Small Business Financing – Case Study

Generally, borrowing funds from alternative debt financing sources is more expensive than taking out a traditional bank loan. However, many times companies either do not qualify for a traditional bank loan or credit line or must pay very high interest rates, include a co-signer/co-borrower, and/or attach communal assets. In that case, these alternative sources are excellent financing sources. Remember, banks determine the interest rate charged based on risk. The highest credit grade corporate customers are charged prime. All other businesses are charged prime + a risk factor. If a bank will not provide financing, the perceived associated risk is higher. These alternative funding sources mitigate their risks by specializing in a particular industry or asset class and compensate for this risk by charging higher fees and/or interest rates.

Example- SBA loan.

A data housing firm, Acme Technologies, made the decision to spin off its data management operations in preparation for its strategic acquisition by a larger corporation. The data management division had largely gone unnoticed despite its successful management by the division’s management. Needing to recoup some value from the division, which Acme’s CFO suspected might be terminated by Acme’s acquirer, Acme’s CFO made the offer to sell the business to the division’s management.

Although the division’s management team was skilled in a number of functional areas including sales, operations, and cash management, they had no experience handling complex financial transactions. They needed guidance so they used their network to find an advisor. They approached a U.S. Department of Commerce-sponsored Minority Business Enterprise Center (MBEC) located at a renowned university for assistance. The MBEC assigned a business advisor to help them.

The business advisor advised the management team to create a company to buy the assets of their employer. She then found a lawyer that completed their incorporation documents and successfully registered the company within three business days. Next, she spent hours requesting and compiling documentation to create an Executive Summary, pro-forma financials, and management team resumes to present to banks and direct lenders. Finally, she used her relationships with financial institutions to locate three entities that financed acquisitions and worked rapidly.

The CFO initially gave management six weeks from the time the offer was made to complete the transaction. The business advisor pushed back in conversations with the CFO and wrangled an extension. Several issues arose which the business advisor worked through quickly with the management team.

Two institutions, one direct lender and one community bank, emerged as the front runners. Both were highly responsive and flexible and recommended the use of an SBA loan. The community bank met face-to-face with the management team and championed the other banking functions it could provide, along with the long-term benefits of working with them. Subsequently, the management team opted to obtain financing from the bank.

Five weeks after meeting with the business advisor, the community bank provided a Letter of Commitment (LOC) to finance the acquisition. Three weeks after obtaining the LOC, the management team closed on the financing and the purchase of the division and began operating under the new company name, Acton Technologies.

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What Are Some Risks and Issues Around My Company Setting Up a Customer Finance-Leasing Program?

Many firms benefit significantly from either setting up on their own or partnering with a third part to set up a customer financing program for their products. Key benefits are increased sales, cash flow, customer loyalty, etc.

But are there also some risks for the company to be aware of also – Of course there are and let’s look at some of those risks.

We would also point out that these risks are in fact the same ones taken on by independent leasing firms also.

Foremost from a risk perspective is that fact the customer financing program will be viewed by the customers as the one and same as your company. Therefore customer service and financing ability are in fact now part of your firm’s reputation.

Companies may also find that the borrowing costs to set up a program are in fact higher than their normal business operating costs. Naturally the method in which the finance division is set up also affects the debt levels of your company. No business wants to fail because it took on higher debt in an effort to in fact help their customers!

On a long term basis company lenders might view your firms foray into customer financing as an additional risk factor, which they might try to compensate on by imposing restrictions such as additional covenants, requests for more equity into the firm, etc. The bottom line is simply that setting up a customer financing scenario may in fact affect your own firm’s ability to borrow.

If your firm is larger then analysts and firms looking at your firm might in fact be raising issues and perceptions around which business you are actually in, i.e. your products, or the financing of those products. Business owners and financial managers will always want to ensure that ultimately they are sticking to their core business model and philosophies. If your firm becomes too enamored by financing you possibly run the risk of total business failure. There are numerous cases in financial history where firms collapsed because of the shenanigans of the finance division.

We have heard the term in business ‘sticking to our knitting’, which of course simply means that management needs unique skills to run a business, and those skills are different in financing. Owners and managers related to the customer financing division must have strong skills in financial sales, structuring, and credit… Naturally we are also inferring that additional skilled personnel ultimately must be hired.

No company every wants to look back in hindsight and say that if failed or stumbled because efforts and funds went into financing, as opposed to r&d, marketing, staff, and product growth. Do not let a customer finance program become an obstacle to your ultimate business success

Business owners should ensure that there is good communications between the main operating company and the customer financing division – clear goals and philosophies should be set out re the function of such a customer finance program.

In summary the benefits of offering financing to your customer are very obvious, and proven true by some of the largest and most successful companies in the world – but all you have to do is to do it right! Ensure your firm is aware of the risks and challenges and monitor your customer financing program on an ongoing basis to ensure you are not straying from your core business model.

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The Finance Division – Figures Don’t Lie, Two Plus Two Equal Four

When it comes to the financial area of a business, figures don’t lie! In other words, half of the communication problems are eliminated by the simple fact that people are working with figures in finance and accounting departments. Two plus two equal four. You can’t misinterpret that! Well, may be verbally, but not on paper.

Just yesterday, I was talking to a “hyper” person on the phone. She talked fast, going from one issue to the other all in the same sentence. She gave me a fax number where to send some information. She gave it all in one breath without pause and continued on with another subject.

I had to ask her to slow down to give me a chance to write down the number, repeating the area code, then the next three digits, which she acknowledged to be correct, then I repeated half of the next four digits, pausing for her to give me the last two, which she did and which I repeated as I had heard it.

When I faxed the information, the fax did not go through. I called her again and it turned out I had the last two digits as 25 instead of 35. But, when I repeated “25″to her which I had written down, she said, “right”. So figures can be misinterpreted verbally.

But not the figures that are calculated by adding machines and computers. Like I said two plus two equal four, not five. So the communication problem is non-existent in financial figures. One can manipulate them but that’s done by humans, not calculating machines.

One of the biggest problems in small business is proper financial and business planning. In larger organizations, this is a normal part of the operation; usually companies have hired people who include this area of the business as part of their job. Because of the nature of the corporate beast, the financial institutions expect and demand this obligational necessity.

When I teach starting a small business, I’m always amazed at the amount of people who “dream” of starting a business but don’t give any thought to putting a business financial plan together. Then, half the class quits within the first few weeks as they see what they hadn’t thought about. They are disappointed at the need to start a business.

Only the serious ones stay on and appreciate what they learn through the exercise. Even if their dream may have to be delayed, they now have concrete figures to work on. They are the effective communicators of tomorrow. They are the ones who will succeed because of their continuous personal improvement, growth and self-discipline.

Once you have the financial figures on a projection, you can manipulate these numbers to fit your goals. If a hundred thousand dollars isn’t enough to start the type of business you’re thinking of, then you will have to figure out how to raise the money or cut back expenses.

In an existing business or corporation, the figures that spew out of the accounting software are telling you exactly where you’re at. Monitoring daily, weekly, monthly will give you the tool to take immediate action to change the totals of top and bottom lines and all the figures in-between./dmh

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