Senate backs small business lending fund

I saw an article in the New York Times this morning that the senate has resurrected the small business lending fund. They've added $30B to a bill to encourage banks to lend to small business. While $30B pales in comparison to the size of the large bank and auto bailouts, it's a least a start. What troubles me is even though 80% of new jobs in the U.S. are created by small business they had to break a filibuster to get it into the bill. It kind of makes you wonder what our representatives are looking at when they spend our money.

Read the full article here.

http://boss.blogs.nytimes.com/2010/07/23/senate-backs-small-business-lending-fund/?partner=rss&emc=rss

If you found this article helpful you may want to download our free whitepaper, "How to Recession Proof Your Business". 

How can you create value without funding?

I read in today’s Bloomberg Businessweek Report that the chairman of the Federal Reserve Ben S. Bernanke said that small business is having trouble getting access to credit needed to keep the U.S. recovery going.

The article referenced  Bernanke attending one of the series of meetings in Detroit last month and today recalling a business owner’s comment there that, “If you thought housing had declined in value, take a look at what equipment is worth.”

It’s absolutely true of course if business isn’t growing and equipment is at a surplus banks, which are conservative in good times, aren’t going to want to lend money on it. Most of small business collateral is either in plant buildings and / or equipment. The combination of real estate and equipment values being low makes collateralization difficult.

On the positive side I just had a client refinance his term debt at a great rate and excellent amortization schedule. The load was 90% guaranteed by the USDA rural enterprise program. Which is essentially a program that is working to create jobs in rural high unemployment areas.

First the company must be “bankable” that is approved by a bank subject to the USDA guarantee. A complete package of the loan evaluation by the bank along with company financial performance for the past three years and a detailed business plan showing sales and job forecasts three years out then goes to the USDA for approval.

Credit isn’t easy to come by but there are ways to get it. A company has to have solid financial performance, a well documented strategy and credible financial forecasts to go long with the collateral.

It goes back to what I’ve been preaching for a few years now. You have to have a plan that’s documented. You have to show progress toward making your projections and goals, and you have to have a credible plan moving forward.

Collateral alone isn’t enough anymore. Banks certainly don’t want to foreclose on your buildings or equipment, they used to get 10% to 25% of the loan value in a distressed sale. Depending on the equipment that number may be optimistic in the current environment.

It really goes back to a blog entry I made a few months ago, the strong find a way to survive and prosper in a poor economy and the weak don’t.

Leaders must take steps to clarify their vision for their organizations, document it, eliminate internal waste, and look for internal sources of cash before they will be successful looking at banks as a lending source. One bank I spoke to that specialized in USDA loans said they get anywhere from 12 to 25 deals a week to look at. They can afford to pick the best deals for them.

It is incumbent upon business owners and leaders to understand that there are sources of funds but competition is fierce, and only the best will be looked upon favorably. Strong economic times allows business to become complacent, weak economies make it imperative that they learn and adjust or perish.

In today's environment you had better have value before you look for funding.If you found this article helpful you may want to download our free whitepaper, "How to Recession Proof Your Business". 

Look for cash internally while getting better bottom line results.

Every business person knows money is tight, and the credit markets show little signs of helping anytime soon. Since businesses don’t have the luxury of the government to simply print money when they need it, they have to look for more practical sources.

 

One of the least expensive places to find of cash is internal. Make sure you have tightened up internal processes and exhausted all internal potential. This source of cash is the least expensive, the fastest, and it can give you better bottom line results.

 

Where are internal sources of cash? Some are obvious and some are tougher to spot. Here are a few examples:

 

Inventory – is cash sitting on your floor.  If it isn’t moving find a buyer for it even at a discount. Utilize just in time purchases to minimize cash tied up in inventory.

 

Accounts Receivable – money is tight for everyone, allowing your customers to stretch you out makes their problem your problem. One thing I found that works well is a small prompt payment discount. Especially larger companies are open to shorter terms such as 10 days for a 2% discount. The discount is cheaper than borrowing money.

