As an in-law coming into a family business, you’re stepping into one of the hardest working environments imaginable. A family member is held to a higher standard than regular employees, but an in-law has to work even harder than a family member.
“It really takes someone with vision and purpose because there will be a lot of extra challenges,” says Ricci M. Victorio, CSP, CPCC, managing partner at the Mosaic Family Business Center.
If you lay the right groundwork, establish clear expectations, and work with an adviser familiar with the challenges that will occur, she says it can be a productive and joyous experience.
Smart Business spoke with Victorio about how in-laws can successfully enter the family business and thrive.
What challenges do in-laws face when coming into the family business?
The hardest thing to overcome is perception. It doesn’t matter if you have an MBA from Cambridge or a Ph.D. from Harvard. When it comes to in-laws, the fact that you married into the business downgrades any credentials in the eyes of non-family managers or employees. People will tend to judge you harshly, so be patient and don’t take it personally.
How can an in-law successfully enter into the business?
The position, pay scale and responsibility must match the in-law’s experience and education. Thrusting an unqualified in-law upon people, no matter how great he or she is, makes it a much harder road. For example, an in-law was a sales manager making six-figures who was downsized. Now, he’s in trouble financially, and the family is worried. The family can bring the in-law into the business, which might be in another industry, but he shouldn’t start as the head of the sales division. He needs to learn the business and earn his way up the corporate ladder. If parents are still concerned about the financial gap, they can consider gifting additional monies from outside of the business — to help until he earns his way up.
It can be helpful to have the in-law candidate interview with the executive management team to gain support.
How can in-laws overcome the assumption that they have the boss’s ear?
You can’t expect the employees to be your friends, because they are going to assume that anything they reveal will get back to the boss. It can feel isolating and you have to be above reproach. Stay professional and never assume to be the heir apparent.
Also, if you have a problem, resolve things through the proper chain of command. If you’re not reporting to your father-in-law, don’t go to him when you have an issue.
Remember when you come home and complain to your spouse about work that you’re talking about a family member. Your spouse may get defensive, run to whomever you’re complaining about or start disliking that person. Try to share more than just the bad days.
What documentation is needed to protect the business, and the in-law?
Families with a high net worth business typically will require a prenuptial agreement that protects the stock from leaving the family in the case of divorce or death of the blood relative. However, there are incentives such as restricted or phantom stock for high-performing managers, which can provide financial incentives that feel like ownership for growing the company.
It’s also critical to create family member employment and stock qualification policies. These policies define the benchmarks and requirements for all family members, whether an in-law or not, as to how they can become stockowners or hold key executive positions, clarifying the pathway and making family employees more accountable.
Why is having a succession coach valuable?
Engaging a coach who specializes in succession transitions to help employed family members can smooth the predictable challenges along the way. Family employees, including in-laws, need a safe place to talk, and guidance to strategize through the maze of issues that will occur. The coach also can facilitate a family business council, which provides a venue for family members to talk about business related topics, questions and issues that would normally feel inappropriate to bring up in a productive environment.
Ricci M. Victorio, CSP, CPCC, is a managing partner at the Mosaic Family Business Center. Reach her at (415) 788-1952 or firstname.lastname@example.org.
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Companies looking to grow and needing an infusion of capital have several options, which come with various costs and requirements.
“We look at capital on a sort of continuum, with equity perhaps being the most expensive form primarily because of its diluting impact on ownership of the company. At the other end, there’s self-generated working capital derived from profitable operations,” says Paul Gibson, senior vice president and Eastern Region market manager at Bridge Bank. “In between there are a variety of financing options to assist a growing company.”
Smart Business spoke with Gibson about where small businesses fit along the continuum and options they have available to secure working capital.
What is the least expensive option to get working capital?
There is no cheaper form of capital than self-generated profits. Apple, Inc. is an example of a company that continues to be profitable and has a huge war chest of cash available for any need. But most small and growing businesses are not capitalized like Apple and look to banks to assist in the form of senior debt. This financing is usually based on a bank’s prime lending rate as its index and has a modest margin over, or under, this index. These loans are structured, including a senior secured lien on all assets through a Uniform Commercial Code filing and frequently have financial and/or performance loan covenants. There may be a borrowing formula and an advance rate against receivables as well. There is a direct relationship between pricing and structure, as all pricing is ultimately dictated by risk. When a business can’t adhere to a traditional covenant structure, the looser structure usually translates to increased pricing.
It’s best to determine working capital and growth capital needs first when exploring financing solutions. Next, identify the various capital sources starting at the least expensive and work down until sufficient working capital is obtained. Many times it’s possible to meet all needs with senior debt, but there is a limit to how much is available and that is largely determined by the profile and complexion of the company — overall assets, liabilities, cash flow, liquidity. All of these factors help identify risk.
