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.

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

The VC market is taking a pause, but the future still looks bright

Valuations in the venture capital (VC) market are either in decline or flattening out, primarily due to inflated expectations, says Michael David, Managing Director for the Equity Fund Resources team at Bridge Bank.

“Startup companies always have nonlinear rates of progress,” David says. “Companies haven’t performed as well as they had been forecasted and the stable of investors has pulled back. Many are looking at this correction cycle as an opportunity to invest in good companies, but they are not going to pay the valuations they did a year ago.”

VC investments reached a 15-year high last year as the sector capitalized on the relative weakness of other markets. But what goes up must come down again at some point and VC investing has slowed down in 2016.

“Companies that are still burning cash, are not yet profitable and are not growing as much as they were are in danger of not receiving funding,” David says. “There is a much more cautious view.”

At the same time, there is still a great deal of capital available to be invested when the right opportunity presents itself.

Smart Business spoke with David about the state of the VC market and what it means for startups.

What factors are driving the drop in valuation?
A number of firms in the market were driving up valuations, including nontypical investors in the segment such as Fidelity and T. Rowe Price. They came into the market and paid very high valuations for high-profile companies.

Since that time, however, these public mutual funds have written down their investments in some of the later-stage companies.

They have created a revaluation of the market, particularly in the so-called ‘unicorn’ companies they had invested in — startups that are valued at more than $1 billion. The reason is that public valuations are not staying in line with what was being paid on the private side.

There was also an expectation that these companies would go public in a relatively short period of time, perhaps within 12 to 18 months. But the public markets have not been receptive to new issues unless you can show a high rate of growth right off the bat.

A number of these companies that have gone public have missed their forecasts, which affected the whole market, as well as the private market.

What effect does the state of the VC market have on the overall economy?
You have the local Silicon Valley economy and the greater economy. They are related, but distinct. Some of the public companies and even a portion of the private companies are still burning cash, but growing. Investment has declined or pulled back and boards are directing companies to get back to profitability. The result is some companies are looking at layoffs.

This correction or right-sizing of companies is not as big as when the dot-com bubble burst, but there definitely is a movement to get cash flow to break even or to be cash flow positive.

Silicon Valley has a robust economy so while there are some layoffs in the tech sector, it’s not affecting unemployment much. It’s just not quite as robust as it once was.

What’s the takeaway at this point on the state of the VC market?
The environment has changed, particularly in terms of valuations. The VC world is looking harder at companies and their subsequent valuations. I don’t think that anyone thinks there will be a robust IPO market anytime soon. Companies will stay private longer and are going to need the capital to get there.

Rather than just focusing on growth on the top line, there is more of a focus on the bottom line. In 2015 alone, VC funds raised close to $30 billion in new investible capital and if a company hits the right target, there will always be capital available. ●

Insights Banking & Finance is brought to you by Bridge Bank

How to improve your business cash flow with an SBA loan

Imagine you wanted to refinance equipment at your company. If you are given a conventional loan, the bank will likely offer a five-year loan term, depending on the type of equipment and useful life. But a U.S. Small Business Administration (SBA) loan could allow 10 years on that equipment, so your cash flow position would be improved with the longer term and amortization.

That’s just a small example of how SBA financing can benefit your organization’s cash flow equation by allowing for debt consolidation and refinance as well as financing working capital, says Romona Davis, vice president of SBA Commercial Lending at Ridgestone Bank.

“When you compare an SBA loan to a conventional loan, you’re going to find more attractive terms with an SBA loan,” she says.

If business owners capitalize on those more attractive terms, they can use the cash savings to assist with marketing, hiring, growing the business, buying inventory, etc.

Smart Business spoke with Davis about how SBA loans can improve business cash flow.

If your business is doing well, why should you still consider an SBA loan?

SBA loans are for small businesses, ranging from startups to well established for-profit corporations. The misconception is that SBA loans are for individuals with bad credit or companies experiencing financial challenges. In reality, SBA loans are for almost any small business.

