Chip technology gives purchasers a new tool to combat consumer fraud

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

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

“Chip technology has been around for over two decades and is already the security standard in many countries around the world,” says Jarrod Long, Vice President and Treasury Management Officer at Westfield Bank.

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

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

What is a chip card and how does it work?

A chip card is a standard-size plastic debit or credit card that contains an embedded microchip, as well as the traditional magnetic stripe.

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

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

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

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

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

Are chips safer to use than magnetic stripe cards?

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

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

Should chip cardholders notify their bank before traveling internationally?

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

Have there been any problems for businesses adopting to chip technology?

When traveling outside the U.S., some card readers at unattended terminals such as public transportation kiosks and gas pumps require a PIN. However, this type of PIN technology is different than what you normally use for PIN transactions in the U.S. and the card won’t be accepted. In these situations, you should locate an attended terminal to complete your transaction or plan for an alternative payment method such as local currency.

Will chip cards allow others to track your location?

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

Insights Banking & Finance is brought to you by Westfield Bank

Choosing the right debt financing option to fund your company’s growth

This is an exciting time for companies that weathered the recent economic downturn and are ready to grow. Many of these businesses are now looking to expand. For companies in this position, there are financing tools that are capable of supporting business growth. Utilize the right one and it could become a cornerstone of success.

“No magic formula exists for choosing the right funding tool for your company,” says Matthew Cannan, Managing Director, Debt Capital Markets, Fifth Third Bank. “The best solution will be based on your business’s capital structure, your current situation and your needs.” That’s why he suggests that companies should begin looking to their financial institution for support when long-term financing is needed.

Smart Business spoke with Cannan about a few capital-raising tools companies should consider as economic conditions create an environment in which many can turn from defense to offense.

How can companies benefit from issuing bonds and what are the trade-offs?

Issuing bonds is a good option for many larger public or private companies that typically need capital over an extended period but don’t want to repay until maturity. One caveat of issuing corporate bonds is that the company must make its financial details available to bondholders through regulatory filings. But for a company looking for a lot of money on fairly generous terms, this debt market is one that ought to be considered. Most corporate bonds are bought by institutional investors and held for five- to 10-year terms at fixed interest rates.

What are the benefits of raising capital via a private placement and how does it differ from public bonds?

For a private company not interested in divulging its financial details to the public, private placement makes more sense. Insurance companies tend to be the principal investors in private placement bonds because they need to generate returns on their customers’ premiums so they can make good on their insurance contracts. Like public bonds, the terms are in the five- to 10-year range with fixed rates, though there are some floating-rate bonds available. In this instance, companies are generally dealing with one investor or very few insurance company investors in a credit-only relationship.

How are financial assets securitized and how can companies use them as a mechanism for growth?

Akin to the smaller-company strategy of factoring accounts receivable, securitization allows larger companies to monetize assets — e.g., account receivables, loans or leases — that they are holding on their balance sheets. The money is most often used to fund ongoing operations and the arrangements usually last three to seven years. There are upfront fees with securitization, but borrowing rates tend to be lower than typical bank rates because of structural enhancements. As an example, credit card companies use securitization markets a lot because their primary assets are customers’ receivables.

The process, however, is more complicated than straight factoring — an arrangement in which a bank purchases the book debts of a company and pays the money to the company against receivables. Securitization involves taking a company’s financial assets and isolating them via a sale to a newly formed bankruptcy remote affiliated entity and then pledging those assets from that entity to a bank, group of banks or institutional investors via the term asset-back bond market. The intermediate entity is used by lenders to isolate the assets from bankruptcy risks in case the company declares bankruptcy. Securitization is a highly structured arrangement that requires a fair amount of time and thought up front.

It’s important to talk with a trusted financial adviser to select the funding tool that will have the greatest benefit to your company. Some of these methods can be complicated to execute. Having someone with experience on your side throughout the process will mitigate risk while creating the best opportunity to maximize value.

