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.

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. 

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.

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.

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.

4 Things Small Business Investors Are Looking For

Whether you are already in business and searching for additional capital and/or a new finance parter, or you are considering embarking on a new entrepreneurial adventure, there are some key criteria investors will consider:

1. A business plan that describes the market opportunity. The value the the business will deliver and its acceptance in the marketplace must be clear. In short, there must be a compelling reason the business exists. NOTE: An executive summary is key. Most investors do not want to see, nor will they take the time to review a 50-page marketing plan.
2. A capable entrepreneur. Since their money will be in your hands, the entrepreneur must convince the investor/lender of his or her competence, commitment and integrty. You are the business.
3. A realistic financial plan. You need to know how much capital you will need, when you will need it and how it will be deployed in executing the business plan. Sure, $1 million sounds great to any business owner, but is that really your cash need and how to plan to use it?
4. An exit strategy. How and when will the investors get their money back and what is the expected return on their investment?

4 Months and Still Going…

Multiple media outlets reported of the consistent 4-month uptick in SBA lending.  Better yet, all signs indicate that this type of lending will continue to increase through the remainder of 2009.  “I think it’s a continuation of the impact of raising the percentage that we guaranteed to 90 percent and the elimination of the fees to the borrower,” said Richard Temkin, U.S. Small Business Administration District Director. “And the banks’ credit requirements perhaps are loosening somewhat, though that seems to be a slow process.”

So, what does this mean for small businesses? This is an encouraging trend that hints that credit markets are starting to thaw from the deep freeze of early 2009 and that banks are increasing lending. For entrepreneurs who have been struggling for the past year, this is good news. Those who are fortunate to still have a traditional bank loan are more likely to keep it. Those of you thinking about starting a business and considering a SBA loan, might just be in luck. Overall, this is a positive sign that Michigan may have hung the “open for business” sign back outside its window.

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

Access to Capital Webinar

Entrepreneurs throughout the country are encountering challenges in gaining access to capital. With credit markets dried up and few banks lending to small businesses, it’s become increasingly difficult for small enterprises to get the working capital they need to grow their business. If you are interested in learning more about the financial spectrum and where to turn when your credit line shrinks, register for the upcoming “Access to Capital” webinar.

Thursday, March 18
9 a.m. EDT

E-mail name and company to: Nicole@macombcountychamber.com.

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