They can be used to purchase or construct owner-occupied commercial real estate; buy out a business partner; purchase a business; obtain machinery and equipment; buy a franchise; refinance existing business debt; or provide for working capital.

The SBA assists with cash flow by offering longer terms and amortization, minimizing prepayment penalties and other protections. Typical SBA terms include up to 25 years for owner-occupied commercial real estate, and up to 10 years for machinery and equipment, a partner buy-out or business acquisition and working capital.

There is also no ‘balloon’ payment. The SBA 7(a) loan provides for a straight term and amortization; there’s no lump sum payment due during the term of the loan.

A borrower’s equity injection can be slightly less with an SBA loan, which is beneficial to some borrowers. Equity injection can range from zero to 30 percent, depending on the project purpose.

In addition, borrowers can utilize SBA loans when they have a collateral shortfall. If a business owner lacks sufficient collateral to cover a project or secure a loan, the SBA allows banks to finance the project once all available collateral has been pledged.

What do SBA loans require in terms of credit and cash flow analysis?

Banks will examine the 5Cs of credit — capacity to repay the loan, capital to invest in the project, conditions of the project, collateral associated with the project and character of the owners and/or personal guarantors. The SBA requires personal guarantees from those with at least 20 percent ownership in the borrowing entity.

Every bank is different in terms of its requirement for cash flow coverage, also known as debt service coverage. The SBA states that “each bank must conduct a financial analysis of repayment based on historical financial statements and/or tax returns and detailed projections.” Banks examine the EBITDA, along with required principal and interest payments on all business debt inclusive of new SBA loan proceeds.

The small business applicant’s debt service coverage ratio must be equal to or greater than 1.15 on a historical and projected cash flow basis. For startups, a three-year projection scenario with the first two years being month-to-month is required. Projections must demonstrate the ability to service the proposed debt.

If you struggle with managing your cash flow, what do you recommend?

Consult with a lender to determine if the existing debt is eligible for SBA refinance.

In order to qualify, the existing debt must be on unreasonable terms, cash flow savings must be at least 10 percent, and the debt being refinanced must be ‘business debt’ that would have been eligible for SBA financing.

Whether refinancing existing debt or obtaining a new loan, SBA 7(a) loans can improve working cash flow, allowing your business to reach its full potential.

Insights Banking & Finance is brought to you by Ridgestone Bank

During times of economic volatility, your bank can be a great partner

Financial institutions operate at the heart of our economic system and as such, are hyper-aware of market indicators and trends that can affect the credit quality of their customers.

The more opportunities you have to keep your banker up to speed on what’s going on in your business, the better equipped he or she will be to work on your behalf, says Rob Fernandez, senior vice president and business line manager in the Technology Banking Division at Bridge Bank.

“Remember, information is neither good nor bad, it’s just information,” Fernandez says. “Information allows decision-makers to make necessary adjustments, or derive valid reasons to continue to support the status quo.”

Those who have been in business for a while and have worked with an effective banker know what an experienced banker can do to keep the partnership on an even keel. They can help you respond appropriately when changes arise in your business that could affect the structure of your existing credit facilities.

“While you might be concerned about revealing too much, if there is important new information about your business that could impact your financial condition, it will eventually surface,” Fernandez says.

“When it does, and if it’s a surprise to your banking partner, their efforts to help you and your business could be nullified due to the resulting uncertainty.”

Smart Business spoke with Fernandez about the gains that can be realized by allowing your bank to work as a partner in growing your business.

Take advantage of networking opportunities
When your bank partner invites you to lunch or an evening event, go whenever possible. Neither of you might be really into whatever sporting or networking event is available, but you’ll end up having quality time getting caught up on each other’s business, not just yours. You want to know how your banker is thinking about the world too.

If you haven’t been invited out for a while or you’ve turned them down repeatedly, take the initiative and invite them to lunch, a corporate event, a networking party, etc. Trust is developed through personal relationships.

