Equipment leasing companies have special banking needs. While most financial institutions attempt to place leasing companies in a regular commercial division, a small cadre of banks provide lease funding solutions specifically tailored to meet the needs of those in the equipment leasing industry.
“Independent leasing companies are a niche type of business,” says Brian Griffin, senior vice president, leasing, for MB Financial Bank in Chicago. “Most banks don’t understand how leasing companies work. Leasing companies have a variety of needs that are specific to their industry. Those needs include warehouse lines of credit, equity lines of credit, equity sharing and debt discounting. MB provides all of these products.”
Smart Business spoke with Griffin about warehouse lines of credit, the advantages of an equity line of credit and the importance of working with a bank that understands how leasing companies operate.
Why do businesses typically choose to finance equipment?
Businesses often choose to finance equipment because it’s a large capital expenditure and they don’t want to lay out large dollar amounts upfront. A lot of larger companies’ budgets don’t allow for large equipment purchases upfront, but they will work with independent leasing companies to make monthly payments over a period of time. Also, some companies prefer to have an operating lease treatment, which means they can finance the transaction off a balance sheet: They don’t have to include the asset or liability on their balance sheet; they just include the monthly rent payment that they have on a lease.
What are the advantages of leases over loans?
Leases are most advantageous to companies that are acquiring equipment that is subject to technological obsolescence, such as IT equipment or medical equipment. A lease provides the lessee with the flexibility of little to no down payment, lower monthly costs, and the ability to return or release the equipment at the end of the initial lease. Leases also allow the lessee the possibility of upgrading the equipment prior to the end of the lease term.
What is a warehouse line of credit?
Leasing companies typically fund leases and then get their funding for the transaction from a bank. A warehouse line of credit allows a leasing company to fund a transaction on their own before obtaining their permanent funding from a bank. A good analogy, although perhaps not so good in today’s environment, is a mortgage broker. First, a mortgage broker funds a mortgage. The mortgage broker then gets money from a bank through a warehouse line of credit. Finally, the mortgage broker sells off the mortgage to an investor and gets paid back. Leasing companies work the same way: They bundle leases themselves by using a warehouse line of credit, and then they assign it to another lending source.
How can a leasing company benefit from a warehouse line of credit?
Leasing companies are typically not capitalized well enough to fund large transactions. As a result, they need a bank to, at a minimum, fund the underlying transaction. Traditional financing options, however, don’t help a leasing company that a) wants to fund a transaction without requiring a bank approval; b) needs to fund progress payments on a deal before it goes to term; or c) wants to shop the market for an attractive rate. A warehouse line of credit provides a leasing company with flexibility by having the lender fund the lease or progress payments for a short period of time — typically 90 days — before the deal is sold to a permanent lender.
What are the advantages of an equity line of credit?
A leasing company typically invests equity into a deal, commonly called the residual. This is money that is permanently left in a transaction until the end of a lease term when the equipment is either sold to the lessee, the lease is extended or it is sold to a third party. An equity line is typically for a smaller amount than a warehouse line of credit and requires a fairly strong lessor. It is also for a higher rate of interest than the warehouse line because the line is funding equity and not debt. The equity line of credit is full recourse to the lessor.
An equity line of credit provides lessors with more opportunities to do business as they can leverage their equity. Since banks are providing the equity loan for them, leasing companies can pursue more deals by borrowing the equity in some of their transactions. With greater access to capital, they are able to do more business while still retaining the benefits of owning the equity.
BRIAN GRIFFIN is senior vice president, leasing, for MB Financial Bank in Chicago. Reach him at firstname.lastname@example.org or (847) 653-1874.
The U.S. Commercial Service provides a number of services designed to help small and medium-size businesses expand international sales. With trade specialists in more than 100 American cities, the primary thrust of the U.S. Commercial Service is to help equip businesses with the knowledge and tools necessary to navigate the foreign market.
Over the past several years a confluence of factors including free trade agreements, technological advancements and U.S. government programs and partnerships have converged to simplify the export process. According to Caroline Brown, first vice president at Comerica Bank, now is the ideal time for businesses to engage in exporting.
“A company can increase its sales and margins significantly by entering the export market,” she says.
Smart Business spoke with Brown about the U.S. Commercial Service, the services it provides and how a company can secure export financing.
What is the U.S. Commercial Service?
The U.S. Commercial Service is the trade promotion arm of the U.S. Department of Commerce’s International Trade Administration (ITA). To increase trade and investment, ITA helps small and mediumsize companies navigate foreign markets by providing counseling and acting as an advocate throughout the exporting process. Its services include market research, trade events that promote a company’s product or service to qualified buyers, introductions to qualified buyers and distributors as well as counseling. In some cases, it provides guidance to companies that are already exporting and are looking to broaden their market. Other times, it works with companies that are new to exporting and have no experience at all.
