Buying equipment isn’t always the best answer. Consider these options.

Too many times how a company finances equipment is the last decision made. But it shouldn’t be.

“Often companies see they have a lot of unencumbered money on their balance sheet and decide they’ll use it to buy equipment outright,” says Jim Altman, middle market Pennsylvania regional executive, at Huntington Bank. “That’s often a mistake because they’re purchasing and funding a long-term asset with short-term funds when it’s better to line up long-term liability for the purchase of a long-term asset.”

He says the recent downturn should have been a lesson that being illiquid is detrimental. By keeping cash on their balance sheets, companies can avoid the pitfalls of the inevitable next cycle.

“Tying up cash in an equipment purchase also limits options for expansion, whether geographic, additional product offerings or acquisition of another company,” he says. “Equipment financing can preserve that liquidity for future opportunities.”

Smart Business spoke with Altman about financing an equipment purchase.

What should companies consider as they look to finance an equipment purchase?

Financing an equipment purchase is usually done by leasing, financing through a loan or buying it outright. To determine which is best, there are three considerations.

First are the economic factors. This deals with liquidity: trying to manage cash with lower payments, improve margins or reduce tax burden.

A second factor is purpose. How will the equipment be used? Is this for a long-term or short-term project?

The third factor is technological. Some equipment will be obsolete in 18 months — smartphones, for instance — while other technology, like plastic injection machines, have not changed significantly in many years. How long the technology is expected to last until it’s obsolete will impact how an equipment purchase is best financed.

What are the advantages and disadvantages of leasing instead of owning equipment?

Compared to ownership, payments are lower when leasing equipment since the company is essentially renting it for a prescribed term. This option generally gives companies flexibility, especially when acquiring specialized equipment for a short-term project.

Leasing is also advantageous when a project requires equipment with technology that will soon be obsolete.

A disadvantage to leasing is the lessee doesn’t get the depreciation benefits. There are, however, noncash deductions to the tax basis. The money doesn’t come out of pocket, but it will help reduce taxes overall.

Leasing also isn’t the best option when acquiring sustainable equipment that will be used for a long time.

What types of leases are available to companies that wish to lease equipment?

There are typically three lease options, through only two are used in business. There are operating/tax leases, capital or dollar out leases, and synthetic leases.

An operating/tax lease is completely off balance sheet — the monthly rent goes into profit and loss statements. The lessee is giving up some tax benefits, but hopefully the bank is providing tax benefits to the company that reduce its payments. Companies can ask their bank for operating treatment or a tax lease to establish rates and terms to get this benefit.

A capital lease, in some ways, acts like a loan. In this arrangement, the lessee gets all of the depreciation benefits associated with the equipment, but they must put it on balance sheet, which is public information. Those obligations might impair funded debt to earnings before interest, taxes and amortization, but the lessee is technically the owner of equipment.

Synthetic leases are not used much anymore. They set up a company to pass Generally Accepted Accounting Principles in terms of the depreciation rules in the tax code that differ from the Financial Accounting Standards Board 13 for treatment of operating leases. A company can purposely fail tax to take the depreciation, but this has fallen out of favor.

Equipment finance specialists, only available at certain banks, can help companies choose the best financing option for the situation. They’ll walk a company through the three fundamental questions and direct a company to the right choice.

Insights Banking & Finance is brought to you by Huntington Bank

How remote deposit capture technology can help your business

Remote deposit capture technology (often referred to as RDC) is a tool that provides a better understanding of your company’s cash position, in addition to saving you time and money, says Debbie Miller, vice president and commercial deposit specialist at Consumers National Bank.

“You are able to print daily reports of your deposits and have better, more detailed records for an audit or your accountant,” Miller says. “You can assign others in your office to make the deposits and you’ll no longer need to copy your checks before depositing them, which will save time, paper and toner. You also won’t need deposit slips or to endorse the back of the check when making a deposit.”

Remote deposit capture technology allows businesses to deposit checks electronically at remote locations for virtually instant credit to the intended account. Paper checks are digitally scanned and an image of the check is electronically transmitted to the customer’s bank.

Smart Business spoke with Miller about the benefits of this technology and how it can help your business.

What are the primary benefits for a business that uses remote deposit capture technology?