When you meet with your banker in a relaxed setting outside of the hustle and bustle of the workday, you can talk about those big-picture questions that you never seem to have the time to talk about. It’s an opportunity that can pay big dividends for your business.

Don’t try to hide your problems
If you know that your financial reporting is going to reveal a problem, don’t wait until your banker gets the report and then has to scramble to respond to internal questions. Give them a heads up so they have time to prepare a case on your behalf.

Your banker wants the relationship to work and wants to advocate for your business.

When you don’t reveal information that can help them do that, it’s akin to tripping your team member as they run to the hoop to score. You lose credibility and trust with them, and they lose credibility with their senior decision-makers, which ultimately comes back to haunt you for what can be a very long time.

When necessary, consider your options
If you don’t think your current banking partner has the courage, industry knowledge or capability to advocate for you, it might be a good time to consider options. Talk to your peers, CPA and attorney for referrals and get to know who’s out there.

Every region has a collection of very strong commercial bankers. By and large, business bankers are a passionate lot and are very protective of their clients. Banking might seem boring from the outside, but inside it’s a dynamic and highly relationship-driven environment filled with very educated and smart people. Make it personal and you’ll reap the benefits of a strong alliance. ●

Insights Banking & Finance is brought to you by Bridge Bank

Why your team can be a great asset when you’re moving your business

Teamwork and collaboration are two attributes that can make a company’s transition into a new office space a lot easier to manage, says William Schumacher, Senior Vice President and Market Leader for Westfield Bank.

“When you get everyone involved in the planning, it creates a certain level of energy and commitment to the project,” Schumacher says.

As Westfield Bank planned its upcoming move into its new Canton office, Schumacher worked hard to gather feedback from employees as to what they would like to see in their new workspace.

“When you take steps to engage your people about what they need to do their jobs, it has a carryover effect,” he says. “They realize that you care about them and their needs and so that feeling of engagement comes through as they deliver your product or service to your customers. It creates a spirit and an energy that is felt by everyone.”

Smart Business spoke with Schumacher about how to keep everything on track when moving your business.

Where is a good place to start if you’re planning to move your business?
The relocation of your business needs to be a very coordinated process. You’ll be working with contractors, utility companies and vendors, in addition to your employees. You need to develop a definitive timeline so that everyone understands when things need to be done and when people need to be ready to take certain steps.

A strong recommendation is to appoint a person to serve as the head of your relocation efforts. This person can manage the bidding process and the logistics of the move so that you and others on your team can stay focused on day-to-day responsibilities in the business.

It will help you keep everything on track and create a sense of discipline and organization that will reassure everybody that the transition is moving forward.

How do you manage the internal transition to the new space?
Make a concerted effort to keep people informed and knowledgeable about what’s happening. Hold regular meetings with different teams and different leaders to make sure needs are being addressed.

Identify functionality and workflow and coordinate relocation plans so that they support and/or create efficiencies both during the transition process and in the new location.

When you maintain a dialogue and keep everyone updated with what’s happening, you reduce the chance for surprises. It’s likely that you won’t be able to implement every suggestion that is made. But the effort you make to be transparent with people should soften the reaction in those instances.

What are some important considerations that need to be addressed when moving your business?
Look at your respective needs and what you want to accomplish. But as you do so, make sure the customer is always part of the discussion. Be certain that any plans you make boost the convenience and accessibility of your business.

For instance, if you move into a beautiful location with state-of-the-art technology, but find that the traffic surrounding the building makes accessibility difficult, that’s a problem.

When we were looking at locations for our Canton office, we visited a location that was ideal from a marketing and visibility standpoint. But it was at a major intersection where traffic would have been a significant issue. If it’s not good for clients, it’s not going to be good for your business.

How do you communicate the move to customers?
As you discuss the logistics of the move of your business, you also want to craft a strategy to inform customers. Develop temporary signage and marketing promotions to share the news. Coordinate an open house to welcome customers and get the new location off to a great start.