Fifth Third Bank. Member FDIC

 

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

How to get back on track

Debt can be a useful tool in building a business, as long as you don’t spread yourself too thin trying to repay the debt, says Rob Lake, senior vice president and head of Life Sciences at Bridge Bank.

“You get to a point where it becomes challenging to raise equity,” Lake says. “Now you have all this debt and you have potential equity providers who are leery of working with you because they don’t want their money to just be used to pay back debt.”

Biotech and life sciences companies are big business in today’s economy, but getting off the ground and beyond the early-stage growing pains can be a challenge.

Smart Business spoke with Lake about the consequences of being overleveraged and what you can do to get back on track toward achieving your goals.

What are some clues that your company may be overleveraged?
There are a couple clues that offer evidence that your company may have taken on too much debt.

Typically, biotech and life sciences companies will utilize a venture debt structure that includes an interest only (IO) period that ranges anywhere from 12 to 24 months. During this period, you only pay interest, not principal.

It’s an effective way to reduce the cash burn at least on a temporary basis. And it’s understandable when businesses look to prolong this period to avoid having to pay both interest and principal for just a little bit longer.

If you are struggling to find debt providers willing to refinance your loan and enable you can extend the IO period, however, that’s a sign that you may have taken on too much debt.

Another clue that you may be overleveraged is if you’re at a point where equity providers don’t want to make any additional investments until you restructure or refinance the existing loan in an effort to reset the IO period.

It’s really challenging if you find it difficult to refinance your existing debt and at the same time are unable to attract additional equity capital.

What can an overleveraged company do to turn things around?
If you want to continue to fund the business, you may have to do a very dilutive transaction, meaning you take on some equity at a lower valuation.

Existing shareholders may get diluted because you typically have the next round of equity with a new investor that will look to lower the valuation of the company.

From a lender’s perspective, right-sizing the debt is more art than science. There isn’t a formula that you can put all the numbers into and get an ironclad solution.

Yes, there are financial metrics that can be used to help determine the right amount of debt for a business, but those metrics are still based on variables and data that may not be as reliable as you would like.

As an early-stage company, it’s hard to pinpoint the true value of the company. Determining the appropriate amount of debt based on the current value of the company is not always accurate.

What’s the key to boosting optimism with your stakeholders?
You need to be collaborative and get everyone around the table to explain the situation. Have your investors reconfirm their support for your business. This will help put your lender at ease.

Talk to your debt provider about an additional IO period or a refinancing/restructuring of the loan. This will help put your investors at ease and may entice them to put in additional equity capital.

Lenders like it when a company has a collaborative attitude and is forthright with a challenging situation. Good management teams are able to coral all of the stakeholders, get everyone to work together and get the company out of a precarious situation.

Demonstrate that you have a plan and work with your investors, lenders and business partners to make it happen. ●

Insights Banking and Finance is brought to you by Bridge Bank

A new tool to combat consumer fraud

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

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

“Chip technology has been around for over two decades and is already the security standard in many countries around the world,” says Jarrod Long, Vice President and Treasury Management Officer at Westfield Bank.

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

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

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

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

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

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

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

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

Are chips safer to use than magnetic stripe cards?
All cards offer protection from unauthorized use of your card or account information.

Chip technology offers another layer of security when used at a chip-reading terminal because it generates the aforementioned unique, one-time code that is needed for each transaction to be approved.

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

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

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

However, this type of PIN technology is different than what you normally use for PIN transactions in the U.S. and the card won’t be accepted.

In these situations, you should locate an attended terminal to complete your transaction or plan for an alternative payment method such as local currency.

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

Insights Banking & Finance is brought to you by Westfield Bank

Give your company’s financial productivity a boost with these tips

Early in the year is a great time to dive into your financials and set some annual goals. There are some simple steps companies can take that, when done together, can add up to big results.