Businesses that use remote deposit capture technology realize a number of benefits that can save both time and money. First, it’s a tool that is always available and is not subject to the hours that your local branch office is open. You can deposit personal and commercial checks directly from your office, which reduces your risk of check fraud by limiting the number of people who will handle the checks. In addition, you can get convenient on-demand check image research and deposit history data online, which puts more information at your fingertips. This technology also enables you to more easily consolidate funds from multiple locations.

What are some things to keep in mind as you make the transition if you haven’t been using it? 

The transition to remote deposit capture technology is typically an easy one to make when you work with your bank, which provides you with the necessary software and hardware. The bank will set up everything and provide the training needed to make the process run smoothly. Beyond that, there are numerous everyday tasks that you might encounter that take you away from your work that can be eliminated by using this tool.

Remote deposit capture eliminates the need to make a trip to the bank, stand in line and wait for a teller to approve your deposit. If there is inclement weather, which often happens in the winter and makes travel by road more difficult, you can save the trip and use technology to make the deposit. How many times have checks sat on your desk waiting to be deposited because you just made a trip to the bank or have too many more pressing commitments on that particular day to make the trip? When you deposit checks electronically, you can do it one at a time or in batches.

Security is another concern. Have you ever thought about what would happen if the deposit was lost or stolen on the way to the bank? In addition to reducing that risk, if something unforeseen does happen, remote deposit capture technology allows you to run a history report versus hunting around and trying to recreate a deposit if it’s lost or stolen. You’ll also avoid having to pay the bank a fee for research because you didn’t make a copy of the checks you deposited and are in a situation where you need that information.

What’s the best way to find a service that fits your business?

Take the time to sit down with your business banker to get updated on the newest products and services that can help your business. Remote deposit capture technology has improved over the years and has become a standard service that many businesses use, providing numerous benefits. It’s not just a valuable tool for companies that aren’t in close proximity to a local bank. It’s become a tool that enables businesses to focus more intently on providing a great product and a high level of service to their customers.

Insights Banking & Finance is brought to you by Consumers National Bank

Give employees the tools to help your customers learn about new technology

Employees play a vital role in helping your customers understand and get comfortable with new technology, says Kurt Kappa, Senior Vice President and Market Leader, Cuyahoga County, at Westfield Bank.

“When your employees demonstrate confidence as they use and answer questions about new products and services, they empower customers with the same self-assurance,” Kappa says. “It enables customers to see past the fear and understand the benefits that the new technology can provide.”

As technology continues to expand exponentially on all fronts, many businesses are faced with the challenge of creating a retail experience that blends technology and human interaction. The goal is to create a superior customer experience, but that’s not always easy with the varying degrees of comfort that customers have with technology.

“You want your customers to buy, not be sold on what you offer,” Kappa says. “You don’t want to push the widget of the week to show that you’re on the cutting edge. Educate and offer the conveniences of technology so customers can decide if it is a fit for their needs.”

Smart Business spoke with Kappa about how to create a blended experience that satisfies customers from all points of view.

How can technology enhance the relationship you have with your customers?
Many customers still enjoy the opportunity to come into a store or office and have a face-to-face meeting with the people who represent a particular business. As business leaders, you can’t put a price tag on those relationships and technology doesn’t mean they have to go away. What it does provide is an opportunity to focus on more important matters.

If you go to your bank and you’re depositing a stack of checks, technology affords the opportunity to make the deposit a very small part of your visit. Instead, you’re able to spend more time talking about your company’s growth plan and how the bank can help you move it forward. You can still have those conversations and reduce the amount of time it takes to manage other tasks that are important, but don’t require any dialogue.

One of the problems with self-service technology is that it can create a feeling for customers that they are being pushed out the door or that you’re looking to reduce your staff. That’s not the goal of most companies, however, and that message needs to be communicated to customers.

How does your approach to technology help customers feel more comfortable?
It starts with the education of your employees. If you’re opening a new location that has enhanced technological capabilities, it’s best to roll everything out in stages. You begin by introducing the new systems to your team and allowing them to see, touch and use the software or equipment.

Have support teams in place to offer training or to answer questions. Then you have a session where your team can use the new systems in a live environment, but without any customers. Again, there is an opportunity to learn and to ask questions.

Next, you could do a soft opening where you are open for business, but you’re not publicizing your new offerings. There are always glitches when you roll out a new program or system and those can be resolved with less pressure. At the final stage after you’ve worked through the problems, you’re ready to go live and market your new capabilities to maximize the opportunity.

