CFA Entrepreneurial Finance and Factoring Conference - The Value of Collaboration

By Toby Dahm, Senior Vice President, Hennessey Capital

I have just returned from the Commercial Finance Association’s annual Entrepreneurial Finance and Factoring Conference.  This is an event where specialty lenders that serve the smaller part of the financing spectrum come together to share ideas, build new relationships and cultivate existing ones.  Each year I get more out of it.  This year I came back with a particularly strong sense that the relationships I forged and the ideas that we shared as a group will play a big role in the growth and strengthening of Hennessey Capital.

In a word, the key to the value of the conference is collaboration.  Although many of us may compete, there is a feeling that we are on a common mission.  We fill various financing niches.  Each one of us meets a need, many of which are underserved.  In order to be successful, we all must understand and manage risk wisely, while creating prosperity for our clients and our firms.

I met a number of people whose firms complement what we do.  By partnering with other specialists, such as purchase order lenders, or export finance firms, we will be able to meet a much broader financing need than any of our individual firms could do.  In addition, I met numerous niche lenders that may not complement what we do, but who can meet financing needs that we cannot and thus become a valuable business resource.  We call the concept of building our network and using it to the benefit of clients and associates “network capital”.  This conference provides a great opportunity to expand our network capital.

The key to having this collaboration work is the attitude of being on a common mission.  There is a strong need for what we collectively do and there is enough business for all of us to prosper if we continue to improve as a group.  The pie is not finite.  If we grow the pie, we all eat more.

I look forward to continuing some of the initiatives that we started at the conference and building on the relationships formed.  Most of all, I look forward to coming together as a group again in November.  This is definitely a group where one plus one is more than two.

2011 IFA Conference Wrap Up

By Jeff Wright, Senior Vice President, Hennessey Capital
I recently attended the 2011 International Factoring Association Conference in Washington D.C. This conference brings together factoring companies and those that service them from across the country. This year’s conference included over 600 attendees which made it the most well-attended event in the association’s history. This may be attributed, in part, to an economy that is showing signs of improvement. The key note speaker, Elizabeth Duke from the Federal Reserve, provided significant data supporting a recovery. While a recovery is in process, it is a fragile one, wherein banks are being cautious about lending to small businesses. Alternative financing, i.e. asset based lending and factoring, are still needed to provide access to capital to companies that do not qualify for traditional banking. Non-traditional funding sources can be that bridge to finance start up companies and those that are in a turnaround stage until they can qualify for bank financing. 

Traditional factoring companies and those that specialize in healthcare, construction, transportation and P.O. and M&E lenders were also represented at the conference. This group provides an excellent forum to network and discuss how we can work together to provide financing to small businesses that need access to capital to grow their businesses. I had the opportunity to meet with P.O. lenders that can provide financing to purchase material and fund the work in process until completion. This allows companies the opportunity to take on new orders without having the liquid capital many companies need. I also had the pleasure of meeting M&E lenders that fund clients with weak balance sheets and operating performance. Their focus is on the asset values and not necessarily on the operating performance of the client. By partnering with them, we can address all the client’s working capital needs.

I also met with a transportation factoring company that was seeking to rediscount its lending portfolio to fund growth in its factoring business. In some instances, they could not capitalize on new business opportunities because they did not have a lender to finance their growth. Hennessey Capital has experience in financing finance companies and sees this as a growing market segment of our business.

One of the break out sessions I  enjoyed immensely was “Negotiating Techniques” presented by Marianne Eby. She explained the importance of being prepared, mutual gain, listening until it hurts, keeping it positive, focusing on trust, relationships and interest, probing to explore, never say no or yes (use yes, if …). I have her presentation for those who would like it. E-mail me to request a copy. I plan on using her list of “crunches” as negotiating probes to help me better service my clients’ needs and make it a win-win for all parties.

Understanding the Financial Spectrum

By Toby Dahm, Senior Vice President, Hennessey Capital

For most small to mid sized businesses, when they think of financing, they think of a bank loan.  Frequently, however, a bank loan is not available or is not sufficient to meet the financing needs of these companies.  What, then, are the options for a company that finds itself in this situation?