Work with your marketing and design team to develop literature that can be distributed to help customers understand what they need to know about the transition, allowing time for them to adjust their routines. A successful move takes time, patience and communication. ●

Insights Banking & Finance is brought to you by Westfield Bank

How to package your SBA loan application

As company balance sheets improve, banks are beginning to look more favorably at providing loans to businesses. But in some industries and for certain types of financing, however, it still can be difficult to obtain a traditional loan.

That’s where U.S. Small Business Administration (SBA) loans can help fill the void. For example, service industries often utilize SBA lending because they don’t have substantial collateral or tangible assets, says Mitch Kendall, vice president of SBA/Business Lending at Ridgestone Bank.

“SBA loans can use cash flow as a determination for valuation. They also have lower equity requirements, providing a unique option for certain businesses,” Kendall says.

Like any loan, the SBA loan process goes more smoothly if you provide the right information in a timely manner.

Smart Business spoke with Kendall about SBA loan applications and how business owners can have a positive experience.

What do business owners need for an SBA loan application?

If you’re starting a new business, spend time developing a business plan. If you don’t have experience putting a plan together, your local small business development center is a good resource. That plan shows your banker that you’ve thought about what markets you want to serve, how you want to approach those markets and that you’ve addressed the many aspects of owning a business.

Your lender also will need three years of personal tax returns, a personal financial statement and a resume detailing your relevant experience.

An owner of an existing business needs:

  • Three years of personal tax returns and a personal financial statement.
  • Three years of business tax returns and internal financials like profit and loss statements, balance sheets, accounts receivable and accounts payable aging.
  • A short summary of your business.
  • Debt schedule detailing current balances, beginning balances, monthly payments, interest rates, original use of funds, etc.
  • Information and tax returns about affiliate businesses.

Because SBA loans are government backed and guaranteed, be prepared to pledge your personal assets. That’s non-negotiable, whether it’s a new or existing business.

Does the timeline take longer?

SBA loans can take longer and require a little more paperwork, so find out if your lender is a preferred lending partner (PLP). That means the SBA delegates the underwriting and approval to the bank, eliminating secondary SBA underwriting. Also, a PLP knows what to expect with SBA loan requirements and approvals and will have streamlined processes.

Every deal is different, depending on the size of the loan and industry. On the short side, count on at least four to six weeks. If there’s real estate involved or the deal is complex, loans can take 10 to 12 weeks.

How can owners achieve a smooth process?

  • First of all, be organized. If you have notes from shareholders, make sure they are in writing and can be provided to the lender in a timely manner.
  • Respond to the bank promptly. Be ready to provide information as soon as possible to avoid delays in the application timeline.
  • Document everything. If you spend time and money organizing your financials, shareholder notes, etc., the process will be easier when you request a loan.
  • The lender will ask probing questions; be ready with timely answers so the bank can become comfortable with the management of your business.
  • You want to come across as professional and organized, just like you do with your customers.

Is there anything else you’d like to share?

Don’t get discouraged if you hear ‘no’ at first. Ask questions about why you were told ‘no’ and what you can do to get to ‘yes.’ Keep working on your plan and documentation, and look for a lender who is experienced in creative loan structuring. There also are alternative lending sources beyond the SBA.

Doing your homework gives you more confidence as you go through the loan application process. This increases the chances of achieving the outcome you desire, and paves the way toward a positive outlook for the future.

Equal Housing Lender.  Member FDIC

Insights Banking & Finance is brought to you by Ridgestone Bank

Why you need to be thoughtful when using a bank line of credit

Business owners use lines of credit to cover short-term working capital needs such as a payroll advance or a situation where you have to make an unexpected inventory purchase, says Joseph P. McNamee III, Vice President at Consumers National Bank’s Stow Business Lending Office.

“You just never know when an issue will arise where one of your customers doesn’t pay on time and you have a payroll file coming due,” McNamee says. “The rates on a line of credit are typically more advantageous than if you were to utilize a business credit card.”