Many growing businesses find it difficult to obtain traditional senior debt financing because they’re focused on growth at the expense of profitability. Some banks specialize in assisting companies in this dilemma, forging strong relationships long before the mega-banks will.
What’s next if companies can’t obtain sufficient senior debt?
Another potential source of working capital is subordinated debt, also known as mezzanine debt or venture debt. Subordinated lenders do not recover their first dollar in a liquidation scenario until the senior lender has collected its last dollar. This type of financing can take many forms.
With subordinated debt there is generally less structure than with senior debt. The reduced or even lack of covenants and junior lien position contribute to increased risk. Because there’s greater risk, subordinated debt also has a higher price.
Some banks offer these instruments, but more often commercial finance companies, hedge funds and other non-bank lenders offer them. The higher rates they charge are reflective of the higher cost of their capital, usually in investor funds or a bank line.
Why is cheaper not always better?
The true cost of capital shouldn’t only be measured in simple dollars or as the spread of basis points in an interest rate. The least expensive capital isn’t always the best capital because there are more factors than just price, such as opportunity costs, ease of use, flexibility of structure and other intangible benefits. For example, a low-interest loan with a covenant package that’s too restrictive can potentially result in a business disruption when a covenant violation occurs. Balancing pricing and structure relative to individual needs is critical when evaluating multiple loan options.
Most people assume that competition is the primary driver of pricing, but it’s not. Risk determines pricing — whether it’s equity or debt — and competition further refines it. Companies should understand their risk profile. It’s a powerful tool in helping to achieve the best outcome for a business’s financing needs.
Paul Gibson is a senior vice president, Eastern Region market manager, at Bridge Bank. Reach him at (703) 481-1705 or email@example.com.
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Remote deposit capture is a treasury management service that allows your company to deposit checks immediately upon receipt by using an electronic scanner, without the need to visit a bank. It saves time, increases productivity and lets employees focus on areas that most benefit the business, using resources in the most cost-effective manner.
“Remote deposit capture reduces your transportation needs substantially. A courier may only need to travel to the bank once per week, as very few items need to go to the bank in paper form — an 80 percent reduction in transportation,” says Kerri Werschky, retail sales manager at First State Bank.
Smart Business spoke with Werschky about how remote deposit capture enhances your banking and business.
How can remote deposit capture improve your operations with time and cost savings?
By using remote deposit capture, substantial savings come from reducing your transportation expenses and allowing employees to focus on other tasks. Most items can be captured, with just a few that must be deposited in paper form at a bank. According to remotedepositcapture.com, a business depositing 10 checks daily to a bank 5 miles away, could save $722 on mileage, $3,930 on recovered labor, $393 on increased productivity and improve cash flow acceleration annually by using remote deposit capture.
This banking service also provides quality control when your accounting system directly receives the data. With this, businesses can access copies of prior transactions, save time and paper because deposit tickets aren’t needed, and still print reports identifying the day’s deposit.
How does remote deposit capture accelerate the collection process?
As payment technology evolves, remote deposit capture has become a fundamental part of the collection process that businesses should be using. Checks sitting in a drawer don’t help cash flow and availability of funds, especially if you are unable to drive to the bank daily to make deposits. You need to quickly process checks through the system for collection.
Remote deposit capture allows extended deposit cutoff times for same-day ledger credit and more flexibility. With the convenience of scanning and depositing checks electronically from your office, employees can easily incorporate the service into your daily business processes. No more rushing to the bank at the end of the day to beat the closing time. In addition, a company with several locations can consolidate banking relationships, even if a bank is not in the same geographic area.
How are remote transfers tracked?
Just by handling transactions through remote capture banking at your own office, you increase accuracy and control. As transactions occur and are finalized, you can keep a close watch on them through online banking. This secure information is convenient, which gives flexibility when transferring money and making payments.
You can make deposits from multiple and/or remote locations, and then centrally track deposit reporting and reconciliation. This consolidation gives businesses a chance to vastly improve payment reconciliation management and the ability to research prior deposits.
What has been done to reduce fraud with remote deposit capture?
Banks work hard to mitigate and manage the fraud risks related to check processing. Remote deposit capture reduces this risk, though, as returned check deposits can be recognized earlier with accelerated clearing.
However, it is vital that businesses also take precautions on their end. Put strong, effective control measures in place around remote deposit capture and check processing to limit exposure. Have written policies and procedures for employees to regularly follow, as well as established security measures for handling checks after scanning.
