Private equity firms use pools of capital that are raised from a variety of sources. This capital comes not only from wealthy individuals, but also from insurance companies (that pay retirement plans and annuities) and pension funds.
As a result, school teachers, police officers and others often have a portion of their retirement assets allocated to private equity, which bolsters the overall investment returns of the fiduciaries that run these funds. These higher returns are increasingly important in today’s low interest rate environment. Private equity firms use this capital to invest in all sorts of companies, creating jobs and economic growth along the way.
“Private equity firms are easily and inaccurately portrayed as corporate pirates,” says Jackie Hopkins, managing director, Sponsor Finance Group, at FirstMerit Bank.
“But these firms are willing to invest in businesses that need capital to grow as well as companies that might go bankrupt if not supported with new capital in exchange for ownership. In order to induce them to accept the risk of these investments, private equity firms need high returns. Sometimes the returns are very large. Sometimes the firms lose their investment. Either way, they provide critical capital that allows the economy to grow.”
Smart Business spoke with Hopkins, who lends to private equity firms, about how these serial entrepreneurs operate.
How does the private equity world work?
Private equity companies use pools of capital from investors, called limited partners. The general partner of the private equity firm is tasked with finding good investment opportunities to generate above average returns. The partner is usually paid operating expenses and a portion of the profits earned. In most cases, the general partner buys a controlling interest in a company with a leveraged buyout (LBO), and uses his or her expertise to improve revenue and profitability, such as helping a Midwest firm expand product sales internationally. After three to seven years, the company is typically resold.
What is a leveraged buyout?
In an LBO, an investor uses debt to finance a portion of the purchase price of a company. Depending on the underlying business risk of the transaction, the amount of debt can be very low or up to 65 percent of the purchase price. Using debt allows the investor to amplify his or her return. In addition, interest costs are deductible while equity capital is not, providing a built-in bias toward debt financing in the capital structure.
The debt to equity ratio changes depending on market conditions — today, the average equity investment for a middle market company is 40 to 45 percent in a LBO. For larger companies, it is usually less, because a bigger company can absorb more financial risk.
How is private equity financing different than traditional middle market bank loans?
Traditional middle market loans focus on the balance sheet —assets, inventory, receivables, equipment, real estate, etc. — so if the company is unable to service its debt out of earnings, the collateral can be sold to repay the debt.
Private equity financing tends to be enterprise value loans, looking at the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Financial institutions look at selling the entire company as an enterprise for a multiple of EBITDA. They consider how sustainable the EBITDA is to figure out how much debt the company can safely carry. So, if you think the average multiple of a middle market company is six times (that is, its total value is six times its most recent EBITDA), the bank might lend up to three times. The inherent risk is the possibility that EBITDA will decline or that the prospects for the company or the industry lead to a lower multiple. So to qualify for this type of enterprise loan, a company should have a sustainable level of EBITDA that is not too concentrated in terms of customers, products or suppliers, and is not prone to cyclical swings.
Jackie Hopkins is managing director of the Sponsor Finance Group at FirstMerit Bank. Reach her at (312) 429-3618 or email@example.com.
Website: Get information about FirstMerit’s Sponsor Finance Group services.
Insights Banking & Finance is brought to you by FirstMerit Bank
“Relationship” might be the most overused word in banking these days, but it sums up the difference between providing a commodity and truly serving a customer’s needs.
“It really is about having a relationship with someone who comes to know and trust you,” says Jeffrey M. Whalen, senior vice president in the Specialty Markets division at Bridge Bank. “What we do in this industry is serve the needs of clients.”
Smart Business spoke with Whalen about how banks stay involved with clients and build mutually beneficial relationships.
Where should price fit into the decision when choosing a bank?
Most business owners say that, when it comes to choosing a bank, developing a long-term relationship in which owners feel empowered to achieve their goals is their highest priority.
Sole proprietors, closely held corporations and family owned businesses in particular want to get to know their banker, and they want their banker to know them and the ups and downs of their industry. They still want a competitive price, but more often than not, they are seeking a partner who can add real, tangible value to their business in the form of sector expertise, advisory services, etc.
