Overseas sales and exports can really help business owners grow their companies. But, when the company gets its first international inquiry, an owner might say, “I always deal cash in advance. Send me a check. I’ll send you the product.”

That’s not how the world works, says Art Rice, vice president and manager of International Operations and Product Management at FirstMerit Bank.

“The world rarely operates on cash in advance anymore. So, it may be days, weeks or months between the actual sale of the merchandise or service and the resolution of the accounts receivable,” he says.

This extended sales cycle can strain your working capital, but the U.S. government has several programs to help, Rice says, including the Export-Import Bank of the United States (Eximbank) and the Small Business Administration (SBA).

And your banker can be very helpful as you get into international sales or expand into new markets, says Frank Pak, vice president, International Division, at FirstMerit.

“We can serve as a great referral source to other professionals involved in supporting exporters, and also referring them to government assistance centers like the U.S. Export Assistance Centers or the SBA, an international lawyer, a freight forwarder, export insurance broker, etc.,” he says.

Smart Business spoke with Rice and Pak about available export support programs.

What are some export support programs?

The Export Working Capital Programs of the Eximbank and the SBA provide an exporter with funds for things like materials and payroll while producing the product. Banks receive a 90 percent guarantee on the loan’s principal and interest, because the government wants to encourage U.S. job creation. Also, the work in process can be included in the advance funding calculations.

It’s better to work with a bank that has Delegated Lending Authority from the Eximbank or Preferred Lender designation from the SBA for this program as it can expedite the process and assures that you’re working with an experienced lender.

Credit Insurance on foreign receivables is when an exporter purchases protection against non-payment of its foreign receivables from Eximbank or a private insurance company. Normally, banks don’t allow the foreign accounts receivable to be included in a company’s borrowing base because of the perceived heightened risk when buyers are located in a foreign country.

With insurance, an exporter has the opportunity to offer longer repayment terms. For example, a company, that typically offers no more than 60-day terms to its customers, sees its competitors in foreign markets offering 120-day terms. With export credit insurance, the exporter is able to take the risk of longer terms that will enable it to be more competitive. Also, if it assigns the insurance policy to its bank, the bank can advance against those receivables, improving cash flow.

For larger export sales, buyers in higher interest rate countries often look for some form of extended payment terms. Typically referred to as buyer financing, the exporter can decline and lose the sale, offer unprotected terms or use a form of insurance to protect its medium term receivable. The U.S. government supports such sales with programs called Medium Term Loan Guarantees. A bank is willing to participate because repayment is guaranteed by the U.S. government. The exporter benefits because it satisfies what the buyer needs and receives payment from the bank almost immediately after shipping its product. While there are restrictions, successful exporters have used such programs for 70 years.

What’s important to know about using export programs like these?

You don’t have to go it alone. Your banker is an advocate who can help you find the right resources as you set up your export program and understand the advantages and disadvantages of available payment methods.

Contacting your banker early in the process, as you’re developing your business plan and researching markets, will shorten your learning curve and help you become successful sooner. Banks can also direct you to government resources, which have additional tools available to support exporters as they expand into new markets. Reach out to your bank now, even if you’re just thinking about exporting overseas, because your banker will be happy to share his or her expertise.

Art Rice is vice president and manager of International Operations and Product Management at FirstMerit Bank. Reach him at (330) 384-7178 or arthur.rice@firstmerit.com.

Frank Pak is vice president, International Division at FirstMerit Bank. Reach him at (216) 317-7399 or frank.pak@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

Published in Akron/Canton

Small Business Administration (SBA) financing has been around for a long time, but these loans are available to more business owners than ever due to recent program enhancements.

Your banker should be able to take you through the programs and eligibility requirements to see if an SBA loan fits your needs, says Tim Dixon, SBA program manager and senior vice president at FirstMerit Bank. And if you work with a preferred lender who has the authority to make decisions on behalf of the SBA, the SBA lending process can be straightforward.

“We do the heavy lifting for the client and try to make the SBA loan process look very much like any conventional business loan,” Dixon says.

Smart Business spoke with Dixon about SBA lending changes.

What traditionally has been covered by SBA lending?

The core SBA 7(a) lending programs can help when your company:

  • Has been in business for a short time.
  • Is tight on collateral or is leveraged.
  • Has some particular industry risk.
  • Cannot meet standard down payments.
  • Needs extended amortization to better fit with cash flow.

