There are many ways that small and medium-sized businesses can find themselves facing financial difficulties that lead to trouble in their commercial lending relationship. When this happens, many times business owners become paralyzed, shutting down and failing to communicate with their lender. While that is understandable, it is the wrong thing to do, says David M. Hunter, chair of the Real Estate Practice Group for Brouse McDowell.
“When a business anticipates that it is entering a period of financial challenge, one of the first things it should do is get competent legal counsel,” says Hunter.
Often, business owners only do this as a last resort. However, retaining knowledgeable counsel early on allows you to obtain practical pointers when there is often greater flexibility to negotiate an agreeable outcome, he says.
“Once a lawsuit is pending, things become much more difficult to negotiate, even with a lawyer involved,” he says.
Smart Business spoke with Hunter about how to work with your bank to preserve good relations during difficult financial times.
When a company realizes it may be headed for financial difficulties, what should it do first?
Small and medium-sized businesses typically have a large file that contains the underlying governing documentation when the business took out the credit facility. In the event that your business is slipping into financial turbulence, locate that file and review the terms and conditions of your loan.
However, most businesspeople are overwhelmed by the paperwork. This is a good reason to get counsel involved early. Your counsel will determine the secured or unsecured position of your lender. If your loan is secured, what are the assets that secure it and what are the current valuations of those assets? Is the loan in default? If not, what is the time period you project you could make the required payments and otherwise adhere to the terms of the loan agreement?
How can an attorney help?
A good attorney either has knowledge to assist a borrower facing a potential loan default or is with a firm with others who have knowledge of the federal bankruptcy law protections or other approaches that would aid a borrower facing an approaching problem.
Once you have secured counsel and discussed the issues, the next step is to contact your lender. Bankers appreciate knowing that a borrower is alert to the problem and wants to collaborate with the bank to address it or explore what remedial options are available.
Business owners often believe that banks want to seize a borrower’s property or shut down a borrower’s business. No bank really wants to do that. If it is reasonably achievable, banks want to rehabilitate nonperforming loans and transform them back into performing loans that pay as agreed. They want to lend money to borrowers that use loan proceeds effectively and to create an improved economic performance for the borrower, which will allow the borrower to repay the loan.
Are there risks in alerting a bank of a potential missed payment?
Some businesses, regardless of efforts taken to head off financial difficulties, can face a situation in which the next loan payment might be missed. No bank will think unkindly of a call from a borrower saying an upcoming payment might not be paid timely. Some borrowers might worry that if a bank finds out about a potential missed payment, an awful consequence will be triggered. But if that is the impulsive reaction you receive from the bank, you are likely dealing with the wrong bank.
However, after 90 days of delinquency, the loan will likely go into a nonaccrual status — a consequence which immediately and negatively impacts the bank’s earnings. This is a more serious situation. If you alert your bank early enough, it will likely work with you to find a solution. But it gets more difficult to take these steps the longer a borrower waits.
At what point does this become a legal issue?
There are legal issues every step of the way. But these become more acute when the evolving facts empower a lender to take steps that can disrupt a borrower’s business. Many loans contain a cognovit provision, a tool a bank can use if a loan is in default. This authorizes a bank to obtain an expedited judgment against a borrower. This expedited judgment can quickly empower the bank to attach the bank accounts or levy upon the assets of its debtor.
It’s important to communicate with your bank before such a provision is implemented in an effort to find a way to augment the terms and conditions of the loan to give the borrower a window of opportunity to make payments. This often leads to the creation of a forbearance agreement — a mutually agreeable written understanding between the bank and its borrower as to how the parties will treat this troubled loan. Forbearance agreements customarily provide that as long as the borrower adheres to the agreement, the bank will refrain from pursuing certain remedies, such as obtaining or enforcing a cognovit judgment.
Preservation of value should be paramount for both the borrower and the bank. Under potential default circumstances, borrowers and banks can do things that can negatively impact a business’s value, and banks know that. If a bank acts aggressively to prompt a forced sale of assets, often the value realized when the assets are sold will be reduced.
Before a borrower gets to that point, the borrower would be well advised to work with a lawyer and devise a strategy to deal with the situation. Often, the owner and lawyer can come up with a plan of payment and present it to the lender. If the plan is reasonable, many times the lender will be receptive.
What are some other potential resolutions?
There is often relief available in bankruptcy. But its practical effectiveness hinges on the size of the company, as the pursuit of such a remedy can often be cost prohibitive. Chapter 11 cases, for example, can come at a high cost and be labor intensive. But a Chapter 11 filing can make sense in certain circumstances.
David M. Hunter is chair of the Real Estate Practice Group for Brouse McDowell. Reach him at (330) 535-5711, ext. 262, or email@example.com.
Insights Legal Affairs is brought to you by Brouse McDowell
Women are playing an ever-increasing role in changing the economics of growth, growing businesses and jobs, and creating new opportunities for everyone. This is especially the case in economies that are slow or stagnant, where greater opportunity exists to start a business.
