A look at payment methods — their costs, risks and benefits

Companies of all sizes tend to face challenges when it comes to managing working capital.

“Suppliers want to be paid quickly for services, but companies want to pay slower to keep more cash on hand,” says Jim Altman, middle market Pennsylvania Regional Executive at Huntington Bank. “The interests of both parties need to be considered as part of the business relationship.”

Smart Business spoke with Altman about cash flow management and payment options that benefit both payers and suppliers.

What are some common payment methods?

The most common payment method is issuing checks. They generally require little more than the recipient’s mailing address in order to effect payment. Checks typically include a check stub that provides remittance detail for the recipient to close out their receivable, but the manual data entry process to record the check stub detail is laborious and subject to error.

ACH and wire transfers require the recipient’s bank account information to complete the transaction. ACH has no easy way to transfer remittance information to the supplier. Wire payments have the same issue and they’re expensive to process, so it’s often not ideal for payers.

Commercial cards are also relatively simple for the payer and receiver once the receiver is capable of processing card payments, however there are fees incurred by the receiver to do so. Detailed remittance information is provided with the card transaction. Payers are willing to send commercial card payments to their suppliers earlier than any other method since they do not need to actually fund those payments until their monthly program cycle ends. Those faster payments make the processing fees worth it for many suppliers.

How does each payment method stand up to fraud?

If checks are intercepted or even momentarily viewed, fraudsters can create fraudulent checks and use them for their own purposes. Seventy percent of payments fraud occurs using checks.

There are multiple methods for fraudsters to gain access to online ACH and wire transfer credentials and then move money from company accounts.

Commercial cards, particularly virtual cards, are the most secure. Payments are made through one-time use cards that are allocated for a specific supplier in a specific amount. It’s very hard, if not impossible, for fraudsters to intercept.

What are the costs of these different methods of payments?

Typically, the cost of a wire transfer for the payer is $10 to $20, ACH is about 25 cents and checks cost between $1 and $3. With commercial cards, the cost primarily falls to the recipient. Commercial cards have the advantage of a revenue share program that comes back to the payer. These rebates can be monthly, with a percentage of dollars put on the card program coming back to the payer in cash. There are often annual bonus rebates if the spending volume crosses a predetermined threshold.

Commercial cards also offer a use of funds gain for the payer. Payment is made in a day, satisfying the supplier, while typically giving the payer a 30-day period to pay the bank.

Conversely, funds transferred by wire are gone the same day, ACH moves funds one day after a transaction is submitted, and checks have to be funded within three to five days of issue.

What should companies consider as they negotiate payment terms with vendors?

Payment timing is a big factor in these negotiations, as is the impact of competition. Many suppliers see card acceptance as a cost of doing business. There is a supplier enablement component to many commercial card programs where the payer’s bank will contact the supplier on the payer’s behalf to see if they will accept card payments.

While each method of payment offers its own unique advantages, businesses with annual accounts payable volumes of $5 million to $500 million may ultimately find it in their best interest to maximize the use of commercial card for payments, given that it’s the most cost effective and efficient form of payment for both parties and is the most resistant to fraud.

Insights Banking & Finance is brought to you by Huntington Bank

What to do when you have concerns about your bank

The changing landscape of banking in Northeast Ohio has led some customers to re-evaluate the relationship they have with their bank, says Kevin Vonderau, Executive Vice President and Chief Lending Officer at Westfield Bank.

The one thing you can’t do when you have concerns about your bank is to pretend that the problem doesn’t exist.

“You have to confront it head on and have an honest conversation with your banker,” Vonderau says. “Identify your concerns and work with your banker to resolve them. If you can’t, it may be time to see if there is a better banking partner out there for you.”

As a business customer, there are a number of factors that should be considered when you begin assessing the possibility of changing banks. You need to take the necessary steps to ensure that you’re making an informed decision that will protect your future.

“You don’t want to go from bad to worse; and remember that it takes time to transition and develop that relationship,” Vonderau says.

Smart Business spoke with Vonderau about how companies should respond to concerns about the relationship they have with their bank.