The two main SBA loan programs are 7(a) and 504, which is done with an area Certified Development Company. The 7(a) loans have a broad range of eligible uses and can serve a variety of purposes — real estate, equipment, working capital, refinancing debt, financing a change in ownership, etc.

The 504 program, which typically has slightly larger loan amounts, focuses on economic development and expansion, and the job retention and creation that come along with it. There are just a handful of eligible purposes, such as real estate purchase and expansion, or purchasing heavy equipment that has a useful life of at least 10 years. And certain types of projects may be eligible for special consideration, including energy efficient projects or projects located in targeted economic development areas.

What SBA program changes are enabling more companies to receive larger loans?

Several years ago, the SBA expanded its role by increasing the size of loans that can be extended. The maximum aggregate exposure of SBA-guaranteed loans for standard SBA programs is $5 million. However, under the 504 loan program, you can go even higher in terms of total project amount. Say you’re buying real estate or doing a significant expansion, your total project could be as high as $12 million when you leverage all your dollars together. The bank could do a first mortgage loan, and the SBA would do a second mortgage financing with a long-term fixed rate, while the borrower puts some equity into the project.

At the same time, the SBA increased the size of businesses that can qualify for lending. What might have been considered a midsize company now qualifies for these ‘small business’ loans.

Another change became effective Oct. 1. The SBA authorized a waiver of the SBA guarantee fee on 7(a) loans of $150,000 or less. The waiver is very broad, just based on the loan’s dollar size. It can be used for any number of purposes, such as working capital, equipment, refinancing, etc. It’s really targeted at benefitting traditional small business owners at those loan amounts — helping grow Main Street. It runs through this fiscal year, or until Sept. 30, 2014.

What has been the impact of these enhancements on lending?

Some of the changes have been in place for a few years, and have really had an impact on increasing the number of loans.

In addition, the SBA has been busy since some of its major program changes, providing continued enhancements. The SBA is always looking at the underlying eligibility requirements to try to provide simplicity for banks and businesses.

Have any SBA loan programs been reduced?

Yes. There was a temporary program that expired Sept. 30, 2012. It allowed banks to use the 504 program to refinance eligible projects and debt. It locked in a good portion of the deal at low 10- or 20-year fixed-rate financing. The banking industry has been lobbying to have that program resurrected again. The program might return later this year or in 2014.

Tim Dixon is SBA program manager and senior vice president at FirstMerit Bank. Reach him at (216) 514-5431 or timothy.dixon@firstmerit.com.

All opinions expressed herein are those of the authors/sources and do not necessarily reflect the views of FirstMerit Corporation.

Insights Banking & Finance is brought to you by FirstMerit Bank

 

 

Published in Akron/Canton

New lease accounting rules will require all leases to be on corporate balance sheets, even though the Financial Accounting Standards Board (FASB) has yet to circulate the final FASB Exposure Draft, which details the changes.

“Until the dust settles, it’s very difficult to make any kind of strategic decision,” says R. Timothy Evans, president of Equipment Finance at FirstMerit Bank. “Yes, it will have a negative impact on some segments of the leasing business for both lessees and lessors, but it’s not going to signal the end of the equipment leasing industry by any stretch.”

Smart Business spoke with Evans about who will be impacted and how operating leases will function when the new rules take effect.

Where does everything stand right now?

Companies currently report operating leases in the footnotes, while incorporating capital leases on the corporate balance sheet. To create more transparency, the FASB wants all leases on the balance sheet.

In the current draft, only operating leases of less than 12 months are allowed off-balance sheet. However, many organizations are lobbying to have more exceptions included, creating further delays.

The current expectation is an implementation date of late 2016 or early 2017, but that could get pushed back.

What distinguishes an operating lease?

An operating lease has to meet four main criteria, as defined by FASB:

  • Rentals and all guaranteed rents discounted back at the customer’s borrowing rate cannot exceed 90 percent of the equipment cost. 
  • Term cannot exceed 75 percent of the economic life of the lease property.
  • Cannot transfer ownership of the property at the end of the lease term.
  • Cannot contain an option to purchase the property at a bargain price.

If your lease violates any of the criteria, you must characterize it as a capital lease.

Why do companies favor operating leases?

