How to prepare your employees for EMV corporate credit cards

Credit cards embedded with Europay, MasterCard, and Visa (EMV) microchip technology will soon become the new standard in the U.S. These cards use personal identification numbers (PINs) and dynamic codes to protect transactions, but the transition to new cards and card-accepting terminals may come with a few hiccups.

“For businesses that distribute credit cards to employees to use for business expenses, it’s important to prepare for snags and to educate employees about how to use the new cards,” says Douglas V. Wyatt, executive vice president and senior commercial banker at Fifth Third Bank.

Smart Business spoke with Wyatt about steps businesses can take to smooth their transition to EMV credit cards.

How can companies help employees transition to the new cards?

The process for using these cards will be different from what employees are accustomed to. For example, in-store checkout may no longer require a card swipe, and employees might be asked to provide a PIN instead of signing. Companies can keep headaches to a minimum by assigning an employee to spearhead communications with card users and card issuers.

The designated team member should be available to provide troubleshooting tips, especially early in the process. Companies can work with their banking partner to educate their designated employees and learn about common issues, how to manage them, and who at the bank can help if a more complicated problem arises.

Prepare all card-using employees for these changes before they start making purchases as mistakes will be common initially. For instance, the process requires users to insert the credit card into a terminal and leave it there during the transaction, so people may forget to reclaim the card afterward.

Banks are helping with this education by providing print materials that explain how the card works, webinars to help cardholders and company administrators learn about chip technology, and help centers to answer individual employee questions.

Companies should consider creating a list of likely problem scenarios with troubleshooting solutions to ensure quick resolution.

How should companies manage their cards’ PIN codes?

Before employees can use their cards, they need to set up a PIN code and activate it by using their cards at a business that processes transactions in real time. The card won’t work properly until this has been done. While many U.S. companies conduct real-time transactions, some overseas merchants process transactions only once per day. Team members who travel internationally may run into issues if they use their new PIN for the first time with such a vendor.

Some employees assume that they can simply update it via their bank’s online management portal, but that’s just the first step. If they then try to use their new PIN at an offline system, it may not work. Employees who don’t know why their card isn’t working may try to use the inactive PIN multiple times and ultimately lock the card so it can’t be used at all.

What other risks must be addressed?

Chip technology is not capable of fighting all transaction fraud. The EMV card improvements do not help protect online purchases and they don’t add extra security for in-store transactions that still use the familiar magnetic stripe.

Employees using the corporate cards should be warned that the chip technology doesn’t make their cards invincible, and that they should still be cautious whenever they use them — in fact, it’s expected that online purchases will be more frequently targeted for fraud after the new in-store standards are in place.

Companies should ask their banks for advice on making online transactions more secure and issue warnings to employees that they need to be vigilant when making online purchases with their corporate cards.

Fraudsters follow the path of least resistance. While chip cards offer added protection, criminals will soon migrate to other tactics.

Fifth Third Bank. Member FDIC.


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

How to benefit from consolidating cash in order to optimize global liquidity

If your company has multiple subsidiaries, you may want to consider revamping your liquidity strategy to consolidate your cash.

Smart Business spoke with Chase Commercial Banking’s Dave Schaich about two options you could consider — physical pooling and notional pooling.

Why would a business consolidate cash?

The primary advantage is that it allows a company’s subsidiaries to borrow from one another to cover temporary deficits, which eliminates interest payments on short-term debt. And beyond providing a sufficient reserve, consolidated cash means that the company’s combined revenue stream will come from diverse sources, making it less volatile than the earnings of any single subsidiary. Predictability provides greater flexibility when investing the company’s surplus cash. A larger pool means:

  • Less cash needs to be kept available for emergencies.
  • More funds will be available for longer-term and higher-returning investments.

How much does structure matter?

It matters a lot. A solid liquidity strategy does more than simply distribute cash to cover shortfalls and earn higher returns on excess balances. A consolidated account should be managed in a way that provides subsidiaries with ready access, while maintaining tight control over the flow of funds and ensuring transparency.

A successful liquidity strategy reflects the company’s organizational structure and the relative independence of its subsidiaries. You might consider two structural options, physical pooling and notional pooling.

How does physical pooling work?

Physical pooling, or physical cash concentration, is the most straightforward strategy for consolidating cash flow. The result is a separate consolidated account to hold surplus cash on behalf of the entire company.

