What to consider when bringing on outside capital to fund a business

Companies typically need to look for outside funding to fuel the growth of their business. In these situations, they could turn to equity, debt or working capital facilities to expand products or services, enter new markets, repair or replace facilities, add equipment or acquire another business.

However, which type of funding to get, and when, can be a tricky question. For Wesley Gillespie, regional president, Northeast Ohio, at ERIEBANK, answering that question in a way that benefits the business is a matter of perspective.

“When businesses take a more expedient approach to solving their funding issues, it can be problematic,” says Gillespie. “What works to solve only today’s problem misses the bigger picture and can put the company in a tough situation later on.”

Smart Business spoke with Gillespie about what to consider when bringing on outside capital to fund a business. 

What issues tend to affect how businesses decide on the method of funding? 

Most often, companies are choosing between getting a loan or a working capital facility to fund some type of growth initiative. A term loan is the better choice of debt when a company is making long-term investments with a long-term payback, such as expanding a plant or adding capital equipment. Banks typically require collateral with a useful life to match the term of the debt. A plant expansion or equipment improvements should generate a return throughout their productive life, and through or beyond the term of the loan. 

Lines of credit fund short-term debts, providing working capital to cover, for instance, any gaps that might exist between payables and receivables. With a working line of credit, banks look for conversion of that asset to cash in 60 to 90 days.

Equity is typically used for riskier gambits, such as entering new markets or acquiring companies to accelerate growth or diversify. These investments might not have an immediate return, making them the higher risk, and a more expensive option.

What flaws tend to exist with how companies approach the question of funding?

Companies don’t always consider the timing of the funding — whether it’s the best time for equity or debt, which has to do with the cost of each. A good time to take on debt is when interest rates are low. A good time to take on equity is when a company’s valuation is high. A company’s life cycle stage should also be considered. Earlier-stage companies that aren’t yet revenue-positive more often use equity to grow, while revenue-stage companies tend to fund through debt.

Companies can also outgrow capital, which creates risk. Companies that don’t have enough capital might not be able to service their customers. Conversely, companies that carry too much debt too early can stifle both their ability to service debt and, in an equity situation, could have too little equity available for new investors to show interest. 

It’s best that business owners and executives step back and consider the bigger picture when making a funding decision. Get a diversity of opinions on matters of funding from a team of advisers consisting of a commercial banker, an attorney and a CPA firm. Such a team can provide an objective look at the whole picture and help make the best funding decision for the business. 

How does timing play into the funding decision? 

It’s important to consider the mix of debt and equity at the moment a funding decision is being considered. If the company is stable and profitable, it could be prudent to take on more debt, potentially buy out some investors to buy back a greater percentage of ownership and secure more profits. 

Companies that have high debt compared to earnings, and are either seeing their profitability suffer or are having trouble covering interest payments as a result might look to diversify and bring equity into the company to get their debt retired. 

There are many ways to acquire capital to fund a business, especially in this environment, which still has favorable interest rates and investors with capital that are looking to put it to work. Ultimately, making the best funding choice is about regularly assessing the funding mix on the balance sheet, asking questions about what’s best for the business and considering the bigger picture.

Insights Banking & Finance is brought to you by ERIEBANK

Selling a business to an ESOP offers more than just financial benefits

Business owners who decide to sell their company to an employee stock ownership plan (ESOP) often say they do so not just for the significant tax advantages, but to preserve their legacy.

“They really want the business to survive them, especially if their name is on the door,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

In many instances, owners sell to an ESOP to reward long-term employees who helped the owner create value in the company and generate wealth. Owners know they can’t run the business forever and want to take care of their employees. An ESOP provides an avenue to do that.

Smart Business spoke with Altman about the process and benefits and reasons to sell a company to an ESOP.

What are the direct benefits to a business owner and employees of selling to an ESOP?

In selling to an ESOP, owners will get, by definition, a full and fair price for their business. There are also tax advantages — an owner may defer all the capital gains tax on the sale of their business until they pass.

Owners are also able to realize an attractive return on their seller notes. In many ESOP transactions, about one-third is financed by a bank and two-thirds is financed by the seller. The seller notes may carry a premium rate that can generate 10 to 12 percent interest.

Employees, however, are the true winners in an ESOP. They receive a retirement benefit that is more significant than they’d get through any other program.