The key to making good use of a bank line of credit is the ability to know when not to use it, McNamee says.

While it can help you manage your cash flow and handle unforeseen expenses, you should avoid using it to purchase equipment or to cover other potentially long-term debts.

“Those are not good uses for a working capital line of credit,” McNamee says. “Anything that you’ll need to make payments on for more than 12 months, you need to be looking at a long-term loan.”

Smart Business spoke with McNamee about how to secure the right line of credit to effectively manage your company’s working capital needs.

Why are long-term expenses a bad use for a line of credit?

Most banks have an aggressive clearing provision that they can enforce with this type of financing tool. If you borrow the full line amount to purchase a piece of equipment and your bank enforces the clearing provision — meaning that you need to pay the debt in full every 12 months — the effort to do so could hurt your cash flow when finances are tight.

That could become a serious issue if those unexpected expenses come into play. Let’s say you need to bolster your inventory or make an important equipment purchase and find that you can’t do it because your cash is tied up attempting to pay off your debt to the bank.

Cash flow is the lifeblood of a business and when you can’t access it, it can create big problems. You need to make sure you have access to cash when you need it, which is the purpose of a line of credit.

What’s the best approach when reaching out to your bank about obtaining a credit line for your company?

Schedule a meeting with your bank and determine if a line of credit is the best fit for your needs.

Your banker will typically want to go over your entire cash flow cycle and review financial statements and tax returns to determine your qualifications.

Before the meeting, you should gather business and personal tax returns from the past two years.

Collect your most recent financial statements, including a profit-and-loss report, your balance sheet, and accounts receivable and accounts payable aging reports, in addition to your own personal financial statements.

What if your company is concerned about its ability to secure a bank line of credit?

If you have a trusted business adviser who has worked with your company, have that person sit down with your bank and look over your financial portfolio together. It could be that you don’t qualify right now for a line of credit, but these conversations could lead to a strategy that puts you in a better situation to get a line of credit in six months or a year.

Banks work with many businesses and often there are challenges that need to be overcome. It is through this work that banks develop contacts with consultants and experts who can help your company get things turned around and back on track toward meeting your goals and growing your business. If you haven’t been able to develop this kind of partnership with your bank, look for someone who is passionate about helping clients grow their businesses.

What’s another tip for how to responsibly use your credit line?

Line of credit payments are primarily interest only. The onus is on the business owner to pay additional principal each month to pay down the debt. You don’t want to get into trouble by paying only interest each month and then playing catchup to pay and resolve your line of credit.

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

The transition to EMV is a chance to spur big change beyond checkout

The U.S. shift to EMV-based credit cards has created a unique opportunity for businesses to rethink their entire point-of-sale system. By upgrading old systems to accommodate new chip-based cards, companies are revolutionizing operations to keep a step ahead.

“When organizations adopt integrated point-of-sale systems to meet EMV requirements, it can bring better security, improved efficiencies and new opportunities for growth that come with streamlined processes,” says Karen Sengelmann, Head of Retail at Fifth Third Bank.

Smart Business spoke with Sengelmann about ways that integrated point-of-sale systems (IPOS) can have a major impact on business operations.

How can companies use the switch to IPOS to improve customer service?

Integration can bring payments and staffing management together to meet recurring customer needs. For example, combining scheduling functions with payment mechanisms can quickly and efficiently process customers after an appointment. Paying for a service and setting up the next appointment can happen from one screen while simultaneously ensuring that staffing schedules will accommodate customer requests. This enhances customer service and reduces staff time spent on each step of these transactions.

What impact could IPOS have on inventory management?

IPOS can integrate with inventory trackers across every channel. If a customer can’t find an item in a particular location, IPOS systems have accurate data on where else within the business the item might be found along with accurate and immediate information about availability and shipment timing. That could lead to increased orders and additional savings in reduced follow up effort across a team.

What industry-specific solutions might be found with IPOS?