By utilizing a cost-effective remote deposit capture service in your business, you stand to gain a wide-range of benefits — accelerated clearings, improved availability, enhanced cash flow with better cash management, reduced return item risk, transportation savings and convenience, and the ability to consolidate deposits from multiple and/or remote locations — that all translates to better operations and more profitability.
Kerri Werschky is a retail sales manager at First State Bank. Reach her at (586) 863-9485 or firstname.lastname@example.org.
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Two-thirds of businesses experienced some type of attempted or actual payment fraud in 2011, according to recent industry surveys, and more than 25 percent of banks are reporting a rise in attempted fraud incidents. Although not all attempts result in financial loss, when they do it’s typically around $20,000.
There’s also reputation risk and extra work when somebody gets account information and starts utilizing it in an inappropriate manner, says Ted Sheerer, Senior Vice President and Group Manager of Cash Management at First Commonwealth Bank.
“Companies need to understand the risks and take them seriously,” he says. “It may cost a little bit and make things slightly less convenient, but they need to do everything necessary to protect their financial assets. They need to take proactive steps and not wait until a loss occurs.”
Smart Business spoke with Sheerer about guarding against corporate financial fraud.
Why has financial fraud increased?
Fraud has increased primarily because of technology — from software that makes it easy to create authentic-looking checks to phishing scams, viruses and malware that can compromise a network and PCs. A company’s financial assets could be more vulnerable today than ever. However, there are ways to substantially reduce risk.
What are some examples of financial fraud?
If a company’s account and routing numbers get compromised, they can become exposed to individuals generating fraudulent checks. Some businesses, through the utilization of Positive Pay, which matches check issue data, including payee line, with items presented to the bank, can catch this with no financial loss. The bank alerts the business regarding items that do not match, and offers the opportunity to pay or return those checks. Unfortunately, many others wait until they experience a loss before taking steps to implement Positive Pay.
A more current example is corporate account takeover, where a company’s network or specific PCs get infected with a virus or malware, somebody obtains access to the system and then performs keystroke logging. The fraudster can then sometimes capture the necessary credentials to get into the business’s online banking.
How should fraud education be handled?
You can educate employees, especially those conducting company financial transactions, by using the knowledge of your IT staff. If you don’t have an in-house IT staff or want to supplement this education, work with your bank to see if it offers any security or fraud seminars. You also can find local and regional fraud awareness seminars through professional organizations.
How can you prevent or mitigate fraud?
To minimize the potential of check fraud, companies can incorporate security features into their check stock, store checks and digital signatures in a secure environment, segregate financial duties, reconcile accounts regularly, and utilize Positive Pay with payee line protection. If something doesn’t match, the bank alerts the business customer who decides to pay or return it.
With increased electronic fraud, which includes Automated Clearing House (ACH) transactions and wire transfers, it’s important to have ACH block and filter. This stops unauthorized transactions from hitting accounts. Companies should also ask if their bank offers malware detection and/or account takeover detection software. This is sometimes provided for free.
Some other preventative measures are to:
- Understand procedures around user authentication and limit users to those who absolutely need access.
- Establish dual verification for any outbound electronic transactions.
- Have dedicated PCs used only for online banking services.
- Change passwords regularly, don’t share or write down logins, and routinely update anti-virus and malware protection software.
What’s the priority with fraud prevention?
The priorities should be Positive Pay, ACH block and filter, and then everything the organization can do to protect its network.
Many businesses don’t take the necessary preventative steps. Only when companies seriously understand the risks can they partner with their bank to combat financial fraud.
Ted Sheerer is a senior vice president, group manager of Cash Management at First Commonwealth Bank. Reach him at (412) 690-2213 or email@example.com.
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If you’re seeking a business loan, chances are you’re going to have some covenants written into the loan agreement.
“Covenants are basically additional terms in a loan agreement, usually to set financial guidelines for a company,” says Mike Dalton, vice president of commercial lending at National Bank and Trust. “I would expect that more than 99 percent of all loan agreements have covenants of some sort. You can pretty much count on a loan having covenants about collecting financial information.”
Smart Business spoke to Dalton about loan agreements and what business owners need to know about covenants.
What are some typical covenants?
Probably the most common are financial statements — requiring that the borrower provide annual tax returns, monthly operating statements in the form of balance sheets and income statements. A covenant that the borrower provides the lender with up-to-date financial information is very commonplace and put on virtually every loan.
Beyond that, a cash flow covenant of some sort is common. This can be measured in a number of different ways, but the covenant basically says that the company needs to maintain, whatever its debt service is, a certain percentage of that debt service over and above through profits and/or after distributions. Outside of the financials, common covenants involve current ratios and leverage ratios, whether debt to asset or debt to equity.
Are covenants solely to protect a bank’s interests, or do they provide any benefits for borrowers, as well?