At the end of each day, the participating subsidiaries sweep their excess cash into the consolidated account, where it is invested collectively. If a subsidiary runs a deficit, the consolidated account ensures that the subsidiary receives the required funds.

For a company with centralized operational control, physical cash concentration has many advantages, such as the system of deposits and intercompany loans are highly transparent and relatively easy to control. Plus, automated controls can be put into place, further improving transparency and efficiency. The structure also maximizes the company’s flexibility when investing the surplus revenue that accumulates in the consolidated account.

How does notional pooling compare?

Notional pooling is an alternative to physically consolidating operating cash. It’s designed to solve many of the issues facing traditional cash consolidation. Instead of transferring funds into a single consolidated account, the subsidiaries keep operating cash in their own accounts. For purposes of calculating interest, however, the bank refers to a ‘notional’ position that combines the separate accounts of each subsidiary.

The single greatest advantage of notional pooling is the ability to operate in multiple currencies — an overseas subsidiary will not have to regularly exchange its currency to participate. Additionally, notional pooling allows subsidiaries to maintain greater autonomy over their balances. Each participant keeps its own account and will not see the daily inflows or outflows from a central account.

What might companies want to take into account when choosing the right structure?

Designing a cash pooling structure that optimizes global liquidity requires a number of decisions about organizational autonomy and impact. For example, it’s important to balance control over spending with the need for access to funds.

Multinational firms must also weigh a variety of tax and regulatory considerations when managing their liquidity and reconciling outlays in foreign currencies. And ultimately, your ideal liquidity structure must align with your own company goals and industry regulations.

It may sound complicated, but your bank’s international treasury experts can work with your accountants and legal team to structure the best solution for your company — and help you achieve the level of liquidity you need to drive global success.

Insights Banking & Finance is brought to you by Chase

A formal mentoring program aligned to common goals has great benefits

Mentoring can provide numerous benefits to an organization, in addition to the individual rewards it offers to both the mentor and the mentee, says Tim Phillips, COO at Westfield Bank.

“The beauty of it all is you’re promoting internal communication,” says Phillips. “It’s not bringing in highly paid consultants to coach your staff. You’re creating an environment where there is dialogue among different departments and a regular sharing of ideas. The value comes from being consistent as an organization, and discussing who is being mentored and what the content of that relationship is.”

That’s not to say that you want mentors following a script in the way they carry out their respective roles.

“Mentoring isn’t about on-boarding or orienting someone to your organization,” Phillips says. “It’s about providing a real time visual perspective into their career path, and building both leadership and communication skills. When you formalize a mentoring program, your mentors understand what the individual and the organization want to achieve. What’s great is that it can go a lot of different places, as long as they are aligned around that concept.”

Smart Business spoke with Phillips about building a strong mentoring program and how to know when it’s effective.

What benefits can mentoring provide?

As a mentor, you get to meet new people who you might not otherwise interact with on a regular basis. It can help you hone your leadership and communication skills and increase your awareness about the talent in your organization. Being a mentor demonstrates that you care about the organization because you’re helping to develop the next level of leadership.

From a mentee’s perspective, it makes you feel cared about. It can help build your  confidence when you interact with senior leaders and the private nature of it allows you to feel more comfortable in sharing candid dialogue.

Where should you begin in developing a mentoring program?

Be aligned around what it is your company wants to accomplish, whether it’s employee retention, improved communication or to develop the next generation of leaders. Have those things in mind and talk about them with your leadership team and then hold each other accountable to the process.

Take the time to document that process. You don’t want somebody to be mentoring the same person for five years, as it’s likely to will lose its value after a period of time. A mentoring program needs to be set up so that it is beneficial to both the mentor and the mentee and if it’s not, you should mix it up.

How do you identify your mentors?

We look for somebody who has been with the organization for a while, has a good perspective across all areas and can speak to the company’s history. You need a willing mentor, so don’t just assign somebody to be a mentor. The person needs to be engaged in the process and should be comfortable coaching others, otherwise it will be unproductive.

You also want somebody who is a good communicator and a good listener who can articulate on behalf of the organization. In general, a good rule of thumb is to have the mentor be one layer up in the organization from the mentee, in addition to being from a different department. You could do two levels up if there is a specific area of expertise to which you want to expose the person, but one level of separation typically works best.

If you’re struggling to find someone to serve in a mentoring role, go back to the benefits of being a mentor. You don’t want to make someone do it. But if you demonstrate that the person can become a better leader by mentoring someone else, it might change their perception of the opportunity.

