Payments fraud: How to make sure your business — and customers — is protected

Now, more than ever, it’s essential for businesses to implement new and improved fraud-prevention models.

According to the 2015 AFP® Payments Fraud and Control Survey, 62 percent of businesses were victims of actual or attempted payments fraud in 2014. The report, which was underwritten by J.P. Morgan, emphasizes the need for new cybersecurity models and stricter control governance. And this is particularly important here in Pittsburgh, where a number of key industries with valuable data, including health care, technology and bioscience, are located.

Smart Business spoke with Chase Commercial Banking’s Thomas C. Engler, vice president of Western Pennsylvania Middle Market, about how businesses can protect themselves — and their customers.

What does the payments fraud landscape look like now?

In 2012, 61 percent of businesses reported being victimized or affected by payments fraud. That number dipped slightly, to 60 percent, in 2013, but last year, it rose back to 62 percent.

So, it doesn’t seem to be going away. And cybercriminals don’t really discriminate — you tend to hear more about the bigger, high profile data breaches, but it’s happening to businesses of all sizes and across a wide range of industries.

As technology continues to play a stronger role in payments, we’re likely going to see even more instances of actual and attempted payments fraud.

Which payment types tend to be the most targeted?

Year over year, paper checks continue to lead as the payment type most susceptible to fraudulent attacks, despite the fact that their overall use continues to decline. Check fraud also accounts for the largest dollar amount of financial loss due to fraud.

Credit and debit cards are the second most frequent targets of payments fraud, followed by wire transfers.

Many businesses experience unsuccessful attempts at payments fraud. How are they coming out unscathed?

Fraudsters attempt to ‘attack’ companies to gauge their weaknesses, to identify the payments methods that can be most easily breached. If an attempt faces security obstacles, the fraudsters will likely move on.

When it comes to check fraud, two of the most-effective obstacles, or features that can help prevent fraud, are the use of controlled check stock, which is not readily available to fraudsters, and the use of dual-tone true watermark.

When it comes to credit and debit cards, organizations need to make sure they’re EMV-compliant. EMV (named after its original developers, Europay, MasterCard and Visa) technology uses a chip, or microprocessor, that’s embedded in a card to make payments at the point of sale (POS). The chip uses encryption to protect, secure and store sensitive data, and it validates the card during each interaction with the POS device.

What does it mean to be EMV compliant, and why is it so important?

EMV is becoming the global standard for credit card and debit card payments — and as of October, Visa, MasterCard, American Express and Discover are expected to shift liability for credit card-present chargebacks to U.S. merchants. So, if you’re not using a chip card acceptance device, and if you’re the least-compliant party, you may be liable for the cost of a fraudulent transaction.

From a fraud perspective, EMV is incredibly important because it:

  • Minimizes fraud and chargeback losses related to the use of counterfeit, lost or stolen cards.
  • Prevents the skimming of card data with dynamic encryption.
  • Prevents liability for POS fraudulent transactions by complying with card brand deadlines.
  • Reduces payment card industry compliance requirements by accepting payments through contact and contact-less chip-certified devices.

Ninety-two percent of finance professionals believe EMV cards will be effective in reducing POS fraud. Ultimately, the sooner you implement high-security checks and EMV capabilities for your business, the safer you — and your customers — will be.

Insights Banking & Finance is brought to you by Chase

How improved payment security measures will affect your business

From large retailers to insurers, data thieves are proving that no company is immune from online hacking.

“But even before the highest-profile cybercrimes took place, banks and credit card companies were working on improved security tools,” says Hollis Schuler, senior vice president, senior group manager, applications development, Fifth Third Bank.

“This is the year that the enhanced security tools will roll out with the promise of dramatically shoring up a business’s ability to protect customer data,” says Douglas V. Wyatt, executive vice president, senior commercial banker, Fifth Third Bank.

Smart Business spoke with Schuler and Wyatt about new payment security measures and what businesses should know.