It’s really mutually beneficial. From a bank’s standpoint, it is risk management, and loaning money is managing the risk of getting that money back. But covenants are certainly guidelines that are going to make a company healthier and are going to help a company potentially weather a down economy or a bad contract it took a loss on. If covenants make sure the business is maintaining appropriate liquidity ratios, they will help the company get through a bad situation. While the bank sets them, covenants are certainly a benefit to the borrower, as well. These are elements that can keep a company healthy and viable through a potential downturn.
Do business owners usually negotiate covenants, or do they use consultants?
It’s probably 50/50, depending on the size of the business. With a smaller, mom-and-pop operation, it’s likely going to be strictly a conversation between the bank and the business owners. When you get into larger companies, it’s not uncommon to have a CPA involved. Potential borrowers are always encouraged to consult with their CPAs.
Are banks dictating terms, or is there a give and take?
I would say they’re somewhat negotiated items. Ninety-plus percent of the time, it’s just a normal conversation sitting across the desk from a business owner and discussing a loan request, identifying strengths and weaknesses, and coming to a mutual agreement on rates, terms, etc., that are acceptable to both parties.
What happens if a covenant is not met?
There is some kind of penalty. It could be a one-time fee or a higher interest rate until that covenant is corrected.
Typically, it’s an interest rate bump — if a business has missed the covenant, the interest rate goes up by 1 percent, 2 percent or 3 percent until the business gets back into compliance with the covenant. If the borrower drops below its current ratio covenant, you’ve got a company that doesn’t have the appropriate amount of liquidity, so the bank’s risk goes up. Therefore, the rates are raised an appropriate amount. Loan rates, especially in commercial lending, are priced based on risk — the lower the risk, the lower the rate. Another way it’s done is a one-time fee where the bank says, ‘We’re going to measure this covenant at year-end, and if you miss it, we’re going to assess a penalty of a certain amount of dollars.’
If the interest rate can go up, is there anything a borrower can do that would lower its rate?
Anything that lessens the bank’s risk is going to lessen the rate. The borrower could provide additional collateral. If it has an acceptable current ratio now, could it ask, ‘If I increase my current ratio above this, can I get a lower rate?’ Sure.
Other than covenants, is there anything else business owners need to understand about loan agreements?
A loan note itself, other than the covenant section, is 90 percent boilerplate. The bank fills in a few blanks as far as loan amount, interest rate and payment amount, but the overwhelming percentage of a loan agreement is boilerplate legalities. They’re pretty standard; most banks use one particular software system. It’s a two-page note and the second page of the note is identical on every loan and goes over definitions of how the bank calculates interest, what makes a default and what remedies the bank has to collect on the loan in the event of a default. That’s the boilerplate section.
Mike Dalton is vice president of commercial lending at National Bank and Trust. Reach him at (937) 382-1441 or firstname.lastname@example.org.
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With lower lease rates and the Marcellus Shale boom, commercial real estate in the tri-state footprint is looking up. Greg Sipos, senior vice president, corporate banking manager, at First Commonwealth Bank, has been encouraged by recent commercial real estate activity in western Pennsylvania, as well as in Akron, Columbus and Youngstown, Ohio.
“When I say those names, you’re not like, ‘Wow, that’s a great place to go,’ but, you know what, it really is these days,” Sipos said. “They’ve had some real estate growth and nice projects in those markets. It’s well ahead of the rest of the country, and I’m encouraged by the amount of activity in the last six months.”
Smart Business spoke with Sipos about the state of the real estate market and how bankers are getting back to the fundamentals of lending.
How does the current commercial real estate market look?
When you look at this market, there was limited asset appreciation over the years, and the borrowers never overleveraged the way that it happened everywhere else. People built equity in their real estate by normal amortization of loans. So if they had a 15-year loan and they paid it back over 15 years, they built equity in their real estate. Western Pennsylvania has always been known for that, as opposed to the rest of U. S., where asset appreciation was due mostly to the perception of overall growth through demographics. Problems occurred because assets were overleveraged in a lot of ways. Conversely, Pittsburgh went from being one of the worst real estate markets in the country to being one of the best in the span of three years because of the steady equity growth.
The mood is very strong in this area with some game changers. The growth in the Marcellus Shale area and the oil and gas industry in western Pennsylvania has brought strength to the market through all aspects, from multifamily to the retail businesses and hospitality industry. Another thing that’s happened in the central business district, as far as Pittsburgh is concerned, is a lot of large firms headquartered in other cities realized that the rent per square foot in Pittsburgh is much more reasonable than the rent per square foot in Manhattan and other comparable markets. Companies are relocating to the central business district or to Pittsburgh in general because of favorable lease rates.