An operating lease offers an extremely low ‘cost of use’ for a company that is capital intensive. As an example, if a company has net operating losses, it cannot utilize depreciation. With a true lease structured as an ‘operating lease,’ the lessor takes the depreciation and prices a residual into the deal, giving the lessee a lower rate.

Operating leases require no down payment and give the flexibility to return the equipment at the end of the term. Companies can upgrade to state-of-the-art equipment without large down payments. 

A point to clarify is that for accounting purposes, a lease is either operating or capital. For tax purposes, it’s either true or capital. There are components of an operating lease that are also components of a true lease — the two aren’t synonymous.  Operating leases are off-balance sheet, but not all true leases are operating leases.

How are companies preparing?

Right now, there’s not enough clarity to develop a strategy. A company with many leases must search through every contract, identify the operating leases and then reconstruct the rent stream in order to report it on-balance sheet. Many may decide to outsource this to accounting firms. 

What’s the anticipated impact?

Companies that just lease to have off-balance sheet treatment will see a major impact. But this change does nothing to modify a lessor’s ability to take depreciation, price residuals and offer creative structuring for the standard equipment financing.

Eight out of 10 companies have some kind of equipment lease, but that doesn’t mean all are operating leases. For most lessors, the operating lease piece of their business generally is less than 20 percent. Some lessors specialize in operating leases.

Almost every bank monitors and restricts the amount of leverage on a balance sheet through covenants. With the accounting change, some businesses’ balance sheets will have too much debt, so covenants and lending agreements will need to be restructured. However, many lenders already look at the operating leases in the footnotes, so there could be other ‘work arounds’ to deal with the new requirements. It’s expected there will be at least 12 months to complete the transition to the new requirements.

R. Timothy Evans is president of Equipment Finance at FirstMerit Bank. Reach him at (330) 384-7429 or tim.evans@firstmerit.com.

All opinions expressed herein are those of the authors/sources and do not necessarily reflect the views of FirstMerit Corporation. FirstMerit is not offering tax or accounting advice. We recommend you consult with your tax or accounting adviser.

Insights Banking & Finance is brought to you by FirstMerit Bank

 

Published in Akron/Canton

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 jacqueline.hopkins@firstmerit.com.

Website: Get information about FirstMerit’s Sponsor Finance Group services.

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Published in Akron/Canton

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 arthur.rice@firstmerit.com.

Romona Davis is a vice president, SBA specialist, at FirstMerit Bank. Reach her at (330) 996-6242 or romona.davis@firstmerit.com.

 

Learn more about FirstMerit’s International Banking export programs.

 

Insights Banking & Finance is brought to you by FirstMerit Bank

 

Published in Akron/Canton

Seventy percent of business-to-business payments are made by check, according to a 2012 Aite Group survey. Also, nearly six out of 10 consumers in the U.S. used checks for at least some payments in 2010, according to the Bank Administration Institute.

With checks still an integral part of business, remote deposit capture allows your company to deposit checks immediately upon receipt without the need to visit the bank to make deposits.

“Clients can scan checks and send an image of those deposits to the bank for posting from the convenience of their office,” says Korlin Scott, senior vice president and director of Commercial Product Management at FirstMerit Bank. “This eliminates the need to make physical deposits, which provides significant time savings for businesses.”

As payment technologies continue to evolve, remote deposit capture has become an integral component in the collection process. Enhancements in mobile technologies have also opened the door for flexible alternatives to capture and submit checks for deposit, he says.

Smart Business spoke with Scott about how this banking technology can fit your business needs.

How can businesses use remote deposit capture most effectively to save time and money? 

Remote deposit capture is a low-cost solution to streamline the collection of check payments and provides a significant opportunity for businesses to create efficiencies in their payment collection processes.

There can be significant cost savings for businesses on a number of fronts. Remote deposit capture allows businesses to reduce their transportation costs of making deposits at a branch and reduce employee time away from work. Perhaps more importantly, businesses can save time by leveraging services that streamline routine activities and allow them to focus on revenue-generating activity.

What are some best practices to follow with this technology? 

One of the biggest benefits with remote deposit capture is that it allows deposits to be made from remote locations, but still lets businesses centrally manage deposit reporting and reconcilement. Since deposits are consolidated, business can see dramatic improvements to reconciling payments and make the process of researching deposits much simpler.