What security improvements are expected?

Current technology aimed at protecting data from cybercrime has room for improvement. A system that was supposed to require customers to input secure PINs for each online transaction was never widely adopted by merchants. New technology will involve banks texting their clients a security code that must be typed in before each transaction can be completed.

Internet merchants should expect an adjustment period and the potential for longer online checkout times to accommodate the new system. This will cut down on what’s called ‘card not present’ fraud, which occurs when someone illegally obtains a customer’s credit card number via an online data breach and uses it to make fraudulent purchases online.

How will these changes affect merchants?

The biggest change coming is a shifting of legal liability for credit card fraud from the banks and credit card issuers to the merchants ringing up the transactions. Once new technology aimed at cutting down on fraud is in place, merchants must support it or they will be liable for reversing bad charges on customers’ credit cards.

Starting Oct. 15, 2015, merchants will be liable regardless of whether or not they support the changes. Gas stations with fuel pumps that accept credit and debit cards will get an extra two years to comply before the liability shift occurs.

How are credit cards adapting?

The smarter anti-fraud payment technology, called Europay, MasterCard and Visa (EMV), involves an integrated circuit card, or smart chip, that is embedded in credit cards, merchants’ point-of-sale terminals and bank ATMs. The chips and the terminals communicate during each transaction, making charges far more secure than they are with today’s credit card magnetic-stripe technology. If a cardholder reports a data breach or a stolen card, the card issuer will deactivate the chip and issue a new card.

Another change is a new system called tokenization, which replaces the customer’s credit card number with a unique number, called a token, which is generated for each individual transaction. Customers using Apple Pay, for instance, take pictures of their credit cards and upload them into their mobile wallets. When they use Apple Pay to buy something, they’re using a token that has been generated behind the scenes, making their transactions more secure.

What else should merchants know?

Retailers should anticipate providing some consumer education at checkout. For example, the technology may involve inserting a credit or debit card into a payment terminal rather than swiping it. Also, the more secure transactions will take longer to approve and customers may need to have this explained to them.

Retailers should start working with their merchant terminal vendors now to make sure they are getting EMV-capable point-of-sale systems. They should also get a system that enables newer payment systems, such as Apple Pay and Google Wallet.

When it comes to costs, smaller merchants that typically rent their point-of-sale devices may not experience a significant increase. Larger retailers that purchase updated hardware may see significant expenses. Given that cost, the nation’s biggest retailers are already replacing their machines.

The new technology is not turned on yet, but during the second half of 2015 there will be advertising explaining the new systems as the enhanced security gets up and running.

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Insights Banking & Finance is brought to you by Fifth Third Bank

How the EMV card switch could impact your business

Smart chip technology is rapidly becoming the standard on credit and debit cards issued within the U.S., and it’s having a sweeping impact on businesses of every size. With the latest weapon in the war against consumer fraud, EMV — Europay Mastercard and Visa chip technology, a moniker derived from the companies that created the standard — card information is more secure.

While small and midsized companies that have yet to feel the effects of fraud firsthand may be hesitant to update their merchant services technology and software, experts warn that not making the change increases vulnerability to a breach. As businesses become more secure, those who haven’t implemented EMV cards will more likely be targeted. For example, larger retailers like Wal-Mart and Target have already adopted the technology.

As part of the transition to EMV cards, the liability for breaches or any type of fraud can shift to the merchant (effective Oct. 1, 2015), as opposed to just the card issuer, if they haven’t put in the proper technology.

Smart Business spoke with Bonny Carroll, assistant vice president of cash management, and Ron Schultz, vice president, commercial banking relationship manager, of First Federal Lakewood, about EMV cards.

Why did it take so long for the U.S. to move to EMV cards?

The global switch to EMV cards began in 1994. The U.S. is one of the last to adapt the standard because the amount of networks that need to be converted and updated is extremely complex. Some countries used EMV cards as their first application of cards, while our network had already established the magnetic strip cards.