How do you gauge the effectiveness of a mentoring program?

If you can find people in your company who have benefited from having a mentor at some time during their career, and are now themselves serving as mentors, that’s a sign that it’s been successful.

If it helps to retain your talented employees, enhances your culture, creates a belief that you care about your people and you are willing to invest in their personal and professional growth, you have strong evidence that your mentoring program is working.

Insights Banking & Finance is brought to you by Westfield Bank

Think your company doesn’t qualify for an SBA loan? Think again

There’s been a recent increase in U.S. Small Business Administration (SBA) lending across the nation, and Northeast Ohio is no exception. The region is experiencing an increase in new requests as projects put on hold during the recession restart. Companies know that capital has opened up, and many are utilizing SBA programs.

“Things continue to pick up, and we get more calls each day with new opportunities,” says Ron Schultz, vice president and commercial relationship manager at First Federal Lakewood.

Smart Business spoke with Schultz and Matthew Lay, vice president and commercial relationship manager at First Federal Lakewood, about the possibilities that SBA lending brings for businesses.

How are SBA loans typically used by companies?

Businesses typically use SBA loans, which are a guarantee on financing, for commercial real estate, equipment purchases, working capital needs and acquisitions. The loans are very useful when there is a collateral shortfall. In general, the maximum loan amount is $5 million with a minimum of 10 percent down.

7(a) loans are the most popular. They have a broad scope and provide the bank a guarantee on the funds, with up to a 25-year term and amortization. 504 loans, for real estate and large equipment purchases, are administered through a local community development corporation. And the Community Advantage loan, for up to $250,000, has increased in popularity over the past 24 months.

Who can qualify for these?

Nonprofits, lending institutions and investment properties are ineligible for SBA funds. Otherwise, most small business organizations are eligible. Revenue, employees size and balance sheet metrics are all considered.

The SBA will only approve funding for owner-occupied commercial real estate, which means the operating company must occupy at least 50 percent of the building.

Why do many business owners equate SBA lending with startups or early stage businesses?

Traditionally newer companies have had success with SBA products because of the following advantages:

  • Low down payments.
  • Extended terms and amortization.
  • Better fixed-rate options for a longer period of time.

However, existing or mature companies should certainly review all options with their bank as well, including SBA financing. In many cases expansion projects are based on projections, and the SBA has more comfort with projections versus historical numbers when compared to traditional funding.

Business owners may be initially unsure because of fees or paperwork hurdles, but that becomes secondary when they realize the benefits.

It also helps when you work with banking experts who know how to appropriately package a deal prior to sending it to the SBA.

If a business owner wants to learn more, what are his or her next steps?

The best way to get started is to contact your banker and learn about the various products and services that can help you accomplish your financing goals. Traditionally, banks consider conventional options first, and then research if the deal can be structured by utilizing an SBA program.

Often you can work with community organizations to put your company in a better position to get funding. These include the county, the Economic Community Development Institute or the local chapter of the SCORE Association, a nonprofit association of the SBA that advises and mentors entrepreneurs and business owners. The SBA also has several configurations that can help facilitate projects that are pending or approaching completion.

While an SBA loan won’t be a fit for every business, it just may be an exceptional way to grow yours.

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

VC capital is available to entrepreneurs with a solid plan to take market share

Venture capital (VC) investment is at a 15-year high and offers no hint of slowing down, says Michael David, managing director for Equity Fund Resources at Bridge Bank.

The second quarter of 2015 saw VC investments totaling $17.5 billion, the most since the first quarter of 2000, which was the previous all-time high. Overall, $50 billion in VC funds were invested in 4,400 companies in 2014 and David expects that figure to be surpassed this year.

One catalyst for the sustainability of this strength in the VC sector is the relative weakness of other markets, David says.

“If you look at the bond market and over the past year, the stock market, they aren’t delivering the returns they once did,” David says. “There is higher risk in VC, but there is a ton of capital chasing good high-potential companies that should help sustain the momentum.”

Smart Business spoke with David about the VC market and what companies can do to stand out with potential investors.

What factors are driving VC investment?

Activity in this sector is strong across the board. Even more important is the tremendous amount of fundraising that is taking place. In the second quarter this year, $10 billion has been raised by VC funds. That’s the strongest fundraising quarter since the last record in 2007 and a 27 percent year-over-year increase.

