Funding options when acquiring equipment in a strong economy

In 2018, many companies increased the pace at which they acquired equipment because of favorable tax law changes and substantial year-over-year growth. In 2019, there continues to be a strong appetite for new and used equipment.

“Capital spending will remain strong and in positive territory for 2019, while credit market conditions should remain healthy,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “The time to capitalize on equipment purchases is now.”

Smart Business spoke with Altman about how to determine the best method to fund equipment acquisitions in today’s economy.

What are the factors that determine how a company finances equipment?

Companies should factor in how buying or leasing equipment will help optimize their income tax, balance sheet, cash flow and equipment situation before entering into any legal agreement.

From the income tax perspective, reviewing the alternative minimum tax position, net operating loss carry forwards, and bonus depreciation requirements are key considerations.

Balance sheet review items include managing to balance sheet and income ratios, ROE and ROA performance measurements, anticipated events that require companies to preserve cash and borrowing, and how the FASB accounting changes will alter a business’s approach.

Cash flow items include 100 percent financing to conserve cash for other needs, minimizing monthly payments, and matching payments with seasonality.

Equipment considerations should focus on what type of equipment a company plans to acquire and when it expects delivery, obsolescence concerns, and long- or short-term ownership preferences. Review all four areas to find the right loan or lease solution.

How has the current economy affected how companies finance equipment acquisitions?

In this cycle, the corporate tax rate change from 35 percent to 21 percent increased the amount of cash on hand. Companies are making more cash purchases than normal, even though interest rates and terms continue to be favorable.

Many companies that have relied on loans for capital expenditure purchases are rethinking this strategy based on whether they can use all of the depreciation benefits in addition to having to deal with limited interest expense deductions born of the Tax Cut and Jobs Act of 2017. There are strategies to maximize the after-tax cost of acquiring equipment. Conserving cash for future growth and acquisitions while entering into the right loan or lease agreement for the right situation can be a prudent strategy.

What is a tax advantaged lease and when do they come into play?

All decisions to acquire equipment have an effect on the income tax position of a company. With the Tax Cut and Jobs Act of 2017, interest expense limitations for companies over $25 million in sales are causing companies to consider tax leasing over debt in certain circumstances. If a loan generated interest expense that cannot be fully utilized, the company is not maximizing its after-tax cost of capital. Among the advantages of tax leasing is a 100 percent lease expense deduction, which could reduce its tax obligation.

Tax leasing allows a company to customize payments based on seasonality, reduce cash flows while entering into a lower cost of capital during the usage of equipment, and offers the opportunity to purchase the equipment for long-term ownership.

What are banks looking for from companies that want to finance equipment purchases?

Knowing what the capital expenditure plans are for the next 12 months and having a plan for acquiring the equipment are key for banks in determining a company’s credit needs. Banks focus on cash flow as the primary source of repayment, with an interest in the value of the collateral as a secondary measure.

Banks will also ask how this additional expenditure will improve revenue, efficiencies, and profit. In line with prudent credit reviews, historical performance, coupled with pro-forma plans, will be an integral component as companies look to form a strong bank partnership during growth or stable economic cycles.

Insights Banking & Finance is brought to you by Huntington Bank

The definition of business longevity is based on ownership’s goals

Business longevity doesn’t necessarily mean working to ensure a company exists beyond first-generation ownership. Rather, the meaning of longevity depends on the goals of ownership.

“Sometimes a business was mainly created to provide wealth for the owner, so longevity could mean staying profitable long enough to realize a successful sale,” says Joe McNeill, senior vice president and Medina market team lead at Westfield Bank.

However, he says business owners do change their minds.

“Owners sometimes realize the importance of the business to their employees and their employees’ families. Whatever the original goal, they sometimes end up taking personal responsibility to make the business successful so that it can continue to exist and provide for the people who work for them for years to come.”

Smart Business spoke with McNeill about defining longevity and how to achieve it.

How do owners/founders determine what longevity means to them?

Longevity has a constantly evolving definition. A business could be created just to fill a need, for personal reasons such as to support a family, to fill a need in the market that isn’t being met, or it could just be a passion project — to start a business that makes the world a better place.