All U.S. cards will be required to have chip technology by 2017, however, the magnetic strip won’t be entirely abolished.

Is better security the only advantage of chip-embedded cards?

It’s certainly the biggest benefit. Fraudsters are able to obtain data from the magnetic strip and use it to reproduce cards, which isn’t possible with the chip technology.

The switch is estimated to cost between $8 and $12 billion total for the bank card issuers and merchants, but the significant decrease in fraud risk justifies the price tag.

The cards are no longer slid through a card reader; instead you dip the card, similar to some ATMs. The card doesn’t typically leave the cardholder’s presence —another layer of security. For example, at a restaurant, the waiter brings the reader out, versus processing the transaction elsewhere.

Also, the technology used to process cards offers an opportunity to go to different payment methods like mobile payments, Apple Pay, Google Wallet, etc.

If merchants haven’t gotten new processing technology yet, how should they proceed?

Start by contacting your card processor and whoever supplies your equipment. Assess what software is integrated with your current set-up and ask questions.

You can come up with a plan, working with your current vendor, but this is also a good time to do a comprehensive review and shop around. Determine if other vendors offer better packages at a reduced cost.

Your capabilities need to be as flexible and accommodating as possible because payment methods like Apply Pay are becoming more standard. You may want to ask your vendor ‘What updates will you provide regularly as payment types continue to evolve?’

Once you’ve upgraded your processing equipment, don’t forget to communicate the security and flexibility in payment methods to your customers.

What do employers who issue credit cards to employees need to do?

Every card issuer is following a different strategy for converting customer cards. Most aren’t issuing new cards all at once, but when the card expires. If your employees are traveling internationally, it may make sense to request cards early if they are available.

What else do business owners need to know?

Along with discussing this with your card issuer, bank and/or merchant services vendor, you can find information online at or

While most companies are in the midst of their switch, if you didn’t think this applied to you, don’t be discouraged. It’s not too late to begin increasing security for you and your customers with EMV card technology.

Insights Banking & Finance is brought to you by First Federal Lakewood


How to protect your online banking transactions from cybertheft

Identity theft, viruses, malware, phishing and hacking can strike anyone, or any company, at any time. Downloading financial records using an unprotected system, for instance, can open the door to a man-in-the-middle attack in which a thief intercepts the signal between a device and a server. Other times, an individual can unknowingly login through a false portal at a hotel or coffee shop and have their bank account information, or their business’s bank account information stolen.

“Many of the main threats against companies are direct hacking attacks,” says Krista Dobronos, senior vice president, Market Leader, Akron, Westfield Bank. “But many more passive attacks are introduced in a company’s systems through human error. In some cases, just opening an email could trigger a virus, especially if it has an attachment that’s downloaded.”

Smart Business spoke with Dobronos to learn more about how businesses can safely conduct their banking online.

How are banks protecting information exchanged through online banking systems?

Many, if not all, banking relationships include an online component that allows customers to complete transactions through a secure Web portal. The convenience of account balance review, electronic bill pay, remote check deposit and direct deposit must be balanced with security to ensure company and customer information is protected.

Information transferred through online banking is typically supported by the highest level of encryption, creating a secure environment for transfers between a browser and the online banking application. Banks continuously monitor these activities and layers of security are in place to make it more difficult for hackers to get customer information.

What internal controls should companies have in place to prevent cybertheft?

First and foremost, perform an evaluation on your existing internal controls and conduct periodic risk assessments to identify gaps and continuous improvement opportunities. It’s also important to establish internal information security policies, such as acceptable uses of your information systems.