Who does an owner need to involve when selling to an ESOP?

There are many professionals involved in an ESOP transaction. The process is essentially as follows: The seller hires an ESOP financial adviser, which is like an investment banker, to quarterback the process for the owner and determine the company’s value. The owner also hires ESOP counsel, preferably an ESOP expert, to set the terms of the ESOP to comply with ERISA law and to negotiate with the legal representative for the buyer. Once an owner has legal counsel and a financial adviser, then it’s time to select an ESOP trustee — the entity that will oversee the Employee Stock Ownership Trust, or ESOT, to buy the stock of the business. The trustee, once selected, hires its own ESOP legal counsel and ESOP valuation firm, and comes up with its own valuation of the business. The two sides then negotiate the price until the owner feels comfortable selling.

How does selling to an ESOP differ from selling to a strategic or financial buyer?

Selling to an ESOP is not dramatically different than selling to another buyer. The difference lies with the benefits to the seller, company and employees. With an ESOP, an owner may defer the capital gains tax on the sale. When the owner’s S-corp stock is sold to a trust, the company becomes exempt from federal and most state income taxes going forward.

There is some regulation when it comes to the sale price of the business. While the buyer, an ESOP trustee, and the seller are free to negotiate, the trustee is guided by ERISA laws and the U.S. Department of Labor in order to protect the employees from overpaying for the company. Each ESOP transaction is eventually reviewed by the DOL. If the DOL determines that the purchase price was excessive, it may reduce the price.

What are some reasons an ESOP wouldn’t be in the owner’s best interests?

If an owner doesn’t have a good management team in place to run the business after he or she steps away, a trustee will see that and won’t want to buy the business. Businesses that have cash flows that fluctuate wildly are less attractive and will get less value in an ESOP structure. Also, companies that are highly leveraged should pay off their debts before attempting a transaction. Otherwise the purchase price will go toward debt and not the owner.

ESOPs are misunderstood and not widely talked about, but offer business owners a tax-efficient way to benefit their employees and preserve their legacy in the community after they have left the business. While a sale to an ESOP may not be for everyone or every business, the strategy is one every business owner should consider as part of their ownership transition plans.

Insights Banking & Finance is brought to you by Huntington Bank

How to look for and identify the signs that it’s time for a new banker

There are signs that a company should evaluate its banking relationship in the hopes of finding a better situation. Among them are businesses that are experiencing a lack of communication with their banking officer, lack of feedback and decision-making ability, and the frequent transition of banking officers. 

“Sometimes a company might have had a good relationship with its banker, one that enables the company to get things done, then the banker leaves for another opportunity,” says Kurt Kappa, chief lending officer at First Federal Lakewood. “If the company then finds itself struggling to work with the bank’s decision makers, they may want to  consider asking to work with another banker, or switching banks entirely.”

Companies benefit from a partner that is proactive rather than reactive. It’s not ideal if the only time a company hears from its banker is when the company reaches out with an issue. They’re not asking to meet with the company to better understand the state of the business, talk through ideas and generally helping to inform the company’s strategic direction. Instead, they’re waiting for a phone call or worse, too busy to recognize they haven’t touched base with the company in awhile.  

“If you call your banker to address a particular issue and don’t get a call back for a couple days, there may not be a strong relationship there,” he says.

Smart Business spoke with Kappa about how companies can evaluate their banking relationship and the signs it’s time to move on.

What questions should a company ask when evaluating its banking relationship?

The first aspect of the relationship to consider is whether the company likes and trusts the person they’re dealing with. Does the company believe the banker has the best interests of the company in mind with each decision that’s made? Does the banker fully understand the business, its competition and the current industry landscape? And does the banker advocate for the business at the bank? It’s important for a business to have the right banking partners on their side, especially when their expertise and advocacy are needed to help the company get through difficult times. 

Once a company has evaluated its banking relationship, what are the next steps?

One of the initial considerations should be to determine if the bank can still complement the company’s strategy. Is the business working with a banker who can contribute to the company’s strategic plans, someone who has the right experience and knowledge? This isn’t to say that a company should switch banks if the relationship isn’t living up to expectations. The issues could center on the person with whom the company is dealing, and one person doesn’t represent everyone in the bank. That’s why a good first step is to look within the bank to see if there’s someone else available who better fits the bill.