What is causing changes in the way banks do business?
Like every business, banks are looking for ways to eliminate overhead whether it is the consolidation of offices or through mergers and acquisitions. Technology has had a major impact on banking by providing customers with anytime, anywhere accessibility and mobility.

The use of technology has decreased the amount of traffic coming into the banks, which means you see offices consolidating which also decreases the number of places where a customer comes in direct contact with a banker. Technology is good for many customers, but it can’t replace the need to be available when a customer needs to talk to a banker in person.

Banks see the need for physical locations, and at the same time, they recognize that millennials have replaced baby boomers as the largest population in the workforce. Millennials look for and expect the latest and greatest technology for customer interaction and on-demand accessibility. Banks must meet the changing needs and expectations of all their customers.

What can businesses do to adapt to these changes?
Establish good relationships with more than one person. Working with a team means you have several resources to rely on to make sure your banking needs are being met. It also helps maintain the relationship if a banker retires or leaves the bank. Strong relationships require give and take from both sides. But the result of loyalty and staying faithful to each other is a team that will work together to make your business stronger.

What if you decide it’s time to consider changing banks?
Look at what is going to create the most value for you and your business while providing the service you want. Value isn’t always the cheapest price; value is what you get in return for your investment of time and money.

Service is a huge component in banking, so look for bankers who have the authority to make decisions which can provide you with answers more quickly and save you valuable time. Consider the automated or electronic processes that you currently have in place; those will have to be transitioned and reset when you move to a new bank.

Take your time and make sure you’re making the right decision before you move; you don’t want to keep jumping from bank to bank to bank. Research and determine both the value and service offered by each bank you are considering.

Keep in mind that there will always be issues during the transition. Talk to potential banks to find out what available resources they provide to create a smooth transition. Talk to your financial team; include your business partners such as your accountant and attorney. You want everyone to be on the same page.

If you are going through tough times, it’s a lot easier if you have a team of good people surrounding you to help you through it. Get input from other business owners on their banking relationships. Chances are they had the same questions you have and they may have found some answers. ●

Insights Banking & Finance is brought to you by Westfield Bank

Venture debt can be a good option to fund medical device technology

Venture debt has long been a favored source of non-dilutive capital amongst life science companies, particularly medical device companies. Why?

Venture capital investing in medical devices and diagnostics has traditionally lagged biotech by more than half, says Justin McDonie, senior vice president and managing director at Bridge Bank.

“Total venture funding for medical device companies declined following the 2008 recession and never recovered, even as funding has rebounded elsewhere,” McDonie says.

According to a recent MoneyTree Report by PricewaterhouseCoopers (PWC), a total of $2.8 billion was invested by venture capitalists in medical devices and diagnostics in 2015. That’s the highest annual sum for medical device and diagnostic venture investments since 2008.

However, investments in this sector are poised for another down year with $1.1 billion invested across 119 deals through the first six months of 2016. Compare this to biotech with $3.7 billion invested across 224 deals for the same six-month period.

“While medical device development follows a well-established development path, the length of time required for 510(k) clearance and PMA approval has increased,” McDonie says. “According to a Stanford University report, it’s estimated that the average cost to bring a low-to-moderate 510(k) product from concept to market is $31 million, while high-risk PMA costs average $94 million.”

Smart Business spoke with McDonie about how the lack of venture capital dollars for medical device companies creates opportunities for venture debt to augment venture capital dollars to fund medical device technologies.

What other factors have driven the investment disparity between medical devices and biotech?
There is a lot of reimbursement uncertainty in the U.S. In addition, under the Affordable Care Act (ACA), a new medical device excise tax was enacted which is a 2.3 percent tax on revenue for device manufacturers. That’s a pretty regressive policy.

The tax is under a moratorium for two years, but in terms of the venture capital view, and because it is viewed as regressive, it’s a tax that hampers the cash flow of cash-burning startups and thereby hinders the length of time that a VC firm has to recoup its investment dollars.