How does the U.S. Commercial Service partner with corporate organizations to build awareness of exporting opportunities?
Because the U.S. Commercial Service is a government agency and has limited resources, it partners with other entities through innovative government-private sector partnerships. The Partnership Program is based on a ‘force multiplier effect.’ By using each other’s organization, data bases and global/regional networks they are able to reach as many small and medium-size enterprises as possible. Under the Partnership Program, seminars are co-sponsored to support the domestic and international marketing efforts of these enterprises. Topics vary from basic seminars to market or industry specific issues. A popular alternative to the traditional seminar is the webinar, a seminar conducted on the Internet and telephone.
How are corporate partners selected?
The U.S. Commercial Service looks for corporate partners that are considered to be best in class, have a recognizable name, are regionally or globally strong, and are involved with international trade and business. Also, corporate partners must possess a significant customer base that is either currently seeking to expand its international business or seeking to enter the international business field.
How can a company secure export financing?
Financing is an important component for companies expanding into exporting. Typically, companies know their product and tend to focus on the marketing aspect. However, it is also important for companies to think about financing very early in the transaction not after they have closed a deal, received an order or finalized a price.
Trade cycle financing can cover everything from the purchase order stage all the way through the collection cycle or it might involve financing one portion of the transaction. In working with exporters, we supplement our programs with government-established programs that can guarantee a portion of the risk for us. Two programs that have been very helpful to exporters we work with are loan guarantees offered by the Export-Import Bank of the United States (Ex-Im Bank) and the Small Business Administration (SBA).
In some cases, companies have to hold their product for inventory purposes, sell it to a client on open account and wait to collect. When you are exporting, as compared to a domestic transaction, the trade cycle is going to get larger because the company you are doing business with is located much farther away. This creates gaps in working capital. We help finance export transactions by making short-term working capital loans that are guaranteed by either Ex-Im Bank or the SBA. The loan proceeds can be used, among other things, to cover overhead, labor costs and purchase of the goods.
What other options are available?
Exporters may need foreign credit insurance, which is very useful in mitigating risk on foreign transactions. Export credit insurance policies protect against both the political and commercial risks of a foreign buyer defaulting on payment. In addition to the risk mitigation, insured receivables can be used to obtain bank financing.
CAROLINE BROWN is first vice president at Comerica Bank. Reach her at (562) 590-2525 or email@example.com. Comerica Bank has recently entered into a formal partnership with the U.S. Commercial Service to expand the outreach to more potential exporters.
The current environment is favorable for those looking to buy land. In order to get the most bang for your buck, however, it is important to get a quality land broker early in the process, according to Hassan Jadali, CCIM, SIOR, principal, vice president, and Tiffany Wiegers, senior associate, both of Colliers Turley Martin Tucker.
In addition to helping you navigate the complexities involved with purchasing a piece of property, an experienced land broker can also provide guidance in determining the most opportune time to buy.
“Your profit is made when you purchase a piece of land, not when you sell it,” Jadali says. “You have to buy the right piece of property, in the right location, at the right price.”
Smart Business spoke with Jadali and Wiegers about buying land for investment purposes, the importance of working with an experienced land broker and how to reduce expenses during the holding period.
Why is land a good real estate investment in the current economic climate?
Under the current market conditions there are not many people buying land. There are, however, land owners holding on to the land they have to sell. This allows for stronger negotiations with the seller. Also, prices are down in some areas up to 30 percent from three years ago. For an investor with cash on hand now is the time to purchase land.
What considerations should be taken into account when buying land for investment purposes?
Land has a cycle like any other business. Investors must make sure they are not buying at the top of the cycle. Investors must also consider the impact of time and costs associated with zoning and government approvals. For example, an investor might get an unbelievable deal on a property at a premium location and then realize utilities aren’t available at the site, substantial grading is required and/or property needs to be re-zoned. When you add all of these factors up, the costs that an investor puts into the property start to accumulate.
Determining the holding period up front is a key factor as well. Many purchase a piece of property thinking it’s in a good location, but do not plan how long they are going to hold it and what it will take to hold it.
For example, an investor plans to hold a tract of land for five years, after four years they meet with the government agency to get specific zoning and the process takes an additional three years. Suddenly the holding period is significantly increased, which takes money out of the investor’s pocket.
What strategies are there to locate the best land available?