Companies also can take advantage of later deposit times, which provides convenience and the flexibility to incorporate the service into their daily business processes. They gain faster access to funds without the security risks of making physical deposits at the bank.

What have banks done to reduce the risk of fraud with remote deposit capture?

Banks are well equipped to manage risks associated with check processing and take numerous steps to mitigate fraud. Since remote deposit capture often provides accelerated clearing, this can help to reduce the risk of fraud by allowing returned check deposits to be identified sooner.

With remote deposit capture, it is critical, however, that businesses also take certain precautions to prevent loss. The most effective measure is to ensure that businesses have strong, effective control measures in place to limit their exposure to monetary risk. These include implementation of policies and procedures for use in remote deposit capture as well as security measures for handling checks after scanning and deposit.

Are there, or will there be, new features available with remote deposit capture? 

As technology continues to evolve, the features and enhancements to remote deposit capture will continue to expand. Mobile technology promises to offer unique opportunities for business with respect to collection of check payments. As banks introduce the ability to deposit checks using smartphones, business can benefit from both reduced scanning equipment costs as well as flexibility to deposit payments for services on location, which will be particularly useful for business that receive payment on the road.

Korlin Scott is senior vice president and director of Commercial Product Management at FirstMerit Bank. Reach him at (330) 996-6496 or korlin.scott@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

 

 

Published in Akron/Canton

Business owners have many choices when it comes to how to pay their employees.

Some handle the payroll process internally, and spend a great deal of time managing all the paperwork of federal and state taxes, Social Security, Medicare, union dues, 401(k) contributions and more. Some use payroll software, which allows accurate record keeping but often has a long learning curve. Some hire a local accountant or a professional tax lawyer/CPA.

Others outsource these tasks to companies that provide automated payroll services.

Smart Business spoke with Michael Cheravitch, director of Business Banking at FirstMerit Bank, about what services to expect from payroll providers and how to ensure you choose the right one for your company.

Why is it important for a business to choose the right payroll provider?

Payroll appears to be pretty simple on the surface. Employers calculate employees’ gross earnings. They deduct the respective payroll taxes and other ancillary deductions such as insurance or 401(k). Then, they send the government its share and produce a payment for the net amount to the employee.

However, payroll is actually more complex than this. There are bonuses, sick time, overtime and other factors that can change from pay period to pay period, affecting compensation. In addition, federal, state and local taxes are always changing and, depending on the complexity of a payroll, the time it takes to keep track of all of these changes can turn it into a daunting task.

If employers aren’t up to date on payroll tax requirements, such as rates or frequency of payments and filings, and they miss a deadline or pay an incorrect amount, they can be fined. Additionally, these errors can lead to an inaccurate payroll and, ultimately, unhappy employees. That’s why it is so important to do it correctly.

How can an outsourced payroll provider benefit a business?

With payroll being a much more complicated task than it appears, businesses need someone they can count on for more than just paycheck calculations. Entering all the data and pushing out a check is the easy part. It is everything else after the fact that becomes difficult.

A bank’s business online payroll, for example, could provide payroll tax payments and filings as well as 100 percent guarantee that payroll taxes will be paid and filed accurately and on time. With online payroll, you can offer direct deposit, which saves time and money for the employer and employee. There are no checks or check stubs to print, and the employees don’t have to make an extra trip to the bank on payday, so their time is spent focusing on business productivity.

How does this compare with attempting to do this work in house?

With most in-house accounting products there are additional costs for keeping the technology up to date and tax tables current. With an outsourced payroll provider, there is no software to purchase, no need to have personnel maintain it and no ongoing fees to keep it current.

Having an employee do in-house payroll presents a risk of knowledge walking out the door if that employee leaves the company. There is no need to have an ‘expert’ in-house with an automated payroll service.

How can business owners determine which payroll provider would be the right fit for their company?

There are many factors that go into determining the best solution when it comes to payroll. The five most important factors are reputation, customer service, ease of use, ability to grow with the company and, of course, cost.

Businesses need to look at the complete picture when deciding on a payroll provider. Working with a small, local payroll provider can present issues with out-of-state calculations and few, if any, offer any liability or guarantee with their service. However, working with a payroll provider that has a proven track record of success and growth offers peace of mind to the business owner.