As you would expect, the answer depends on a number of factors.  The first, is the stage in the life cycle of the business. 

A company that has not yet launched its product or service into the marketplace is in need of seed capital. Sources of seed capital financing include:  Owner equity, family and friends, seed investment funds, grants (which is very specialized), and micro loans, or a combination of these sources.

The next life cycle stage is “post revenue but pre bankable.”  Companies in this category have not yet developed a favorable enough financial history to qualify for a bank loan, but have sales.  The sources of financing that fit this stage include:  Asset based loans including factoring, revolving lines of credit, equipment leases, venture capital (a very selective capital source), merchant cash flow lends and government guaranteed bank loans through programs such as the SBA.

The next life cycle stage is those companies that are bankable but need more capital than a bank loan will provide.  These companies usually have a good financial track record but their rapid rate of growth and limited financial strength require additional funding beyond the bank.  Some sources for this additional funding include factoring, equipment leasing, mezzanine debt, and private equity investment.

The final life cycle stage is where bank funding is sufficient to meet all of the financial needs of the business.  These businesses have matured to the point where they have built up enough financial strength where a bank loan provides all of the capital that they require.

The second factor is the nature of the business.  This will determine which options are available to the company throughout its life cycle.  Those businesses that are asset intensive will want to pursue asset-based financing and work with lenders that have an appetite for the various assets they require.  Some companies are working capital intensive and will benefit from a revolving form of asset-based lending.  Other companies are equipment or real estate intensive and will benefit from equipment leasing/lending, and/or mortgage loans.  Companies that are do not have assets but have stable cash flow may be able to utilize a merchant cash flow lender or contract finance company.  Some companies have a strong base of intellectual property assets that can be used to attract various forms of financing.

A third factor that will weigh in is the financial strength of the business owners and support they provide through personal guaranty or other secondary sources of repayment, such as outside collateral.

As you can see, there are a variety of forms of finance that exist for businesses and many of these may be available to assist you with the growth and success of your company.

At Hennessey Capital, we maintain contact with many providers of these sources of funding and we welcome the chance to review your financing needs and identify an appropriate source for your business.  We always welcome the chance to share our financing expertise, and we would love to hear from you.

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.

 

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. 

Creating a Credit Policy that Helps You Get Paid

By Candace Pavliscak, Chief Credit Officer & Senior Vice President, Hennessey Capital

Everyone thinks of the banking/finance industry when they hear the term “credit policy” particularly with the prevalent coverage in the media as of late. I have even seen “lending policy” and “credit policy’ used synonymously in some articles but I believe what they each represent is very different. While it is true that all financial institutions have a credit policy that drives their lending practices (some better than others as we have seen), every business should have some form of credit policy.

Why should your company have a credit policy? Think about it, as a goods or service provider you are extending credit to every customer that doesn’t pay you cash on the spot for your work. You should have some idea of how much credit you are willing to extend and to whom. The basics of a credit policy can be summarized as follows:

Know your customer. How well do you truly know your clients? What reputation do they have around town or among industry peers? What are their typical payment habits? Is there an end user beyond your customer that will affect payment to you? If so, how strong is that company? It is a recommended practice to request credit references and utilize public data to analyze your customers before you begin a relationship.

Know yourself. You need to be able to determine how much risk you are willing to take? This boils down to how much are you willing to lose. As we see with personal investors, some are willing to take big risks for the possibility of larger returns and others prefer smaller returns and limited risk. Find the balance that suits your business. Remember though that no one collects 100% from all its customers 100% of the time. Also be aware of how many “good sales” you have to generate to make up for the one “bad sale.”

Have a process and make sure it is communicated to all employees. This principle encompasses everything from your sales process (do your sales people understand your risk tolerance?, will they get the reference information you want?) to your invoicing process (what can you bill for?, when can you bill it?, where do you send the bill? and what approval is needed for your customer to pay the bill?) and finally to your collections process (do you have the right AP contacts for your customer?, are you making timely follow up inquiries?, and do you have any leverage if payment issues arise?)

Having clear expectations with your customer and your employees helps to set the tone and build relationships for your company to succeed.