Certainly there are business owners who do prioritize pricing above other aspects of a banking relationship, but in those instances, the owners shouldn’t be surprised if the relationship with their banker doesn’t yield much in terms of value-added services.
By nature, some businesses are very transactional and may not require value-added services. In those cases, business owners may look to other criteria to evaluate a potential banking relationship, such as how active the bank is in supporting their industry or business ecosystem, or how the bank’s core values align with theirs.
Some also want to deal with independent banks, as opposed to larger national banks, because they often have direct access to decision-makers. At a large bank, your account might be managed from a region far from your own, and local representatives can’t help you if there is a problem. For example, if you want to increase a line of credit or need help optimizing cash flows, a regional or independent bank may be able to respond faster because of its locale and relationship with you.
How can banking relationships provide additional benefits to the customer?
Relationship benefits depend in large part on what kind of bank you have chosen to partner with. Banks with a broad range of capabilities can, for example, accommodate an equally broad range of needs a business owner might have as his or her company moves throughout the business cycle. And banks with broad sector knowledge can bring a unique and valuable perspective to the table when helping a business owner evaluate options for growth and expansion, for example. Also, a bank should be able to bring forward a network of professional service providers who can help the owner with other issues that inevitably arise, such as how to establish an employee stock option plan, tax audit and preparation, etc.
So, the right relationship can yield a multitude of additional benefits, and it is important that these conversations are held prior to committing to a bank.
How frequently should bank personnel and clients meet?
It should be every month for larger, more complex client relationships and at least every quarter for smaller ones. Those guidelines, however, are general. Every business should be viewed as unique — because it is.
Therefore, the frequency of interactions with a banker should be driven by the needs of the client, and the dynamics of its business. It’s important for clients to know that a bank should have their best interests at heart and is there to solve problems. Sometimes a client might have problems it isn’t even aware of, but if its banker has the right experience and perspective, and if the communication in the relationship is frequent, the banker should be able to catch these problems before they impact the client’s business.
Communication in the relationship, combined with expertise on the side of the banker, is the key to getting the most in terms of value for the business owner. It really becomes a strong partnership if that can be achieved.
Jeffrey M. Whalen is a senior vice president, Specialty Markets, at Bridge Bank. Reach him at (408) 556-8614 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by Bridge Bank
Cleveland may not seem like a city that comes to mind as a banking center in the United States, but nearly 100 years ago, Cleveland was awarded one of the 12 regional reserve banks that make up the Federal Reserve System.
So how was Cleveland chosen as a Federal Reserve Bank city? In 1914, a well-organized campaign led by a group of Cleveland businessmen, financiers and politicians was instrumental in the decision to locate the Fourth District headquarters in Cleveland.
A Federal Reserve Organizing Committee was established under the Federal Reserve Act legislation, says Mark Sniderman, chief policy officer, Federal Reserve Bank of Cleveland.
“Members were appointed and they were charged with determining which cities around the country should be the headquarters for these reserve banks,” he says.
“Cities were invited to apply, so the business and banking communities in the cities that were interested got together and outlined what their resources and strengths were.”
The Fourth Federal Reserve District comprises Ohio, western Pennsylvania, eastern Kentucky and the northern panhandle of West Virginia.
“The reason for the boundaries of Cleveland’s district was due to the fact that it was steel and coal country,” Sniderman says. “It was an economic cycle in this part of the country that was driven by heavy industry.
“When cities were bidding to become headquarter cities, they were thinking about themselves as the center of an economic region of the country that had its own need for credit depending on what was driving those economic cycles.”
The other 11 banks that make up the Fed are Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Mo., Dallas and San Francisco.
“From a reputation point of view, getting a Federal Reserve Bank in Cleveland elevated the stature of the city … and would be a validation that Cleveland was a major league city in the financial world,” Sniderman says.
At the time the Cleveland Federal Reserve was built, it held total assets of $613.7 million, making it the third largest of the 12 district banks. Today, the bank has assets of some $79 billion, making it the ninth largest by assets.