New Enterprise Associates raised a $2.8 billion fund and IDP Investments LLC raised a $1.3 billion fund just in the second quarter. The Social + Capital Partnership raised $600 million. So far this year, 50 new funds have been raised, a figure which points to some sustainability for the future.

More companies are remaining private longer and not going public because there is so much capital available, both debt and equity capital. Additionally, nontraditional investors have entered the market, particularly for the late-stage, higher profile, ‘unicorn-type’ companies with billion-dollar plus valuations.

It’s a good time to raise capital, particularly for software and media-focused companies.

Which opportunities tend to attract VC investors?

The three big areas of investment right now are software, media and life sciences. Once companies get to the point of needing to raise institutional VC, they need to have a product, early revenue and customers. So you need to be in the right market and there needs to be evidence of sustainable growth.

The really early seed-stage deals are being done by some of the smaller funds, the angel investors. Once they hit critical mass with either a product or some buy-in from customers, that’s usually a tipping point for raising capital.

VC investors want companies that are going to grow fast and take market share or have the ability to create new market share. Everyone is looking for growth. Companies that are me-too companies, or just have mediocre growth are not going to attract a lot of capital.

What’s the key to making a positive impression when you meet with investors?

Present your growth story and a realistic plan for how quickly you can scale the business with a boost of outside capital. VC firms want to see within a five-year window how quickly you can grow the company and create value.

Strong management teams are really important as is a market niche that can be exploited.

These are smart people that dig into the intricacies of the market and the backgrounds of founders and management teams.

They want to see a team that has experience, has built a vision and is able to attract the people needed to build a sustainable company. If things go in the wrong direction or the market shifts, they want to know that the business has the ability to pivot.

What about balancing risk versus reward?

There is willingness to take risks in the early stages and as the business starts to get traction, VCs can continue to fund in multiple rounds to grow it.

But the passion of the entrepreneur and the vision, if it can be validated, is very powerful. If the right team is behind it, it can attract other people and show potential for the future. A clear, well thought out vision is key to the success of any lasting venture.

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

Why your search for an investor has to be about more than just money

Success in the world of biotechnology and life sciences requires a level of patience that is foreign to most types of businesses and industries.

On average it takes 10 to 12 years and over $1 billion in capital to get a new drug from the laboratory to the market to be sold to consumers, says Rob Lake, senior vice president and head of Life Sciences at Bridge Bank.

With such great effort needed to get your product out the door, you want partners you’ll be comfortable working with for extended periods of time. When you face challenges, as most growing businesses do at some point, the relationship you have with your financial partner can go a long way toward determining your future.

“Some lenders tend to over steer,” Lake says. “So on top of whatever is already going on at your company, a relationship with an inexperienced lender can make it that much more difficult to manage your business.
“That can be very stressful for a management team and an investor group trying to position your company to work through the issues and get back on track.”

Smart Business spoke with Lake about the real value of selecting a lender or bank that truly understands the challenges your business faces.

What should you consider when looking to raise capital in the life science industry?

You need a lender who understands your business. A standard bank that does commercial and industrial lending is likely to underappreciate the peaks and valleys of a life sciences company, such as navigating through regulatory agencies or the uncertainties of clinical trials.

There is such a thing as ‘greener capital.’ A knowledgeable lender knows how to react to bad news, and how to chart the best course of action to keep things on track. It’s like piloting a small plane. If there is turbulence, you’re not going to want to over steer in one direction or the other to try to stabilize the aircraft.

You want to keep it as steady as you can and it will stabilize once you get through the bad weather. The same applies to working with a lender that clearly understands the issues life sciences companies face and will work through occasional challenges along the way to help the company achieve its goals.

What are some key things to know before you meet with a lender?
You need to think about what you would do if things with your business don’t go according to plan and compare it with the underwriting rationale of the lender. Lenders will typically underwrite to a downside case to explore that scenario.

What if you do not get approval on an expected date and it takes another year to get that approval? How would such a delay affect your company financially? How much more money would you need to raise? What will it take to get there? Do you have the resources to get there?

The base case is a little more optimistic scenario and the downside case is if the wheels completely fall off. The more likely case is a third option in which the wheels don’t totally fall off, but maybe you have a flat tire. How do you fix it and get through that scenario?

It’s helpful to hear the lender’s mentality as they go through the downside process.  There are lenders in the space that offer more favorable terms (i.e., more capital or lower cost); however, it could cost more money in the long run (fees and legal expenses) if they haven’t thought through what the downside looks like.