“Start by reviewing revenues and expenses from last quarter,” says Jordan A. Miller, Jr., president and CEO, Central Ohio Fifth Third Bank. “Are your revenues growing enough to support your expenses? Can you boost one and reduce the other?”

Smart Business spoke with Miller about tips companies can use to help make 2016 a banner year.

What should business owners know about their company’s revenue and expenses?

Stay on top of the numbers. Business owners sometimes get so focused on sales and operations that they don’t have a good handle on their finances. Don’t turn everything over to your accountant and expect him to tell you how your company is doing once a year. As a business owner, you should know how much cash is coming in every month, how much you’re paying in fixed and variable expenses and what profit you’re clearing. If your company isn’t as profitable as it should be, take steps quickly to boost prices or cut expenses.

How can attention to receivables improve cash flow?

Many small to midsized businesses have poor cash flow that can be attributed to a constant backlog of slow-paying or nonpaying accounts. Take steps to decrease your collection time, including establishing electronic banking to speed up the process. Institute 30-day collection cycles with interest accruing on late payments, if possible. You can also offer small discounts — say 2 percent — for customers who pay up within 10 days of invoicing. Examine your payment records to identify slow-paying customers and contact them to work out a more agreeable payment schedule. If you have customers who consistently pay late or not at all, consider declining future credit to them.

What can business owners do to maintain cash flow while staying on top of vendor and supplier payments?

Reevaluate your payments. Many business owners can improve cash flow by making their own payments on the date they are due, rather than as soon as an invoice is received. If you are paying your suppliers early, ask them to consider giving you a discount. You may also get volume discounts if you buy inventory and supplies from one vendor or a limited number of vendors. Your goal: Keep cash on your balance sheet as long as possible, while still ensuring that your bills are paid in timely fashion.

What pricing strategies might benefit businesses?

Most small businesses cannot succeed in the long run if they are competing on price. Larger companies can always charge less and make up for it by increased sales volume. What you can deliver is superior service and unique products for which customers will be willing to pay more. Figure your time and your company’s overhead, including labor, marketing and fixed costs, into your product pricing or your hourly rate if you’re running a service business. Make your value clear in your marketing and advertising to justify your higher pricing to would-be customers.

What is a good cash reserve target that will help businesses weather an unexpected downturn?

It’s best to keep a minimum of six to eight months’ worth of working capital on hand so you can get through unexpected downturns or seasonal sales fluctuations without putting your business at risk. While this may seem difficult to set aside, the cost of not having this capital in place when a crunch hits can have dramatic, long-lasting and sometimes irrecoverable effects. Use this reality to motivate you. Put the reserve fund in a short-term certificate of deposit or business savings account where it won’t be vulnerable, and tap into it when you need additional cash for emergencies or unanticipated setbacks.

Fifth Third Bank. Member FDIC

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

A look at how banking in the community helps stimulate the local economy

When your business does its banking locally, it is doing its part to keep money in the community that can then be invested to retain existing jobs, create new jobs and support the local economy, says Ralph Lober, president and CEO at Consumers National Bank.

“When you’re supporting that local hardware store or grocer, you are helping them maintain employment and their ability to invest in the community,” Lober says. “It’s the same thing with your local bank. It creates a cycle of money where the same dollar is spent repeatedly. If you pull that dollar out of the community, it can be hard to get it back and the economic impact is multiplied.”

Companies often underestimate the capacity of community banks to help them manage their business as they grow, Lober says.

“If you keep your bank informed and in the loop and let them help you grow, that bank can grow with you for quite a while,” he says. “If it gets to the point where you’re growing too fast or you need a larger credit facility, your banker will tell you that and help you make adjustments or transition to a larger bank. But for most businesses, that scenario is quite a ways off.”

Smart Business spoke with Lober about the benefits of banking locally, both for your business and the community.

What are some misperceptions that may prevent businesses from banking locally?

