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!

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.

PO Financing- the ideal financing tool for the right situation

By Mike Semanco, President, Hennessey Capital

For many entrepreneurs, landing that large purchase order is just what the doctor ordered.  You worked hard to win the client, outlasted the competition and are in a position to build on your success.   The team celebrates until someone asks, “Do we have the cash to purchase the large amount of supplies needed to deliver the project?” 

Growth can be a major drain on a company’s cash and a major reason why we stress the importance of cash forecasting. 

Although purchase orders are covered in the Uniform Commercial Code as an asset of a business, it is not an asset that is easily financed, unlike accounts receivable, inventory, equipment or real estate.

Purchase order financing is offered by very few finance companies and is usually best suited for distributors.  Manufacturers and service providers are not ideal candidates for PO financing due to the concern of performance risk.  PO Financing for distributors allows for the securing of goods by way of letter of credit (promise to pay once certain stipulations are met), so that the distributor can increase its buying power with suppliers.   In the case of a distributor, they are not responsible for manufacturing the product so performance risk lies with the supplier.  PO financing will be structured so that the supplier will not receive payment unless they produce the proper product as defined in the PO, which eliminates the issue of performance risk and thus satisfies the PO funding source.

PO financing carries more risk to a lender than traditional A/R financing thus the cost is more than traditional A/R financing.  Due to the increased cost, companies must make sure they have sufficient margin in the order.  PO financing is typically used in conjunction with an A/R line of credit or factoring facility so that once the product is received by the end user, invoices can be financed and the cash can be used to repay the PO funding source.  This opens up the PO finance facility to be used for new orders. 

Purchase order financing is not ideal for every business but in the case of a distribution model where product needs to be purchased and sold to large entities or retailers, it could be a great tool to secure the cash needed for new growth.

Hiring Opportunities in Tumultuous Times

The economic crisis has created tremendous opportunities for companies looking to expand their teams. In the commercial finance industry the retrenchment of many firms has created a large talent pool of professionals with impressive credentials and histories of success who are now available to finance organizations in growth mode. Toby Dahm shares his thoughts on this topic in the September edition of The Secured Lender. Read the article