“Women are taking advantage of these opportunities in droves, and they’re able to grow businesses in times of slow economic changes,” says Stephanie Union, a partner and chair of Kegler, Brown, Hill & Ritter’s women-owned business area.
Many women have taken small mom-and-pop shops and grown them into successful small businesses.
“There’s a greater opportunity for women to do that today, whereas in past generations, there might not have been, and communities are benefitting from the number of jobs they create,” she says.
As women continue to progress in the professional world, mentorship programs, referrals and professional associations designed to support women business owners are increasingly important.
Smart Business spoke with Union about the unique opportunities women have today to give or receive advice that can help grow women-owned businesses.
How can women helping other women and referring business to each other be beneficial?
There’s recognition among certain successful women that you can pass on your success by referring your colleagues and friends to other female professionals. It’s amazing the number of referral groups, professional networks and organizations that provide many opportunities to get involved, a number of which encourage referrals among women. Having that camaraderie can help women succeed and gain ground in their own businesses.
There are also a number of certification programs for women-owned businesses that offer a leg up in terms of getting certain types of work from federal and state governments. For example, the Women’s Business Enterprise National Council will certify women-owned businesses, as does the Small Business Administration. The certification processes are rigorous, and companies have to prove that they are a woman-run business and that the majority of the company is controlled by a woman. The documentation and effort required to get certified is stringent, but that designation can be very beneficial for companies in certain industries.
How do the needs of women business owners differ from those of their male counterparts?
A number of women find themselves in industries traditionally dominated by their male counterparts, so finding their way among the men can be a challenge. Partnering with people who have insight into the industry can help them find comfort. Many women business owners have navigated the waters themselves and can help other women get established.
The needs of women business owners can sometimes be fulfilled more fully by fellow women. Women who are professionals generally have a better sense of what other women business owners are experiencing and what they have to face on a daily basis. That empathy can direct the way women do business together and help all of those businesses succeed and prosper.
How can women benefit from working with services that cater to women business owners?
Having ties with professional women’s groups can give someone perspective on the obstacles women deal with and how to support women going through those struggles. While the services aren’t different or better, they are provided in a way that women can appreciate more and respond to better.
There is something to be said for knowing the struggles women face and have faced. Taking these into account when giving advice can help women business owners succeed.
What issues are women business owners likely to face?
There have been historic struggles for women. While there are laws that allow women to vote or prevent discrimination, women still face struggles that are different from those that men face.
Maintaining a work/life balance is an issue for both men and women, but it’s hard when you’re a mother and working full time, considering there remain different societal demands for women than men. While conditions are changing, they haven’t fully equalized between the sexes, so daily struggles still exist. The goal is to recognize those struggles and support women by helping them find balance within the working world.
What can women do to help other women be successful professionals?
There are mentoring opportunities. Who better to understand the struggles of a woman than another woman? Some organizations and associations have mentorship programs, but, in my opinion, the best mentorships happen without much formality. It is better if the relationship develops naturally.
Natural mentorships are informal. It’s not a situation where you must meet with the woman you are mentoring four times per year and accomplish certain goals. Instead, it is a relationship that develops in which you care about the way the person you are mentoring is advancing and can offer her advice.
To be prepared to be a women business owner, you also need education. When starting your own business, there are a lot of things you need to know in terms of accounting issues and legal matters, including rules surrounding employees and hiring. You need to have a good education or surround yourself with people who have experience in those areas.
A number of women-focused associations or organizations can provide the support or connections needed to get a business up and running.
Stephanie Union is a partner and chair of Kegler, Brown, Hill & Ritter’s women-owned business area. Reach her at (614) 462-5487 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA
If you run a small business that has had difficulties obtaining a loan, there is some good news. Preferred lenders can help businesses navigate through the U.S. Small Business Administration (SBA) loan programs to obtain financing needed for growth and expansion. The SBA loan process can be confusing, and small businesses may experience unknown challenges when applying, such as a collateral shortfall or not enough cash down payment to put into the transaction. However, preferred lenders, like community banks, can help small businesses with this process.
“We’re likely experiencing the lowest interest rates in history,” says Edward L. Wood, CTP, regional vice president of commercial lending for National Bank & Trust. “The ability to lock those rates in for a longer period makes today a compelling time to get an SBA loan.”
Smart Business spoke with Wood about SBA loans and how obtaining one could benefit your business.
What types of businesses can benefit from an SBA loan?
Typically, the SBA’s goal is assist small businesses with their growth and lending needs, rather than large corporations that do more than $100 million annually in sales. However, there are a variety of SBA rules that companies must abide by to qualify for an SBA loan. It is always recommended that the borrower find an experienced SBA lender who participates in the Preferred Lender Program (PLP) and can help you navigate the SBA requirements.
How do SBA loans differ from other loan products?
There are many advantages to SBA loans, including a lower down payment, sometimes as little as 10 percent, which is typical of two SBA programs known as 504 loans and 7A loans. You also can get extended payment terms with these loans. For example, lenders with working capital loans prefer to keep amortizations between 36 to 48 months. Under the SBA 7A guaranteed loan program, many lenders allow longer amortization periods, usually up to seven years, which provides an even greater benefit to the borrower.