One factor that often pushes a company to go with a larger bank is name recognition. Smaller banks can’t afford to blanket the airwaves with advertisements, so they may have less visibility in the market. You may also have concerns about whether a locally based bank has the industry expertise you need to grow your business.

In actuality, community banks have the ability to get more involved in your business and can act as a consultant for you as you develop your growth plan. There is also an element of familiarity when smaller, growing businesses work with community banks. Your bank understands the moving parts of your business and can relate to some of the challenges of growth, but then use that knowledge to help you pursue your company’s goals.

Most community banks invest heavily to stay up to date with the latest payment, cash management and security systems, and offer all of the delivery channels and products necessary to meet the needs of busy business owners and managers.  In a highly competitive, customer-focused industry, these investments are critical to attract and retain business.

How do you determine whether a bank is a good fit for your business?

You need to get to know your banker. Talk to the commercial lender or business banker and ask questions about how they would get involved with you to support your business. Sit down, have a conversation and gauge your comfort level.

You should also ask for references and talk to people who work with this bank on a day-to-day or week-to-week basis. Ask how the bank keeps pace with technology and what systems it has in place to make banking easier. Learn how the bank supports the business and contributes to its success.

What should you do before you meet with a bank?

Be prepared to discuss your growth strategy. Have solid, well-thought-out projections that demonstrate you have thought about the future and you understand what your company needs to accomplish to remain competitive in its industry. If you go to your bank and say that you need $1 million to help your company increase sales, you need to explain the specific investments necessary to achieve that goal. Document what product or service lines you are looking to boost, how you will do it, and how the investment will affect revenues, operating expenses and net results.

You should also keep your accountant in the loop and use their expertise to develop your projections. When you take those steps, you give your bank the tools it needs to support your growth plans.

All economies, whether local, regional or state depend on give and take interaction and a reliable flow of money. When you work with your local bank you support local investment that benefits the financial future of your business and your community.

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

There’s money hidden in your company. Here’s how to find it

Many of today’s CFOs are finding themselves overworked. With not enough time in the day and a tight economy putting pressure on their finance department, many CFOs are scrambling to mitigate the impact of increasing wages and health care costs to bring back the perks needed to retain and attract the best employees.

“If CFOs had unlimited resources and time, they could do a reasonable job of uncovering hidden savings in their companies,” says Marylou Garcia, managing director of Expense Reduction Analysts. “But because finding those savings can be tedious and requires an intimate understanding of the inner-workings of each supplier industry to get that last 10 to 30 percent of savings, it’s not practical and not always considered the best use of their time.” Garcia’s experience with clients continues to reinforce that 10 to 30 percent of many large spends could be recovered from the supplier base with no compromise to quality and service.

Smart Business spoke with Garcia about options CFOs have to streamline expenses and optimize savings with oftentimes surprising results.

What are the more common areas in which companies overspend?

There are many areas in which overspending occurs. Most often, however, overspending happens within the category of general and administrative (G&A) expenses because they’re typically not reviewed with a fine-tooth comb the way larger costs, such as payroll and cost of goods, are. The primary reason companies overpay suppliers in this category is because the supplier is motivated to get the highest margin they can and not make it easy to get the lowest price, and it is impractical for procurement departments to have an intimate understanding of the inner-workings of each supplier industry.

Companies’ buying in this category typically comes from multiple sources and could be somewhat fragmented. General items, such as office supplies or telecommunications, can come from multiple vendors. If your company is buying office supplies from multiple providers, the spend per vendor is significantly less than if it were consolidated. That means each supplier doesn’t have much of a reason to offer a substantial discount. More importantly, most companies don’t really have the insider knowledge to negotiate the best pricing with their suppliers.

