Moving from Prototype to Production

By Mike Semanco, President, Hennessey Capital

 

In our world of lending money to small and midsized companies for working capital purposes, we get calls all the time about how to commercialize a concept or product.  Most of the time, these conversations are very difficult.  Entrepreneur’s are passionate about their product and know it inside and out.  The challenge comes in the form of addressing the following unknowns:

1) is there a market?
2) how is the initial launch funded?
3) how do you scale the business if the product takes off?
 

Setting the stage to address the above questions was a recent dinner conversation with a budding entrepreneur.  She developed a clothing product for both kids and adults to use in the winter months.  Even though there are similar products in the market, hers has a few twists which makes it very unique.  I proceed to ask the questions stated above and hear the following. 

1) Of course there is a market, I gave it to friends and family to try out and they loved it. I think it could be a big hit in the retail market.

2) I hear commercials all the time from banks that they will lend money to small businesses so I will ask my bank for the money.

3)  I have no idea.

Interesting answers.  We proceed with dinner and I put on my coaching hat and do my best.

A market test with family and friends is a good start but if you truly want to build a business and not just a hobby, don’t think small.  First, have you determined if the product can be patented in order to protect your idea before you begin approaching specialty retailers and distributors?  As for financing the initial launch, I am sure sweat equity was poured into making the first few hundred products.  Since the business has been no sales outside of friends and family, the first round of financing will come from the entrepreneur’s savings account, possibly from family members or friends of friends who believe in the idea enough to take the risk.  Banks like to lend money to companies with a track record, typically 2 years or more and a history of some earnings.  Lenders who specialize in purchase order financing and receivable financing may be able to help but they will require the business to have sales or a purchase order from a reputable buyer. 

What happens if the product does take off?  Has the business owner considered which suppliers to approach for raw material as well as manufacturing, packaging and distribution sources? 

The process of moving from prototype to production can be a daunting task.  A task that an entrepreneur should not take on alone.  Remember the business plan that was written a few years back when you thought it was not needed.  Time to dust it off and use it as a framework to tackle the next stage in your business.  Your CPA, attorney, friends and fellow business owners should be leveraged to help you think through the details of moving from prototype to production.  This is an exciting time in an entrepreneur’s life but it can also be one of the most stressful.     

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.

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. 

When to Consider Hiring a Temporary CFO

By: Jeff Wright, Senior Vice President, Hennessey Capital

In my 27 years of asset-based lending and commercial loan workout experience, I have consulted with many small businesses that know how to manufacture a product but have difficulty managing the financial aspect of their business. This includes companies that are experiencing significant challenges as well as growth-oriented companies. Many rely on trusted advisors like their CPA, banker, or attorney to provide assistance on financial matters affecting their business. However, these key advisors are often handling many clients, or may not have experience in your industry to provide targeted guidance on some of the complexities of the situation.  When this is the case, a temporary CFO can provide invaluable insight and expertise in evaluating and managing your business finances. Owners can draw on the CFO’s experience to fill skills sets management does not possess. This frees up management to address operational issues and marketing initiatives. Owners, however, must be willing to give up some control.

It goes without saying that small businesses need strong financial support in place. A temporary CFO with experience in the industry can provide invaluable support in the strategic planning, budgeting, and cost control for a small business as they grow. Their objective opinion can be helpful when considering taking on a new project, investing in new equipment, or evaluating overhead expense to improve cash flow. A temporary CFO’s experience can also be used as a resource when discussing financing options with a lender or suppliers, and in dealing with customers. They can also implement financial systems to monitor the financial performance of the company and provide timely reporting to help management make educated business decisions.

The primary role of a temporary CFO is to manage the cash of the business. Ownership can draw on their skills on an as-needed-basis without expending significant dollars usually required for a full time CFO.  If you could use additional assistance in managing your financial operations and benefit from an outside perspective, it may be time to consider a temporary CFO for your business.

Asset-Based Lending Grows in Popularity

An article from this Tuesday’s Wall Street Journal highlights the flexibility  that asset-based lending provides.  Weezabi LLC, the company highlighted in this story, is a prime example of how small businesses can use an asset-based line of credit to say “yes” to new business opportunities. Read the article

SBA Lending: Down But Not Out

Although SBA lending is down sharply in 2009 compared to 2008, the movement of new activity as of late, is a positive sign of good things to come.  Even a slight increase in activity will give entrepreneurs some level of hope that a bigger credit thaw will happen in 2010.  In the meantime, entrepreneurs need to be creative and think outside the bank box for financing solutions.  Asset-based lending, factoring, PO financing and equipment leasing will continue to be viable solutions to today’s financing challenges.

Macomb Incubator Promises Progress for Small Businesses

The new site of entrepreneurship for Macomb County was unveiled on Monday in Sterling Heights and what a sight it was.  After interacting with many of the 400+ business owners, professional service providers and dignitaries, it was clear that entrepreneurship in Macomb County is alive and kicking.  At a time when negative press is running wild, it was great to see so many folks energized about what the future has in store for our region.  Business owners were excited about being able to leverage the Incubators talent in the areas of sales introductions, marketing, finance, business coaching and business planning.  It will be a valuable resource in moving entrepreneurship forward. Learn more about the Incubator

Access To Capital

We recently held a webinar discussing how entrepreneurs can gain access to capital and how to determine what type of financing makes sense for their business.

Take a listen below…. (it’s about 20 minutes long).

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Small Business Loans Criticized

Monday President Obama released a plan to increase the federal guarantee of small business loans to 90% and decrease fees associated with the loans. However, the action is being met with significant criticism. Read the Wall Street Journal article: Small Business Loans Criticized

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