However, there’s also a chance that the company might have outgrown its current banking relationship. The bank just might not be able to offer the rates and amortization structure it needs, making relationships, at that moment, a secondary consideration. If that’s the case, then it’s time to move on. 

How should a company use what it learned to find a better relationship?

Once a company has done its evaluation and identified the problems, a good next step is to start asking friends and professional advisers such as CPAs and attorneys who they recommend. It’s likely they know who in the community does what well.

Some banks are large enough and provide ample services, others can provide the hands-on relationship a company might be looking for. Which the company ultimately chooses depends on what’s important to the business owner, as well as what the company needs at that stage in its life cycle. What’s needed at one point in time might not be what’s needed later. And while some banks can grow with a company, others can’t. That’s why companies should regularly evaluate their banking relationship.

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

How to efficiently manage your technology assets

In today’s environment, technology is everywhere — from tablets and smartphones to medical and manufacturing equipment. That’s created an imperative for companies to carefully track their endpoint devices to ensure they are updated with the most recent software. It necessitates working with an experienced partner that specializes in providing online asset management capabilities and facilitating a successful refresh strategy.

“Companies with many employees are managing a lot of endpoint devices that come in, go out and possibly change hands as frequently as each month,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “When software licenses and device warranties end, a company must quickly and efficiently retrieve and replace or update those devices and software applications. That process is made easier through the implementation of a tracking system.”

Smart Business spoke with Altman about how companies can manage their technology assets throughout their lifespan.

What should businesses take into account from the day hardware is bought or leased?

A good first step is to estimate, as accurately as possible, when that technology will be due for an upgrade — what is the useful life of that equipment and when will it need an upgrade? If, for example, a device is on a depreciation schedule of five years, but the actual useful life of it is only two, the company won’t be ready to replace the device because it’s on the books for another three years.

Also, consider the replacement process strategy. Have a plan to swap out the assets, which are proliferating exponentially — consider that, on average, each employee may have three active devices at one time. With so many devices to update and replace, it becomes easy for chaos to be created.

Given all of this, don’t underestimate the value of leasing technology assets to manage the obsolescence factor and avoid having too much capital tied up in equipment.

What are the possibilities for streamlining and establishing efficiencies?

Companies no longer maintain devices that originate from one manufacturer and are purchased at one time. Tracking them requires a platform that enables a company to keep an active catalog of all devices, who has them and where they are in their lifecycle to more easily identify problems with certain model numbers, so users can be called in to have those issues addressed. It also allows a company to incrementally replace devices that have aged-out of their useful life, rather than all at once.

While tracking hardware lifecycles is critical, staying on top of the software maintenance schedules of those assets is equally as important. Have a mechanism to track versions throughout the network to maintain the most recent security updates, the newest user experience and compatibility as people work together and share information.

Companies of any size with any number of company-owned devices should track their assets. While a company with 20 to 30 assets doesn’t need a robust platform, as the device count rises and organizations spread out through remote working arrangements and travel, the need for an advanced solution increases.

Generally, what should companies expect in terms of device lifecycle?

Obsolescence must be carefully estimated, but for a quick reference, keep in mind that smartphones have a useful life of two years, laptops up to four, desktop computers up to five, storage devices and servers will last for four years before needing an upgrade, mainframes can go five years, and network phones and switches can last as long as seven years. Of course, this is just a generalized guide. Companies should review their hardware to determine a more accurate sense of the replacement schedule.

The importance of monitoring and tracking devices and software can’t be overstated. There are cases in which a device is still active beyond its warranty or maintenance contract, which can create costs that are hidden within an organization. Think about where the technology is going to be, not where it is. Accurately depreciating devices can be a major cost saver both in terms of replacement and maintenance costs, and productivity.

Insights Banking & Finance is brought to you by Huntington Bank

How to ensure your family’s estate-planning wishes are carried out

When it comes to estate planning, high-net-worth individuals naturally think about their assets — physical capital such as real estate, financial wealth, etc. But there are other assets to consider as well.

“There are questions, when it comes to transferring wealth, that are tough to answer,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “They are questions focused on helping families get to the core issues surrounding their personal values and the legacy they wish to leave.”

Financial legacy is just one part of the equation. There are different capital structures families should consider, such as social, human and intellectual capital.

“The right wealth management team will ask questions designed to get high-net-worth individuals thinking about the role and purpose of wealth in their family and how it can be used to help them flourish.”