Hospitality is known as a good indicator for the economic health in commercial real estate. What is the outlook in the tri-state area?
Yes, hospitality is an indicator, and it is doing very well now. Western Pennsylvania had a lot of older product, but now a lot of newer product is coming online around Pittsburgh and in some of these smaller towns. Morningstar, a financial-data firm, reports that — at least for the next three or four years — it’s definitely an industry to lend in.
When banks make a loan for hospitality, they look at what the drivers will be — why will people be coming and staying here. A lot of the hospitality that got into trouble was in resort areas because, during recessionary periods, people tend to forgo vacation. The hotels that are successful are the ones that have many drivers. For example, is it a flagged property? It’s much easier in today’s market to get a loan for a Marriott, a Hilton, a Holiday Inn or a Choice product because of the reservation system. One hospitality loan was recently done in Latrobe, Pa., the home of professional golfer Arnold Palmer. There’s a lot of industrial around, it has a resort element because of Idlewild Park and the Laurel Highlands, it has St. Vincent College, hospitals, and it has Mr. Palmer’s name attached to it, which results in reciprocating agreements between Latrobe and Florida. So there are drivers for occupancy. You don’t want to open up a hotel where you have to bet on tourism or one industry.
How have lending practices changed, and how much emphasis is being placed on equity?
The one thing that’s different now — that hasn’t come back the whole way — is the lending rules were generally much less stringent pre-recession. Post-recession, it’s back to the fundamentals. When you want to buy something, you need to have a down payment for it and you need to have cash flow to repay it.
Banks are requiring down payments. As a business owner, when you are thinking about making that expansion or when you’re thinking about buying a new building, you need to make sure you have the right amount of equity to go into the project. The bank is no longer willing to take the equity risk it was taking pre-recession.
Having equity shows you can afford it and shows your commitment to the project. If you are able to buy real estate without putting equity into it, it’s much easier to walk away. Some people might be interpreting that as unfair, but it’s not really unfair, it’s just the way it’s always been done prior to the years leading up to the recession.
It’s important to remember there are differing ways to find equity. These include:
- Equity through government programs.
- Investors on the sidelines looking to invest.
- Personally guaranteeing loans, a practice people were always comfortable with. Borrowers have to be willing to guarantee the indebtedness, maybe by pledging other equities in other properties as collateral.
Greg Sipos is a senior vice president, corporate banking manager, at First Commonwealth Bank. Reach him at (724) 463-2556 or email@example.com.
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The recent uptick in sales is like a breath of fresh air for beleaguered business owners — unless they don’t have enough cash to meet rising expenses while they wait out a typical invoicing cycle.
A conventional line of credit may seem like the prefect solution, but since an owner’s personal and business finances are intertwined, those who fell behind on mortgage payments or bills during the recession may not qualify.
“Owners need short-term funding to carry receivables and hire staff now that the economy is improving,” says Paul Herman, small business lending manager at California Bank & Trust. “Their best bet is a short-term line of credit (SLC) since bankers primarily focus on a company’s cash flow cycle during the underwriting process.”
Smart Business spoke with Herman about the opportunities to grow your business by tapping a short-term line of credit.
What is an SLC and when are they advantageous?
Essentially, an SLC is bridge financing. Savvy executives tap the line to pay expenses between the time revenue is generated and receivables are collected. For example, they may need cash to purchase supplies or inventory to handle seasonal spikes or new contracts before the goods are finished, delivered and paid for. Contractors frequently use an SLC to pay bonding and insurance premiums so they can bid on new projects, and veteran attorneys and doctors often use the funds for operating expenses when they launch a new practice.
You can draw on the line as needed and repay the funds at will as long as you meet the terms of your agreement and attend periodic reviews with your bank.
How does an SLC differ from other loans?
It’s assumed that owners will pay down a short-term line as cash is received, so bankers are primarily concerned with how quickly a company converts receivables into cash when they consider an SLC request.
Long-term debt is typically used to purchase equipment, buildings or other fixed assets, so bankers must consider depreciation as well as a company’s profitability to assess its ability to service the loan. In fact, stable but slow growth is often a key indicator of a company’s ability to service debt over the long term, while an SLC is the perfect solution for cash flow shortages resulting from a growth spurt.
Are there risks associated with an SLC?
No loan is risk free. However, prudent owners can avoid default or cash shortfalls by following these best practices:
- Accurate forecasting — Some owners are so afraid of taking on debt that they run out of cash because they don’t ask for a large enough line. This won’t happen if you accurately forecast your company’s growth and cash conversion cycle. In fact, it’s better to ask for the maximum limit since you have the option of drawing the funds as needed.