Several venture capital firms have said they’re not going to invest in medical devices anymore or have pivoted towards investing in later-stage device opportunities where there is a clear reimbursement pathway and shorter exit horizon.

Investors are not willing to spend tens of millions of dollars fighting a reimbursement battle. If you look at biotech valuations versus medical device valuations and the multiples on return, those multiples are significantly less for medical devices than biotech.

With the uncertainty in the reimbursement world as it relates to devices, coupled with the lack of venture dollars and LP dollars that are allocated to device venture funds, funds have either turned toward biotech only or later stage medical device or health care services.

What is the key to maximizing the value of venture debt?
You need to be clear about the problem you are trying to solve by adding leverage to your balance sheet. Is it pure balance sheet bolstering for a company that might be entering into strategic negotiations? Or is it bolting on capital that is going to provide runway extension?

Often, venture debt is funded alongside an equity component; you can augment with equity to reach the same financing target, allowing VC’s to keep more equity dollars on reserve should future funds be needed. For example, and for the sake of simple math, if a company raises $12 million and is burning $1 million a month, it will have 12 months of runway.

A $6 million debt deal is going to provide that company an additional six months of runway. For a commercial stage company, that six months could be very meaningful as further revenue growth could drive a higher valuation at the next equity raise.

There are various development milestones where debt can play a meaningful role in helping companies reach critical inflection points in a non-dilutive fashion, such as PMA approval or 510(k) clearance. The key is to understand the value of venture debt and be clear about what it gets you without over leveraging your business. It has to buy you something meaningful. Otherwise, there is no point in doing it.

Insights Banking & Finance is brought to you by Bridge Bank

Business owners have an opportunity to boost their retirement savings

Business owners need to take the time to review their own personal finances and identify strategies that put them in a stronger position for retirement when that day comes, says Daniel Eshler, vice president and mortgage division manager at Consumers National Bank. It’s a step that can be easily forgotten in the midst of running a business.

“We’ll be working on a business transaction and a question will come up, ‘Did anybody ask about their mortgage?’” Eshler says. “You find out it’s at a much higher rate just because they never got around to refinancing it. There’s a lot of opportunity to provide assistance to clients on the mortgage side.”

The approach from a strategic standpoint is very similar to the way you would approach any other investment in your portfolio, whether it’s personal or business.

“You want to review your mortgage,” Eshler says. “How many years do you have left? Does it coincide with what you want to accomplish in your retirement? Is it time to upgrade or downgrade in terms of buying a new house or selling your current home?”

Smart Business spoke with Eshler about available options when it comes to refinancing your mortgage to boost your retirement savings.

What benefits can non-conventional portfolio lending provide business owners?

Business owners need options when it comes to mortgage financing. A non-conventional loan is a loan that may not conform to the secondary market guidelines set by Fannie Mae, Freddie Mac, Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). Many times, you have borrowers with strong credit and income, but they may have unique situations with another aspect of the loan that may not meet the exact requirements of a secondary market or sellable loan. For example, there may be a unique feature of the property such as the square footage of the home or the number of bedrooms and/or bathrooms that may be different than comparable properties that have recently sold. It’s also possible the property may have significant land value versus home value or may have additional out buildings.

Where is a good place to get started with a non-conventional portfolio lending strategy?

The strategy for a bank is to fully understand the goals and financials of each borrower. Most often the secondary market loans will offer the client the best rate and fixed terms. Therefore, when possible, the bank will start by analyzing income and credit to make sure the borrower properly qualifies for the loan. The bank’s residential mortgage department works closely with business development officers to determine the best solutions for a client’s lending needs based on several factors including: demographics of the loan, characteristics of the property and income cash flow.

What are some things to keep in mind that might help or hinder the benefits you get out of this strategy?

Whether it is a sellable loan or a portfolio loan, setting client expectations is critical for a successful transaction. By setting proper expectations for documentation of income, appraisal timeframes, processing, underwriting and closing, this helps clients understand the process of home financing. The easiest way to hinder the strategy is to not supply the documentation needed to make an informed decision.