One must understand the governmental process and be patient. The majority of the time governmental approvals are necessary, whether it is a zoning issue, a conditional use permit or both. The average time for a land deal to close is nine months due to the contingencies and due
diligence with a land sale. It is not like a building inspection where one can take occupancy upon receipt of approvals. Because there are so many processes involved with land, it is important to hire an experienced broker with extensive knowledge in land acquisitions and dispositions. What people don’t realize is that it takes time and expertise to face and overcome the challenges associated with purchasing or selling a parcel of land. A broker who does not specialize in land may not be aware of all the potential obstacles. It will save time and money in the long run if a broker with land experience is hired over a broker without land expertise.
How can a land expert aid in the process of searching for and buying land?
Brokers specializing in land have market knowledge and relationships with land owners, appraisers and municipal leaders. A good land broker will research any future plans or improvements such as highways or road construction that might impact the property. These factors can add or take away value from the property.
How can one reduce expenses during the holding period?
First, try to find a temporary use for the site. For example, if you have an industrial site, perhaps you can rent the property to a trucking company to park its trucks or to an auctioneer to auction equipment. If the site is located on an interstate and has good visibility it might make sense to construct a billboard or rent it for temporary signage. Consider farming the land. Large pieces of property that are zoned commercial will be assessed with very high taxes; by farming the property taxes may be significantly reduced.
HASSAN JADALI, CCIM, SIOR, principal, vice president, and TIFFANY WIEGERS, senior associate, are both of Colliers Turley Martin Tucker. Reach Jadali at (314) 746-0370 or firstname.lastname@example.org. Reach Wiegers at (314) 236-5471 or email@example.com.
Hampered by a steady rise in energy prices, a downturn in the housing market and woes in the credit market, the U.S. economy has been sluggish throughout the first half of 2008. The good news, however, is that despite this confluence of negative economic indicators, the economy has shown growth.
“The U.S. economy has been remarkably resilient,” says Dana Johnson, Comerica Bank’s chief economist. “It has grown nearly 1.5 percent at an annual rate over the first half of the year, despite a rise in energy prices, a fall in housing prices and a consistently disturbed credit market.”
Smart Business spoke with Johnson about his economic outlook for the coming months.
What is your economic forecast for the remainder of 2008 and moving into 2009?
The second half of 2008 is going to look a lot like the first half where growth averaged about 1 percent on an annual rate. As we move into 2009, I see the economy accelerating gradually. Six months from now I think the problems with the credit market will be less intense and the credit crunch will be less evident. I also think by the time we reach the end of the year we will have seen a partial reversal in the runup of energy prices particularly crude oil and gasoline.
We’re beginning to see more evidence that the plunge in building activity is beginning to slow and perhaps the bottoming-out process is underway. The drag from home building is going to become smaller as we move through the second half of the year into 2009. Finally, I think we’re going to continue getting good support to the economy from a narrowing of our trade deficit in real terms. The weakness in the dollar has been underway for about six years and decent growth abroad helps the trade deficit continue to be a source of support for the U.S. economy.
Do you anticipate continued turmoil in the financial and housing markets?
In the near term I certainly do. There are still tremendous concerns about the size of the losses that may result from further defaults, and there is no sign yet of a peak in default rates in mortgages. Until we see clearer evidence that the home price declines are beginning to subside, there is going to be a lot of concern about the condition of financial institutions that, in one way or another, are exposed to the housing market.
California has relied heavily on the subprime mortgage market. What impact will this have on housing prices in the state going forward?
House prices have already declined quite sharply, particularly since last fall, when the credit crunch cut off the flow of new jumbo and subprime mortgages. The decline in home prices has been sharper in California than in most other parts of the country. Over the next year, California home prices are probably going to under-perform against the national average by 10 percent. We are seeing a much more rapid adjustment in home prices in California in this episode than we did in the first half of the ’90s. In the past, adjustments have taken quite awhile, but this one is progressing quite quickly.
Do you expect oil prices to continue rising?
I have given up believing that I can forecast the near-term movements. I do believe that we have been in an overshoot episode. I also believe that any retracement in energy prices is likely to be quite modest compared to the run-up we've experienced over the past six years.
How will this impact the economy as a whole?
The spike in energy prices has created tremendous hardships for any heavy user of petroleum-based products. Overall, the energy price increases have created a drag equal to about $100 billion this year as compared to last year. This figure matches the order of magnitude of tax rebates that people have received. Without the tax rebates there would have been a much more visible impact of the run-up of energy prices on the economy.
One of the bright spots in the current U.S. economy is exporting. Do you expect this trend to continue?
