fill their needs. The staffing industry is beginning to see an increase in the level of activity as businesses ramp up production and level of service. This can create a cash flow problem for staffing companies that do not have adequate cash reserves. Employees must be paid weekly or bi-weekly but must wait 30-60 days to collect from their debtors. This causes a drain on cash especially when they are trying to grow their business. They may also lose out on the opportunity to bid on new contracts, due to cash constraints. Management can inject additional capital or they can secure funding from third party investors. The challenge with either of these options is that current ownership may have to sacrifice a level of control within their business to achieve the desired outcome.

An alternative for staffing companies that face this cash crunch is to seek business financing. Since the staffing company’s primary asset is the people they contract out, it does create an accounts receivable that can be leveraged to generate the working capital they need to pay its employees and operating expenses on time and take advantage of new opportunities. If traditional banking sources are not available, a factoring company can provide an alternative source of financing. Factoring is the sale of accounts receivable or invoices at a small discount to obtain immediate cash. This type of financing gives businesses the ability to ensure growth without diluting equity or incurring debt. While factors are concerned with the long term viability of the company, their primary focus is on the debtor strength, the debtor’s ability to pay the invoices being purchased and the character of the management team. While traditional funding sources, like banks, may focus on the staffing company’s past, factors look at future opportunity and growth opportunities. A factoring facility is easy to qualify for and can quickly create immediate working capital availability to meet cash needs. Factoring can be used to bridge the gap between the time the service is delivered and the time the invoice is paid and helps in managing the in-flow and out-flow of cash for staffing companies that want to capitalize on the prospects that lie ahead for their in-demand service.

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