 

Quality and rework- this is a huge cash burner. Scrap must be measured and controlled. If you are buying raw materials and aren’t using them to generate sales that’s waste. You’re spending cash and not recovering any.The same is true of poor quality. If you ship and bill something and have to accept a return and reship, it’s incurring costs without increasing sales.

 

Poor performing employees – they cost the same as top performers, but don’t produce as much. Demand a return on all of your investments including your investment in people.

 

All of this is made easier by having clear and timely data to support your decisions.

 

 

If you found this article helpful you may want to download our free whitepaper, "How to Recession Proof Your Business". 

Small Business Needs Credit Help!

Any kind of real recovery and job creation is impossible without access to credit by small to mid-sized businesses.

A newsletter from the Small Business Administration dated September 2008 provides the following interesting figures about U. S. small businesses. It says the firms with fewer than 500 employees –

• Represent 99.7% of all firms with employees.
• Employ about half of private sector employees.
• Create between 60% and 80% of all new jobs during the last decade.
• Generate more than half of non-farm gross domestic product.
• Employ 40% of our nation’s scientists, engineers, and computer workers.

In spite of that information loans are tough to get for small to mid-sized businesses.

Banks are looking for businesses that present no risk. Loans if they make them, must be over capitalized, and in nearly all cases personally guaranteed by the owner.

Even profitable small to mid-sized businesses in the U.S. have trouble getting asset-based financing using receivables and inventory as collateral.

New entrepreneurs, and even experienced business people, often ask me to help them write plans to get SBA financing for a new or troubled venture. I tell them it just doesn’t happen that way. The SBA, USDA, and most other federal loan programs simply guarantee bank loans. You have to get the bank to approve your loan first. But banks are not in the venture capital business. They want secure loans.

Every business owner or CEO must start with a vision and a well-constructed plan. Then evaluate all decisions about securing and spending working capital against that plan.

If you don’t have a clear vision, a well-constructed plan, and well-defined goals, you can burn lots of cash going down blind alleys and chasing false opportunities. That can cause you to loose credibility with your lenders and investors. Or even worse, lose your shirt!

When you need additional capital, know how much you need and exactly how you’re going to use it. With every trip to the well, you may have to pay higher costs in terms of –

• Equity dilution.
• Additional personal guarantees.
• Additional debt service costs.

Conserve your cash. If you don’t, the day may come when you can’t get any more.

Evaluate non-revenue-based activities most critically.

It’s relatively easy to calculate the return on investment for things such as new machinery or raw materials that you’ll use within thirty days to manufacture products and generate sales. It’s much harder to evaluate the ROI for overhead expenditures, such as information systems or employee benefits. But you still need to do it.

For example, suppose you’re considering investing in additional employee benefits with the goal of reducing turnover. Do your best to assess the recruiting, retraining, and other costs associated with turnover. Then project how much reduction in the turnover rate you can realistically expect as a result of the proposed new benefits. Finally, estimate how much money the reduced turnover will save you and calculate your ROI.

Look inside your organization for cash before you look outside.

Seek to free up working capital by –

• Reducing inventory. Inventory is cash on your floor. Even asset-based lenders generally won’t loan you more than 50 percent of the value of your inventory.
• Reducing rework and scrap. These soak up cash for materials and labor, but they generate zero sales.
• Retraining or dismissing underachieving employees. The investment for underperformers is about the same as for high producers, but the return is far less.
• Increasing quality. This frees up cash by reducing the amount of rework, scrap, and customer returns.

We’ve all heard the expression “Cash is King.” That’s even truer when you don’t have it and someone else does.

Over the years, I have gained (with considerable pain) a greater understanding of and appreciation for the real cost of money. One this is certain,

The golden rule: “He who has the gold makes the rules.”

If you found this article helpful you may want to download our free whitepaper, "How to Recession Proof Your Business".