What are lenders looking for in a borrower profile?

Lenders like business models that are diverse and have novel intellectual property supported by an underlying ‘platform technology.’ Multiple shots on goal help the lender mitigate risk.

They also want to understand the value proposition and see that it makes sense from a commercial viability standpoint. Ultimately, does the product and or service you’re developing address an unmet need?  Improve patients’ lives or clinical outcomes?  Save the health care system money?

Validation is another important attribute lenders like to see. This could come from many sources including the quality and reputation of your investors, strategic partners, a positive reimbursement decision or revenue traction.

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

Why employers should worry that employees aren’t ready for retirement

Discussions with retirement plan sponsors and participants have revealed that employee savings behavior is a concern. Some of that can be attributed to ineffective retirement programs, but that ineffectiveness has a lot to do with participants having limited time, knowledge, interest, and in many cases the ability, to plan and save for retirement.

“When it comes to retirement confidence, debt management challenges continue to dilute employee confidence and overall financial wellness,” says Sheri Kehren, vice president, program manager of financial workplace wellness at Fifth Third Bank. “In 2010, when Fifth Third began focusing on financial workplace wellness solutions, the Federal Reserve calculated American consumer debt at $2.4 trillion, and The Wall Street Journal reported that 70 percent of Americans were living paycheck to paycheck.”

While employees acknowledge they need to save for retirement, their behavior toward reaching that goal hasn’t changed.

“The economic downturn pushed some employees to stop saving because they were dealing with more immediate financial needs,” says Tony Hunter, vice president, institutional services at Fifth Third Bank.

He says, according to Fidelity Investments, during the recession, 47 percent of employees reported managing everyday finances like mortgage payments and credit card debt rather than saving for retirement.

“Fundamentally, many employers’ retirement systems aren’t working because employees don’t have money to save,” Kehren says.

Smart Business spoke with Kehren and Hunter about the growing concern over employee retirement, how that’s affecting employers and what can be done about it.

Why should employers be concerned about employee retirement planning?

Employee financial problems are employer problems since employees don’t leave their concerns at home — they bring them to work as stress and in some cases, like when creditors call them at work, their problems follow them around. That stress plays out as decreased job performance and satisfaction, increased absenteeism, reduced engagement and high turnover.

It also influences their ability to take advantage of a company retirement plan. Some 30 percent of employees are set up for inadequate retirement. And while each year employers are contributing $118 billion to retirement plans and employees are putting some $175 billion toward their retirement savings, employees are withdrawing some $70 billion of that savings for nonretirement purposes.

How can people stay on track for retirement?

To be effective, retirement programs must educate, inspire and empower employees to take control of their money and get on track. Employees need to learn how to actively manage their income instead of letting their income manage them. There’s an imperative to eliminate debt rapidly and learn how to invest successfully for the long term.

There are milestones that line the retirement path for employees. The first is to save $1,000 for an emergency fund. Second is to focus on paying off all debt. The third is to accumulate in savings the equivalent of six month’s worth of expenses. The fourth milestone is investing 15 percent of household income in a retirement plan.

How can employers help their employees get financially prepared for retirement?

Employees are looking to their employers to provide access to programs, tools and services, investment guidance, and advice to help them be better prepared to retire. Consider augmenting your current corporate wellness program or your employer-sponsored retirement plan with financial education. The programs should be easy to access while driving behavior and incorporating accountability for employees.

You can’t help employees get on track with retirement unless they’re financially fit first. Focus on behavior change and really look for programs that can demonstrate results in moving the needle.

Fifth Third Bancorp provides access to investments and investment services through various subsidiaries. Investments and Investment Services: Are Not FDIC Insured, Offer No Bank Guarantee, May Lose Value, Are Not Insured By Any Federal Government Agency, Are Not A Deposit. © 2015 Fifth Third Bank.


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

How to plan for a higher interest rate environment

“We know the Federal Reserve is planning to raise interest rates sometime this year. What we don’t yet know is how that might affect business owners and operators,” says John Hayes, executive director of the Pennsylvania Middle Market in Chase’s Commercial Banking group.

Smart Business spoke with Hayes about what businesses need to know and do to prepare for the higher rates.

Interest rates are currently at zero. Why is the Fed set on raising them?

The Fed has a dual mandate — to simultaneously control inflation and to achieve full employment.