There are many ways to take steps internally to safeguard company information, a few of which are:

  • Dedicate and restrict one computer to online banking transactions. Allow no Internet browsing or email exchange, ensure this computer has the latest security patches, and create unique and separate user IDs for every employee accessing the system.
  • Segregate responsibilities among employees by maintenance, entry and approval.
  • Assign dual system administrators for online cash management services.
  • Establish transaction limits for employees who initiate and approve online payments.
  • Create an escalated authorization process for high transaction limits.
  • Monitor account activity and review all transactions on a daily basis.
  • Never bank online using computers at kiosks, cafes, unsecured computers, or unsecured wireless networks.
  • Who should establish these protocols and who should enforce them?

It’s a company’s responsibility to protect its customers’ data and information. For some companies, the law defines to what extent that must be done.

All companies are at risk for a security breach and should have internal controls to reduce their exposure. Companies with limited resources may want to engage with a consulting firm or an outsource partner to protect sensitive information.

If a company suspects it is the victim of a cybertheft, what should it do?

Immediately contact your financial institution regarding your suspicions. Exercise internal incident response procedures if they exist. If not, then see what options are available to you through your bank or insurance provider. You may also need to seek out a third-party that specializes in cybertheft mitigation.

Ultimately, it’s getting to be good business practice to secure customer data. It may seem like an overhead expense, but it ensures the integrity of customer relationships, which is important because a breach of information is also a breach of trust.

Insights Banking & Finance is brought to you by Westfield Bank

Experience is key when developing your strategy to create an ESOP

The complexity of transitioning to an Employee Stock Ownership Plan (ESOP) can be intimidating, says Elisabeth C. Schutz, senior vice president and director for the ESOP Group at Bridge Bank.

“Many attorneys and CPAs don’t want to spend the time and energy it takes to learn about them,” Schutz says. “That’s one reason why you don’t see more ESOP companies in the U.S. today.”

An ESOP is a qualified retirement plan. It’s regulated by the IRS and the Department of Labor and came into being with the passage of the Employee Retirement Income Security Act in the 1970s. The regulation is meant to ensure that the plan is used for the benefit of employees.

The process can be challenging, but when done the right way, it can provide significant financial benefits for a selling shareholder, the sponsoring company of the ESOP and its employees.

“Studies have been conducted comparing two companies that are of similar size and in similar industries,” Schutz says. “One company with an ESOP and one without. The studies have found that the company with the ESOP is more profitable by about 2 percent at a net income level. In the right situation, it’s a powerful tool.”

Smart Business spoke with Schutz about some of the important details to consider when exploring an ESOP.

What are some benefits to forming an ESOP?

The following are advantages to companies that choose to form an ESOP:
■  Flexibility – The seller can sell either a minority interest or up to 100 percent of the stock to the ESOP. Plus, the seller controls the deal.
■  Cash Flow Enhancement – The ESOP sponsor company can repay acquisition debt with pre-tax dollars.
■  Corporate Finance Tool – An ESOP is the only type of qualified employee benefit plan that can borrow money, provided the ESOP uses the money to buy employer stock.
■  Profitability – ESOP companies are typically more profitable than similar companies that do not have an ESOP.
■  Employee Ownership – Employees of ESOP companies vest ownership in the stock of the company over time. The sponsoring company makes the contribution to the ESOP on behalf of the employees – the employee does not make any contribution.
■  C corporation tax benefit – Sellers of C-corp stock may defer, sometimes permanently, capital gains tax on the sale by reinvesting the proceeds from the sale into “Qualified Replacement Securities.”
■  S Corporation tax benefit – A 100 percent ESOP-owned S-corp pays no federal income tax.

What does a company need to know when looking to set up an ESOP?

You need a lawyer with experience implementing ESOPs.

It is customary to have separate counsel represent the ESOP and the company. You also need a qualified valuation adviser with ESOP experience who is independent, having no relationship with the company or the other advisers involved in the transaction.

Due to the administrative complexity inherent in ESOPs, a qualified third-party administration firm will be engaged to track participant accounts and assist with compliance issues. Depending on the company and the situation, you may hire an investment banker, a financial adviser and an institutional trustee to assist with setting up and implementing the ESOP.