The Cleveland Federal Reserve location quickly outgrew its original building and in 1921 construction started on a new headquarters for the bank. Two years and $8.25 million later, the bank was completed in August 1923 at the corner of Superior Avenue and East Sixth Street. The 13-story building is a modern adaptation of an Italian Renaissance palazzo, or fortress palace.
When the new Federal Reserve Bank of Cleveland opened to the public, an estimated 40,000 visitors passed through. In 2012, about 10,000 people visited the Cleveland Reserve Bank. That includes individuals who were part of a bank tour and individuals who visited its Learning Center and Money Museum.
While free tours are given in the building today and security measures are aided by technology, back when the building was first established they didn’t have those luxuries and were worried about robberies.
“In the days when the building was built, they were worried about mobsters like the Dillinger Gang breaking in with machine guns and things like that,” Sniderman says.
As a result, steps were taken to provide as much security as possible. The original vault is housed in its own building and was constructed before and completely separate from the main bank because of its size.
The concrete walls are 6½ feet thick, reinforced throughout with an intricate, interlaced type of fabricated steel. The vault door is 5 feet thick and has a 47-ton, 19-foot-high hinge. Yet, despite its 100-ton weight, the door is so precisely balanced that one person can swing it closed.
Today, much of the purpose for the Federal Reserve System remains the same with obvious changes in technology and banking advancements forcing some adaptations.
“What’s happened over time is technology has changed some of the ways we do business,” Sniderman says. “Banks and financial entities have become more complicated. They deal in a much wider range of products. They interact in so many kinds of financial markets that supervising banks has become a more sophisticated endeavor.”
Today, the Federal Reserve Bank of Cleveland supervises 35 state member banks and 285 bank holding companies, financial holding companies and savings and loan holding companies.
How to reach: Federal Reserve Bank of Cleveland, (216) 579-2000 or www.clevelandfed.org
Companies looking to grow and needing an infusion of capital have several options, which come with various costs and requirements.
“We look at capital on a sort of continuum, with equity perhaps being the most expensive form primarily because of its diluting impact on ownership of the company. At the other end, there’s self-generated working capital derived from profitable operations,” says Paul Gibson, senior vice president and Eastern Region market manager at Bridge Bank. “In between there are a variety of financing options to assist a growing company.”
Smart Business spoke with Gibson about where small businesses fit along the continuum and options they have available to secure working capital.
What is the least expensive option to get working capital?
There is no cheaper form of capital than self-generated profits. Apple, Inc. is an example of a company that continues to be profitable and has a huge war chest of cash available for any need. But most small and growing businesses are not capitalized like Apple and look to banks to assist in the form of senior debt. This financing is usually based on a bank’s prime lending rate as its index and has a modest margin over, or under, this index. These loans are structured, including a senior secured lien on all assets through a Uniform Commercial Code filing and frequently have financial and/or performance loan covenants. There may be a borrowing formula and an advance rate against receivables as well. There is a direct relationship between pricing and structure, as all pricing is ultimately dictated by risk. When a business can’t adhere to a traditional covenant structure, the looser structure usually translates to increased pricing.
It’s best to determine working capital and growth capital needs first when exploring financing solutions. Next, identify the various capital sources starting at the least expensive and work down until sufficient working capital is obtained. Many times it’s possible to meet all needs with senior debt, but there is a limit to how much is available and that is largely determined by the profile and complexion of the company — overall assets, liabilities, cash flow, liquidity. All of these factors help identify risk.
Many growing businesses find it difficult to obtain traditional senior debt financing because they’re focused on growth at the expense of profitability. Some banks specialize in assisting companies in this dilemma, forging strong relationships long before the mega-banks will.
What’s next if companies can’t obtain sufficient senior debt?
Another potential source of working capital is subordinated debt, also known as mezzanine debt or venture debt. Subordinated lenders do not recover their first dollar in a liquidation scenario until the senior lender has collected its last dollar. This type of financing can take many forms.