What else can you do to earn customer loyalty?
If you talk about being a community business and cultivating relationships, you need to take actions that reflect those promises. Get your senior management team involved in community events and with the local chambers of commerce.

Be part of the community and be involved in efforts to make it better. When you show that you care about the area in which you do business, you show customers that you’re about more than just making money for your business. That can go a long way toward helping customers to feel good about turning to you for the products and services you offer.

Insights Banking & Finance is brought to you by Westfield Bank

Why your search for an investor has to be about more than just money

Success in the world of biotechnology and life sciences requires a level of patience that is foreign to most types of businesses and industries.

On average it takes 10 to 12 years and over $1 billion in capital to get a new drug from the laboratory to the market to be sold to consumers, says Rob Lake, senior vice president and head of Life Sciences at Bridge Bank.

With such great effort needed to get your product out the door, you want partners you’ll be comfortable working with for extended periods of time. When you face challenges, as most growing businesses do at some point, the relationship you have with your financial partner can go a long way toward determining your future.

“Some lenders tend to over steer,” Lake says. “So on top of whatever is already going on at your company, a relationship with an inexperienced lender can make it that much more difficult to manage your business.
“That can be very stressful for a management team and an investor group trying to position your company to work through the issues and get back on track.”

Smart Business spoke with Lake about the real value of selecting a lender or bank that truly understands the challenges your business faces.

What should you consider when looking to raise capital in the life science industry?

You need a lender who understands your business. A standard bank that does commercial and industrial lending is likely to underappreciate the peaks and valleys of a life sciences company, such as navigating through regulatory agencies or the uncertainties of clinical trials.

There is such a thing as ‘greener capital.’ A knowledgeable lender knows how to react to bad news, and how to chart the best course of action to keep things on track. It’s like piloting a small plane. If there is turbulence, you’re not going to want to over steer in one direction or the other to try to stabilize the aircraft.

You want to keep it as steady as you can and it will stabilize once you get through the bad weather. The same applies to working with a lender that clearly understands the issues life sciences companies face and will work through occasional challenges along the way to help the company achieve its goals.

What are some key things to know before you meet with a lender?
You need to think about what you would do if things with your business don’t go according to plan and compare it with the underwriting rationale of the lender. Lenders will typically underwrite to a downside case to explore that scenario.

What if you do not get approval on an expected date and it takes another year to get that approval? How would such a delay affect your company financially? How much more money would you need to raise? What will it take to get there? Do you have the resources to get there?

The base case is a little more optimistic scenario and the downside case is if the wheels completely fall off. The more likely case is a third option in which the wheels don’t totally fall off, but maybe you have a flat tire. How do you fix it and get through that scenario?

It’s helpful to hear the lender’s mentality as they go through the downside process.  There are lenders in the space that offer more favorable terms (i.e., more capital or lower cost); however, it could cost more money in the long run (fees and legal expenses) if they haven’t thought through what the downside looks like.

What are lenders looking for in a borrower profile?

Lenders like business models that are diverse and have novel intellectual property supported by an underlying ‘platform technology.’ Multiple shots on goal help the lender mitigate risk.

They also want to understand the value proposition and see that it makes sense from a commercial viability standpoint. Ultimately, does the product and or service you’re developing address an unmet need?  Improve patients’ lives or clinical outcomes?  Save the health care system money?

Validation is another important attribute lenders like to see. This could come from many sources including the quality and reputation of your investors, strategic partners, a positive reimbursement decision or revenue traction.

Insights Banking & Finance is brought to you by Bridge Bank.

How to make your franchise dream a reality with SBA financing

Franchise opportunities are on the rise, with more than 3,100 franchise concepts available in almost 300 industries. The International Franchise Association indicated, in its Franchise Business Economic Outlook for 2015 report, that the number of U.S. franchise establishments is projected to increase.

“With the rise in franchise opportunities, there’s an increase in financing to support the franchise concept, including through the U.S. Small Business Administration (SBA),” says Romona Davis, vice president of SBA commercial lending at Ridgestone Bank.

Smart Business spoke with Davis about franchise financing and how SBA loans fit in.

Why do people purchase a franchise?

Franchising is looked at as a way to start a business that already has a track record. There’s usually brand recognition, assistance with site selection, training, R&D of new products and services, off-site marketing assistance, and overall guidance and support from the franchisor and other franchise owners. It can be viewed as a team approach.

Do franchisors provide the debt financing?