How much of a factor is timing to make this strategy work?

It’s very important to hit closing/contract dates in purchase transactions as other loan transactions could be awaiting the close of a particular loan. Because rates and terms are typically most favorable for residential home loans, clients often use refinancing transactions for more than just the rate and term. They may refinance to purchase property, homes or for personal/business needs.

Timing the rate environment is also important in financing. Typically the pricing of mortgage rates changes daily and sometimes rates are more volatile than others, depending on current and world events. These days, rates are again at historic lows, so it’s not a bad time to refinance your home as part of your overall strategy as a business owner to reduce debt if you are nearing retirement or planning to sell your business in the near future.

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

What you can do to protect your company against FX volatility

Business leaders need to understand their exposure to foreign exchange (FX) volatility and the risk it presents to their companies, says Gareth Sylvester, senior vice president and foreign exchange advisor at Bridge Bank.

“First and foremost, it’s about understanding what your actual exposure is; quantifying it and then understanding your own risk tolerances and desired outcome for managing the risk,” Sylvester says.

“Moreover, it’s essential that FX risks be proactively versus reactively managed. While there is never a ‘perfect hedge,’ even establishing the simplest policy to mitigate a portion of your exposure is better than no hedge at all.”

You need to be able to position your business to tackle FX risk from a position of strength rather than making decisions due to fear, lack of preparation and urgency, Sylvester says.

Smart Business spoke with Sylvester about FX volatility and what you need to know to safeguard your business.

What are the greatest concerns for businesses when it comes to FX exposure?

In the case of most treasurers, it is the financial impact on the businesses from excessive FX market volatility or a rapid appreciation/depreciation of a currency that creates the greatest of concerns. Regardless of whether you are importing or exporting, the fears remain the same.

What is the impact on my payables/receivables from FX volatility and how does this affect my competitiveness from a product pricing perspective within the region I operate?

While most treasurers will factor into their budget a degree of FX volatility, a significant adverse FX swing can result in, at best, a small decrease in the value of your expected receipts. At worst, it can result in your product or service no longer being price competitive in a certain geographical region.

Where should a business leader begin in trying to proactively address these risks?

The first thing is to identify in what form the FX exposure risk arrives. Is it transactional, translational or economic in nature? In most instances, businesses are faced with transactional risk wherein the value of their payables/receivables is affected by FX market moves. Another key question you want to be sure to answer is when does the business recognize a transactional FX exposure?

Does it happen at the time an invoice is received or submitted, when cash is paid or received, or on historical business trends and volumes? Once the exposure is identified, the second stage is to measure and quantify this risk and the potential impact to the business. Depending on the size of the international exposure, some organizations will also assess the impact on their margins in order to assess risk.

The next step is to determine your goals for managing the FX risk. Are you looking to minimize earnings volatility, for example? You also want to gauge what level of risk exposure the company is prepared to take.

This will help calculate the correct volumes to be hedged, over what time horizon and perhaps even the hedging instruments. Lastly, and crucially, it is imperative to measure the effectiveness of the hedge program.

Did you achieve your goals? Did it minimize the effects of FX volatility? If so, that’s great news, but you’ll still want to review again in three to six months. If not, you need to adjust your hedge approach and review it again in three months.

How difficult is FX management in terms of the need to go back and make adjustments as conditions in the market change?

Any FX hedging program should have clear and defined objectives. The FX policy is intended to be a living, breathing document. A hedging framework and policy document should never be drafted, signed off, filed and ignored. It is paramount that periodic effectiveness reviews are conducted to ensure that the key objectives for managing the FX risk in the first place are being met.

Failure should prompt a process review in order to determine where the inefficiencies are arising and what can be done to rectify these concerns.

Insights Banking & Finance is brought to you by Bridge Bank

Early challenges with the switch to EMV is no reason to avoid it

As the roll out of EMV continues in the U.S., the key challenges for merchants have been the cost of replacing terminals, the time it takes to modify point-of-sale (POS) software to support the EMV change, and the certification process that must be completed to implement EMV capture. That has created a time and cost burden.