With subordinated debt there is generally less structure than with senior debt. The reduced or even lack of covenants and junior lien position contribute to increased risk. Because there’s greater risk, subordinated debt also has a higher price.
Some banks offer these instruments, but more often commercial finance companies, hedge funds and other non-bank lenders offer them. The higher rates they charge are reflective of the higher cost of their capital, usually in investor funds or a bank line.
Why is cheaper not always better?
The true cost of capital shouldn’t only be measured in simple dollars or as the spread of basis points in an interest rate. The least expensive capital isn’t always the best capital because there are more factors than just price, such as opportunity costs, ease of use, flexibility of structure and other intangible benefits. For example, a low-interest loan with a covenant package that’s too restrictive can potentially result in a business disruption when a covenant violation occurs. Balancing pricing and structure relative to individual needs is critical when evaluating multiple loan options.
Most people assume that competition is the primary driver of pricing, but it’s not. Risk determines pricing — whether it’s equity or debt — and competition further refines it. Companies should understand their risk profile. It’s a powerful tool in helping to achieve the best outcome for a business’s financing needs.
Paul Gibson is a senior vice president, Eastern Region market manager, at Bridge Bank. Reach him at (703) 481-1705 or email@example.com.
Insights Banking & Finance is brought to you by Bridge Bank
Banks typically exclude export accounts receivable (A/R) and work in progress (WIP) from a company’s borrowing base, which can be challenging for a company with global sales that are rapidly growing or when a single large export order is received.
As a result, Export Working Capital loans were created by the U.S. Small Business Administration (SBA) to allow U.S.-based businesses to have access to a low-cost source of funds that support their international sales and manufacturing cycles.
“Through programs like this, the SBA — a taxpayer-funded federal agency — is putting our tax dollars back into the U.S. economy to promote retaining current jobs or even creating new jobs associated with international sales that otherwise could be won by foreign competitors,” says Arthur G. Rice, vice president and manager, International Operations and Product Management, FirstMerit Bank.
Smart Business spoke with Rice, as well as Romona Davis, vice president and SBA specialist, FirstMerit Bank about how these transactions work to enable small businesses to obtain funds for international sales and operations.
What are some benefits and how do these loans differ from others?
These loans are different from what you might call ‘standard’ operating capital line facilities in that the benefits are focused on international business. Under standard operating line facilities, the borrower is not permitted to include any A/R, WIP or inventory tied to foreign sales into its borrowing base calculations.
This restriction can severely limit the borrower’s ability to have access to sufficient working capital to allow the small business the ability to react quickly to significant market opportunities. These foreign opportunities can be encountered through trade shows, Web sales and foreign distributors. The ability to include foreign A/R, WIP or inventory may allow the small business to jump from 75 to 90 percent advance funding rates.
Who can apply for these loans?
Any for-profit organization whether organized as a corporation, sole proprietor or partnership that meets size standards as a small business can be eligible for the SBA. This program supports both manufacturing and service-oriented organizations and has many applications.
SBA Export Working Capital loans are granted for up to $5 million to fund export transactions from purchase orders to collections. There’s a low guaranty fee and quick processing time. The SBA also has two additional export loan programs — Export Express Loan Program and the International Trade Loan Program.
In addition to supporting ongoing exports, what else can Export Working Capital loans be used for?
Export Working Capital loans not only support your ongoing export business, but also can be used for:
- Issuance of standby letters of credit to support bid bond requests, cash down payments and warranty periods.
- Purchase of raw materials, components, participation at foreign trade shows and general export marketing activities.
- Collection of foreign A/R.
Are there any exclusions or conditions business owners need to keep in mind?
The SBA Export Working Capital Program is quite flexible and able to be utilized for most international sales opportunities. However, products to be exported must be more than 50 percent U.S. content and shipped from the U. S. There also are some specific restrictions based on federal regulations that your lender can make you aware of to help you stay in compliance.
What do you need to get started?