Aside from the technical aspects of running the plan, companies often find it a very good idea to hire ownership culture consultants to help communicate what the plan is about and create employee participation structures.

How do you find the right adviser?

You’ll find some excellent ESOP advisers and some that are not as good.

Consider reputation in the industry and experience with ESOP transactions. If you have an adviser that isn’t familiar with some of the subtleties that come into play, that can create problems. So you want someone who knows the ins and outs of crafting an ESOP to make it a smooth transition for your business. ●

Insights Banking & Finance is brought to you by Bridge Bank

Why introspection is the first step to enabling the support of your bank

Before a bank can help you identify products and services that can make your business run more efficiently, you need to have an idea of the gaps that are holding you back, says Abigail Avalos, vice president of Treasury Management Services at Bridge Bank.

“What’s important to you?” Avalos asks. “Companies have so many things that they are managing and so many different priorities. Before you meet with your bank, you need to sit down and think about treasury management services and which options would most effectively help your business.”

A good banking partner will help a company manage its cash flow and create efficiency with its banking activities, as well as ensure that the latest technology tools are being utilized, Avalos says.

“When a bank is able to match up the right services with a company’s needs, the result is a day-to-day management process that is streamlined and easy to manage, allowing you to focus on the growth of your business,” she says.

Smart Business spoke with Avalos about how treasury management services can help your company meet its growth goals and function more efficiently.

How can companies enable banks to provide stronger support?

When you come to a meeting with your bank, be prepared to talk about your business and what it needs.

Companies often focus on the lending side with their bank and then the discussion about deposits comes in the second part of the relationship, which is where treasury management services come into play. Give your bank an idea of what you want to do. What solutions are you using that are working and where are you still experiencing challenges? Make a wish list in terms of what you are looking for.

The more you open up, the more you can find out about services that fit your needs. Say you’re using a courier service to make deposits into your bank account and you’re averaging 50 to 100 deposits a week.

That can get expensive and you may have concerns about the deposits arriving at the bank and being entered into your accounts in a timely manner to ensure the funds are available.

Your bank can work with you to get a scanner to process the payments or a lockbox if you have a high volume of transactions to manage so as not to burden your team with managing that task. Electronic or wire payment services may also be a good option. Be clear about your priorities and you’ll find the right solution for your needs.

What if a company has concerns about the state of its financial record keeping?

Banks are not in a position to tell you how to manage your accounting team.

As a treasury adviser, the goal is to make recommendations that create efficiency. Some customers who are not as familiar with the platforms banks use may require more hand-holding to see how a product or service could help remedy some of your company’s inefficiencies.

But the goal with most banks is to work with you at your speed to get to a place where your treasury management systems are no longer a hindrance to growth, but rather a tool that can propel your company forward.

How do banks stay connected to what’s happening in the industry?

Treasurers are always aware of current developments in the market and are looking to see what competitors are using. If your bank is regularly reaching out to you about new products and services, that’s a good sign.

The intent isn’t to give you the hard sell to buy another product that you won’t use. It’s to make you aware of what’s available to help your business and then try to match those tools with your needs.

One of the best ways to establish a more informed relationship with your bank is to have regular meetings to review your account structure, conduct an account analysis and talk about options that might be worth considering for your business. ●

Insights Banking & Finance is brought to you by Bridge Bank

When seeking an SBA loan, separate fact from fiction

Many business owners and entrepreneurs think that U.S. Small Business Administration (SBA) loans are exclusively for startups. However, these loans can also help existing businesses.

“A business simply has to show that it has the need for the expansion, which can be justified through projections that a bank will use to determine if the loan makes sense,” says Daniel Minick, Akron Metro Area manager and vice president at Consumers National Bank.

“If a company doesn’t have enough income, but buying equipment can help the business take off, the company may be a good candidate for the loan.”

Smart Business spoke with Minick about the common SBA loan misconceptions and what banks need from applicants.