Some franchisors carry the entire debt financing per franchise owner, while others carry a fraction of the loan through a franchisor-owned finance company.

Many franchisors still don’t offer financing but work directly with companies or mediators who specialize in securing financing for their prospective franchisees. Mediators typically provide assistance with business plans and packaging of potential franchise opportunities for submission to banks, nonbank lenders and other funders.

Where does the SBA come in?

The SBA can be a valuable resource for franchise financing. An SBA loan through a bank or nonbank lender provides a loan guarantee up to 85 percent. In addition to the loan guarantee, the SBA provides other guidance as it relates to franchise financing.

The SBA has a franchise committee that reviews existing franchise brands. This review covers the franchisor’s business operations, the agreement governing the franchisor/franchisee relationship and other related documents. The results are compiled in the SBA Franchise Registry. Not all franchises have been reviewed by the SBA; therefore, be sure to obtain a copy of the Franchise Disclosure Document (FDD) — presented to buyers in the presale disclosure process — along with the Franchise Agreement for further review by your bank.

The SBA loan guarantee also can offer a lower down payment and longer loan term with no balloon payment. In the event a franchise concept has limited hard assets (i.e., service company), the SBA loan could mitigate the proposed collateral shortfall.

What do business owners need to know before investing in a franchise?

Franchising is a contractual relationship. The brand owner doesn’t manage or operate its locations. However, the franchisor does allow the business owner to use the licensor’s brand and method of doing business to distribute products or services to consumers.

The franchisee pays the franchisor an initial upfront fee to acquire the franchise as well as an ongoing royalty fee. Training and support is provided by franchisors.
Franchising can offer peer support and networking. Each franchisee has an exclusive territory, so cooperation is not only possible but also built into the business model through annual conferences, regional meetings, websites, etc.

All prospective franchisees should review the FDD. This legal document provides the history of the franchisor, ownership, types of franchises offered, business experience, litigation, financial performance and more.

From a financing perspective, lenders desire applicants with experience and/or transferrable skills in the franchise-related industry, a 20 to 30 percent down payment, adequate personal credit history, a detailed business plan and projections that demonstrate the ability to repay the loan.

What else would you recommend?

Research multiple franchise brands. Once you’ve identified a prospective brand, conduct a thorough examination prior to contacting the franchisor. Then, interview the franchisor and follow up with its references. Once you’ve finalized your decision, meet with your banker to see if you qualify for SBA financing — to make your dream a reality.

Equal Housing Lender.  Member FDIC

Insights Banking & Finance is brought to you by Ridgestone Bank

Research, specialized financing needed before doing business overseas

Middle-market companies that can capture a segment of business in a foreign market have a tremendous opportunity to increase their revenues and outpace competitors in the same industry. Exporting products overseas, however, requires fastidious research upfront.

“Research is needed to determine if the company’s product has enough of a price and/or quality advantage in the target market,” says Jim Altman, middle market Pennsylvania regional executive at Huntington Bank. “The other critical element is getting the funds needed from a lender that is qualified to finance international transactions.”

Smart Business spoke with Altman to learn more about what it takes to export into foreign markets.

Where should companies start that have never done business internationally?

A good first step is to call the local U.S. Export Assistance Center, which is part of the Department of Commerce. The professionals there will conduct market research in the target country to determine if the product would be competitive in that market. They will research and advise with regards to market potential as well as any potential regulatory compliance requirements for the product being sold. In addition, they can set up meetings with potential foreign buyers, and vet those companies and their owners.

How do companies finance a deal that takes place between two countries?

Many companies don’t realize that only banks with a capable trade finance unit can provide the types of loans needed for such transactions.

A trade finance unit can work with The Export-Import Bank of the United States to secure special types of credit guarantees that mitigate inherent collateral risk associated with credit lines used to support export sales. Additionally, trade finance departments can help companies mitigate payment default risk posed by a foreign buyer. This is done by constructing letters of credit or providing credit insurance.

The reason that exporters should consult with a trade finance specialist is that export-related collateral — export related inventory and foreign accounts receivable — are not eligible for borrowing against in a standard revolving line of credit.

In addition, many single sale contracts where a company is selling a more complex, specialized product will require work in process finance. This is a feature traditional loan products typically cannot accommodate or if they do, the advance rate is marginal at best, somewhere in the 20 percent range.