“Right now, only some 25 to 30 percent of U.S. merchants are EMV capable,” says Jim Altman, Middle market Pennsylvania Regional Executive at Huntington Bank. “That’s created an issue that for some merchants is adding up to a double-digit increase in their volume chargebacks.”

EMV is an important layer of additional security for both card users and merchants. It greatly reduces the risk of skimming data from magnetic stripe cards. Merchants in Europe have realized the benefits of EMV deployment, but they’ve had a longer time to deploy.

“Merchants that are holding off on adopting the new equipment needed to process EMV cards should make arrangements to get up to speed as soon as possible,” he says.

Smart Business spoke with Altman about the transition to EMV and how merchants can make it go smoothly.

What is involved in EMV certification?

Merchants work with a processing companies, such as FirstData, that validate credit card transactions. The processors are responsible for ensuring that merchants’ POS terminals are compatible with the processors’ operating system and must be compliant before terminals can be up and running in merchants’ marketplaces.

Processors are certifying merchants’ hardware, software and their retail environment to ensure that they are properly capturing and storing data. That affects the type of servers being used and their encryption capabilities, retail terminal locations and the number of POS devices.

Merchants that have not yet updated their POS should do so as soon as they’re able. If  merchants’ processors have the capability and they can get the equipment, they really need to do that.

Many are avoiding it because it’s an expense and a time commitment, but the incidence of chargebacks that they cannot decline is going to be an increasing burden.

There are instances in which merchants want to get equipment but it’s not available. Check in with your processor monthly until you can acquire it.

What are chargebacks and what can be done to avoid them?

Chargebacks happen when consumers discover a charge on their credit cards they don’t believe they made. They call their card issuers and dispute the transaction. The card issuer contacts the merchant about the transaction and the merchant has to prove that it was a legit charge. If the merchant can’t validate that charge, the issuers debit the merchants.

In October 2015 there was a ‘liability shift’. Merchants without EMV-capable POS hardware that process cards that are EMV-chip-enabled lost their ability to fight disputed charges. That stuck non-EMV merchants with more chargebacks.

How are consumers reacting to the added processing time at checkout and what challenges does this present to merchants?

There is an effort underway to capture the information from EMV cards without consumers needing to keep the card in the machine as long. There are upcoming enhancements in the industry whereby the card can be removed while the machine finalizes the transaction. Until that solution rolls out, expect the issue to come up around the holidays when POS lines get longer.

Despite the challenges associated with adoption, EMV protections are working.

Their introduction has decreased the number of counterfeit cards. However, some fraud has switched from face-to-face to digital — scenarios in which the card doesn’t need to be present.

This is a phase in/phase out approach. Soon EMV hardware will be installed at gas pumps, and PIN numbers also will become more customary as card issuers move toward PINs and away from signature. It’s worth the effort. It will take time and there will be challenges, but it’s something merchants should set up. In the long run, the increased security will overshadow any difficulties.

Insights Banking & Finance is brought to you by Huntington Bank

Know the signs of business email compromise, or risk losing money that can never be recovered

Business email compromise (BEC) fraud has been increasingly successful, so it has become more pervasive. The FBI recently reported a 270 percent increase in identified victims and exposed loss from BEC events between Jan. 2015 and April 2016.

“They’ve invested more time and better tools to ramp up the level of sophistication to improve their success rate,” says Jim Altman, middle market Pennsylvania Regional Executive, Huntington Bank. “It’s an easy way to get money and it will continue until it’s not.”

Smart Business spoke with Altman about BEC, how to identify it and what CEOs can do to stop it from happening in their companies.

What are the characteristics of BEC fraud and what forms might it take?

BEC happens when a fraudster masquerades as a company executive and uses what appears to be the executive’s company email address in order to instruct employees to move money to an account the fraudster can access.

These messages typically have a sense of urgency, saying something such as, ‘I’m traveling so I won’t be able to respond to email quickly, but I need you to make this transaction for me.’ They typically ask employees to send money to someone they’ve never sent money to before using a wire transfer — and the money can’t be recovered once it has been moved.