For some owners, the business becomes part of their purpose. They can become passionate about helping and being there for their customers and often feel a responsibility to support the company’s employees and their families. The goal, then, becomes ensuring the business lasts as long as possible because they feel that others are depending on its success.

What is the strategy behind longevity?

Successful business owners commit to their vision for the company and to their employees. A business can only last if there’s an investment in people. Then the vision needs to be communicated to those employees and a road map created with the mile markers to success clearly indicated.

Longevity also means not growing too quickly. Controlled growth is preferred. Develop a steady stream of revenue and have a good customer base. It’s natural to want to keep growing, but that should be done through planning and establishing a manageable pace.

What are the landmark stages of a business, and how do a company’s capital needs change through those stages?

The startup stage is the riskiest time for a business. Every decision is critical. At this stage, raising capital can be tough because the value of the business is based almost entirely on an idea and the owners’ experience.

The growth stage is next. Here, owners are required to carefully manage the company’s bottom line. It takes lots of planning and forecasting, and a solid foundation in place on which to grow. It’s also when financing comes into play. Owners would be wise to tap into their banker for advice when it comes to planning and forecasting capital needs, something that’s critical during this phase.

The next stage is expansion. That could mean expansion in terms of geography, products and services, production, or workforce. At this stage, having key people in place is very important.

After expansion is the maturity stage where a company is either sold or passed on to the next generation. When this happens, a company can move into another growth phase, typically because the next generation of ownership is eager to expand the business. Here, banks can provide significant help aligning a company’s capital needs with its goals.

How can banks help owners achieve their business longevity goals?

A banker can offer an outside perspective on ways to grow, such as through a well-timed acquisition or an influx of working capital. From a financing and financial statement management perspective, bankers can get into the numbers and help owners put them into a bigger-picture context to better navigate growth and slowdown periods.

Bankers are in a position to stand back, look at the business from the outside and offer a fresh perspective. They can help owners assemble and execute a step-by-step game plan to achieve their goals and bring success to any stage of business.

Insights Banking & Finance is brought to you by Westfield Bank

Owners need to prepare themselves and family for life after business

A personal financial plan, which serves as a road map for living life today and in retirement, is essential for everyone to have, especially a business owner. 

“It’s usually the case that business owners are so busy working on the short- and long-term plan for their business that they overlook anything not directly related to that pursuit,” says Brian Hirko, vice president, program manager and senior investment adviser at FFL Investment Services. “Personal finance takes a backseat, and that can become an issue.”

Financial plans not only set up the business owner for retirement, but can also serve as a road map for family and trusted advisers should there be an event like a death or disability that happens to the owner. 

“When such devastating events occur, it is important to have a plan in place to help guide family or advisers on the financial plan,” says Anne E. Bingham, senior vice president and chief private banking officer at First Federal Lakewood. 

Smart Business spoke with Hirko and Bingham about personal financial plans and what goes into creating them.

What is a financial plan?

AB: A personal financial statement is a good starting point. It’s a snapshot of a person’s financial history at a specific point in time, listing bank accounts, investments, real estate, mortgages and business assets. It shows a person’s net worth and gives owners a sense of where they are financially today so a plan can be created — a financial plan — to get them where they want to be to afford the lifestyle they want after retirement. 

How do business owners’ businesses manifest in their financial plans? 

BH: The business will likely show up as the main source of income or debt for the owner. When an owner is planning for the future and considering their business, the age of the owner and stage of life should be considered. Someone who is 65 and tired of working might want to get a formal business valuation in preparation for a sale or transfer of ownership. Younger owners who aren’t yet ready to exit would be better served by an informal valuation. It’s less expensive and time consuming, but provides a reliable sense of the company’s value, which can be used to form the rest of the financial plan. 

When should financial plans be reviewed?

BH: A financial plan should be a living, breathing document, not something that’s created, then put on a shelf. It’s ideal to review the financial plan every couple of years, regardless of what events do or don’t transpire. Events such as a health problem, birth, death or divorce are all reasons to revisit the plan.

These plans can be managed in software that enables owners to quickly and easily update information and make different assumptions based on those inputs to see how changes affect their ability to reach their objectives.

Who should business owners involve in the creation of their financial plan?

AB: The first person to involve should be the person you typically consult on financial matters. This could be a spouse, partner, child, accountant, etc., because it’s not just a discussion about what happens to the business, but how personal financial goals will be reached together. And owners should also include any business partners. 