Along with the application and fee, you’ll need at least one year’s worth of financial statements and a brief history of your company, including senior management biographies and pro forma business plans. You also need a clear description of your proposed use of the working capital proceeds.
All opinions expressed herein are those of the authors/sources and do not necessarily reflect the views of FirstMerit Corporation.
Arthur G. Rice is a vice president, manager, International Operations and Product Management, at FirstMerit Bank. Reach him at (330) 384-7178 or firstname.lastname@example.org.
Romona Davis is a vice president, SBA specialist, at FirstMerit Bank. Reach her at (330) 996-6242 or email@example.com.
Learn more about FirstMerit’s International Banking export programs.
Insights Banking & Finance is brought to you by FirstMerit Bank
Remote deposit capture is a treasury management service that allows your company to deposit checks immediately upon receipt by using an electronic scanner, without the need to visit a bank. It saves time, increases productivity and lets employees focus on areas that most benefit the business, using resources in the most cost-effective manner.
“Remote deposit capture reduces your transportation needs substantially. A courier may only need to travel to the bank once per week, as very few items need to go to the bank in paper form — an 80 percent reduction in transportation,” says Kerri Werschky, retail sales manager at First State Bank.
Smart Business spoke with Werschky about how remote deposit capture enhances your banking and business.
How can remote deposit capture improve your operations with time and cost savings?
By using remote deposit capture, substantial savings come from reducing your transportation expenses and allowing employees to focus on other tasks. Most items can be captured, with just a few that must be deposited in paper form at a bank. According to remotedepositcapture.com, a business depositing 10 checks daily to a bank 5 miles away, could save $722 on mileage, $3,930 on recovered labor, $393 on increased productivity and improve cash flow acceleration annually by using remote deposit capture.
This banking service also provides quality control when your accounting system directly receives the data. With this, businesses can access copies of prior transactions, save time and paper because deposit tickets aren’t needed, and still print reports identifying the day’s deposit.
How does remote deposit capture accelerate the collection process?
As payment technology evolves, remote deposit capture has become a fundamental part of the collection process that businesses should be using. Checks sitting in a drawer don’t help cash flow and availability of funds, especially if you are unable to drive to the bank daily to make deposits. You need to quickly process checks through the system for collection.
Remote deposit capture allows extended deposit cutoff times for same-day ledger credit and more flexibility. With the convenience of scanning and depositing checks electronically from your office, employees can easily incorporate the service into your daily business processes. No more rushing to the bank at the end of the day to beat the closing time. In addition, a company with several locations can consolidate banking relationships, even if a bank is not in the same geographic area.
How are remote transfers tracked?
Just by handling transactions through remote capture banking at your own office, you increase accuracy and control. As transactions occur and are finalized, you can keep a close watch on them through online banking. This secure information is convenient, which gives flexibility when transferring money and making payments.
You can make deposits from multiple and/or remote locations, and then centrally track deposit reporting and reconciliation. This consolidation gives businesses a chance to vastly improve payment reconciliation management and the ability to research prior deposits.
What has been done to reduce fraud with remote deposit capture?
Banks work hard to mitigate and manage the fraud risks related to check processing. Remote deposit capture reduces this risk, though, as returned check deposits can be recognized earlier with accelerated clearing.
However, it is vital that businesses also take precautions on their end. Put strong, effective control measures in place around remote deposit capture and check processing to limit exposure. Have written policies and procedures for employees to regularly follow, as well as established security measures for handling checks after scanning.
By utilizing a cost-effective remote deposit capture service in your business, you stand to gain a wide-range of benefits — accelerated clearings, improved availability, enhanced cash flow with better cash management, reduced return item risk, transportation savings and convenience, and the ability to consolidate deposits from multiple and/or remote locations — that all translates to better operations and more profitability.
Kerri Werschky is a retail sales manager at First State Bank. Reach her at (586) 863-9485 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by First State Bank
California small business owners rely on banks for traditional financial services, of course, but also for valuable knowledge and advice on navigating today’s challenging economy.
That’s why California Bank & Trust periodically conducts surveys of small business owners as part of the bank’s commitment to understanding small business owners’ challenges and needs.