Businesses should look for a payroll provider that has been recognized and awarded for the customer care it provides and can answer questions and provide solutions to problems. Also, look for a payroll service that provides live support available at one number, eliminating all the shuffling around and waiting for a call back.

With the many options available for payroll services, ease of use is one of the most important factors for business owners. For example, employers can look for an award-winning online product that allows business owners to run their payroll from any Internet-capable device. Employers simply log in to their online account, enter hours and other specific payroll information, preview the payroll to ensure data is correct and press ‘approve’ — everything else is taken care of. Processing payroll this way takes about five minutes.

Another important factor to look at is whether the provider can grow with the business’s future needs.

Finally, businesses should consider the cost of working with a payroll provider. One of the major advantages of working with an all-inclusive provider is that there are no hidden costs for direct deposit, reports, and payroll tax payments and filings. Online technology significantly cuts operational costs, and those savings are passed on to customers. For example, some customers could pay half the cost charged by larger companies, accountants and CPAs, and most local providers.

Michael Cheravitch is director of Business Banking at FirstMerit Bank. Reach him at (330) 849-8699 or michael.cheravitch@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

Published in Akron/Canton

Finding the necessary financing to thrive — or just survive — can be difficult for small businesses. But there are resources available to help startups and entrepreneurs compete in this market.

“SBA loans are designed for borrowers that might not qualify for conventional financing due to a number of different reasons,” says Romona J. Davis, Vice President of SBA lending with FirstMerit Bank.

Smart Business spoke with Davis about how to determine whether an SBA loan could help your business, and how to get started with the process.

What are the differences between SBA loans and conventional loans?

The main difference is that SBA loans are backed by the United States government, which provides a guarantee to the bank. SBA loans are for borrowers that might not qualify for conventional financing due to a variety of reasons, such as:

  • Insufficient collateral

  • A startup business or one that’s only been in existence for a short period of time

  • The company is looking for a longer term on its owner-occupied commercial real estate purchase

  • The borrower is in a ‘high-risk’ industry

  • The borrower only wants to inject a minimum down payment

  • Impending or current ownership changes with the business

  • Inconsistent financial performance over the past few years

How does a lender determine if an industry is high risk?

It varies by bank. Most banks consider the restaurant industry as one that has a lot of risk associated with it. Also, when the economy changed and building contractors were negatively impacted, they became high risk.

However, being part of a high-risk industry doesn’t mean a conventional loan is impossible.

What can SBA loans be used for?

SBA loans can be used to:

  • Purchase owner-occupied commercial real estate

  • Buy out a business partner

  • Buy a business

  • Purchase machinery and equipment

  • Buy a franchise

  • Construct a building (the business must occupy 60 percent of the space)

  • Cover working capital needs

  • Refinance existing business debt

What types of businesses are eligible for SBA loans?

To qualify for SBA financing, the entity must be designated ‘for-profit.’ In addition, the business must meet certain SBA size standards, demonstrate good character, have a positive payment history on previous federal debt (no prior defaults on federal debt), possess U.S. or Legal Permanent Resident status, and show reasonable expectation of repayment.

What are the required size standards?

The SBA has developed size standards for different types of industries. Companies must meet either a maximum number of employees, maximum revenue amount or an alternative size standard to qualify as a small business.

How is ‘good character’ determined?

First, the SBA looks at the company’s credit, tax liens and any prior delinquencies with the government.

Also, the SBA always wants to know if a borrower has any criminal background, has been under indictment, is currently on probation, has ever been on probation, or has ever been charged with or arrested for any criminal offense, other than a minor motor vehicle violation.

The two ways to assess character, from the SBA’s perspective, are through personal credit and personal background.

Why might a business opt for an SBA loan instead of a conventional loan?

Businesses might opt for an SBA loan versus a conventional loan if they:

  • Want a longer term on their owner-occupied commercial real estate or equipment loan

  • Want a straight term and amortization versus a balloon note

  • Prefer a lower down payment on their transaction

  • Have a collateral shortfall

  • Want to consolidate business debt into one loan that could offer a longer repayment period

  • Want to buy out their business partner with a minimum equity injection

  • Want to purchase a business but there’s insufficient collateral

  • Desire cash flow savings due to a longer term and amortization

How can businesses get started with the loan process?

If a business is interested in an SBA loan, the first step is to contact a bank that participates in the SBA program. The banker will need to make certain that the company is eligible as indicated above. Assuming the business is eligible, the borrower would need to provide a financing package to the bank for SBA consideration.