A wealth adviser will typically be the guide of the financial plan. He or she might bring in other professionals, such as a private banker or insurance agent, as needed. An attorney and accountant will get involved later when it comes time to draft and execute any necessary documents.

A financial plan is not just a document, it’s a road map for life after business. However, very few people take the time to figure out how they’re going to spend the 20 to 25 years of life after retirement. Meet with a financial planning team and start planning today.

Securities and insurance products are offered through Cetera Investment Services LLC, member FINRA/SIPC. Advisory services are offered through Cetera Investment Advisers LLC. Neither firm is affiliated with the financial institution where investment services are offered. Investments are: Not FDIC insured. May lose value. Not financial institution guaranteed Not a deposit. Not insured by any federal government agency. Located at: 14806 Detroit Ave., Lakewood, OH 44107 (216)-529-5624.

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The importance of an entrepreneurial culture in established companies

“Often when people think of entrepreneurialism, they think of someone who launches and runs an early stage business,” says Joseph Bilinovich, senior vice president and market team leader at Westfield Bank. “But an entrepreneur could be the leader of an established company, or anyone within a company who’s responsible for finding ways to enhance and improve existing products, or to create new products in order to stay ahead of the competition through continuous innovation.”

Entrepreneurialism doesn’t just happen organically in an organization, he says. It’s encouraged by leadership and needs continued support to survive.

“Leadership can empower a group or department to be open minded and share their thoughts and ideas openly without fear of criticism,” he says.

Smart Business spoke with Bilinovich about entrepreneurship in business: what it looks like, how it’s nurtured and what role banks play in helping entrepreneurial companies get their financial footing.

Why is entrepreneurship in business important?

Entrepreneurship in business helps, in broad terms, identify new products and services and adapt to a changing world. It’s the strategic practice of creativity. It’s collaborative and is undertaken throughout an organization with the aim of doing things better or doing them in a way that hasn’t been done before.

Companies survive by trying to do things differently. There’s always a competitor lurking, so there are always improvements that can be made to stay competitive not just locally, but nationally and even globally.

Entrepreneurship is a way of being proactive, testing the way a company thinks and behaves in order to gain an edge, rather than be reactive. It helps companies think outside the box.

What does entrepreneurship in business look like in practice?

Entrepreneurship in business is top-down and intentional. It is embedded in a company’s culture.

Clear priorities should be established, and processes should be put in place to get feedback and measure the results to evaluate whether what’s being done to move the needle is effective relative to the goals that have been set. There should be regular meetings and communication to discuss progress. A Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis is a concise and proven process to evaluate the progress made.

It’s great to think big and shoot for the stars, but too often companies do little to no planning regarding their capital needs and how they’ll finance their ideas. An idea on its own won’t gain traction without financial backing. So many initiatives fail not because the idea was bad, but because it was undercapitalized.

How does entrepreneurship in business relate to banking and lending?

Banks play a key role as companies look to take their entrepreneurial ideas to market. Companies need banks to provide the financing to fund innovations but also need a banking partner that can properly structure that financing.

Bankers also act as advisers to companies and deal with many types of businesses in a variety of industries and of various sizes. That gives bankers a lot of experience, wisdom and knowledge about what businesses do right and what they do wrong.

There is a lot of nonlending advice and counseling that comes from a good banking relationship. Bankers can help identify what investments should be made or when it’s better to pass, whether a company is making the right decision or paying a fair price. Those conversations require trust between a business and its banking partner.

Entrepreneurial companies are innovative in their thinking and bold in their decision making. But to survive, companies also need strong financial oversight and a trusted partner to guide them through their financial decision-making. Boldness is good, but it has to be tempered by wisdom.

Entrepreneurialism is alive in local businesses, but well-thought-out plans are critical to success. Companies should hire entrepreneurially minded employees and work with knowledgeable advisers to enhance the chances that the ideas employees generate will succeed.

Insights Banking & Finance is brought to you by Westfield Bank

What to consider when seeking growth capital

Seeking growth capital is a critically important function for a company or business owner, a function that requires considerable planning. Many times, however, business owners and managers, once they realize they need capital to continue growth, act hastily without planning, which often leads to mistakes if certain aspects are overlooked or overvalued.