With respect to foreign accounts receivable, domestic banks don’t have the internal resources to understand lien rights in multiple jurisdictions, so in most instances, placing a lien against foreign accounts receivable is a non-starter with your commercial bank. Trade finance departments have experience in managing and understanding various risks associated with selling abroad. Additionally, they are well versed in structuring credit lines that can be fully utilized to support export transactions.

At what point should companies reach out to get financing in place for foreign deals?

Once a rough outline of a contract with a foreign partner is in hand that indicates which party is paying for cost of freight and cargo insurance, it’s time to contact your bank’s trade finance specialist and your freight forwarder. There are fees for the risk-mitigating government guarantees that need to be priced in along with the logistics fees to fully understand the true margins on that sale before moving forward with a deal. And it’s always prudent to factor at least ½ of 1 percent extra in to your project cost to account for unforeseen expenses that are not related to actual production.

Breaking into a foreign market for the first time isn’t as much of a mystery as many companies assume it to be. There are ample resources available in the U.S. to help companies understand their target market and how to finance the deal.

Start by having an informal conversation with a bank’s trade finance unit. The people who work in these departments often have connections to logistics providers, lawyers and the like who understand international business and can facilitate a strong entrance into a foreign market.

Insights Banking & Finance is brought to you by Huntington Bank

Give employees the tools to help your customers learn about new technology

Employees play a vital role in helping your customers understand and get comfortable with new technology, says Aaron M. Barnhart, Senior Vice President and Retail Sales Leader at Westfield Bank.

“When your employees demonstrate confidence as they use and answer questions about new products and services, they empower customers with the same self-assurance,” Barnhart says. “It enables customers to see past the fear and understand the benefits that the new technology can provide.”

As technology continues to expand exponentially on all fronts, many businesses are faced with the challenge of creating a retail experience that blends technology and human interaction. The goal is to create a superior customer experience, but that’s not always easy with the varying degrees of comfort that customers have with technology.

“You want your customers to buy, not be sold on what you offer,” Barnhart says. “You don’t want to push the widget of the week to show that you’re on the cutting edge. Educate and offer the conveniences of technology so customers can decide if it is a fit for their needs.”

Smart Business spoke with Barnhart about how to create a blended experience that satisfies customers from all points of view.

How can technology enhance the relationship you have with your customers?
Many customers still enjoy the opportunity to come into a store or office and have a face-to-face meeting with the people who represent a particular business. As business leaders, you can’t put a price tag on those relationships and technology doesn’t mean they have to go away. What it does provide is an opportunity to focus on more important matters.

If you go to your bank and you’re depositing a stack of checks, technology affords the opportunity to make the deposit a very small part of your visit. Instead, you’re able to spend more time talking about your company’s growth plan and how the bank can help you move it forward.

You can still have those conversations and reduce the amount of time it takes to manage other tasks that are important, but don’t require any dialogue.

One of the problems with self-service technology is that it can create a feeling for customers that they are being pushed out the door or that you’re looking to reduce your staff. That’s not the goal of most companies, however, and that message needs to be communicated to customers.

How does your approach to technology help customers feel more comfortable?
It starts with the education of your employees. If you’re opening a new location that has enhanced technological capabilities, it’s best to roll everything out in stages. You begin by introducing the new systems to your team and allowing them to see, touch and use the software or equipment.

Have support teams in place to offer training or to answer questions. Then you have a session where your team can use the new systems in a live environment, but without any customers. Again, there is an opportunity to learn and to ask questions.

Next, you could do a soft opening where you are open for business, but you’re not publicizing your new offerings. There are always glitches when you roll out a new program or system and those can be resolved with less pressure. At the final stage after you’ve worked through the problems, you’re ready to go live and market your new capabilities to maximize the opportunity.

What else can you do to earn customer loyalty?
If you talk about being a community business and cultivating relationships, you need to take actions that reflect those promises. Get your senior management team involved in community events and with the local chambers of commerce.

Be part of the community and be involved in efforts to make it better. When you show that you care about the area in which you do business, you show customers that you’re about more than just making money for your business. That can go a long way toward helping customers to feel good about turning to you for the products and services you offer. ●

Insights Banking & Finance is brought to you by Westfield Bank

Transparency is key to maintaining strong ties with your bank

Communication is the lifeblood of any strong relationship, including the one that develops between a business and its bank.