What are the documents needed to complete a SBA loan application?

The two most common SBA loans are 7(a), which are meant to establish a new business and to assist in acquisitions and expansions of an existing business, and 504 loans, which are used to purchase real estate and fixed assets such as equipment. Regardless of which type is sought, banks want detailed information during the application process. Specifically, they want to know the history of the business, its current needs, details about the key players in the business, a break down of the costs for the purchase and financial projections for the business.

It’s also important for the business owner to provide three years worth of personal financial information for the banker. That’s because all loans must be guaranteed by the ownership of the business. Therefore, all guarantors or owners must provide personal financial statements. It’s a big piece of the equation.

When it comes to personal finances, bankers are looking for an individual with a decent financial history. A banker wants to see that a business owner has been able to maintain a good lifestyle while owning and operating a business, and that he or she is not carrying lots of personal debt.

For startups seeking SBA loans, bankers want to see that the individual or his or her spouse has enough income to be supported while the business gets off the ground.

What are some common misconceptions about SBA loans?

The biggest misconception is that the process can take months. The truth is most banks have streamlined the process so that it’s much shorter now. Really, the actual time it takes to get approval comes down to whether or not bankers have a full package of information from the applicant. If they do, the loan request can be processed and approval can be granted in two to three weeks. Real estate loans, however, will likely take longer because there are environmental and other reviews that must be completed before loans are granted.

The SBA guarantees the loan from a bank, which lowers the qualification threshold because banks are facing less risk. Even so, bad credit will be an impediment to getting an SBA loan because it can give bankers the impression that the owner is financially irresponsible. Student loans that have been charged off will automatically disqualify someone from getting a loan, for example. A felony will also disqualify someone.

What are the pros and cons of SBA loans?

Looking at the pros, SBA loan rates are close to those of traditional bank financing, whereas not too long ago those rates were higher.

Another positive is that the SBA can help with a collateral shortfall. Typically, a commercial loan from a bank would be 80 percent loan to value. An SBA guarantee could mean going higher because the SBA may mitigate a shortfall all together.

Also, SBA loan products have a greater chance of bank approval because of the guarantee that’s provided.
Looking at the cons, many banks making SBA loans have variable rates, so those seeking loans should choose their bank carefully. It’s best to find a lender offering fixed rate loans.

Another issue is that the SBA fees, depending on the product, can be higher than traditional financing.

Finally, business owners need to find a bank that supports SBA products because not all of them do. It’s also important to find a banker who is educated on the SBA loan process because they’ll be an advocate for the success of their customers.

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

How the foreign currency environment breaks the rule

The findings of the fifth annual Chase Business Leaders Outlook, a survey of over 1,600 midsized business leaders, show a growing optimism about the national economy. And for the first time in the history of the survey, middle-market companies’ optimism about the national economy exceeds their outlook for their local economies and industries.

But that confidence drops when looking outside of U.S. borders — at least in the near term. Foreign competition appears to be a significant challenge for middle-market businesses, rising to its highest level since 2012. Northeast and Midwest leaders, in particular, expressed concern regarding competition overseas, which may be tied to the rising value of the U.S. dollar and its impact on exports.

Similarly, manufacturers remain more preoccupied with foreign competition than other industry leaders, which again could be related to the dollar’s increasing strength and manufacturers’ concerns about the cost of commodities.

Smart Business spoke with Dave Schaich, president of the Western Pennsylvania Middle Market at Chase Commercial Banking, about the survey results and strategies for navigating a higher-dollar environment.

What expectations do middle-market business leaders have for 2015?

In general, business leaders have steady expectations for revenue and sales and slightly higher expectations for profits. The most bullish industry is retailers — 80 percent of retailers expect higher revenues in 2015 and 78 percent expect higher profits (up from 67 percent and 55 percent, respectively, in 2014). Of course, retailers also anticipate spending more than other industries, so it will be interesting to see how the year will shake out.