Within a category, another area where savings are commonly lost is in the review of invoices, which typically aren’t easy to follow or understand. Having visibility into the different areas of expenditures within a category is an opportunity to ask questions, challenge historical assumptions that may have been established many years ago and are no longer relevant, and ask suppliers to validate if they still are. It might be discovered that your company could be paying for things that are no longer important or relevant. Sometimes in a supplier relationship that’s existed for a long time, people get comfortable and there’s not as much incentive to negotiate better pricing. It’s a good practice to review your expenses on a regular basis, and have the negotiation done by someone other than the person in direct contact with the supplier. Lastly, as the market changes, prices change. Unless you’re keeping abreast of what’s happening, it’s easy to miss a better price or alternative that came about because of a process or technology change.

How can busy CFOs find the time it takes to reduce these expenses?

There are third-party companies that CFOs can engage to provide a high-level review of their general ledger expenses. They’ll look at the size of the expenditure per expense category, identify any seasonality, analyze the number of suppliers used and estimate the potential savings/incremental cash flow to the company. The partner will list the areas of potential savings and, based on that, a decision can be made to dig deeper on certain items or find other areas where hidden savings could be found.

Knowing that time is a concern, it is important for CFOs to partner with a firm that has the supplier industry specialists who can bring their knowledge and benchmark data to the table and can structure their processes so that majority of the heavy lifting is done by their team and their intellectual property is solid. It is important for the firm to analyze data at the invoice level, challenge past assumptions and present the facts to their client. Once the savings have been identified, the third party should help the company through the implementation of the project, work with the various stakeholders and supplier groups and monitor the savings to make sure they are realized.

Savings in and by itself isn’t very important unless you know what to do with it. Many companies have important expenditures, either operating or capital, that are not being funded for the fiscal year. It makes sense for companies to pick an expenditure or two that have fallen below the budget line to target, and tie the savings to that expenditure — new software, for instance. Sometimes the savings discovered results in hiring a person to help departments that are understaffed and overworked.

Knowing how little time there is in the day and how impractical it is to have several industry specialists within a company, CFOs are often glad that there are resources available to them to see if they’re leaving money on the table, where it is and how to get it. Having a conversation with a qualified third party is a quick way to begin to address this and increase cash flow without tying up internal resources.

Insights Banking & Finance is brought to you by Manufacturers Bank

Marylou Garcia is the managing director for Expense Reduction Analysts, a worldwide network of more than 700 consultants in 30 countries specializing in delivering extra profits for midsized companies through cost reduction. Garcia has an MBA in Finance from the Wharton Business School, has held senior positions in finance, including CFO and Corporate Finance Director for various multinational hotel chains, and has helped many companies in the U.S. and internationally increase their operating margins and cash flow.

A look at what’s in store for the business community in 2016

Two hot topics California businesses will be thinking about as 2016 gets going are a minimum wage increase and a split property tax proposal for businesses that own real estate.

Whether you view these changes as opportunities or challenges depends on your point of view, says JC Timmons, senior vice president, Southern California Corporate Banking, at Bridge Bank.

“This minimum wage escalation and the attendant politicization is only in the beginning cycle, so it’s likely not going to go away,” Timmons says. “But this is clearly a 2016 and beyond item that companies are budgeting for, factoring not only into their profit margins, but also into their supply chains.”

Cost increases along that supply line in California could lead to some difficult decisions on labor and managing to those relationships is important, Timmons says.

“If you’re doing business across state lines with different wage thresholds, those pressures in the supply chain need to be watched carefully,” Timmons says.

Smart Business spoke with Timmons about the split property tax proposal and other factors that will affect businesses in 2016.

What is the split property tax proposal?
California has Proposition 13, which limits the assessed value of properties to no more than a 2 percent increase per year, as long as the property is not sold.

Senate Constitutional Amendment No. 5 (SCA-5) would leave residential real estate untouched, but it would single out commercial and industrial property ownership, opening those properties up to greater annual valuation and tax increases.

This proposal has not been met warmly in California’s business community as it would be a disadvantage for businesses in the state.

It’s easy to think of the massive, well-capitalized Fortune 1000 firms in the state that can roll with this, but there’s another element to it.