“Knowledgeable banking professionals who take the time to understand your business objectives and your industry will often provide valuable suggestions on how to significantly improve your finances,” says Tory Nixon, Executive vice president at California Bank & Trust.
In support of Small Business Month, Smart Business spoke with Nixon about the most recent survey the bank conducted and what it revealed about the challenges small business owners face as the state’s economy continues to recover.
What challenges do California small business owners face?
Laws and regulations seem to be the biggest hurdle for business owners, with nearly 38 percent of survey responders citing that as a major issue. There’s also concern over cash flow and money management, access to capital and finding top quality employees.
Nearly half of those who responded describe California’s economic climate as worsening. While that might appear bleak, about half of all respondents also cited a need for additional capital in 2013 to expand or increase staffing.
What tools can owners use to overcome these challenges and succeed?
As noted, access to capital continues to be a challenge for smaller businesses, but small businesses can and do get financing — especially when maintaining a good working relationship with their business banker, who can help in arranging loans and lines of credit.
One key advantage that small business owners have over their larger counterparts is access to Small Business Administration financing. Look for a bank that’s a preferred SBA lender. That’s a sign that there are knowledgeable bankers who can help you navigate the complexities of both SBA 504 and SBA 7(a) loans, or provide you with traditional small business financing options.
Small business owners also should stay focused on their cash flow. Your business banker can provide expertise in cash management and access to accounts and technologies that can keep idle cash working as hard as possible.
How do business owners feel about their banking relationship?
Again, small business owners seem to be extremely concerned with cash flow management and access to capital, but a significant number are also looking for more expert knowledge and advice from bankers.
The bank’s survey found that about 80 percent of business owners feel their bank doesn’t do enough to inform them of state, federal or local programs that could help their business. That’s why many local and community banks are extending services to provide access to highly informative resource centers, digital magazines and newsletters, which provide exactly that kind of information and are easily accessible online. Banks also are providing valuable information through social media channels and via email marketing programs.
How can you improve your banking relationship and increase business growth?
In most cases, all you have to do is ask for help — and your business banker will follow up as often as necessary. Knowledgeable banking professionals who take the time to understand your business objectives and industry will often provide valuable suggestions for improving your finances.
Getting the most from your banking relationship means keeping the lines of communication open and scheduling regular meetings. Don’t be shy about sharing your business vision; it will inspire your banker to suggest the best solutions, technologies and financing to help your business grow in the months and years ahead.
Tory Nixon is executive vice president at California Bank & Trust.
Website: May is Small Business Month in California. Learn more.
Insights Banking & Finance is brought to you by California Bank & Trust
Interaction with an employee forms the basis for a customer’s perception about a company, which makes customer service a great opportunity to showcase the company’s brand, says Jo Ann Lofton, senior vice president, retail executive, Cadence Bank.
“It’s all about knowing your customer — they trust you and you trust them. That’s the basis of a good relationship,” she says.
Smart Business spoke with Lofton about best practices for good customer service.
What is the value of good customer service?
Good customer service creates loyalty, generates customer retention and ultimately brings in revenue. It also creates an avenue for referrals. Word-of-mouth endorsements are extremely important, especially when based on a strong and proven relationship. Creating that is an exception and people talk about exceptions.
What are the top elements of high-quality customer service?
Listen and get to know your customers and what’s important to them. It’s critical that you understand the customer’s concerns in order to offer help and solutions.
Employ people who like people, have good judgment skills and an innate desire to help others. Make sure employees have the attitude that you want projected. If there’s friction in the office, call the staff together, acknowledge it and find solutions to create a positive atmosphere. It’s amazing how a friendly and peaceful office will give energy to customers who call or walk in.
Train your people diligently. They need to know exactly what’s expected of them, both with external customers and co-workers. They must have the tools and the authority to bring about swift solutions to problems, and they should be acknowledged for good performance.