Tailored solutions can help companies streamline important tasks. For example, when a small bistro can allow diners to use a tableside tablet to place and pay for their orders, service is quicker and payments are more secure. Since the system is tied to the back of the house it can also help businesses unify inventory and cash flow management.

In a health care setting, an IPOS system can streamline paperwork and maintain HIPAA compliance. Patients can complete forms on a tablet in the waiting room and team members can post those forms instantly to the patient’s file. This may help satisfy privacy laws and reduce costs by streamlining administrative work. It could also reduce manual processing errors.

How might IPOS offer insights into trends happening within a business?

Integrated systems can yield a clearer, more organized view of a business’s data, which can be used to make better-informed decisions. IPOS systems combine information from all channels to give a holistic view of inventory levels and customer trends. That can help retailers better control inventory, adjust promotions and reduce costly end-of-season markdowns.

An IPOS system can also automatically analyze individual customers’ spending habits and deliver personalized rewards and discounts at checkout. It can analyze foot traffic so merchants can tailor flash sales, set staffing levels and make product placement decisions to capitalize on peak hours.

What flexibility might IPOS offer customers?

Customer desire for flexibility and speed extends to payments, and new IPOS systems accept cash, credit cards, gift cards, store credit, and are compatible with smartphone-based payment methods. Many systems are also mobile, allowing merchants to use hand-held devices that process transactions from the shop floor or at pop-up events.

These options help reduce checkout wait times while decreasing manual errors since employees at checkout don’t have to enter data or handle a number of different loyalty or gift cards.

Since the EMV transition is requiring many merchants to change their traditional POS systems, the switch is a logical jumping-off point for organizations to make other modifications that will help them keep pace.

Fifth Third Bank. Member FDIC

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

Chip technology gives purchasers a new tool to combat consumer fraud

Credit and debit cards using chip technology (also known as EMV) are becoming the security standard in the U.S., offering another layer of protection for both individual and corporate consumers.

Used in more than 130 countries around the world — including Canada, Mexico and the United Kingdom — it also provides consumers with greater acceptance when traveling internationally.

“Chip technology has been around for over two decades and is already the security standard in many countries around the world,” says Kurt Kappa, Senior Vice President and Market Leader, Cuyahoga County, at Westfield Bank.

“Many merchants across the U.S. are beginning to accept chip card transactions and this will continue to grow within the coming years.”

Smart Business spoke with Kappa about how chip technology works and what consumers should know about it.

What is a chip card and how does it work?
A chip card is a standard-size plastic debit or credit card that contains an embedded microchip, as well as the traditional magnetic stripe.

The chip protects in-store payments because it generates a unique, one-time code that is needed for each transaction to be approved. It’s virtually impossible for fraudsters to replicate this feature in counterfeit cards, providing greater security and peace of mind when making transactions at a chip-enabled terminal.

You may hear chip cards referred to as ‘smart cards’ or EMV cards. These are different ways of referring to the same type of card. Similarly, an EMV terminal is the same as a chip-enabled terminal.

A chip card is not the same as PayPass or payWave, systems where you wave or tap your card in front of a device to make a payment. A chip card must be inserted face up into a chip-enabled merchant terminal and then left in the terminal while the transaction is processed.

You’ll be prompted to enter your PIN or provide a signature as you normally would to verify the transaction, although you may not be asked for a PIN when traveling internationally.

If the retailer isn’t equipped to read the chip card, just swipe as you do today. However, if you swipe your chip card at a chip-enabled terminal, the terminal may prompt you to insert your chip card into the terminal. Transactions made over the phone or online will not change.

Are chips safer to use than magnetic stripe cards?
All cards offer protection from unauthorized use of your card or account information. Chip technology offers another layer of security when used at a chip-reading terminal because it generates the aforementioned unique, one-time code that is needed for each transaction to be approved.

This makes the transaction more secure by ensuring that the card being used is authentic, a process that makes the card more difficult to counterfeit or copy.