Smart Business spoke with Altman about legacy planning and what families should consider well ahead of a wealth transfer.

When should the conversation about legacy planning begin, and who should it include?

It’s really never too early to start the conversation around legacy planning. It’s a conversation between spouses and typically includes adult children. Those conversations are facilitated by a team of advisers — a wealth adviser, estate planning attorney, accountant — and a designated professional to quarterback the team to ensure whatever is decided gets accomplished.

The process tends to begin by talking about the financial plan, which should lead to an understanding and documentation of the family’s financial and nonfinancial goals — the latter being what the family hopes it can accomplish in later generations. That, then, leads to a discussion about transferring assets. This could include the charitable giving strategy, which requires the creation of a plan to fulfill those charitable goals.

Whatever is decided ultimately needs to be written out in a plan so that it can legally affect the family’s estate plan.

What do families tend to overlook when considering their legacy plan?

Families sometimes created a plan when their net worth was much lower than it is currently. Their situation has completely changed, but yet their plan has not. Typically that’s because the person has pushed off making changes because they’re busy and estate planning seems like a problem to deal with in the future. Working with a team can help address this because then someone can follow up — usually annually — to ensure the plan is still up to date.

It’s also important to ensure all the professional advisers on the team are on the same page. If they’re not collaborating, important aspects of the plan can be missed — tax savings, investment opportunities, transfer strategies that enable a family to avoid paying wealth transfer taxes.

Further, not coordinating the business succession plan with the estate plan can lead to significant problems down the road. It’s not enough to tell people involved with the business who will succeed the current ownership when the time comes. It has to be documented — who should take over, how the asset passes to family (if at all) — for it to be legally binding.

What should someone look for in a legacy planning team?

A good place to start when putting together the legacy planning team are trusted family members and friends, especially those who are similarly situated — a personal or professional referral is important.
All the members of the team should be technically competent and each should have the right credentials. For example, the wealth adviser should have a CFP designation, meaning the person is obligated to be objective and put the interests of the client ahead of his or her own.

It’s also important to relate to the people on the team. A warm rapport is significant because legacy planning happens over a long period of time. And over that time, private and personal discussions will be had on sensitive topics, so the interpersonal dynamics of the group are significant.

Legacy planning involves thinking beyond financial capital. It means considering the legacy the family wants to leave and all they want to be remembered for. That’s why starting early, and with the right team, is critically important to the plan’s success.

Insights Banking & Finance is brought to you by Huntington Bank

How banks can help businesses achieve their goals

Through smart planning and a little luck, there comes a time in a company’s life cycle when it has the chance to aggressively grow.

To pursue this growth, companies may look to add new and growing clients. They may add a production line to launch a new product or increase volume. Or they may acquire a business. Some companies may leverage the momentum to sell or transition the company to new owners. 

“When companies are firing on all cylinders — when market opportunities and sound, creative strategies align — it’s a great time to be more aggressive in their pursuit of growth,” says Mike Toth, president of Westfield Bank.

Smart Business spoke with Toth about how banks can help businesses achieve their growth goals. 

What supports do businesses need during periods of accelerated growth?

Companies looking to speed up their growth should spend time re-evaluating their client relationships and client makeup. It’s a good idea to look at the existing client base to ensure there is a higher percentage of growing businesses within their client portfolio. If they find they don’t have many clients that are growing, it’s highly recommended that the company seek out more clients that are in that mode. 

Many companies are leveraging their bank’s relationships with accounting firms, attorneys and other service professionals as they pursue acquisitions — something not a lot of business owners have dealt with — to perform valuations and other due diligence processes. 

Access to capital is another need, both short-term working capital and longer-term capital, to support fixed asset purchases and acquisitions that are critical to really take full advantage of a window of opportunity. 

What, generally, tends to slow down business growth?

One barrier is access to talent. Some companies can find themselves in a market in which highly qualified candidates are hard to find, which creates competition for truly talented people.

It can also be difficult for companies to grow when they are unable to get the funding needed to take critical next steps, such as servicing a large new client or upgrading equipment. Companies that can’t access capital can find themselves with missed opportunities. 

How are banks able to help businesses grow and overcome obstacles to growth? 