Be responsive, whether by email, phone or to a customer in front of you. It’s unacceptable not to respond. Even if you don’t have an answer or solution, you can thank them, tell them you’re looking into it and promise to get back in a timely manner.
Finally, honor what you promise the customer. Customer relationships are built on trust, respect and integrity. These qualities determine the strength of your relationship and give the customer confidence in the decisions that are being offered. You have to know when to be flexible to meet a need. Customers relate your resolve and decision-making ability to their overall impression of the company, and that can have a lasting impact.
How do you instill a culture of service excellence?
A service-centered culture begins with a leadership team committed to a philosophy that advocates exceptional service and employees who are deeply dedicated to fulfilling that promise.
It’s also essential to know your target market and how to respond to them. Different cultures, for example, have specific expectations that may call for distinctive interaction in certain situations. Understand the differences and what’s important to each culture, and see how you can meet the needs of those customers with the resources you have available.
What are some lessons you’ve learned from disgruntled clients?
The greatest lesson is to know that you can help resolve any issue by listening, staying calm, and using common sense and good judgment when offering solutions. And remember it’s not just what you say, but how you say it — your body language speaks volumes.
If what you’ve proposed does not work for the client, work with him or her to devise an agreeable and suitable solution that meets his or her needs, and then take action immediately. Most importantly, take the opportunity to learn from the experience and make improvements.
What would you consider an out-of-the-box convenience to offer customers?
It doesn’t have to be dramatic. If you have conference rooms, you can offer them to good customers. You can invite customers to have lunch with the chairman, and have an open discussion on the economy and what’s happening. It’s more than just taking on a little inconvenience in the hopes that maybe you’ll get something out of it. If you really want to help them they will sense that.
Jo Ann Lofton, is senior vice president, retail executive, at Cadence Bank. Reach her at (713) 807-1336 or email@example.com.
Cadence Bank offers a host of resources for small businesses through all of its branches. Find the nearest location.
Insights Banking & Finance is brought to you by Cadence Bank
Two-thirds of businesses experienced some type of attempted or actual payment fraud in 2011, according to recent industry surveys, and more than 25 percent of banks are reporting a rise in attempted fraud incidents. Although not all attempts result in financial loss, when they do it’s typically around $20,000.
There’s also reputation risk and extra work when somebody gets account information and starts utilizing it in an inappropriate manner, says Ted Sheerer, Senior Vice President and Group Manager of Cash Management at First Commonwealth Bank.
“Companies need to understand the risks and take them seriously,” he says. “It may cost a little bit and make things slightly less convenient, but they need to do everything necessary to protect their financial assets. They need to take proactive steps and not wait until a loss occurs.”
Smart Business spoke with Sheerer about guarding against corporate financial fraud.
Why has financial fraud increased?
Fraud has increased primarily because of technology — from software that makes it easy to create authentic-looking checks to phishing scams, viruses and malware that can compromise a network and PCs. A company’s financial assets could be more vulnerable today than ever. However, there are ways to substantially reduce risk.
What are some examples of financial fraud?
If a company’s account and routing numbers get compromised, they can become exposed to individuals generating fraudulent checks. Some businesses, through the utilization of Positive Pay, which matches check issue data, including payee line, with items presented to the bank, can catch this with no financial loss. The bank alerts the business regarding items that do not match, and offers the opportunity to pay or return those checks. Unfortunately, many others wait until they experience a loss before taking steps to implement Positive Pay.
A more current example is corporate account takeover, where a company’s network or specific PCs get infected with a virus or malware, somebody obtains access to the system and then performs keystroke logging. The fraudster can then sometimes capture the necessary credentials to get into the business’s online banking.
How should fraud education be handled?
You can educate employees, especially those conducting company financial transactions, by using the knowledge of your IT staff. If you don’t have an in-house IT staff or want to supplement this education, work with your bank to see if it offers any security or fraud seminars. You also can find local and regional fraud awareness seminars through professional organizations.
How can you prevent or mitigate fraud?