Years ago, these emails were often poorly written. But the sophistication has ramped up, making it far more difficult to identify fraudulent emails by that characteristic. They’re also including personal information about the executive obtained through social media, such as, ‘I’m on a campus visit with my daughter and need money sent to this account.’

There’s also a variation of this email involving vendors. In this case, a fraudster compromises a vendor’s email and tells an employee of a client company that the vendor company has switched banks or accounts and payments should be transferred there. That account, of course, doesn’t belong to the vendor.

What could be the consequences of falling victim to BEC fraud?

From a bank’s perspective, these appear to be valid transactions, so it’s not likely to trigger an inquiry by the bank. Companies that can recognize that they’ve been victimized quickly enough can work with their bank to get a hold placed on the funds being transferred, but that’s extremely time sensitive. Usually the money is moved as soon as it hits the fraudster’s account. If that’s happened, there’s little chance of recovering those funds.

Still, the bank’s investigation unit will engage law enforcement to find the fraudster. That, however, doesn’t help get the money lost back into the company’s accounts. Law enforcement is looking for patterns over time to identify and catch fraudsters, but that doesn’t solve the immediate problem of recovering the money that was lost.

How can companies avoid becoming a victim of BEC fraud?

This type of fraud is occurring with greater frequency and companies are taking losses. Preventing it starts at the top. CEOs should send the message down through the organization that it’s not only appropriate but imperative to question an uncommon request and to do so by phone, not in an email response to the person making the request. Instruct employees to knock on executives’ office doors or call, and be comfortable doing so. That’s the toughest part. The cultural norm is that CEOs give instructions and employees follow through with them. Adding this caveat requires a direct approach.

If the fraud is masked as a vendor, there should be a standard procedure employees use to verify the request. Again, don’t rely on email alone. Validate and verify this type of request through another channel to the vendor contact on record.

Communication within an organization is critical to preventing fraud. Anyone who can approve financial transfers within the company must be trained how to spot BEC fraud. Procedures should be in place that instruct these employees how to determine whether a request is or is not valid. In this case, a little prevention goes a long way toward combatting this increasingly common and sophisticated threat.

Insights Banking & Finance is brought to you by Huntington Bank

Be clear about your company’s needs before pursuing a new line of credit

One of the keys to securing an appropriate line of credit for your business is being clear about the problem you’re trying to solve, says Kelly Cook, senior vice president, Technology Banking Group at Bridge Bank.

“Are you trying to fill a cash flow gap between when you invoice for your product or service and when you actually get paid by the customer?” Cook says.

“Or are you trying to solve another problem in your business where you might be looking for additional cash to hire new salespeople or more operations team members. Those represent different types of cash needs that may require a term loan or even an equity investment.”

Clarity of purpose gives your bank or lender a solid starting point to help you find the right solution for your financing need. It also helps you avoid getting the wrong facility in place that could make it harder to obtain credit in the future.

“The more informed your bank or lender is with regard to the health of your business, your needs and your future plans, the better they can help you access additional borrowing capacity or financing to work out of a troubled situation,” Cook says.

Smart Business spoke with Cook about how to determine the appropriate line of credit for your business.

What are the best uses for a line of credit?

A typical line of credit is a working capital, revolving facility used to finance a short-term asset such as accounts receivable or inventory.

This differs from a longer term, more permanent type of financing like a term loan or equity that might be used to finance an asset with a longer life such as a new office or an increase in staffing. You want the type of financing to match the type of cash needed in the business.

What should you consider before pursuing a new line of credit?

First off, be sure that you clearly outline any existing debt or credit facilities for your prospective lender. Fully disclose any existing leverage, either through a bank loan, a finance company, or any other note or convertible note.

Your existing debt profile will have a strong influence on what a new lender can structure for your business. Depending on what you are trying to achieve, it may make sense to pay off the existing credit facility with a new one.