In order to address those impediments to growth, businesses are well-served when they network and build relationships with their bank and other service partners. Companies should leverage their banker to make introductions to potential partners and, maybe counterintuitively, their competitors. It’s not unheard of for competitors to collaborate on certain projects when it’s mutually beneficial. And banks can bridge that gap. 

Banks are also helping companies overcome obstacles in the market by providing capital and making independent insights — objective opinions that can give companies a new perspective on the market and their place in it. 

A company’s banker can work with owners or executives to help them more accurately predict and plan for future capital needs. They can also identify potential pitfalls by leveraging not only their past experience, but the wisdom of other clients who found themselves in similar situations. 

What are the best ways for businesses to create strong relationships with their banker?

Business owners can get the most out of their relationship with their banker by being transparent and communicating regularly. Business owners should be explicit about what they’re looking for from their banker. Some banks will host networking events, which are good places for business owners to make new connections. 

An accomplished banker will get to know a business, and through that knowledge provide customized solutions to overcome obstacles and support the company’s goals. Banks want to see their clients thrive, and will find ways to be supportive, whether that means help with idea generation, networking and building relationships, or finding creative ways to build value.

Insights Banking & Finance is brought to you by Westfield Bank

What to consider when buying a professional practice using seller financing

Buying a professional practice—medical, dental, veterinarian, law offices and accounting firms—can be a unique process, especially when the professionals who will succeed the current practice owners have high student debt and/or don’t have enough money for a down payment. In these cases, the seller will carry the bank loan and the buyer will make payments directly to the seller, which is called seller financing. The buyer pays the seller as agreed until the buyer is capable of holding the bank loan on their own.

The seller will sometimes set terms where the buyer must obtain financing other than seller financing after a set period of time, such as five years. That’s when a bank can step in and refinance the seller note, which essentially is the bank taking over the loan previously held by the owner.

Regardless of the financial strength of the buyer coming into the deal, after that person has demonstrated they can successfully run the business on their own through steady performance or growth for a period of time (typically around 24 months), then the bank will likely refinance the note. That’s one of the key reasons buyers need to connect with a bank early in the process.

Smart Business spoke with Karen Mullen, Vice President, Commercial Lending, First Federal Lakewood, about buying a practice and the role of seller financing in the process.

How is the value of a practice determined?

The practice is purchased based on an amount agreed upon by the buyer and seller and can be contingent on any number of variables. There are companies that specialize in practice valuations that apply their analysis to help the parties determine the price for the business.

Once a price is determined and the transaction is made, the purchase agreement is the legally binding document that gets taken to the bank.

When should the buyer of a practice get a bank involved?

The buyer should seek out a banking partner as early in the deal process as possible—the earlier the better—because through the banker, the buyer is enlisting their help to guide them through the process.

Ideally, the goal is to ultimately get a more traditional loan. Typically, if someone is selling a practice it’s because they want to get out, often completely, and don’t want to worry about whether they’ll receive payments each month for a practice they continue to own. So a banker can help set a timeline for the transition as well as the terms of or financial responsibilities around that transition.

All banks have different lending requirements. Some might want the seller to stay on as a consultant, some might not. So it’s good to get the bank involved at the beginning, even before the buyer starts paying the seller.

How important is it to properly value the business when refinancing through seller financing?

There’s a tendency by people who sell their practice to think their business is worth more than its actual value. That’s why business valuations are so important. They ensure buyers don’t start paying on a practice only to find out it’s worth far less than the purchase price. That’s also why the person buying the business should always request the tax returns of the practice they’re purchasing. It’s essential that a buyer see and review the financials before buying.

In addition to a banker getting involved early, when should other outside professionals get involved?

When purchasing a practice through seller financing, it’s important to have professional service providers on board early. That includes an attorney and CPA, as well as a banker, to outline the goals of the transaction prior to starting the process. Then, a timeline can be discussed as to when the buyer plans on taking over and when the previous owner will be completely out of the business.  Knowing the end goal and engaging early with service professionals, as well as a banker, will greatly increase the chances of a successful transaction.

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

How banks can help businesses achieve their goals

Through smart planning and a little luck, there comes a time in a company’s life cycle when it has the chance to aggressively grow. To pursue this growth, companies may look to add new and growing clients. They may add a production line to launch a new product or increase volume. Or they may acquire a business. Some companies may leverage the momentum to sell or transition the company to new owners.