In terms of growth strategies, company leaders are planning to take a slightly more organic approach than they have in years past. Rather than expanding in target markets in the U.S. or across the globe, they plan to focus on attracting new customers, diversifying product and service offerings, and up-selling or cross-selling to their existing client base.

What’s the outlook for global business?

Although 27 percent of middle-market executives had an optimistic view of the global economy last year, that optimism has dropped to 19 percent in 2015. That said, leaders whose companies are doing business overseas or plan to in the near future tend to be more optimistic than their non-global peers.

When it comes to doing business internationally, business leaders cite currency risk as the area of greatest concern. This year, this concern has increased significantly — from 39 percent in 2014 to 50 percent. But given the strengthening dollar, this really isn’t surprising.

How should companies plan for currency risk?

It’s a brave new world. Businesses have to think about managing currency risk in ways they really haven’t had to deal with in the last several years.

Overall, 73 percent of leaders surveyed estimate that up to a quarter of their total sales will come from overseas this year. This is up 3 percent from 2014. And with this increased non-domestic exposure comes various challenges, not the least of which is foreign currency exposure.

For decades, academics have praised the benefits of hedging long-term economic foreign currency risk by issuing debt in the same currency. While this is still good in theory, today’s U.S. multinational companies may find that hedging on a much smaller scale adds unexpected exceptions to the rule.

There are two reasons for this. First, firms are generally reluctant to issue debt in a foreign currency when interest payments in that currency are higher than the U.S. Second, the accounting treatment of foreign currency debt is not always issuer-friendly.

In today’s global economic environment, the importance of managing the impact of foreign exchange rates on companies becomes increasingly important. Overall, while the costs of hedging (i.e., paying higher interest) are immediate, affecting all-important earnings per share targets, the benefits of hedging today come through reduced volatility that can only be gained using a long-term strategy.

Insights Banking & Finance is brought to you by Chase

Today’s M&A market is optimal for high-performers, less so for others

Companies that are performing in the top quartile of their respective industries have many M&A options.

“Valuations for high-performing companies have never been better, buyers never more plentiful,” says Mike Burr, senior managing director, head of mergers and acquisitions at Fifth Third Securities.

Even though economic conditions are good, the supply of interesting, quality opportunities is limited, making analyzing the M&A market precarious.

“Companies that are not high performers in their industries should carefully consider their expectations of value before initiating an M&A process,” says Doug Wyatt, executive vice president, senior commercial banker at Fifth Third Bank.

Smart Business spoke with Burr and Wyatt about the M&A market and what strategic and financial buyers can expect this year.

Why hasn’t U.S. M&A activity more closely followed the positive economic news?

There is a significant focus on the multi-billion dollar transaction during the past 18 months, with transactions of over $1 billion dominating M&A headlines and corresponding transaction activity. The broad M&A market, which in 2014 was only modestly improved from 2013, understates the underlying positive conditions of the U.S. market. Significant liquidity, both from financial and strategic buyers, and a very low rate environment, create a very positive backdrop for sellers.

Between 2010 and 2013, middle market companies sought and executed various strategic recapitalization transactions to satisfy many of their liquidity goals. Many of these private business owners accomplished those goals and are currently struggling with the benefits of a full sale process despite a very positive market. That has sellers wondering where to invest their proceeds.

What industries are leading the way?

Health care and energy are notable industries of anticipated activity, but for different reasons. The aging population will help the health care industry continue year-over-year double-digit growth rates.

In energy, the falling oil prices mean many companies dependent on higher oil prices are faced with overleveraged balance sheets, which will create operational challenges and drive transaction activity in the second half.

What caused the year-over-year decrease in first quarter 2015 deal activity?

We’re seeing a period where the benefits of liquidity are not an exclusive focus of many private and small cap/middle market business owners. Many have already satisfied this need. The Q1 2015 middle market marketplace reflected this lack of motivation, with transaction levels down 20 percent. However, the large billion-dollar transaction activity continues unabated and is driving the overall M&A market.

