Working Capital Lines of Credit and Loans that work - not just for the bank!- By Stan Prokop -7 Park Avenue FInancial
When business owners and financial managers have successfully negotiated working capital facilities or term loans it should not be the end of the story. By that we mean that the business person needs to continually focus on what the bank or other financial institution requires, and more importantly, how they view the customer from a control point of view - i.e. are they in control or able to exert control on your business.
The balance sheet must be a top focus for the business owner - once a firm is over leveraged, i.e. borrowing too heavily, the bank generally starts positioning around their overall security or your ability to de-leverage.
Borrowers must be comfortable and knowledgeable about the use of 'triggers '. Triggers are the implied actions the bank or institution will take when things aren't working out. This can include everything from general poor financial performance to very specific pre agreed upon financial ratios. And the business owner must remember that he or she agreed to and concurred with these ratios.
Banks want to see cash flow ' flowing ' - flowing to repay their debt - so there many be triggers put in place by the bank to ensure that minimum cash flow standards are kept, and also that owners and shareholders do not withdraw excess funds.
Over time business owners will probably find, in our experience, that the bank restrictions either tighten up or loosen, depending of course on the overall comfort level the bank has with the firm. Clearly firms that seem temporarily challenged in profits and balance sheet quality will receive much more scrutiny.
Business owners can do some very solid and valuable preparatory work in negotiation of bank triggers. If they have a solid long term history of earnings this should be a very strong negotiating point with the institution. Simply by self introspection of the firm can the owner or financial manager focus on what is going to go wrong re sales, pricing, forex, etc. The owner needs to be able to talk to these issues and show how he could address them.
For a start calculate your own key operating ratios, if they are going to be discussion points with your bank or institution you might as well know your numbers now. Using 'what if 'scenarios help immensely and will position yourself as knowledgeable about your business.
Discussions with your bank need not be absolute and immediate on any time of loan negotiation - you can get a great informal sense of what the bank is thinking and work from that point forward. Try and read between the lines as to what is hot, and what a Vis is not with the bank Vis their perception of your firm, industry, etc.
In summary, business owners need to show maximum flexibility on working capital and loan negotiations. Negotiations should be from strength, accentuating the positive. Example - strong forecast sales and profits and potentially offset a weaker balance sheet. Trade-offs with the bank is also encouraged- and fewer triggers and covenants are better than more! And yes, there is more than one bank in the world, although business owners should be cautioned that shopping around is not optimal at all times, and can in fact backfire, particularly a small business. Business owner beware!
IS A SALE LEASEBACK OF MY ASSETS A GOOD THING? - By Stan Prokop - 7 Park Avenue Financial
At various points in the economic cycle a business owner or financial manager considers a sale leaseback financing. Is that type of transaction advantageous, and what are the risks and benefits?
Many firms do not fully know about or understand the advantages of this type transaction. This is a classic alternative financing strategy that works best when it is a good deal for the lessee and the lessor. It does not work well when the lessor presumes it is a 'cash grab' by the lessee.
This type of financing should be contemplated if your firm has the following characteristics:
- Experiencing working capital challenges
- Declining profits
- Excess unencumbered assets
- High amount of debt
If a company has a high amount of debt a sale leaseback transaction can still be a very positive financing event. By structuring the the transasction as an operating lease the debt becomes 'off balance sheet '. This gives the appearance of the company being not so highly leveraged and quite often it can save the company from being in default of its loan covenants.
In many cases the sale leaseback can bring a significant amount of capital back into the firm.
So when does a firm consider such a transaction - every industry is different but if the firm is bottom line, over leverage, i.e. Debt too high, there can be advantages to an off balance sheet sale leaseback transaction.
If a company has historically had pride of ownership, and has significant assets, and is suddenly going through a high growth stage it also becomes a good candidate for a sale leaseback. Cash flows are restructured and the company gains significant new working capital.
The best candidates, overall, for this type of financing strategy are high growth companies who would prefer to invest additional cash in receivables and inventory. Naturally no lessor wants to consider such a financing if the company is in some sort of death spiral.
In some cases when assets have in fact appreciated (not depreciated in value) the company may actually be able to report a gain in earnings, as the sale leaseback transaction in excess of book value allows the company to book the sale leaseback gain into the profit account!
Many government institutions, such as municipalities, hospitals, etc may find this type of financing strategy as optimal in solving temporary budget cuts and working capital challenges.
In summary, a properly structured sale leaseback can provide new cash, enhance earnings, and in effect be a creative way to temporarily re finance the firm or institution.
Wondering where to go for business loans that cater to your company’s needs?
7 Park Avenue Financial has the proven expertise on Windsor Ontario business loans, because we have the professional experience and the personal contacts to obtain loans that will make a real difference for your business. We also have the track record to prove it! Between March and April 2008, we originated over one million dollars in financing for our clients – so you can rest assured that we’re working for your best interests!
We understand that today’s marketplace is full of challenges and obstacles, and it can often be difficult to push ahead and make your business stand out above the rest. A business loan can truly be that thing that helps you to surge ahead… but only if it’s a loan that works specifically with the interests and needs of your business.
At 7 Park Avenue Financial, we put those needs and interests first. We want to hear about your goals for the business’ future, and how you see your business developing and growing within your industry. Keeping those things in mind, we’ll then work toward finding the right business loan that works within those guidelines, presenting you with financing options that are personalized and unique for your situation.
You can also rest assured that you’re getting access to some of the highest levels of senior management at well-known financial institutions, which means your voice gets heard at the top right from day one! We’ve built these valuable relationships so that our clients never have to settle for a mass-produced solution from a volume-based financing house. Instead, we offer personal service with solutions built on a case-by-case basis.
Allow us to find the perfect business loans for your company in Windsor Ontario, and watch your business vision grow into a reality!
Wondering how else we can help your business, or would your like more information about 7 Park Avenue’s full range of financial services? Please give us a call today, and set your business on the right track to success.