Creating a sound credit policy is critical to avoiding confusion with customers and keeping your company’s financial house in order. For additional resources/samples of effective credit policies, see Inc’s Finance Guide: How to Create a Smart Credit Policy

Using Working Capital to Complement a Current Bank Line of Credit

By: Toby Dahm, Senior Vice President, Hennessey Capital

Before Reese’s Peanut Butter Cups became one of our favorite Halloween treats, nobody thought that peanut butter and chocolate could be combined to become something so delicious.  In the finance world, there is an often overlooked recipe for growth financing that creates a win/win/win scenario.  That recipe is to utilize factoring as an incremental financing tool in addition to an existing bank loan.

Hennessey Capital has utilized this strategy to propel many companies to a higher level of revenue and profitability, while enabling the client to maintain a very competitive financing cost structure.  For most small and middle market companies, a bank loan provides the lowest cost financing that they have access to.  However, it is common that a bank is comfortable at a certain level of exposure to a client, but the client’s growth trajectory creates a financing need that exceeds the bank’s comfort level.  This is where factoring can be the perfect tool to fill in the funding gap and enable the client to achieve success.

The benefit is that the client can very quickly put the factoring facility in place to complement the bank loan at very little fixed cost.  The factoring facility becomes a tool to finance their working capital needs as their growth accelerates.. By providing up to 85% financing of accounts receivable, without diluting any equity ownership, the factoring facility enables the client to access cash immediately, instead of waiting for their customers to issue payment.  Factoring provides great flexibility to the client by being able to finance the rapid growth when it is needed, while providing the choice to terminate the program when it is no longer needed due to expansion of the bank loan or a reduction in working capital growth.

An IT staffing company was able to utilize this program to take on additional work that enabled them to grow from $2 million in annual revenue to over $10 million during an 18-month period.  Although Hennessey’s factoring facility was replaced by an expanded bank loan, the client has continued to grow at a strong pace and is now achieving annual revenue that exceeds $100 million.  Another IT consulting firm utilized a factoring facility with Hennessey Capital to enable it to expand its base of consultants on one project from 10 employees to 75 employees over a 90-day period.  As they demonstrated their performance and profitability on this project, their bank agreed to increase their financing to replace the factoring facility.

Just as chocolate and peanut butter can be combined, a bank line and a factoring facility can also be combined to form a very healthy 3 way partnership between the bank, the client and the factor.

When it Makes Sense to Hire a Turnaround Consultant

By: Jeff Wright, Senior Vice President, Hennessey Capital

In my 27 years in the asset-based lending and commercial loan workout business, I have observed many companies experiencing significant problems with operating performance. In a typical scenario, these businesses endure a substantial decline in revenues and/or are dealing with costs that are increasing at a higher rate than revenues. Management is often slow to begin cutting overhead expenses. Losses and tight cash flow frequently trigger covenant violations with their lenders who, in turn, to take steps to protect their security interests. When this occurs, it may be time to consider hiring a turnaround consultant.

Many companies, however, use the excuse that they can not afford an outside consultant or they can handle the task internally. It is important to recognize that even the most talented businesspeople can benefit from the support and guidance of an experienced consultant.

Hiring a consultant can provide an unbiased, independent opinion of the company’s current position. When tough decisions need to be made to reverse downward trends in operations and changes must be implemented and monitored, consultants can analyze the business decision from a position of greater objectivity. Moreover, some of the “change” burden can be handled by the consultant so that management can focus on the day-to-day responsibilities of running the company.

The most common benefit to hiring an outside consultant is access to his or her experience. The consultant can draw on that field experience to fill gaps in the management team’s skill set and develop and implement a plan that has worked in a similar situation in another organization. Other benefits include the consultant’s ability to draw on sources in their network for advice, and to connect with potential customers, suppliers, investors, or buyers. Many consultants also have relationships with a variety of lenders and can help in negotiating favorable restructuring agreements.

The overlying take-away here is that cash is king. The ability to improve cash flow is the consultant’s primary objective, so that the company can continue as a going concern, grow the business, and take advantage of new opportunities.

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