Where your business is in its life cycle is another factor which could affect the structure of your loan and the type of line of credit you can obtain. If your business is established and growing, you’re likely to get more favorable terms with a credit facility that provides flexibility as well as adequate borrowing availability.

If you don’t have a strong track record, it doesn’t mean financing is unavailable. It could just mean that you might start with a more restrictive structure or higher pricing for a period of time.

How important is a financial forecast in your ability to get a line of credit?

You and your senior leadership team should develop a forecast that represents your best estimate of how the business is going to perform going forward.

A lender is not only interested in where the company has been, it also wants to have a sense for what the future looks like.

Everyone understands that actual future performance will not exactly match the forecast, but the forecast should show performance that can support the line of credit being contemplated.

What is a line of credit collateral audit?

Lenders will often require a periodic collateral audit — a third-party checkup on how a loan’s collateral is performing and a profile of a business’s customer base.

For an accounts receivable line of credit, the audit will evaluate accounts receivable performance — validating that invoices are being issued against contracts or purchase orders, that they are being issued per contract terms and that payments are coming in per contract terms.

The audit will also measure customer profile information such as customer concentration. ●

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

How to boost productivity and take steps that will grow your business

Hard work that doesn’t support your customers or generate revenue for your business is only going to get in the way of productivity, says Jon Park, chairman and CEO at Westfield Bank.

“The analogy I use would be running on a treadmill,” Park says. “You’re doing a whole lot of work, but you’re not going anywhere. Some businesses can create work and complexity and tie up money and not get any positive return out of it. Don’t spend time, effort and money on opportunities that aren’t going to be profitable.”

Certainly, there are some goals that are more difficult to achieve and it may take patience to see those projects through to completion. But you’ve got to have a sense for the investments that are worth making and those that are not going to help grow your business.

“If you’re just going to break even, you shouldn’t be doing it,” Park says.

Smart Business spoke with Park about how to better position your company for growth.

Where is a good place to start when plotting the growth of your business?
You need to understand the scalability of your growth and its fixed and variable cost components. Everybody would like to project a straight line of revenue that consistently goes up. But that rarely happens in business.

It bounces up and down and you need some perspective on how you’ll respond if revenue growth does not meet expectations. How can you adjust your expenses along the way? If growth is slower than anticipated, can you scale back expenses? If you’re growing faster than you expected, can you scale up your resources?

Have a plan for either scenario. It’s always better to be proactive and in a position to make informed decisions based on more thoughtful consideration of all the pertinent details.

How do you know if a risk is worth taking?
Risk assessment comes down to your ability to solve for the number of years it will take to recover your cash investment, also known as the earn-back period. The ‘cash investment’ represents cumulative cash spent less incremental new revenue generated for an expansion opportunity prior to the break-even point.

The earn-back period refers to the amount of time after reaching break-even to recoup the upfront cash investment. Aim for an earn-back period of four years or less. If you’re adding a new product, hiring a new sales team or expanding geographically, you want to know how long it will take to get a return on that investment.

If it takes longer than four years, the risk is higher and the return may not achieve targets.

Stress testing can be a useful tool to assessing the worthiness of a risk and addressing the volatility of expenses. So you want to buy a 50-unit apartment building when interest rates are 4 percent. At that rate, you make money. But what happens if the interest rate rises to 6 percent? Do you still make money?

Customer concentration is another problem that can restrict growth. If you rely on one segment or a few customers for the majority of your revenue, and these customers experience a downturn, it could deliver a big hit to your profitability. Take steps to diversify your customer base as much as you can to avoid this situation and ensure stable growth.

How do you prioritize growth opportunities?
Sit down with your management team and prioritize which opportunities are the most attractive. If you have 10 different ways to grow your business, discuss what makes each opportunity attractive and place them in order from most appealing to least appealing.

Appealing growth opportunities offer profitability, scalability of resources and don’t have concentration risks. Focus on three or fewer growth opportunities at a time to boost your odds of success. When you try to do too many things at once, it spreads your team thin and results in sub-optimal implementation.

Insights Banking & Finance is brought to you by Westfield Bank

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.

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