Yes, I do. The dollar has been going sideways since March. It’s beginning to stabilize and when the Fed starts tightening, which I expect to happen sometime next year, I wouldn’t be surprised if the dollar begins to firm a bit. The dollar is very low compared to what it was a year ago, or six years ago, and is creating a good, competitive position for anybody producing goods and services in the U.S. and trying to sell them abroad. Growth abroad has slowed, but not as sharply as it has in the U.S. The combination of growing incomes abroad and the low value of the dollar signals that we will continue to see good growth in our exports in the coming six to 12 months.
DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 462-6839 or firstname.lastname@example.org.
The Economic Stimulus Act of 2008 was created in an effort to bolster the flagging economy. Designed to stimulate capital investment by businesses and professionals, the new provisions include tax breaks in the form of increased depreciation write-offs.
In order to take full advantage of the Stimulus Act, it is important to take a proactive approach, says Barbara Rosenbaum, executive vice president of Gumbiner Savett Inc.
“Taxpayers working on a new construction project or adding leasehold improvements in 2008 can proactively work with their accountants to identify qualifying property, and then ask their architect, engineer or contractor to be sure those items are identified and billed separately,” she says.
Smart Business spoke with Rosenbaum about the new depreciation rules, how a company can take advantage of the new tax rules and why it’s so important to stay abreast of changes to the tax code.
What are the new rules regarding depreciation?
The rebate for individual taxpayers was the most publicized piece of the Economic Stimulus Act of 2008, yet there are two major provisions that businesses need to focus on: bonus depreciation and increased Section 179 expensing. A substantial one-year increase in the maximum amount of qualified property that can be expensed (from $128,000 to $250,000 during 2008) is accompanied by increases to the phase-out threshold (from $510,000 to $800,000). That means if taxpayers add more than $1,050,000 in qualifying property, they have no Section 179 deduction. This deduction is limited to the taxable income of the trade or business, though the nondeductible amount can be carried forward indefinitely.
The new bonus depreciation rules are back for a limited time. They allow a taxpayer 50 percent first-year bonus depreciation on qualified property that meets all three of these requirements:
- Original use must begin with the taxpayer after Dec. 31, 2007 (no used property),
- must be acquired after Dec. 31, 2007 and be placed in service after Dec. 31, 2007, and before Jan. 1, 2009.
Why were these changes adopted?
In the past, Congress has used bonus depreciation, as well as increased expensing of assets, to encourage business investment. With the economy ailing, Congress is hoping these new rules, available for a limited time only, will increase business investment, which will in turn act to stimulate the economy. We have seen this tool used before, for example, post Sept. 11, 2001.
When do the new rules become effective?
To qualify for bonus depreciation or the increased expense allowance, property must be purchased and placed in service in 2008. Be careful, as there are differences in the definition of qualified assets. For bonus depreciation the original use of the property must begin with the taxpayer and has to occur after Dec. 31, 2007, and before Jan. 1, 2009. The expensing rules are more expansive.
How do the new depreciation rules interact with pre-existing cost-recovery rules?
The IRS has acknowledged that questions may arise as taxpayers evaluate the benefits of the new 50 percent bonus depreciation. As this ‘new’ bonus depreciation is patterned after prior provisions, and to keep it simple, the IRS is allowing taxpayers to rely on prior regulations (with appropriate adjustments for dates, etc.) until new guidance is issued.
How do the new depreciation rules interact with the increased expensing election?
The interaction of the expensing and the bonus deprecation rules make for some fat deductions. The sections must be applied in a specified sequence to purchases of qualifying assets that are placed in service in 2008: first, expensing under Section 179 (an elective provision); second, the bonus depreciation (a mandatory provision unless one elects out); finally, MACRS depreciation applies. The basis of the asset is reduced after each step, decreasing the basis before application of the next rule.
How can a company best take advantage of the new tax rules?
Plan and project. Taxpayers can control their deduction by electing to expense (or not) under Section 179 and by accepting or electing out of bonus depreciation by class, by entity or altogether. Most people don’t realize that bonus depreciation is mandatory unless you choose to elect out. Effective use of elections can maximize deductions.
Be attentive. The timing of asset purchases can impact the availability of Section 179 expensing. If you are going to be buying equipment costing more than $1 million, and you want to maximize your 2008 deductions, think about deferring a portion of the acquisition until 2009.
Work with someone who can get you the information you need. Look beyond the general rules. For example, the original use requirement has a special rule that applies to property placed in service in 2008, sold and then leased back within three months. Every rule has an exception and every exception has its own exception.