Disclosure: All opinions expressed in this article are that of the authors or sources and do not necessarily reflect the views of FirstMerit Bank or FirstMerit Corp.

 

Romona J. Davis is Vice President of SBA lending for FirstMerit Bank. Reach her at (330) 996-6242 or romona.davis@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

Published in Akron/Canton

Approximately 25 percent of mid-sized companies plan to expand how they use treasury management products this year, according to Greenwich Market Pulse. Treasury Management is more important than ever to make sure businesses not only manage risk but effectively oversee their payments and receivables with adequate liquidity.

But, how can you ensure your business is maximizing its liquidity and cash position potential?

“Businesses are increasingly challenged to provide a disciplined, efficient means to effectively manage their capital position and liquidity in response to the rapidly changing economic environment, increased regulation and globalization,” says Korlin Scott, Senior Vice President and Director of Commercial Product Management for FirstMerit Bank.

“As financial systems continue to evolve with more sophisticated functionality to support these market drivers, there are significant, cost-effective opportunities for businesses to leverage Treasury Management services for improved payment settlement, reconcilement and cash positioning.”

Smart Business spoke with Scott about how companies can use Treasury Management to save money and time.

Why is Treasury Management important for businesses?

Improving cash flow can help any business efficiently manage its working capital. When key aspects of the cash flow cycle can be utilized to their fullest extent, companies gain competitive advantages.

Treasury Management services can significantly drive efficiencies in the receivable collection processes and provide enhanced control over payments while delivering a real-time view into company finances. Driving improvements in the cash flow cycle can have a direct impact on a company’s working capital and ability to focus on revenue-generating activities.

What’s the first priority for employers with treasury management?

Taking advantage of a bank’s robust technology allows a business to significantly improve its cash flow cycle without costly investments or additions to staff.

The broad range of payment and collection services available includes automating the routine, daily process of making/receiving payments and centralizing the reconcilement of information for a consolidated view of the business.

Integrating these services — and, perhaps more important, the information — is key to achieving significant reductions in time spent on day-to-day administration and transaction processing.

How can employers more efficiently manage how they receive payments?

There is a tremendous opportunity for businesses to improve order entry through cash conversion, particularly with check payments, by speeding up the payment collection and posting process.

For example, lockbox services effectively automate the collection of larger volumes of payments. Payments are received at a central location and scanned for automated deposit, accelerating the cash application process. The ability to capture and image not only the payments but associated remittance information also improves the reconciliation process, leading to improved availability of funds.

Another service that is equally as effective is Remote Deposit Capture, which can be used instead of or in conjunction with lockbox services. Remote deposit allows your business to deposit checks immediately upon receipt without the need to visit the bank. You also have the flexibility of later deposit times providing faster access to funds without making physical deposits at the bank.

What’s the best way for a business to manage how it pays out cash?

Gaining control over the timing of outgoing payments allows businesses to more accurately forecast cash outflow, as well as maximize use of their available cash.

Automated Clearing House (ACH) services allow businesses to make and collect payments electronically with specific settlement instructions to more efficiently control the timing of the payments.  ACH typically costs much less than writing checks and with the ability to initiate payments online, you can significantly reduce payment risk while enhancing your ability to manage recurring payment information.

Wire Transfer is another alternative, providing an easy, secure means to transfer funds worldwide. For urgent payments, wire transfer has a distinct advantage over writing checks and ACH, as it provides immediate funds availability, which is an effective tool to improve the purchase to payment process.

These are just a few of the Treasury Management options that can more efficiently manage your cash flow, whether it’s expediting payment collection or gaining better control over outgoing payments.

 

Korlin Scott is Senior Vice President and Director of Commercial Product Management at FirstMerit Bank. Reach him at (330) 996-6496 or korlin.scott@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

Published in Akron/Canton

When it comes to merchant fraud, businesses that accept credit cards as payment often have an “it can’t happen to me” mindset. Unfortunately, it all too often does.

“Security risks are not going to go away,” says Michelle Thompson, vice president, fraud/risk officer for FirstMerit Bank.

Business owners and their employees may be doing things which could put the company at risk, like unintentionally being negligent with sensitive client credit card information. And until you have worked through the process of becoming PCI compliant, you may not have realized that you were at risk for data integrity issues.