“The capital acquisition process requires forethought,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “Importance should be placed on it well ahead of the time it’s needed.”

Companies and business owners seeking growth capital also have a tendency to focus narrowly on interest rate. Altman says negotiating small differences in the interest rate on growth capital to fund an initiative that is expected to bring, say, a 25 percent return, isn’t very meaningful.

“What is meaningful is working with the right partner to provide that growth capital,” he says.

Smart Business spoke with Altman about options and strategies when seeking growth capital.

What capital options are available to companies to fund growth?

There are a number of options for companies seeking capital. Companies can turn to banks for term loans and lines of credit as a source of senior capital. Additionally, some companies can get the junior/subordinated capital funding they need through angel investors and private equity firms. Terms are generally more flexible with those type of firms. Depending on what the business owner is looking for, an equity investment from these firms would require giving up a percentage of ownership, which may not be plausible to a company given where it’s at in its growth phase and how current ownership feels about relinquishing some control to an unknown new partner.

How do companies determine which form of capital is best to support their growth?

It’s important to have a multiyear financial projection model as the basis for decisions such as funding growth. From that projection model, a company can work with an accountant or a banker to determine the appropriate levels of capital needed and what form of capital might be best for the long term.

Capital need and the form of capital will migrate as a company’s leverage profile and leverage position change over time. Typically, the larger the company becomes — as its revenue, cash flow and asset base increase — the more capital options it has.

Capital providers will start by determining what level of capital the overall asset base of the company supports. As companies grow, that decision can shift to the level of capital supported by cash flow or its level of enterprise value.

What questions should companies with growth capital needs ask lenders?

When companies are exploring their options for growth capital, the focus should be on determining the advantages, disadvantages and characteristics of each form of capital. Equally if not more important than the terms and the cost of capital is who is providing the capital and what kind of partner that represents to a company. Certain sources of capital might want more control over a business, which might mean bringing on a partner who has the authority to make decisions on behalf of the company.

Talking with bankers, in particular, is a good opportunity to ask how the bank has helped other companies that are similarly situated. Find out how those companies found success, what made them stumble and what mistakes other business owners have made that caused setbacks at this stage in their company’s growth.

Finding the right solution is the most important decision a business owner can make. Start planning early and involve trusted, experienced advisers. It’s limiting to think of growth capital based solely on the rate, structure and terms. The partner is important, which is why companies should establish the relationships needed to acquire that capital well before it’s needed.

Insights Banking & Finance is brought to you by Huntington Bank

Use the right tools to increase available cash flow

Treasury management encompasses all of a company’s working capital programs. There are best practices that create efficiencies in treasury operations and technological solutions that help companies manage payables and receivables. Treasury management can also involve liquidity solutions, making it easy to leverage short-term cash for investments.

Companies that adopt the latest treasury management tools increase their competitiveness and can positively affect their profits, liquidity profile, and customer and employee satisfaction.

Some companies, however, get stuck employing the same processes they’ve used for decades, ignoring alternatives that could greatly improve efficiency.

Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about the effect treasury management efficiency has on business operations.

Where do companies tend to make mistakes with treasury management?

Many companies become set in their ways because they’ve got a staff that’s been in the same roles for a long time who are using the same processes that have been in place for decades. They tend not to embrace new technological advancements available in the marketplace, which means they’re missing out on strategic opportunities. Efficiently managing cash inflows and outflows creates excess cash that can be used to reduce interest expense by paying down debt and/or to increase interest earned through timely investment.

Another mistake companies make is not protecting themselves properly from fraud. Companies get comfortable with the people who run the day-to-day operations of a treasury department. Sometimes those people’s lives change, and they do things that are unexpected. There are fraud prevention tools that can protect a business from fraud, which is important because just one incidence of fraud can wipe out a company’s profitability.

Where can improvements be made in the treasury management processes?

A treasury diagnostic review can help companies discern best practices in all areas.

For payables, that could mean adopting electronic payment methods rather than paper, using virtual cards and automated clearing house (ACH) for the electronic transfer of funds.

On the receivables side, companies can receive hundreds of paper payments, which need to be keyed in manually. Improvements in receivables management now include intelligent character recognition in lockbox processing that can capture invoice data at a high quality and reduced expense.