Many small businesses sign triple net leases and by the nature of those leases, tax obligations flow back to the tenant. So you’d see monthly lease payments increase by a significant amount in those instances. In short, a split-roll property tax would increase operating costs with negative consequences.

This is an important policy that the business community is going to be watching and certainly making capital budgeting decisions around if it ever gets legs through the legislature.

What about any specific industries to watch this coming year?
In California, we’ve seen nice comebacks the last few years in health care, hospitality and professional services.

Certainly technology companies continue to thrive, as do any providers making or moving a tangible product.
Themes or common traits emerge with the most successful firms. One of the most common themes is that the owners and managers care deeply for their businesses.

Oftentimes a large percentage of personal net worth is tied into these businesses, and if that’s not the case, as an executive, the day-to-day business needs are very time-consuming, thereby important.

Lenders and depository institutions like to serve in as much of an advisory role as is possible and this begins by understanding the ultimate objectives of the company and its management team and creating value within that context.

What are some examples of creating value from a banking perspective?
The most highly pursued answer is oftentimes credit, and in situations where it is applied appropriately, strong value can be created.

For example, if there is a way to generate a loan facility accretive to the objectives of the company, or a structure to create additional free cash flows or other specific deal points personal to ownership, a bank aims to do that.

But a loan is not always the priority. Oftentimes there are solutions determined with foreign exchange experts on international commerce that still get overlooked by the folks down the street. Other times, it’s an introduction to another expert that can help solve a problem, or prevent one from occurring in the first place.

The focus is always on improving business value that even an objective third party would see, and in doing so, a business realizes the maximum benefits of business ownership. ●

Insights Banking & Finance is brought to you by Bridge Bank

SBA loans can help your business in more ways than you might think

Small Business Administration (SBA) loans can be a great resource for businesses that are struggling to obtain funding from traditional lenders, but they should not be viewed as a loan of last resort, says Ken Mannina, senior vice president and regional sales manager at Bridge Bank.

“The participating lenders that provide SBA financing get a credit enhancement from the SBA,” Mannina says. “However, the credit enhancement does not mitigate all risks for an applicant with poor credit, an operating company that has a history of losing money or a property that provides weak collateral support for the loan.”

SBA loans are a great tool for small business owners where debt is typically not otherwise available from conventional institutional sources. However, looking beyond the loan request and evaluating the business and its specific needs, the following should be considered.

“Some capital requirements are best served with debt, others with equity,” Mannina says. “However, most will require a combination of both.”

Smart Business spoke with Mannina about SBA loans and how to best position your business to secure the funding it needs.

What are some common misconceptions about how the SBA can help a business?
One of the most common misconceptions out there in the business community is that SBA loans are actually small.

The definition of ‘small business’ is very broad. Most businesses are eligible based on size. SBA loans go up to $5 million and can accommodate an owner-occupied commercial real estate purchase of up to $15 million.

Another misconception is that you have to be in business for several years to get the SBA loan. SBA loans can be made to startup or recently started businesses, however, there will likely be collateral requirements. Many applicants have only one full fiscal year of tax return reporting at the time they seek SBA funding.

There is also a belief by some business owners that SBA loans take a long time both to approve and to fund. In reality, many SBA loans we work on are funded in 60 days or less.

Business owners should also know that SBA loans can be used for more than just working capital, which should dispel another myth about the program. SBA loans can be used for working capital, but also for the purchase of equipment, business acquisition, debt refinance, partner buyout, or purchase and construction of owner-occupied commercial real estate.

What’s the key to identifying your greatest need and using that knowledge to secure the necessary funding?
The key to identifying your greatest need starts before you apply for the loan, at the time you are initially formulating the reason you need capital and/or are starting your business. You need to determine the best financing option to manage that need. Is it debt or equity?

Business owners want capital so they apply for a loan, but thought and due diligence needs to be applied before this decision is made.