Be flexible. Examine written binding contracts entered into before Jan. 1, 2008, for substantial modifications that can be made in 2008 to qualify for bonus depreciation.
BARBARA ROSENBAUM is executive vice president of Gumbiner Savett Inc. Reach her at email@example.com or (310) 828-9798.
When a dispute arises between businesses, it is not uncommon for one of the parties involved to look to the court system for resolution by filing a lawsuit. However, there is an alternative method available to resolving legal problems before going to court.
“Alternative dispute resolution, or ADR as it is commonly called, is a process where legal disputes are removed from the court system and resolved by trained mediators or arbitrators independent of the court system,” says Daniel P. Makarski, senior partner at Secrest Wardle.
Under the right circumstances, ADR can be used to settle disputes faster and less expensively than if the dispute were processed in the court system. In addition to saving time and legal expenses, ADR provides parties with greater privacy than is afforded in a public courtroom and can permit valued relationships among parties to be preserved.
Smart Business spoke with Makarski about ADR, the benefits it provides and how ADR costs compare to cases processed in the court system.
How can a company benefit from using ADR?
The primary benefits of ADR are expedited resolution of issues, cost savings and finality. It is faster and less expensive to engage a mediator or arbitrator to resolve a dispute than it is to proceed with protracted litigation in the courtroom that may not be finally resolved for many years because of delays and appeals.
What are the most commonly used forms of ADR?
The most common form of ADR today is mediation. With this process, the parties select a mediator, usually an experienced attorney with expertise in the area of the dispute, either prior to the commencement of litigation or early on in the case. The mediator convenes in a conference or conferences with all of the parties involved as well as their counsel and attempts to amicably resolve all outstanding issues.
Arbitration, another form of ADR, is increasingly being contractually mandated.
Many business contracts require that the case be decided by an arbitrator or arbitration panel. The selection of the arbitrator or arbitrators and the rules governing how the arbitration will proceed are either included in the contractual language mandating arbitration or delegated to an entity such as the American Arbitration Association. All parties are bound by the decision of the arbitrator or arbitration panel.
Under what scenarios is it most appropriate to use ADR?
An appropriate scenario for ADR is a dispute between businesses that they cannot resolve themselves. Instead of filing suit, or continuing an existing lawsuit, parties can retain a mediator to try to bring them together and resolve any outstanding issues. If this is not possible, parties can select an arbitrator or multi-person arbitration panel that will decide all issues in an expedited manner.
How should a business go about selecting the appropriate ADR process?
Since all ADR processes involve some legal issues, it is my recommendation that businesses should rely upon the trusted advice of their counsel to decide which ADR process is appropriate for them.
How do ADR costs compare to cases processed in the court system?
ADR has significant cost-savings potential in comparison to litigating in the court system. Business disputes are usually handled by attorneys on an hourly fee basis. The more complicated, contentious and protracted the dispute, the more expensive attorney fees and costs will be. If a dispute can be resolved by a trained mediator or arbitrator prior to or early on in a case, these costs and fees can be eliminated or significantly reduced. Generally, the mediator’s or arbitrator’s fee is paid pro rata by the parties and will be a fraction of what it would cost to proceed with a fully litigated case.
DANIEL MAKARSKI is senior partner at Secrest Wardle. In 2002, he was awarded the prestigious Respected Advocate Award from the Michigan Trial Lawyers Association. In 2003, he received the Civility Award from the Macomb County Bar Association. Reach him at (586) 465-7180 or firstname.lastname@example.org.
Obtaining a business loan can be a challenging task. There are a number of resources, however, that can aid entrepreneurs in their quest to obtain capital.
“Consultative resources can help entrepreneurs effectively develop a plan for their business,” says Thomas FitzGibbon, executive vice president for MB Financial Bank in Chicago.
Smart Business spoke with FitzGibbon about what type of resources are available, how they can best be utilized and the advantages of working with a bank that can underwrite and process loans locally.
What are some challenges that an entrepreneur might face when seeking bank financing?
The first challenge is that the entrepreneur must be prepared for a loan application. They need to have a business plan, a financial plan and a marketing plan that effectively creates a story that a banking institution can buy into. Entrepreneurs, by nature, are idea people, not necessarily financial gurus. They need to find a way in which they can translate their idea into a story that enables the lender to effectively underwrite the opportunity. A key word when talking about bank financing is translation: translating the idea or concept of a business promotion activity into a story that has both a financial look as well as an effective marketing strategy.
What types of resources are available to help entrepreneurs with the process?
SBA-supported and local business-supported organizations, often referred to as Small Business Development Centers, or SBDCs, and a variety of state agencies across the country provide operating support for organizations that help entrepreneurs prepare applications, business plans and marketing and financial plans.