The theme of digitization and electronification can also extend to the back office, employing processes that reduce the area needed for the paper backup of payment histories by storing them in the cloud rather than a storeroom or in rows of filing cabinets.

Companies need to have strong programs in place to protect themselves from fraud. Educating all employees about ways to avoid business email compromise and other common fraud techniques is critical to protecting company assets. Using dual control in all money movement and leveraging fraud management tools like positive pay services are also best practices.

How can a bank help companies improve their treasury management processes?

It’s easy for companies to get caught up in their day-to-day tasks and overlook some of their lost opportunities. They also just might not be aware of all the tools available from banks that could help them become more efficient.

A bank’s goal is to be a trusted, consultative adviser that can talk with business owners to get a clear understanding of their operating environment. Banks work with clients in many industries, which gives them broad knowledge of the treasury management and back office practices being used, which helps them discern best practices and tailor that knowledge into actionable insights for their clients.

Companies should leverage their banker to get another perspective on what’s happening in the market and what resources are available to avoid fraud, and work together to drive business results. By questioning the status quo, companies can drive their business forward.

Insights Banking & Finance is brought to you by Huntington Bank

Why it’s important for your bank to know your succession plans

Succession plans show a bank that a business owner is focused on the company’s future and is taking steps to ensure that if something happens, the business can succeed without him or her at the helm. 

“When an owner is engaged and is thinking ahead, it gives a bank confidence,” says Kurt Kappa, chief lending officer at First Federal Lakewood.

Still, many business owners don’t want to think about the business existing without them. They might know they need a plan, but resist putting one in place. That can create problems in a banking relationship.

Smart Business spoke with Kappa about the importance of a succession plan and why banks want to know about it.

Why does a business’s succession plan matter to a bank? 

When an owner’s exit involves transitioning the business to the next generation or to employees, it’s important for the bank to get to know and build relationships with the next generation of ownership. The relationship between a bank and a business owner is personal, and banks want to know that the people lined up to take over the business know the industry, understand operations and have a vision for the business’s future.

A sale or transfer could also affect existing loan covenants. Companies that are headed toward a sale event are going to put significant emphasis on growth, building up their balance sheet and income statements. That growth could trigger a loan covenant. 

Additionally, in a transition, an owner will likely pull money out of the company ahead of his or her exit. That makes sense for owners because they built the business and have earned their share. A bank can be the source of financing if the newly transitioned business owner needs additional cash flow to maintain the business through the transition. 

How does a business’s succession plan affect the decisions a bank would make regarding that business?

Banks want to know that business owners have a contingency plan in the event that they’re suddenly unable to operate the business — they want to know what happens to the company, who takes over, and if that person or people are capable of taking it over in that event. For example, if the owner’s spouse inherits the business, will they be able to run it, or do they plan to sell? Is there a life insurance policy in place that will be able to cover the company’s debt? If there is no plan in place, a lot could go wrong that would negatively affect the lending relationship. 

When should a business owner talk with his or her lender about the business’ succession plan?

The business’s bank should be made aware of the company’s succession plans very early in the relationship. The relationship began with the current owner, so the bank already knows his or her story and feels comfortable with that lending arrangement. But once a transition plan is in place, the sooner the bank can know the plan and the players in the succession plan, the better. 

Without a succession plan, the business could be put in a tough place if a sudden transition in ownership is made. This situation could disrupt the current lending relationship if the bank doesn’t feel confident in the new owner and his or her ability to run the company. 

When should succession planning begin?

Succession or exit planning should begin as soon as an owner decides whether to transfer the business to an heir or an employee, or to sell it. Either way, the process can’t be done overnight. 

And while it might be tempting to put a plan together and then forget about it, understand that the conditions that exist at the time the plan is created could, and probably will, change before the plan is implemented. It’s a good idea to start assembling a plan at least five years before an exit and revisit the plan if circumstances change that require the plan to be updated.

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

The benefits of banking local with a community bank

For all big banks offer, the trade-off is often access and local knowledge. Business owners want a banker who is a trusted adviser and often that’s not possible in a national bank where decision makers tend to be centralized at the corporate headquarters. Their distance means they may not understand the nuances of doing business in a particular community.