One of the keys to maintaining that strength through the ups and the downs is the willingness of the business leader to remain transparent when the times turn tough, says Jeffrey M. Whalen, senior vice president and market manager for Specialty Markets at Bridge Bank.

“Your bank doesn’t know your business as well as you do,” Whalen says. “When a difficult situation arises, you need to keep your bank engaged in what’s happening so you can work together to find solutions. Companies get into trouble when they try to hide problems, putting the bank in a difficult spot.”

Transparency builds trust and boosts your chances of getting the help you need, when you need it.

“If you reach out to your bank when you run into trouble to set up a meeting, a relationship-oriented lender is going to reciprocate by reaching out to you on a regular basis to check in and see what it can do to help you,” Whalen says. “The strength of that relationship is critical for the financial well-being of your business.”

Smart Business spoke with Whalen about how to build a strong relationship with your bank.

What are some key steps you can take to increase the likelihood of securing a loan for your business?
Show your financial statements to the bank, even if your company has not been profitable. The numbers are what they are and you don’t want to hide them. Every company faces challenges from time to time. The key is your ability to develop a plan to turn things around and work with your bank to fine-tune that plan to give it the best chance to succeed.

Within most banks, there are different divisions that might be better suited to helping a company that finds itself in recovery mode. The difference is that some of these groups might be more aggressive in the way they collateralize your loan.

These groups want to see diversification in your receivables to prove that you’re not too reliant on one customer for your revenue.

If you pursue financing through the U.S. Small Business Administration, the bank will likely want real estate as collateral. The key is that you keep your bank engaged and work collaboratively to find solutions.

The more communication you have with your bank in terms of full disclosure, accurate and timely historical financials and an affiliation with a well-known CPA firm is going to increase your likelihood of securing a loan.

What are some signs that you have a problem with your bank?
If your bank is not checking in with you regularly on the progress or success of your business, that’s a red flag. Another concern is when you have to keep retelling the story of your business to your banker or if you have a new relationship manager each year.

Either they don’t trust you or they don’t understand your business. When those things happen, you’re going to want to have all your data ready and available for the next banker because you’re probably going to need to start shopping for one.

What are some common mistakes that can get a business in trouble with its bank?
When a bank extends a line of credit, there are typically four or five covenants that you cannot violate. If you violate those covenants and don’t have a conversation with the bank about how to get back on track, that is going to get you in trouble with your bank.

A line of credit is extended for a specific purpose and when you use it for other expenses, it can hurt your business. It’s also a problem if you take too much money out of the company and cause the net worth to erode. The bottom line is when you maintain a regular dialogue with your bank, you can avoid many of these difficult conversations. ●

Insights Banking & Finance is brought to you by Bridge Bank

How to use the SBA for business acquisition financing

Most businesses have intangible assets that are difficult to value and nearly impossible to collateralize. You will hear terms like “blue sky” or “goodwill” to describe these assets.

Due to the more flexible collateralization standards associated with U.S. Small Business Administration (SBA) loans, these assets can be financed along with the more tangible assets that are a part of the business acquisition. This is just one reason why a business owner should consider an SBA loan for a change of ownership or business acquisition, over a conventional loan.

Smart Business spoke with Romona Davis, vice president of SBA Commercial Lending at Ridgestone Bank, about the advantages of utilizing the SBA for business acquisition financing.

Beyond flexible collateralization standards, why else are SBA loans more attractive?

Conventional loans for business acquisitions are based on a three- or five-year term. This can make it tough for the business to meet the debt service requirements of most lenders. Utilizing an SBA loan, the acquisition can be stretched out over seven or even 10 years. This lowers the payments and makes it easier for the borrower to hit the debt service targets of the lender.

Stretching out the amortization of the loan also frees up additional cash flow for the new owner of the business. He or she may then use that cash flow to invest in marketing, implementation of new initiatives or adding a product line. Cash flow is king.

In addition, long-term amortization can help with the ebbs and flows of business that inevitably arise. If you are in a downslope when a three-year conventional loan becomes due, the bank might put you in forbearance or impose monthly renewal fees. With the SBA, you have something in place long term.

Is seller financing sometimes involved in a business acquisition?

Yes, quite often. With SBA financing of a business acquisition, a seller’s note can be used as a portion of the required equity injection.

Typically, lenders in a business acquisition scenario prefer a 25 percent equity injection from the borrower. This can be a tough requirement for many borrowers. If the seller agrees to hold back a note, and it is structured correctly, that note can be counted as part of the borrower’s equity injection, thus making it easier to come up with the needed equity.