- Be disciplined — Only use the funds to close short-term cash flow gaps. Otherwise, you may run out of money and have to liquidate assets to pay bills or meet payroll.
- Be responsible — Bad debt, delinquent customers or risky business practices can leave well-intentioned owners holding the bag. Are you ready, willing and able to accept responsibility for managing your company’s credit, cash flow and an unmonitored credit line?
How can a business maintain the quality of its assets and increase borrowing capacity?
Owners often emphasize sales, but what good is top-line growth if the margins are bad or you can’t collect your hard-earned money? Even tenured customers may encounter a cash crunch as the economy rebounds, especially if they wait too long to secure short-term financing. Be disciplined about verifying a customer’s credit worthiness, keep an eye on receivables and don’t forget to make timely collections calls.
Finally, don’t ignore your balance sheet because a business can’t survive with high debt and little equity. Grow assets as well as revenue, and make sure your balance sheet reflects the norms for your industry.
What do bankers consider when evaluating a request for an SLC?
In addition to reviewing traditional underwriting criteria like business and personal credit scores, bankers want to know whether you have the means and ability to manage and repay a line of credit.
They’ll look at your industry experience, the viability and diversification of your customer base, along with the ebb and flow of your company’s cash flow during previous cycles. Will your customers pay on time? Can your business survive if one customer defaults? Do you have enough personal assets or sources of secondary support to pay your bills while you wait for an invoicing cycle to conclude?
Bankers may be able to use government guarantees to overcome minor risks, and you could qualify for a conventional line of credit down the road if you use an SLC as a stepping stone to build your credit score and your company.
Paul Herman is the small business lending manager at California Bank & Trust. Reach him at Paul.Herman@calbt.com.
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When a company gets into a position of missing payments on a loan, the loan originator could possibly sell your debt to a third party. Once your commercial loan is sold, the velocity of both money and information becomes critical.
“Don’t panic,” says Brian R. Forbes, a member with Dykema Gossett PLLC. Instead, he suggests being proactive.
“The more proactive and transparent you are, the more likely the asset manager responsible for your loan will internally advocate options that may allow opportunities for a mutually acceptable restructure,” he says.
As a borrower, you have the chance to start your lending relationship over because there is no previous history with your new lender. Forbes says there is a possibility that you can restructure your debt on terms more favorable than offered by your original lender.
Smart Business spoke with Forbes about how to handle your distressed debt after it changes hands.
How do you define distressed debt?
Distressed debt would be any debt or credit that has one or more missing payments, either partially or in whole, or is in imminent danger of missing one or more payments without the ability to cure. If you are a borrower who has reached this critical point, there is a possibility your debt will be sold to a third party.
At what point does debt get sold?
Distressed debt can be sold at any given time. The third party that buys debt often has a different objective than the original lender because they are seeking to maximize their investment returns in a shorter time frame. Since the distressed loan frequently is purchased at a discount, an opportunity exists to negotiate terms more favorable to the borrower. The new lender could potentially offer more creative workouts, such as allowing the borrower more time to refinance, extending payments, stretching amortization or allowing a discounted payoff. A new lender is not always negative for the borrower.
How would you know your debt has been sold?
Most loan sale agreements require a borrower be notified immediately upon the closing of the loan sale. The loan buyer will contact the borrower quickly to ensure all payments due under the loan are going to the buyer and not to the seller. If the debt is in distress and there is a default, a workout specialist or asset manager will contact the borrower for updated information. In the best-case scenario, the borrower’s financial statements are complete and easily reviewed and verified, which enables the asset manager to quickly assess the situation and recommend a course of action.
The anticipation from an asset manager’s perspective is that information flows between parties within a month of closing. If the debt involves real estate, such as an office or apartment building, the asset manager will want to see rent rolls, pro forma financial statements and detailed budgets. The less information the asset manager receives, the more difficulty the asset manager has evaluating the credit and recommending a mutually favorable solution.
What’s at risk once it has reached this point?
The velocity of money and information is critical to the third-party debt purchaser. The new lender is making a decision as to whether there is a workable solution between it and the borrower. Many third-party buyers prefer to work quickly to resolve the asset with the borrower in either a full or, if justifiable, discounted payoff. In order to do this, the asset manager needs accurate information quickly to pursue the most cost-efficient action.
The remedies third-party buyers often exercise if they are forced to operate without the requested information include foreclosure, but generally third-party buyers do not want to own the property. Third-party buyers can enforce other remedies under any guarantees of the loan and pursue their rights against the guarantors and the underlying collateral. Third-party buyers will pursue a general workout strategy if it makes sense for both parties.
What should a company do when its commercial loan gets sold to a third party?