Conversely, local insight and advice, as well as personalized service, are among the mainstays of community banking. They understand where the local market is going and how other local businesses are adjusting to those trends because they are in the market, every day. That’s important when a business owner needs advice about whether or not conditions are right to expand or hold off and it’s not the type of advice local businesses get from a large bank.

Smart Business spoke with Kurt Raicevich, SVP and Chief Retail Officer at First Federal Lakewood, about how services differ between community banks and their national competitors.

What are the banking services most small businesses need?

All businesses need checking and savings accounts — places to house money, a mechanism to send it where it needs to go and a good accounting of those transfers and receipts via a monthly statement. As banks get more technologically advanced and businesses become more sophisticated, online banking services are of increasing value. These easy-to-access services, many available through smartphone applications at the touch of a finger, offer owners the ability to quickly see if a check cleared or a deposit posted.

Remote deposit is a service that enables businesses to make a bank deposit through a device installed at their place of business. It means not taking time out of a busy day to go to the bank or paying employees to make bank runs.

Access to capital is another critical need for companies that are experiencing rapid growth or need to invest in technology or capital improvements. Lines of credit can help cover seasonal issues or fund large orders that require a capital influx. Loans are critical to fund vehicles and equipment, or make facility improvements.

When it comes to accessing loans and lines of credit, speed is essential. Some community banks have responded to this need with programs that eliminate much of the paperwork by creating a digital approval process that business owners can complete at their desks. These simplified programs save owners valuable time while connecting them to the funds that are critical to keep their businesses running at full speed.

But most importantly, small business owners need trusted advisers who are plugged into the issues area businesses deal with. They need a sounding board for ideas and someone who can share best practices gleaned from their exposure to a broad swath of businesses.

What can local community banks offer small businesses that larger banks can’t?

Banks, whether large or small, have a similar menu of offerings for businesses. What can’t be offered by large banks is typically local decision making — a decision-maker with the authority to affect fees, rates, products and more.

At a community bank, a business customer is no more than a few feet away from someone who can provide a definitive yes or no on a decision. That’s because community banks maintain, first and foremost, a commitment to the businesses within a specific geographic area. This gives local banks a high commitment to the community and greater speed and authority when it comes to decision making.

What questions should small business owners ask themselves that will help them determine if they’re in the best banking situation?

Business owners should ask themselves questions about the direction they want to go. Are they looking to grow? How long do they want to continue to operate the business? What might an exit look like? What is standing in the way of the success they want to achieve? With these questions in mind, the next question should be whether or not their current bank can help find any of the answers. If not, it may be time to find a banking partner that can.

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

How to protect margins from cyclical commodity price changes

When it comes to commodities, companies are concerned about price fluctuations and how those fluctuations affect gross margins and budgets. As companies look to protect their cost structure, buyers worry about prices unexpectedly going up and how those price fluctuations will affect margins.

“Margins are affected by an array of exposures that carry the risk of price fluctuations, which in turn creates changes that affect customer prices, which will need to be adjusted to compensate,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

Buying commodities brings a consistent exposure and a price risk that can’t always be passed on. Companies, however, can protect their margins and cost structures by hedging their commodity exposures. That’s why it’s critically important for companies to know and understand their exposure.

Smart Business spoke with Altman about working with commodities, the importance of understanding exposures and how companies can protect themselves, and their customers, from risk.

How can businesses protect their margins from cyclical commodity price changes?

Companies can hedge to reduce their risk exposure in commodities. Two common ways of doing that include using a swap or optionality. Which to use depends on the nature of the exposure.

Commodity swaps, which trade a floating price for a fixed price over a period of time, is a strategy that works well with a set budget, and when the company knows what the line-item cost is going to be.

Optionality is a strategy which gives a company the option to buy or sell at a certain price. When the concern is that costs will increase, a company can buy a call option to cap the costs while preserving downside participation.

What mistakes do companies tend to make when it comes to buying commodities?

It’s important that companies understand their exposure with any commodity. It sounds simple, but there are many companies that don’t know their exposure and, equally as important, what it means to their business.

Companies that buy commodities should understand how much of their cost structure is exposed and the volatility of the commodities they buy. Commodity volatility affects pricing, which affects existing contract structures. When commodity prices are high, there’s not a lot a company can do to insulate itself because hedging in a high-price environment isn’t effective.