Entrepreneurs need good financial guidance. Skilled professionals, such as accountants and attorneys, can help them access the appropriate resources. Also, in many cases, banking institutions sponsor and work with Small Business Development Centers and other entrepreneurial support institutions. For example, we work with ACCION Chicago. Such partnerships between community-based institutions help entrepreneurs align themselves with the resources that can help them be successful as well as help them through lending programs so they can obtain the capital necessary for them to start their business.
What type of credit-enhancement resources can be used to help obtain a loan?
There are state programs and, in some cases, municipal programs that can provide the credit enhancement necessary to reduce the risk. For instance, in the state of Illinois, the Department of Commerce and Economic Opportunity will participate in a loan that a local depository would originate; in other words, it will take a secondary position on the loan and in effect the lender gets paid back first. The state of Illinois also has a program called the Community Access Program, or CAP, that provides a credit enhancement by virtue of establishing a loan loss reserve. Both the SBA’s 504 Program and 7(a) Program are extremely good programs.
What are the advantages of working with a bank that has local underwriting and processing capabilities?
You’re able to deal with people that are making decisions right there rather than in some other part of the country. You are going to get more of a local view of the business potential, and you will have the opportunity to present alternative scenarios. Larger banking institutions are less likely than local institutions to look at finding alternative credit criteria, such as creating longer terms or establishing different collateral requirements.
How can entrepreneurs benefit from a relationship with a banking partner that can provide a single point of contact for loans, investments and resources?
Large banks tend to be more transactional in nature with entrepreneurs while local institutions and community banks tend to have more of a relationship feel. If I have your company in my portfolio and you are making widgets, and I know somebody else in my portfolio who is looking for widgets, then I’m going to do a referral.
One of the things that is very important in the relationship banking model is what I call the ‘Triangle of Influence.’ The top part of the triangle represents other businesses that can either use your company’s business or other businesses that are like your business that you can learn from. The second leg of the triangle is the legal community: What attorneys work in this space? We can refer people to attorneys while some attorneys refer entrepreneurs looking for access to capital to us. The third leg represents the accounting end of the business. So much of an entrepreneur’s success is built on whether or not he or she is adequately monitoring the accounting for the work he or she is doing. A local or community bank will use the Triangle of Influence to help an entrepreneur.
THOMAS FITZGIBBON is executive vice president for MB Financial Bank in Chicago. Reach him at email@example.com or (847) 653-1996.
New payment solutions are enabling companies to trim costs while improving efficiencies. Designed as an alternative to checks and petty cash, the commercial card is a payment solution that streamlines the payment process for all types of business expenses. Workplace card solutions are stored value (similar to prepaid) cards that can be used to pay employees or customers on an ongoing or temporary basis.
Companies that utilize such offerings can improve their control and reporting of expenses while taking advantage of the flexibility that the cards provide.
“During uncertain economic times, work-place and commercial card solutions give companies the ultimate in flexibility,” says Paul Lewis, vice president of Treasury Management at Comerica Bank. “You can extend payment terms if you need to, or if you’re cash rich, you can take advantage of discounts by paying early.”
Smart Business spoke with Lewis about some of the advantages of workplace and commercial card solutions.
What is the commercial card?
The commerical card is used by business customers to pay for a variety of goods and services. The most common categories are business travel, maintenance, repair and operation (MRO) expenses, low-value procurement expenses, and vehicle expenses. One way to configure a commercial card offering is that on one card a company can customize the permissions or controls according to its various employees’ job responsibilities. For example, the card could be controlled for just travel expenses, just purchasing expenses, just vehicle expenses or any combination of those categories.
How does this payment solution help streamline business expenses?
The two big features on a commercial card program are the control you can customize it to fit the specific needs of an employee or department and the reporting, as you get a tremendous amount of data on the back end. In addition to managing expenses, customers can use this data to track supplier expense and negotiate better payment terms and better discounts. For example, you can use the data associated with a travel card program to aggregate your company’s expenditures at a specific hotel chain and then try to negotiate better rates based on your volume.
For virtually all transactions, the commercial card allows you to extend payment terms, which can increase cash flow. Based on the settlement you have with your bank, you can enjoy terms up to 30 to 45 days. Also, you can enjoy discounts from your suppliers associated with faster payments because they receive their money within two days after the transaction is approved.
What type of online management and reporting tools are available?