Is the market overvaluing transactions?

This is always a big question when you see average valuation multiples exceeding double digits (as multiple of EBITDA).

Historically, when M&A valuations exceed the valuation multiples of the overall public market indices, it’s an indication we are approaching an overheated environment.

Corporate balance sheets and private equity funds have never been this liquid. How are they going to deploy this capital?

There’s just not the level of attractive transactions, so it’s likely that for the balance of 2015-16, valuations for solid, top quartile growth companies will remain high. This will challenge corporate and private equity balance sheets to put liquidity to work. However, the corporate buyers participating in the billion-dollar M&A market are starting to put a dent in their cash stockpile.

Are the new lending regulations hindering M&A activity?

It appears so. However, what is actually happening is a shift in the cost of capital as banks examine their leverage portfolios and pull back their leverage lending initiatives, which will likely increase as federally mandated leverage guidelines gain clarity. The reduction of less expensive bank capital will put more pressure on buyers and their cost of capital as more expensive alternative financing replaces bank financing.

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Insights Banking & Finance is brought to you by Fifth Third Bank

What to consider before launching a commercial solar project at your firm

As a business owner, taking on a new capital project requires careful thought and analysis. Will the new project benefit our stakeholders and our employees? Will the new project have a positive impact on our bottom line? The same thought process should be applied when considering a commercial solar project for your company.

“Business owners that are considering commercial solar projects should understand the economics of solar,” says Roy Pack, vice president and relationship manager in the Energy & Infrastructure Group at Bridge Bank. “Does it make financial sense for my business? That’s the way you need to look at it.”

If you are launching a commercial solar project, there are three things you’ll want to keep in mind: Who is going to build it, how are you going to finance it and what financial incentives are available to help you cover the project costs?

Smart Business spoke with Pack about these three crucial steps and some other keys to managing your next commercial solar project.

What kind of support can a bank provide toward building a commercial solar project?

A bank can often provide construction financing by issuing a loan and then directing the loan proceeds to pay the contractor/builder or the manufacturer of major equipment such as solar panels. Because the nature of repayment relates to the quality of the solar energy facility, a bank should have knowledge of high-quality equipment manufacturers and builders that are available in your area.

A bank with solar experience will also understand the construction process. Will the project require additional capital because it is a carport system? What happens in case of construction delays? How does the permitting process work and do I need to contact my local utility? When approached with a capital request, a qualified solar lender will understand these issues that a business owner faces. Business owners and banks should always share the same objective: to build a high quality solar facility.

What are the benefits of using a bank with expertise in financing solar power?

Most solar projects will qualify for one or more incentives that make the projects more financially attractive to build. Various incentives include cash rebates, tax credits, tax refunds or performance payments. Incentives can be based on the cost to build or electricity output, they can also be federal, state or local benefits.

Because of the complexity, a bank with solar experience can help a business owner fully understand and eventually monetize those benefits. A bank should also have the ability to incorporate those incentives into a borrowing formula which will increase the value of a loan to the business owner.

How important is your ability to be a project manager?

There are a lot of moving parts involved with solar projects, so you need to be a good project manager or have one in place. Stay on top of your builder, major equipment manufacturers and all the important details involved during construction.

Keep a clean accounting of all capital expenditures and understand the legal aspects of your new solar property. This will help you avoid headaches, keep your expenses down and manage the project from start to finish.

What about the project’s return on investment?

The ultimate decision of whether to build solar or not depends heavily on the project’s return on investment (ROI). It will reflect the project’s capex requirement, how bank debt can help pay for that capex, financial incentives and expenses required to operate and maintain the project.

In many cases the largest contributor to ROI will be a significant savings on a business owner’s electricity bill. A solar project can only be green-lighted if it makes financial sense. ●

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