Should chip cardholders notify their bank before traveling internationally?
It is recommended that you set a travel notice on any card you plan to use while traveling so your card access is not interrupted. For your protection, your bank should continue to monitor card activity even when a travel notice is set.

Have there been any problems for businesses adopting to chip technology?
When traveling outside the U.S., some card readers at unattended terminals such as public transportation kiosks and gas pumps require a PIN.

However, this type of PIN technology is different than what you normally use for PIN transactions in the U.S. and the card won’t be accepted. In these situations, you should locate an attended terminal to complete your transaction or plan for an alternative payment method such as local currency.

Will chip cards allow others to track your location?
Chip card technology is not a locator system. The chip on your card is limited to supporting authentication of card data when you make a purchase. The chip card is intended to provide you with the same benefits and services that you get with your debit or credit card, but does so with an added level of security. ●

Insights Banking & Finance is brought to you by Westfield Bank

Know your operating cycles and you’ll find working capital easier to manage

Managing the working capital of a business tends to be a balancing act that requires a deft touch in order for the company to operate smoothly, says Michael Hengl, senior vice president and business line manager for Capital Finance at Bridge Bank.

“Working capital tends to be comprised by inventory, cash and receivables,” Hengl says. “Too much or too little of any of those categories can make it difficult to be a profitable company.”

If you have too much cash sitting on your balance sheet, that’s an opportunity cost, he says.

“You’re not investing that cash in a higher yield,” Hengl says. “At the same time, if you have too much inventory, that’s cash that is tied up and you risk inventory obsolescence. You risk not being able to sell the inventory in time and you put a strain on your liquidity that could impede your ability to meet financial obligations.”

When you understand your operating cycle and how money is spent and earned in your business, you are better able to retain control of your valuable working capital.

Smart Business spoke with Hengl about what strong companies do to effectively manage their financial cycles.

How do companies typically get into trouble managing their working capital?
Rapidly growing companies are often susceptible to cash flow concerns because they invest heavily in inventory, only to watch the economy take a downturn that leaves them with a warehouse full of unsold product.

You may also choose to be more conservative with your inventory, but if you cut it too close, you risk missing out on sales when you can’t keep up with demand.

But it’s often that strong growth, which is obviously what every company wants, that can really put a strain on working capital.

A company will say, ‘We’re selling more than we ever have. Why is there such a strain on cash in our company?’ The problem arises when you become too focused on your income statement and your revenue and profits. You also need to look at the balance sheet items and your assets and liabilities. You need to have a balance.

What are some traits common to well-managed companies?
You need to have a strong understanding of your company’s operating cycle from the point that you make an investment or buy inventory to the point that it gets converted back into cash. You need to be knowledgeable about the components and decision points within that cycle.

Work closely with your inventory managers or your product managers to determine how much product is needed. Spend time with accounts receivable and talk about credit terms that are available to clients.

You don’t want to be overly generous where you potentially end up with bad debt and extended receivables. Nor do you want terms to be restrictive to the point where you lose the opportunity to make a sale.

These types of companies tend to be very strong at predicting cash flow and at setting up contingency plans if a client doesn’t pay on time. Do you have a line of credit in place to handle the unexpected? Can you defer a payment to a vendor?

If your company struggles to collect receivables, look for ways to get your clients on a regular schedule. If you’re going to grant extended terms, try to get a concession out of it. Tell the client, ‘We’ll grant you another 30 days, but can you pay 25 percent of it today?’ There are many ways to work with a client.

How can a bank help?
Sit down with a bank’s treasury management department and look at tools that might speed up bill collections or shorten the cash cycle through the use of a lockbox, remote deposit capture or electronic banking.

A bank can also help you identify possible remedies in your reporting or poke holes in faulty assumptions you may have made about your business. Your bank has a vested interest in seeing your business grow and succeed.

Another thing to keep in mind is when you have a bank audit. Don’t be afraid to ask about the results. There may be findings that can help you improve your processes. ●

Insights Banking & Finance is brought to you by Bridge Bank