In terms of reporting, there is a product called Smart Data, which allows a company to manage all of its card transactions and associate a transaction down to a specific merchant. It also automates the posting and the reconciliation of those transactions directly into a general ledger system. A program administrator, which is the individual at a company that is responsible for managing the company’s card program, can use an online account maintenance (OLAM) solution. OLAM allows the program administrator to provision cards, approve authorizations and essentially manage all of the transactions that cardholders perform. Card-holders themselves can use an online statement to review pending and posted transactions. All of these are online Web-based tools.
What are some of the challenges associated with payroll exceptions?
Challenges of payroll exceptions include disbursing the first pay to a new hire or the last pay to an employee who is leaving, disbursing pay when a check is lost or was not issued and disbursing pay or per diems between normal payroll cycles.
How can workplace card solutions address these issues?
Using a payroll exception card helps businesses comply with local laws and union issues. For example, with production shoots, which are so prevalent in the entertainment industry here in California, production companies have to follow very specific rules in relation to payroll. Of course, it’s not just the entertainment industry; the rules are in place to protect the rank and file across all sectors. If you are an hourly employee, on your last day, your employer has to provide your compensation before you leave. Sometimes, cutting a check and finding somebody to sign it can be difficult. By replacing the traditional paper process with a workplace card, a company can alleviate a lot of concerns.
What types of companies stand to benefit the most from these card solutions?
Any company that spends money on anything can benefit. Whether a company is paying suppliers, paying employees, paying contractors or paying customers, there is a card solution that meets its needs. Each card solution offers the benefits of ease of use, greater access to data and improved processing efficiencies. There really isn’t a company out there that can’t benefit. We work with entities of all sizes, in all business segments, with all types of expenditure requirements.
PAUL LEWIS is vice president of Treasury Management at Comerica Bank. Reach him at firstname.lastname@example.org.
Private bankers provide a number of customized banking services, including commercial real estate loans, unsecured credit products, securities investments, insurance premium financing for estate planning and working capital lines for professional firms. By establishing relationships with their clients and developing a personalized approach, private banking relationship managers can service all of the financial needs for key owners as individuals and their businesses.
“With private banking, clients have a very special relationship with their banker,” says Nga Nguyen, vice president in Comerica Bank’s Western Market in Wealth & Institutional Management.
Smart Business spoke with Nguyen about private banking lending options, what types of services private bankers provide and the importance of establishing relationships.
What types of private banking lending options are available?
Our private banking representatives strive to provide out-of-the-box lending. Everything is customized because clients have special and different needs depending where they are in their life. Let’s say that a high-ranking executive needs to borrow money so he can relocate. We can help him obtain a mortgage so he can purchase a house in the area he wants to live in. If he has stock options, we would consider making him a loan so that he can exercise those options at the right time. If he has equity in his house, then we can give him a line of credit so that he can pursue viable investment opportunities. That’s what I mean by customized services rather than set products that people can fit in a box.
How do loans collateralized by securities work?
If customers have a portfolio that is being managed by a brokerage firm, instead of liquidating their portfolio, they can bring it to us. We have the capability to manage their portfolio and can use the securities as collateral so they don’t have to sell their assets, but they can draw cash from their holdings. In today’s market, which is so volatile, people don’t want to sell their securities outright. This is a very bad time to sell anything. By using securities as collateral, we can give customers a line of credit that is very flexible and can be used to purchase other assets or to make additional investments.
What factors do you consider when making loans to individuals?
We don’t just look at such factors as how much you made last year or how much you averaged during the past three to five years. We look at who the individual is, the total relationship between the individual and the company that is banking with us and what the likelihood is that the individual can pay us back. The collateral is secondary. The individuals are the most important factor: their integrity, their track record and their relationship with us.
How do individuals qualify for private banking lending options?
With many banks, you must have at least $5 million in liquidity before you qualify for private banking, while other banks focus on the individual. Many of our clients have put their cash back into their companies or used it to make investments. For example, if clients have built their business, owned it for more than 10 years, have a lot of equity in the business and we have a long-term relationship with them, then we will make sure they have a private banking relationship and all related services, including lending.
How important is it to work with a private banking partner that offers customized solutions?
It’s very important to the bank as well as the individual because, in addition to lending, banks also provide other services, such as:
- Cash/debt management
- Education funding
- Stock-option analysis
- Life and disability insurance analysis
- Investment plan review
- Retirement planning
- Estate planning
- Charitable giving
By establishing trust and a meaningful understanding of clients’ needs, banks can offer customized solutions. These services are as important as how much money a client can borrow because, without good planning, the money you make may not be passed on to your heirs, and you may be paying more taxes than you should. Private banking involves all of the services combined, not just the lending side.
What role do relationships play in private banking?