To minimize the potential of check fraud, companies can incorporate security features into their check stock, store checks and digital signatures in a secure environment, segregate financial duties, reconcile accounts regularly, and utilize Positive Pay with payee line protection. If something doesn’t match, the bank alerts the business customer who decides to pay or return it.
With increased electronic fraud, which includes Automated Clearing House (ACH) transactions and wire transfers, it’s important to have ACH block and filter. This stops unauthorized transactions from hitting accounts. Companies should also ask if their bank offers malware detection and/or account takeover detection software. This is sometimes provided for free.
Some other preventative measures are to:
- Understand procedures around user authentication and limit users to those who absolutely need access.
- Establish dual verification for any outbound electronic transactions.
- Have dedicated PCs used only for online banking services.
- Change passwords regularly, don’t share or write down logins, and routinely update anti-virus and malware protection software.
What’s the priority with fraud prevention?
The priorities should be Positive Pay, ACH block and filter, and then everything the organization can do to protect its network.
Many businesses don’t take the necessary preventative steps. Only when companies seriously understand the risks can they partner with their bank to combat financial fraud.
Ted Sheerer is a senior vice president, group manager of Cash Management at First Commonwealth Bank. Reach him at (412) 690-2213 or firstname.lastname@example.org.
Insights Wealth Management is brought to you by First Commonwealth Bank
Business credit cards can be highly useful, efficient and versatile tools for many small business owners, as long as they are used in a prudent way. What are the benefits of using business credit cards? How should you select one? What best practices should be employed?
Smart Business spoke with California Bank & Trust Senior Vice President and Corporate Marketing Director Steven Borg to discuss how entrepreneurs can best use business credit cards to improve financial management processes and streamline cash flow.
Why should small business owners use a business credit card instead of a personal card for company expenses?
Using a business credit card instead of a personal card lets you more easily track your spending, keeping business and personal expenses separate. Most card issuers provide highly detailed reports categorizing your expenses, which can be very useful for accounting and tax purposes. Like personal cards, business credit cards may come with various rewards programs, such as cash back or additional savings on business expenses. Using a business credit card also may provide public relations value to your business by making a good impression when you’re purchasing goods and services, or entertaining clients.
What are the advantages of using a dedicated business credit card?
Using a dedicated business credit card allows you to control spending, streamline your operations, view your transactions efficiently and provide your business with fraud protection.
Business credit cards typically permit multiple users to have individual spending limits, giving you the ability to control your company’s spending while still allowing your entire team to move forward with their business needs. Additionally, having your employees use their respective business credit cards eliminates the need for your company to reimburse them for expenses. This saves on paperwork, streamlines processes and gives you more precise control over your team’s spending.
Most business credit cards come with enhanced reporting features, allowing your management team to watch expenses closely, categorize the transactions and make strategic decisions based on the complete spending patterns of your company — an excellent cash flow management tool.
Putting all of your expenses on a business credit card also offers you a certain level of protection against fraud. Like personal credit cards, the card issuer may be able to resolve problems with any products or services you’ve purchased with the card.
What are some of the pitfalls of using business credit cards?
Like any other credit card, interest builds if you let balances grow too high. In some cases, a ‘penalty rate’ is imposed for late payments, which can seriously impact your credit rating and be costly for your company, so pay off your balances regularly.
Although business credit cards allow for improved efficiencies, it is important that managers and owners continue to monitor their team’s transactions, control their expenses and pay off their balances monthly. Additionally, if your company decides to allow for multiple users, there is potential for misuse. Setting strong boundaries, creating specific spending limits and monitoring transactions monthly will reduce the risk in this area.
What should a small business owner do before applying for a business credit card?
Sit down with a business banker who understands your business and industry to help you chose the right product for your specific business needs. Review terms such as rate, grace period, any rewards programs, and perhaps most importantly, the type of information and functionality available in the monthly reporting. It’s also important to find out how credit limits are set and how you can control your employees’ use to minimize risk.
Above all, remember that while the use of a business credit card may very well be a smart business practice, it certainly does not replace astute management.
Steven Borg is senior vice president and corporate marketing director at California Bank & Trust.
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