Also, the sellers are often sole proprietors or family businesses and they want to see their legacy carried forward. Keeping the seller engaged assists the buyer in making the transition and assures the bank there is a team in place that can make it longer term.

What was the change the SBA made to its ownership rules and why?

The SBA removed the liquidity requirement a few years back. Without that requirement, the SBA made it possible for businesses with owners who have strong liquidity to obtain financing through an SBA loan. Removing the liquidity requirement allows borrowers who may not have good liquidity to bring an equity partner who has liquidity to the table to help them get an approval.

The reason the SBA made this change was to provide borrowers more flexibility in how they can structure their business when they seek SBA financing.

When business owners use an SBA loan for a business acquisition, what do they need to understand about the lending process?

Business acquisition loans are complex. Anyone who is considering utilizing bank financing for a business acquisition should engage his or her banker early in the process. Ideally, before you even start negotiating with the seller.

Your banker can advise you on areas where you can be flexible in negotiation and areas where you need to be less flexible. He or she also can alert the buyer to some of the pitfalls to avoid.

Since a lot of information will be needed from both parties, the sooner documents are provided, the easier the process becomes. Also, be sure there is open and honest communication from the start. Don’t leave any surprises to the end, or your financing can be delayed or compromised.

Always make sure you are dealing with a lender who has SBA experience and a bank that is a preferred lending partner with the SBA.

Equal Housing Lender.  Member FDIC

Insights Banking & Finance is brought to you by Ridgestone Bank

Why details are a valuable tool in making your case for a line of credit

One of the best things a company can do to bolster its case for a line of credit is to invite bank representatives to take a tour of its operations, says John Holland, Vice President and Business Development Officer at Consumers National Bank.

“When you meet at the bank and you’re sitting at the table looking at numbers, it can be difficult to convey what you want to do with your business,” Holland says. “If you’re able to bring people from the bank to your business and show them what you’re doing and offer a sense of what you could do with additional funding, that will be to your advantage.”

When you can share your goals and a clear sense of purpose with your bank, it puts you in a much better position to secure additional funding support.

“You need to look at your bank as a financial partner in your business,” Holland says. “In the same way that your accountant or your lawyer wants to help you, your bank has the same goals.”

Smart Business spoke with Holland about how to best position your company to secure a line of credit from your bank.

What are some key things to think about when pursuing a line of credit?

The most important thing for the banker is to understand what is causing or driving your motivation to get a line of credit. Is it to increase your productivity? Is there a gap in your current operation in which a customer is stretching out your receivables? Do you have too much inventory?

If you want to expand your market and go into a different market, you’re going to need working capital in order to help you get through that cycle. You need to determine the time frame and work with your bank to determine the line of credit that would best meet your needs.

How do banks determine an amount for the line of credit?

Banks generally use a formula to determine what an appropriate line of credit amount would be. First the bank will want to know your cash conversion cycle, which is basically the time between spending money to make your product and the collection of money from the sale of the product.

In order to determine the conversion cycle length, you will need to answer questions such as, ‘How many days does it take to make your product? How long does the product sit in inventory before it’s sold? How many days do you have to pay your vendors? How many days does it take for your customers to pay you?’

For example, let’s say you determine that your cash conversion cycle is 30 days and you expect your total sales to be $1 million this year. Divide the sales by 365 to get the daily sales average, in this case $2,740. Multiply the daily sales average by the cash conversion number (30 x $2,740 = $82,200). In this example, a line of credit amount of approximately $85,000 would be appropriate for your company. Of course, if your company’s sales are seasonal, you may need more financing during your busy season and less when business slows down.

Each time you prepare a set of financial statements, it is a good practice to recalculate your cash conversion cycle. If that cycle begins to lengthen, it may be time to reevaluate your line of credit needs with your banker.

How can the bank help after you get the line of credit?

One thing banks have done to facilitate lending is to use a borrowing base line of credit. Every time you want to draw on your line of credit, you send the bank a certificate that shows the status of your inventory, your receivables and your payables.

The idea is to make sure you are within the scope or parameters of the line of credit. This protects both you and the bank.

The borrowing base line of credit is a positive approach intended to help your company grow conservatively. Your bank is right there with you on a monthly basis to help you stay ahead of your finances. It’s all about enabling the bank to be a financial partner in your growth plans.

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