“When companies are firing on all cylinders — when market opportunities and sound, creative strategies align — it’s a great time to be more aggressive in their pursuit of growth,” says Mike Toth, president of Westfield Bank.

Smart Business spoke with Toth about how banks can help businesses achieve their growth goals.

What supports do businesses need during periods of accelerated growth?

Companies looking to speed up their growth should spend time re-evaluating their client relationships and client makeup. It’s a good idea to look at the existing client base to ensure there is a higher percentage of growing businesses within their client portfolio. If they find they don’t have many clients that are growing, it’s highly recommended that the company seek out more clients that are in that mode.

Many companies are leveraging their bank’s relationships with accounting firms, attorneys and other service professionals as they pursue acquisitions — something not a lot of business owners have dealt with — to perform valuations and other due diligence processes.

Access to capital is another need, both short-term working capital and longer-term capital, to support fixed asset purchases and acquisitions that are critical to really take full advantage of a window of opportunity.

What, generally, tends to slow down business growth?

One barrier is access to talent. Some companies can find themselves in a market in which highly qualified candidates are hard to find, which creates competition for truly talented people.

It can also be difficult for companies to grow when they are unable to get the funding needed to take critical next steps, such as servicing a large new client or upgrading equipment. Companies that can’t access capital can find themselves with missed opportunities.

How are banks able to help businesses grow and overcome obstacles to growth?

In order to address those impediments to growth, businesses are well-served when they network and build relationships with their bank and other service partners. Companies should leverage their banker to make introductions to potential partners and, maybe counterintuitively, their competitors. It’s not unheard of for competitors to collaborate on certain projects when it’s mutually beneficial. And banks can bridge that gap.

Banks are also helping companies overcome obstacles in the market by providing capital and making independent insights — objective opinions that can give companies a new perspective on the market and their place in it.

A company’s banker can work with owners or executives to help them more accurately predict and plan for future capital needs. They can also identify potential pitfalls by leveraging not only their past experience, but the wisdom of other clients who found themselves in similar situations.

What are the best ways for businesses to create strong relationships with their banker?

Business owners can get the most out of their relationship with their banker by being transparent and communicating regularly. Business owners should be explicit about what they’re looking for from their banker. Some banks will host networking events, which are good places for business owners to make new connections.

An accomplished banker will get to know a business, and through that knowledge provide customized solutions to overcome obstacles and support the company’s goals. Banks want to see their clients thrive, and will find ways to be supportive, whether that means help with idea generation, networking and building relationships, or finding creative ways to build value.

Insights Banking & Finance is brought to you by Westfield Bank

Why mitigating cyber fraud should be a top priority in your company

Ransomware, malware and phishing attacks are the major types of attacks being used today, all of which are a means to facilitate payments fraud via check, wire, ACH and credit cards. These methods of entry seem to have one of two primary purposes. One is an account takeover, which is an attempt to gain access to an account. The other is business email compromise, in which targeted email accounts are compromised and the owner is impersonated by a fraudster who makes requests to move payments around, a tactic that’s become increasingly popular as a means of perpetrating payments fraud.

“Business email compromise has shown to have traction,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “These emails legitimately look as if they’ve come from a manager, and employees naturally respond to the request. The result is that dollars are increasingly moving out of company accounts.”

Smart Business spoke with Altman about the cybersecurity threats that are affecting companies’ financial accounts, and how companies and their banks can mitigate those threats.

What steps have banks taken to protect their clients from fraudulent banking activity?

Banks have taken at least two primary approaches to combat fraudulent banking activity. Communication and education have been important first steps. Through this approach, banks are helping their clients consider the cybersecurity landscape. Tactics will continue to evolve, so it’s important to establish a dialogue so that business owners can better understand the impact cybercrimes can have on their companies, regardless of their size, industry or characteristics.

Products and offerings are being created to help mitigate fraud, products such as positive pay and cyber liability insurance. There are also strategies such as establishing multiple accounts, each of which is used for a specific purpose. That can help limit potential fraud and lead to faster identification of fraudulent payments if a transaction occurs that’s out of character for a specific account.

Banks can also validate transactions. When a request looks outside the norm, the bank will call the customer to verify that the transaction was legit prior to any money movement.

What can companies do to mitigate cyber fraud, especially financial fraud?

It’s important to stay informed about what’s happening in the area of cybersecurity and cyber threats because resiliency is a key part of business safety.