The best referrals I have are from existing clients because they have friends who may need the same types of services. They want to make sure that their friends are well taken care of. A private banker should focus on two things: providing solutions and maintaining trust. It is all about relationships.
NGA NGUYEN is vice president, Wealth & Institutional Management, in Comerica Bank’s Western Market. Reach her at (619) 652-5744 or email@example.com.
The U.S. dollar, still the benchmark for world currency, has been sagging the past several years. A detriment to U.S. consumers and U.S. companies that import products, the weakening dollar benefits some players in the global marketplace.
“Exporters will generally see their sales increase as the price of their product becomes cheaper in foreign currency terms,” says Gary Loe, vice president, foreign exchange at Comerica Bank.
Smart Business spoke with Loe about the weakening dollar, who benefits from it and why he expects the dollar’s value to increase as the year progresses.
What are some of the factors behind the weakening of the dollar?
Current economic factors that may be signaling recessionary conditions in the U.S. economy and could undermine confidence of U.S. dollar-based assets include the downturn in housing, turbulence in the equity markets and job woes. Additional interest rate cuts by the U.S. Federal Reserve could further erode the return of investors as lower interest rates may produce additional inflationary pressures, lowering the dollar’s value. Also, continued budget and trade deficits tend to weaken the U.S. dollar.
We are in an election year and increased political uncertainty could warrant a more cautious approach to holding assets based on the U.S. dollar. Lower oil prices could reduce demand for U.S. dollars, as oil is priced in U.S. dollars globally. More and more countries are diversifying away from the U.S. dollar as their principal reserve currency and are substituting the euro, pound, yen and others.
Who benefits from the weakening dollar?
Exporters will benefit from the weakening dollar. Mutual funds with overseas investments rise along with the currency they are denominated in as long as the funds don’t hedge against currency movement. People holding foreign currency accounts or notes will benefit as well as people holding gold; gold is priced in dollars across the globe and generally rises when the dollar loses value as buyers using other currencies drive up the price as it becomes cheaper. Also, our trade deficit should decrease as U.S. entity sales outside the country increase, and U.S. companies will buy less from foreign trading partners. The weak dollar is encouraging foreign manufacturers to set up factories in the U.S., bringing jobs and other economic benefits.
How does the dollar’s lower value help exporters?
The weak dollar makes American goods and services less expensive in the global marketplace. Therefore, exporters should increase their sales. The entities buying the exporters’ goods will be able to purchase them with fewer units of their own currency. Also, sales could increase as buyers shift purchases they currently transact with entities in other countries.
Do you expect this trend to continue?
In the long run, we should see the trend continue. The two major factors driving this are, one, the current account deficit a broad measure of U.S. global trade and investment and, two, the federal budget deficit. Experts don’t expect either to narrow significantly anytime soon, so in the long term, the dollar could very well keep falling.
What is your forecast for the dollar in the remainder of 2008?
There are many reasons why we could end 2008 with the dollar at a higher value than today. The U.S. Federal Reserve has made it clear that it wants to be ‘ahead of the curve,’ meaning it would rather risk a little inflation than bear the consequences of a recession. Unlike in the recent past, when interest rate cuts weighed on the dollar, new cuts may be viewed by the market as a monetary stimulus and spur investment, help correct housing imbalances and aid in minimizing the effects of a recession.
The dollar trend of the past few years, coupled with a stabilizing to improving equity market, will tend to encourage U.S. dollar demand (investment) as U.S. investments are bargains compared to anytime during the past few years. Higher oil prices (higher inflationary pressures) will tend to increase demand for U.S. currency. The upcoming elections could help the U.S. dollar as policies are re-enacted, amended or abolished. At the end of the day, foreign central banks will not want super-strong currencies, as it tends to diminish demand from the world’s largest consumer market the United States for foreign goods, which is needed to boost the rest of the world’s economies. I believe dollar positives will outweigh dollar negatives, and we will end the year with a slightly higher dollar.
How do fluctuations in the dollar’s value affect today’s global economy?
The U.S. has the biggest impact on the global economy and its monetary unit value, and fluctuation has the greatest effect relative to other currencies. The value affects company profits, budgeting and manufacturing costs. It has ramifications on capital investment, plant openings and closings. For example, some companies that have outsourced customer service and call centers to India have returned these centers to the U.S., since the weak dollar has eroded the cost benefits of operating overseas. It all underscores the importance of hedging currency risk to help mitigate variances from companies’ forecasts and plans.
GARY LOE is vice president, foreign exchange at Comerica Bank. Reach him at (800) 318-9062 or firstname.lastname@example.org.