One of the Fed’s actions in response to the recession was to stabilize the U.S. economy and financial system by implementing a ‘zero interest-rate policy’ to reduce short- and long-term interest rates. This helped spur employment, restrain inflation and finance spending in a time when many businesses were struggling.

Capitalism, however, is based on interest rates being above zero. The Fed’s goal in raising interest rates will be to remove the unnatural stimulus that’s been in place since the recession, and to do that, it’ll move rates back to something more normal, which is likely in the 3 to 4 percent range.

How much should businesses worry?

In short, rising interest rates shouldn’t be a threat to businesses — when the Fed raises rates, it will be a result of the economy doing better. Interest rates were above zero before the recession, and eventually, they’ll have to return to a number above zero to support a healthy and robust economy.

So far, the Fed has shown great patience when timing this long-anticipated rate hike. It has been cautious not to disrupt the economy’s growing momentum by normalizing rates prematurely.

The rate hike’s pace will likely be governed by the same sense of caution. Barring the unlikely reappearance of strong inflationary pressure, the Fed will likely be reluctant to take any action that disrupts markets or upsets expectations. And as interest rates slowly lift from near zero, the benefits of a stronger economy will more than outweigh the higher cost of borrowing.

How will higher rates impact the stock market?

While bond yields are certain to climb with rates, they are unlikely to lure investors away from stocks, which are poised to continue rising on strong corporate profits.

Current stock prices are aligned with historic norms — stock gains have paralleled growth in earnings, and the market’s average price-to-earnings ratio is consistent with past periods of economic expansion. There is little reason to believe the market’s gains have been fueled by easy money, or that the end of rock-bottom interest rates will diminish the potential for future growth.

Let’s talk timing — when can we expect the Fed to start raising rates?

If the Fed intends to wait for definite evidence of inflation before raising interest rates, the planned hike could be delayed into 2016.

With the labor market continuing to tighten, however, the Fed may gain confidence in the eventual return of inflation and take action to begin normalizing interest rates, even before the definitive appearance of rising prices.

Many analysts anticipate the rate hike beginning later this year.

What actions should business owners take now to account for a future with higher interest rates?

When interest rates rise, the cost of borrowing money also rises. So, if your business is credit-dependent, you may want to factor in an increase in costs.

Part of your consideration should be the impact on your customers and vendors — will you have to pass along some of your increased costs via higher prices? How will that affect sales and receivables? Try to think about how you might handle a change in customer purchasing behavior; how might that affect your business?

Ultimately, the impact of higher rates will vary from business to business, but you’ll want to think through all the potential implications for increased costs and how they might affect your day-to-day operations, as well as your longer-term goals and strategy.

Insights Banking & Finance is brought to you by Chase

How to work with your bank to find the right products for your needs

One of the strongest signs of a healthy relationship with your bank is the ability to routinely discover and implement new ways to maximize your money.

“Let’s say you don’t have any lending needs, everything is paid for and you’re just at a point where you’re making a lot of money,” says Debbie Miller, vice president and commercial deposit specialist at Consumers National Bank. “Instead of letting that money just sit in your checking account, you can try what’s known as a sweep account.”

A sweep account automatically transfers amounts that exceed a certain level into a higher interest earning investment option at the close of each business day. It can be used to pay down a line of credit as well as save you money on interest.

Cash management services can help your business improve cash flow, lower your costs and identify ways to protect your money that provide you and your team with peace of mind about your company’s financial assets.

Smart Business spoke with Miller about how to work with your bank to find the right cash management services to support your business and protect your funds.

What are some popular bank products or services that can help any business?

Fraud protection has become a hot-button as you see more cases of internal embezzlement and attempts to hack into corporate accounts. One of the most popular tools to protect against fraud is Positive Pay, which is used by many banks to match the account number, check number and dollar amount of each check presented for payment.

The company will transmit a file to the bank to make sure the check information matches up with the file information. If everything matches up, the check is sent through for payment. If there is an exception, the check is not cleared and you get a report.

Remote deposit capture is another tool that fits under both fraud protection and convenience. Instead of having to run to the bank to deposit checks, you can deposit them electronically from your office. You get a copy of the check front and back and in most cases, you can refer to past deposits going back as far as 24 months.

How can your company prepare for a meeting with your bank?

In addition to the standard checking account statements from the past two to three months, you should bring an analysis statement. A bank statement will list the number of deposits you have and the amount of deposits, but it doesn’t tell you how many items were in that deposit. The analysis statement is more detailed than your average bank reconciliation statement.