Consider the ratio of debt to equity. What is a good structure that fits your needs and comfort level in terms of the resources at your disposal, the feasibility of your business, how it will have the best possibility of succeeding and how much you expect the business to grow?

Capitalizing the business with adequate equity at the beginning will be a key factor in the early stages of the business. Equity is defined as non-borrowed funds that are injected by the business owners. This could be money that you have been setting aside in a personal account for the express purpose of growing and supporting your business or it could be a gift from a family member.

What do SBA lenders want to see that will encourage them to want to support your business?
First and foremost, SBA lenders want to see repayment ability. They want to see historical cash flow from operations that is adequate to repay the loan.

Beyond that, the SBA lender will want to see management with the technical ability and character to run the business successfully and repay the loan. Lastly, the SBA lender will want collateral to support the loan, i.e. the assets of the business and possibly the assets of the principals of the business. ●

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

A look at bellwether economic indicators and what they signal for 2016

By any measure, if you look at the period since the U.S. economic recovery began in mid-2009, words like lackluster, subpar and disappointing come to mind, says Jeffrey Korzenik, chief investment strategist at Fifth Third Bank.

That’s particularly true not just relative to long-term growth in the U.S., he says, but when considering the depth of the recession in the context of history there’s typically a period of rapid growth that follows on the other side of a recession. While that hasn’t been realized in this cycle, there’s reason to be optimistic.

Smart Business spoke with Korzenik about the state of the economy and the signs to look for that signal better or worse conditions are on the horizon.

What economic indicators might suggest that growth is or isn’t at a point that would give entrepreneurs confidence?

Entrepreneurs can take confidence that there are many positive indicators, such as improvements in consumer strength, not just traditional consumer spending statistics but forward indicators of future spending. Payroll growth is part of that. Though its pace may be disappointing, it does reflect continued growth in the economy. Also the improvement in credit scores bode well for future spending.

The demographics of the U.S., at least for entrepreneurs in some sectors of the economy, give reason to be optimistic. While the focus tends to be on baby boomer retirement, what seems to be overlooked is the upward trend of millennials coming into the workforce. They’re increasingly moving into homes and driving demand in the housing market, and at the same time they’re driving demand for consumer goods.

What can be seen as signs of positive momentum heading into 2016?

One positive sign is that automotive sales are flirting with new records. The increase in household formations is an advanced indicator for demand for housing. And the continued growth in payrolls is certainly encouraging.

What could be an important early indicator of economic growth are the results from surveys of purchasing managers in manufacturing. Those are showing continued growth, though they have reflected loss of momentum in recent months. Close attention is being paid to borrowing costs for corporations, which can indicate confidence.

As unemployment creeps lower it suggests business expansion in the U.S. is coming to an end. That concern in the labor markets can be tempered by the slack that exists in the global economy. If we start to reach the limits of our capacity in the U.S., we can still see growth in the global economy, which has a positive feedback mechanism that can support continued U.S. growth.

What indicators will you be watching for in the coming year that could suggest the U.S. is headed for positive or negative economic growth?

We’ll be on the watch for rising energy prices. That can be constructive if it’s modest and gradual particularly for the U.S. economy, which produces and consumes a lot of energy.

While the best-case scenario is China and other emerging market countries can manage through the challenges of naturally slower growth, policy mistakes in those markets have some ripple effects in the U.S, specifically the continued economic reform in China. It’s not a disaster scenario but it could impact global growth. In Japan in the long term, it will be interesting to see the impact of the Trans-Pacific Partnership. There will likely be a vote in Congress to lift the oil export ban, which has interesting implications for the U.S. and the global economy.

There is good news on the horizon. For instance, Europe’s economy is healing nicely and may accelerate its growth. Japan, on back of some reforms, could move growth a notch or two higher and that could help make up for some of the slow down that’s happening in emerging markets.

Fifth Third Bank. Member FDIC

 

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