Some companies may know their exposure, but they don’t have a thorough enough understanding about what that exposure really means for them. That could be because the company has always operated in a steady price environment, so it’s never been an issue and not something that’s a priority to track. That’s not just a problem at middle-market companies, it happens at large companies, too.

Companies that don’t pay attention to their commodity exposures can miss budgets and miss their margins, which unfortunately is all too common. That’s why it’s so important for companies to fully understand their exposure and its implications because there are steps companies can take to mitigate those risks.

Who can help companies better understand their exposure?

Some banks can help companies get a sense of their exposure through a sensitivity analysis, which can give companies a better sense of how their margins are affected by certain price changes. This can help companies determine the range of price changes that they can live with, and when they need to hedge to protect themselves.

Companies that are uncertain about their commodities exposures should have a conversation with their bank as soon as they’re able — before they experience an issue. These conversations can take place any time, but it’s a good idea to have them if something in the cost structure has changed or a pricing mechanism has changed.

Buyers that have constant commodities exposure should always have an eye on the market and regularly keep in touch with their bank so they can act when prices are low. Those with seasonal exposures should have these conversations late in the third or early in the fourth quarter when they’re in their budgeting cycles.

Insights Banking & Finance is brought to you by Huntington Bank

How community banks can help businesses reach the next level

Growing businesses often need an influx of capital to fund various growth activities, which is why loans and lines of credit are popular among small to midsize businesses. To a small business, a $10,000 to $50,000 loan could make a significant difference in the growth plan, but getting that financing is a big decision that should take a lot of thought before a commitment is made.

“Companies may need to act quickly, but they shouldn’t act hastily,” says Kurt Raicevich, SVP and Retail Division Head at First Federal Lakewood.

Through his interactions with business owners, Raicevich understands that there is a lot of work that goes into running their business — the owners are often doing all the hiring, firing, invoicing, as well as running much of the day-to-day themselves. When a business owner applies for financing through conventional methods, they’re asked for significant paperwork, including their tax returns, personal financial statements, accounts receivable, and payables, which takes time many owners just don’t have.

“Business owners need flexibility and speed,” he says. “Community banks understand this and offer products that enable them to apply for a loan by answering just a few questions, all electronically, so they don’t have to leave their desks. It’s good to know that funding can be available with just a few clicks.”

Smart Business spoke with Raicevich about how community banks can help businesses fund projects and what to consider ahead of a financing request.

What are the difficulties businesses face when trying to get a loan for a relatively small amount of money?

For a bank, the amount of work it takes to make a $1 million loan and a $50,000 loan is the same. Since it tends to be more economical for banks to make loans for larger amounts, it can make it difficult for businesses to get loans for relatively smaller amounts.

In addition, smaller businesses can struggle to qualify for some lending products if they lack capital or have insufficient cash flow. Some businesses may not have been in business long enough to qualify for the products some banks offer, and that can really hamstring growth.

While larger banks focus on larger businesses, community banks are committed to helping the community thrive, and that means helping small businesses. They understand that a $50,000 line of credit could be critical for a local business to grow.

What are some common uses of funds in the $10,000 and $50,000 range?

Companies typically use lines of credit that are between $10,000 and $50,000 to purchase inventory in advance of a large order — for example, when a company needs to fund a purchase of materials to manufacture products for a big sale.

A term loan is a product that funds more substantial purchases, such as a truck or a lathe. These capital goods, in turn, can be termed out and depreciated over their useful life, which can offset the interest that accompanies a loan.

What should businesses understand about the process, the terms, etc. to make sure they get the full benefit of this financing?

Businesses should do their due diligence before pursuing financing from a bank. Before committing to a loan, they should understand what goal they are trying to reach through financing. Whether they are working to improve operations or trying to open up additional revenue streams or markets, they should understand the risks and rewards of using financing to meet those goals.

In addition, business owners must understand the financial strain that financing will have on their business. If paying on a loan taken out to help one part of the business makes another part of the business suffer, it could create a damaging situation that will be difficult to recover from.

Business owners have limited time and a lot of responsibility. Community banks understand that. Community banks are constantly communicating with businesses to learn about their financing needs and best practices. Because of their experience working with small businesses, community banks are adept at finding ways to help businesses fund the projects to can help them as they grow.

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