If a third-party buyer purchases your debt, anticipate that the new lender will be proactive in exercising its remedies under the loan documents in an effort to resolve the credit and that you should provide the new lender such information required under the loan documents. Remember, many debt buyers contractually respond to investors and lenders in the same manner as the borrower responds to the lender under the loan documents. It is advisable to have your asset manager well informed of your credit and circumstances in order to facilitate the best solution. Without sufficient information, new lenders often immediately exercise remedies.
Be forthcoming. Obtain counsel and with his or her advice gather and give your accounting information to your new lender who can evaluate and understand your credit as quickly.
What are the best-case outcomes once a company has reached this point?
The best scenario is the borrower obtains the opportunity to keep its business going, resolves a current credit that by its size may be limiting opportunities for the borrower, obtains for any guarantor a release from his or her guaranty for consideration, and either purchases the debt or refinances the debt at a price discount that corresponds to the current fair-market value of the asset serving as collateral or the value of the business. Do not panic. Everyone is interested in finding the best solution, which often means the borrower refinancing the debt with another lender.
Should a borrower get counsel involved?
Retain an expert representing borrowers in this context immediately to determine whether restructuring is viable and the best option. Counsel can help structure the best solution given the facts and circumstances of the underlying credit, while identifying and minimizing potential adverse tax consequences.
Brian R. Forbes is a member with Dykema Gossett PLLC. Reach him at (214) 462-6403 or firstname.lastname@example.org.
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Banks have been dealing with evolving regulations for as long as banks have been in existence. So while the Dodd-Frank Wall Street Reform and Consumer Protection Act has given some in the banking industry cause for worry, the critical issue is how institutions will evaluate the potential effect and cope with increased regulations. While some banks might buckle under the threat, others will adapt to the new laws and regulations without allowing the complexity and costs of compliance to become an impediment.
“Savvy institutions recognize that the key is aligning their adjustments with their business models and processes,” says Jim Stempak, a principal at Crowe Horwath LLP. “By integrating compliance with normal business operations, banks stand to extract greater value from their business processes.”
Smart Business spoke with Stempak about how banks can find opportunity in new and revised regulations where others find dismay.
What regulations must banks be prepared to deal with in the near term?
Compliance officers are struggling with the efforts of bank regulators as they implement regulations under Dodd-Frank. Banks do not know what to expect from future regulatory examinations or where examiners will focus, so those expectations remain a moving target.
Questions also remain about the range of authority of the Consumer Financial Protection Bureau (CFPB), the agency established by Dodd-Frank. All banks will be directly or indirectly affected by CFPB rulemaking. Some will be required to work with this new agency’s examiners, who will be conducting exams and assuming responsibility for consumer compliance regulations in certain banks (those with more than $10 billion in assets). The CFPB is in the process of bringing its employees up to speed on the agency’s mission. Banks, however, are waiting without clear direction regarding the scope and timing of the CFPB examination process and how the new agency will coordinate efforts with other federal bank regulatory agencies. Financial institutions will be forced to contend with this environment of uncertainty for quite some time. Meanwhile, there are some measures that banks can take now that will allow them to successfully navigate this changing environment.
How have banks historically coped with increased regulation while managing to stay successful?
As the dust settles on Dodd-Frank’s initial effects, banks can begin to see that successful adaptation comes down to taking a measured and systematic approach to integrating the requirements with normal processes, often using enhanced technology. However, a silo approach to compliance is unlikely to succeed. Saddling the compliance officer with the sole responsibility of adapting to this new reality is unrealistic. Instead, success requires that key managers throughout the organization get on board. Line-of-business managers, for example, will need to integrate Dodd-Frank compliance into their daily activities, while IT managers will need to adjust existing technology platforms to integrate processes that facilitate compliance, or possibly design entirely new processes and technologies.
History offers examples of how banks learned to turn difficult regulatory requirements into opportunities. Take, for instance, the Know-Your-Customer (KYC) identification programs required by Bank Secrecy Act (BSA) regulations. This mandated banks to catalog their customers’ banking activity to better identify suspicious behavior. To do this, some banks used the information they gathered to develop a profile of each customer.
Another, more effective, approach manipulated existing processes and technology platforms to better gather information while sending a message to each customer that outlined how the bank’s inquiries were intended to better understand each customer and provide him or her with personalized products and services. As a result, the customer experience was improved, new accounts were opened in less time and many cross-selling opportunities became available to the bank. The customer service enhancements were in addition to establishing a solid platform for efficiently and effectively complying with the regulatory requirements.
Similar to what was done for KYC compliance efforts, information obtained through Dodd-Frank mandated data collection also likely will provide opportunities for banks to use the information for marketing and other value-added opportunities. By ingraining the requisite activities in their existing processes, banks were able to successfully adapt to the regulations rather than treating them as if they were burdensome compliance activities.