Educate employees on what to look for in terms of fraud — for instance, don’t click on links because of the threat of malware, don’t provide personal information to anyone through email and be empowered to validate any request to transfer funds.

Also, companies should evaluate their technology, making sure their networks and systems are up to date and aren’t vulnerable to attack.

From a payments perspective, think about internal processing and the controls that are in place to make sure money isn’t moving unexpectedly. Companies can institute dual verification of payments, two factor authentication and other steps to be more aware of what money is coming in and what’s going out.

Why is it important for companies to act now to protect themselves from cyber fraud?

Fraudsters are looking for the path of least resistance, so companies must be vigilant and don’t assume it’s an unlikely scenario. Payments fraud has been reported in all 50 states and in 150 countries. Not all of those attempts are successful, but it highlights the determination fraudsters have for finding a way in. It’s also an indication that fraud will not only continue to happen, but may happen more frequently.

While protecting against payments fraud might seem like just one more thing to do, preparation is less disruptive than a financial or data loss from a successful breach. That can be a major distraction as companies try to recover their losses and manage their reputational damage.

Cybercrime takes on lots of shapes and forms. Companies must believe that it could happen to them and be ready for it in order to minimize the chances of a successful attack.

Insights Banking & Finance is brought to you by Huntington Bank

Why it’s important to include your bank in year-end planning

As the end of the year approaches, businesses often start putting plans together for how they’ll approach next year’s market.

“Right about now is when people start planning,” says Kurt Kappa, chief lending officer at First Federal Lakewood.

He says it’s usually right around the months of September and October that companies start to focus in on budget planning, looking for areas of opportunity to expand their sales, and line up equipment purchases to either replace outdated equipment or expand into new areas of business.

“Companies, as they take into consideration all their possible moves in the coming year, should really get their bank involved. That way, whatever their plan, it can be properly funded,” he says.

Smart Business spoke with Kappa about what companies should consider as they set a strategy for how they’ll approach the year ahead.

What should companies review as they develop their strategy for the coming year?

A good place to start is by taking a look at areas where improvements either need to be made or can be made, as well as where growth opportunities exist and how the company will approach those. 

Companies should make sure their cash flow aligns with the capital needs of their expansion plans. If a strategic move runs the risk of draining the company’s cash flow, it could mean the company isn’t able to meet a bank’s lending standards or the cash-flow covenants in their loan documents. 

Banks have debt service coverage ratios set on the loans they make. If a company spends a dollar, it’s got to show the bank that it will make more than that on the return. If they can’t, they won’t get more money to expand or make capital purchases. That’s why it’s important to plan now so companies can have these conversations with their banker and make the necessary adjustments to get the financing they need.

How should year-end planning align with a company’s five-year strategic plan? 

Companies always need to be flexible. While it’s important to stick to a carefully crafted, long-term strategic plan, there will inevitably be things that change during the implementation of that plan, both positive and challenging.

For instance, a company could find itself faced with an attractive potential acquisition that it didn’t foresee, or there’s an opportunity to land a new, large customer. On the other side, a company might have a key piece of equipment break and need to replace it with a new piece that’s more expensive than the current model — something that falls outside of the company’s anticipated expenses.

Changes such as these require companies to adjust their financial plan. They’ll want to stick relatively close to their five-year strategic plan budget but allow for the flexibility to capitalize on opportunity and adjust to unforeseen setbacks. 

Who should be involved in the planning?

Planning the year ahead should involve the leadership team, as well as a trusted CPA. The company’s bank will play a significant role in a company’s plans going forward. Often, however, the bank has already set the financing guidelines and it’s the CPA who keeps the company in line with those guidelines.

How can a company’s bank help as they map out their strategy?

It’s good for everyone to understand what the bank’s financing requirements will be if the company looks to acquire. For instance, what will be the out-of-pocket obligation? What will be the debt-service ratios? And how will it all affect the banking relationship?

Have a conversation about the structure, and give considerable thought to whether the company can meet those goals. If not, a major move such as an acquisition might not be possible, or profitable, and the opportunity should be allowed to pass.

Now is the time for companies to start looking at their year-end forecast and compare that to their budget vs. the actual figures. They should project what they anticipate doing for the upcoming year and make adjustments so they can feel confident that the plan is achievable, focus on it and grow.

The whole team, including the banking partner, needs to be on the same page in order to achieve success.

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