It might say you had 100 deposits, wrote this many checks and had an average balance of X. You also should be knowledgeable about background information on your business. Be able to describe your sales cycle, what your typical transactions look like, and how you pay your suppliers and employees. This information can be very helpful to a bank in arriving at conclusions about the best tools and solutions to meet your company’s needs.

What if you feel like your bank is not meeting your expectations?

Ask your bank what it can do to help you improve your cash flow. Maybe you feel like you’re getting a lot of service charges and paying for things that aren’t really helping your business.

There are more advanced financial tools out there that can help your business. If you don’t feel like you’re being made aware of these options, you need to ask questions.

What additional steps can you take to protect your funds?

Many leaders want to know how they can get better control over their funds. You may have a person who handles your financial reporting who has been with you for years, someone you would never suspect of improper activity. There may not be any reason to suspect a problem, but you still should take precautions to protect your business.

Work with your bank to set up a process by which you get regular reports about account activity. If you see something that isn’t right, you’ll know about it and can promptly deal with it.

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

A look at how FX hedging can help you mitigate foreign currency risk

Global currency markets have been experiencing larger than normal swings of late and with greater frequency, CFOs are citing foreign exchange volatility as a factor when companies miss their earnings targets. Increasingly, business leaders are looking to implement hedging programs to mitigate foreign exchange rate risk and create more certainty and stability within their organizations.

“For global businesses, the hedging of foreign denominated cash flows is vital to avoiding earnings swings,” says William R. Schumaker, vice president and foreign exchange advisor in International Banking at Bridge Bank. “Companies that maintain ineffective hedging programs, or those that do not hedge at all, unnecessarily expose themselves to financial risk.”

Foreign exchange (FX) hedging gives treasurers the ability to protect cash flow and profits by locking in certain rates of exchange. This is done for balance sheet items such as payables and receivables, as well as cash flow items such as forecasted sales and expenses.

Smart Business spoke with Schumaker about some of the key components of a successful hedging program.

Which tools can companies use as part of a hedging program?
Working closely with a trusted banking partner, an organization can easily gain access to the necessary and appropriate hedging tools available in the marketplace to mitigate their currency risk.

There are myriad FX hedging instruments which can be employed to lessen foreign exchange rate risk, from basic FX spot transactions to range binary options. But you don’t need a sledgehammer to kill a gnat; future foreign currency exposures can be effectively managed with a simple FX forward contract.

It is essentially the same as a standard spot trade, except that instead of the deal settling and funds being made available in two business days, settlement can be pushed forward to a predetermined future date of the customer’s choosing and with an exchange rate locked in.

This will protect company margins from unfavorable variations in the currency exchange rate from inception to settlement date. The price of the forward versus spot is adjusted marginally, accounting for the interest rate differential between the currencies involved given the duration.

With the nominal rate differentials between the U.S. and, for example, Europe, Canada or Great Britain, forward hedging costs in these currencies are relatively flat. A variation of the standard forward is the ‘window forward’ contract.

Offering more flexibility, the window forward allows the holder to choose a ‘window’ of time in which to execute a future foreign currency conversion. This tool can be particularly helpful when you have expected cash flows with nonspecific settlement dates.

What hedging strategies are used by global companies?
Many companies choose to execute all of their hedging for the entire year in one fell swoop prior to the beginning of their fiscal year. While this static hedging strategy provides companies the opportunity to set budget rates for the year, it is also limiting.

The practice of establishing cash flow hedges at the start of the year lacks flexibility as opportunities to react to FX forecast changes and favorable market entry points are largely lost.

A better method is often the layering of hedges. This dynamic approach realizes the correlation between time and risk; with longer dated exposures carrying a greater degree of uncertainty with respect to exchange rates.

As an example, one might consider hedging shorter term commitments, perhaps out to six months, at 100 percent while commitments from six months to one year may have a hedge ratio of 75 percent and exposures beyond a year could be treated with yet a lower hedge ratio.

As time progresses, hedges can be adjusted to fit their appropriate ratio for the new time period. No matter how you implement it, this ‘rolling’ hedge structure should see more stable hedge results and provide a smoothing effect on forward hedge rates over time versus a single hedging event.

These are but a few key hedging concepts. The areas of netting, derivative accounting and effectiveness testing are important topics which demand attention. Nevertheless, it’s certainly worthwhile to consider developing a hedging program to protect against adverse FX movements. ●

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