How can organizations best cope with complying with these regulations?
To facilitate compliance with new or revised regulations, organizations should develop cross-functional teams that alert the organization to changes that are likely to be required or that are coming. Teams can begin to develop strategies for implementing new or revised processes and technology. This will necessitate involvement from thought leaders from all levels of the organization, rather than taking an approach focused solely on compliance. Teams should develop a client-focused experience that also improves product development and existing processes as they work to bring the organization into compliance.
When dealing with certain consumer lending regulations, the team should consist of management representatives from areas including mortgage origination, consumer lending, regulatory compliance, IT and marketing. Teams should coordinate efforts to monitor specific regulations that affect consumer financial products, analyze the customer’s fit with the product and deliver products fairly to all consumers. This is especially important considering CFPB will be carefully evaluating compliance with new and revised regulations for consumer financial products, including mortgage loans.
Every financial institution will be touched by the regulations and it is up to banks to take an integrative approach to compliance to make a smooth transition while positioning them to take a competitive advantage. This will allow them to comply with the regulations while simultaneously advancing their business.
Jim Stempak is a principal at Crowe Horwath LLP. Reach him at (214) 777-5203 or email@example.com.
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Approximately 25 percent of mid-sized companies plan to expand how they use treasury management products this year, according to Greenwich Market Pulse. Treasury Management is more important than ever to make sure businesses not only manage risk but effectively oversee their payments and receivables with adequate liquidity.
But, how can you ensure your business is maximizing its liquidity and cash position potential?
“Businesses are increasingly challenged to provide a disciplined, efficient means to effectively manage their capital position and liquidity in response to the rapidly changing economic environment, increased regulation and globalization,” says Korlin Scott, Senior Vice President and Director of Commercial Product Management for FirstMerit Bank.
“As financial systems continue to evolve with more sophisticated functionality to support these market drivers, there are significant, cost-effective opportunities for businesses to leverage Treasury Management services for improved payment settlement, reconcilement and cash positioning.”
Smart Business spoke with Scott about how companies can use Treasury Management to save money and time.
Why is Treasury Management important for businesses?
Improving cash flow can help any business efficiently manage its working capital. When key aspects of the cash flow cycle can be utilized to their fullest extent, companies gain competitive advantages.
Treasury Management services can significantly drive efficiencies in the receivable collection processes and provide enhanced control over payments while delivering a real-time view into company finances. Driving improvements in the cash flow cycle can have a direct impact on a company’s working capital and ability to focus on revenue-generating activities.
What’s the first priority for employers with treasury management?
Taking advantage of a bank’s robust technology allows a business to significantly improve its cash flow cycle without costly investments or additions to staff.
The broad range of payment and collection services available includes automating the routine, daily process of making/receiving payments and centralizing the reconcilement of information for a consolidated view of the business.
Integrating these services — and, perhaps more important, the information — is key to achieving significant reductions in time spent on day-to-day administration and transaction processing.
How can employers more efficiently manage how they receive payments?
There is a tremendous opportunity for businesses to improve order entry through cash conversion, particularly with check payments, by speeding up the payment collection and posting process.
For example, lockbox services effectively automate the collection of larger volumes of payments. Payments are received at a central location and scanned for automated deposit, accelerating the cash application process. The ability to capture and image not only the payments but associated remittance information also improves the reconciliation process, leading to improved availability of funds.
Another service that is equally as effective is Remote Deposit Capture, which can be used instead of or in conjunction with lockbox services. Remote deposit allows your business to deposit checks immediately upon receipt without the need to visit the bank. You also have the flexibility of later deposit times providing faster access to funds without making physical deposits at the bank.
What’s the best way for a business to manage how it pays out cash?
Gaining control over the timing of outgoing payments allows businesses to more accurately forecast cash outflow, as well as maximize use of their available cash.
Automated Clearing House (ACH) services allow businesses to make and collect payments electronically with specific settlement instructions to more efficiently control the timing of the payments. ACH typically costs much less than writing checks and with the ability to initiate payments online, you can significantly reduce payment risk while enhancing your ability to manage recurring payment information.
Wire Transfer is another alternative, providing an easy, secure means to transfer funds worldwide. For urgent payments, wire transfer has a distinct advantage over writing checks and ACH, as it provides immediate funds availability, which is an effective tool to improve the purchase to payment process.
These are just a few of the Treasury Management options that can more efficiently manage your cash flow, whether it’s expediting payment collection or gaining better control over outgoing payments.
Korlin Scott is Senior Vice President and Director of Commercial Product Management at FirstMerit Bank. Reach him at (330) 996-6496 or firstname.lastname@example.org.
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