Smart Business spoke with Thompson about merchant fraud and how businesses can protect themselves.

What should merchants be aware of in terms of fraud?

Many times, merchants will take a transaction over the phone, and the customer on the other end of the line is someone they’ve never done business with before. If the supposed transaction is fraudulent, oftentimes, the individual posing as a customer will ask that the product be shipped to an alternate or obscure location. Another tactic is to provide multiple credit cards for payment. I have seen this where the credit card numbers were almost identical, and all from the same credit card issuer. A credit card issuer is not going to provide an individual several cards in their name. A frequent tactic used is the individual will create a sense of urgency in order to rush the order. This is a very common fraud pattern, and it’s still working.

Merchants should also be wary of calls through the relay line, oftentimes called the TDD or TTY line, referring to telecommunications devices for the deaf or teletypewriter. This phone assistance line was originally created with an interpreter or someone in the middle to serve people who can’t speak or don’t speak the language. Unfortunately, to-day, 90 to 95 percent of these calls are fraudulent. Criminals use this tool to mask them-selves for anonymity. Beware of misspelled words or a structure that is grammatically incorrect.

There are a large number of merchants, many of which have accepted credit card transactions for many years, who believe that once they receive an authorization number, they are guaranteed payment. All that authorization code validates is ‘At this time, that credit or debit card has availability to cover the cost of the pending transaction.’ That doesn’t mean, however, that the authorized person is the one using the card.

Why do so many merchants fall for these ploys?

Businesses are anxious to sell their product, so they tend to bypass red flags, focusing on making a sale. Fraud is much more prevalent than many merchants think, or would like to admit. In some cases, it’s glaringly obvious, but in others, it’s very well hidden.

Many merchants also don’t understand that a credit card transaction is the same as accepting a check. Many merchants accept cards because the process feels safer and quicker. But if somebody writes you a check, especially if it’s for a large dollar amount, you could wait the standard 10 days to know if that check’s going to come back. It’s the same process with credit card transactions. They provide  provisional credit, just like a check; however, there’s no guarantee it’s not coming back.

What preventive measures can merchants put in place to avoid becoming a victim of fraud?

Knowing your customer is key. Many businesses are motivated by the prospect of a large sale; however, it’s important to utilize common sense and good judgment. A busi-ness also needs to be aware of whose hands are in the mix. Is there a person selling on the front line who faxes or emails orders to an accounts payable department? Does that person know this customer? Has someone completed proper due diligence on the credit card being used as payment? It takes everyone working together. The best way to help prevent employees from accepting fraudulent transactions is education. Educate everyone in the company who has any part in the sales process. It’s the best defense for protecting yourself.

What happens when a merchant or its service provider discovers a fraudulent transaction? Is there any way to recover the money that was lost?

If merchants suspect a fraudulent transaction, or are unsure about a customer or trans-action, they should contact their merchant services provider immediately. If the merchant reacts quickly enough, the shipment can often times be tracked down, and there may be the option to engage legal enforcement to attempt to track down the perpetrator.

It’s unfortunate that there are times when a merchant is unable to retrieve their product. This is prevalent with international transactions. Once the product leaves the United States, the likelihood of it being tracked down, even if the transaction is fraudulent and you can prove it, is fairly minimal due to the distance. That’s why it’s essential, when conducting international transactions, for a merchant to ask a lot of questions and look for those ‘red flags.’ When we do confirm that a transaction is truly fraudulent, we simply walk the client through backing out of the situation, and many times that reduces or negates any cost/loss being incurred by them.

What should merchants know about Payment Card Industry (PCI) compliance?

 

PCI is the unified security standard on behalf of American Express, Discover, MasterCard and Visa, although each of the Card Brands still has its own individual security standards and requirements. If a merchant does not become PCI compliant, and they should experience a breach, the fines and costs associated with it could put them out of business. There should be a partnership between a merchant and its merchant service provider.  Safety and security should be a merchant’s No. 1 concern when processing credit card transactions.

 

Michelle Thompson is vice president, fraud/risk officer for FirstMerit Bank. Reach her at (330) 849-8937 or michelle.thompson@firstmerit.com. For more information on PCI compliance, visit the PCI Security Standards Council official site at www.prcisecuritystandards.org.

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Published in Akron/Canton
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