Also with a SBA 7A loan, the bank is lending all of the funds for the project and the SBA provides the lender with a guarantee, generally around 75 percent of the total loan amount. These loans offer working capital to fund growth, accounts receivable and inventory.
The SBA 504 loan is geared toward equipment financing and/or owner-occupied real estate. With this type of transaction, the borrower has two loans — one with the SBA who finances 40 percent and the second with the lender who finances 50 percent. The borrower is only required to provide 10 percent equity in the project. Under the 504 program the lender maintains a first mortgage on the collateral while the SBA takes a second position. Additionally, with the SBA 504 loan, the borrower should be aware there are prepayment penalties within the first 10 years.
The effective rate for the SBA portion of the 504 loan in August 2012 was a fixed rate of 4.45 percent. The lender portion is usually handled with a five-year adjustable rate.
What is the process to obtain an SBA loan?
The process starts when a borrower contacts his or her preferred lender. The lender will assist him or her through every step of the process. The lender drives SBA 7A loans and capital lines of credit from start to finish and submits the transaction to the SBA for approval. For SBA 504 loans, the lender will also work with a third-party non-profit entity that will underwrite and submit the transaction to the SBA for approval.
To apply, simply provide the same information you would for any other type of loan. Lenders are looking for the last three years of business and personal tax returns of the guarantors and accountant-prepared financial statements covering the three previous years. A personal financial statement from each year and an aging of the business accounts receivable and payables are also needed.
Why is now a good time to apply for an SBA loan?
The uncertainty in the interest rate market makes today a compelling time to apply. Because of this uncertainty, the SBA loan becomes an incredibly viable product that could allow you to fix part of your total debt service for up to 20 years. Getting longer amortizations on working capital loans are compelling because it allows the borrower to stretch payments out over a longer period of time, thus reducing your debt service requirements.
There is also uncertainty in the market, not only in terms of where interest rates will head but also where inflation will be and the debt level the U.S. has taken on. While interest rates will rise no one can be sure when that will happen, so it is to a company’s benefit to act now.
How can working with a community bank to obtain an SBA loan be beneficial?
A community bank has the ability to better execute an approval. There are fewer people at the top involved in the approval process than at a larger bank.
Depending on the type of transaction, it could take three weeks to get an approval once the lender receives all necessary information. Community banks are well suited to obtain all the necessary information upfront, which can help avoid delays.
Edward L. Wood, CTP, is regional vice president of commercial lending and the HCDC (Hamilton County Development Corporation) 2011 lender of the year. Reach him at (800) 837-3011 or email@example.com.
Insights Banking & Finance is brought to you by National Bank and Trust
During the next two years, there are things that employers need to know and need to be doing to comply with the Patient Protection and Affordable Care Act.
“While this was working its way through the Supreme Court, many were holding their breath waiting to see what would happen,” says Dale R. Vlasek, a member and chair of the employee benefits practice group for McDonald Hopkins. “The decision is that it is constitutional, which means that businesses must take action.”
Smart Business spoke with Vlasek about the changes businesses need to be aware of as health care reform takes effect.
How does the ruling play out for employers?
The Supreme Court determined the individual mandate — the requirement that all U.S. citizens have health insurance — and imposing a penalty or tax on those who do not purchase insurance is constitutional. Large employers effectively face a similar mandate, called shared responsibility, or ‘pay or play,’ that goes into effect in 2014, requiring that they offer a health care package that is affordable, limits an employee’s cost sharing and provides essential benefits, or the employer must pay a penalty.
Large employers are those with 50 full-time employees who worked at least 30 hours per week during the previous year. To determine if your company fits this description you should add up all the hours worked by full- and part-time employees and divide that total by 2,080. This could show that you qualify as a company with more than 50 employees and that you must provide your employees with the opportunity to participate in your benefit package or pay a penalty.
How will the mandate affect the benefits offered?
Medical benefit packages must offer a certain level of coverage. There should be a limit on cost sharing in terms of deductibles and co-insurance, and it must be affordable, which means the amount an employer can expect an employee to pay in terms of premium costs. The way the law is written, premium costs can’t be more than 9.5 percent of an employee’s household income. That can be difficult for an employer to determine, so the IRS allows employers to work from an employee’s W-2 income statement.
If the employer chooses not to offer benefits, it will pay an excise tax that is $2,000 per year, multiplied by the number of uninsured full-time employees. The employer can, however, subtract 30 employees from the total who are uncovered, leaving it to pay penalties only on the remaining
If an employer is offering coverage that some can’t afford, those employees could get into a health care exchange or potentially be eligible for subsidies or tax credits to help pay for coverage. The employer then must pay an excise tax, but only on those who are eligible for the tax credit or
How else might existing benefit plans be impacted?
Insured plans previously had no discrimination rules from a tax perspective, so, for example, you could have a plan that only covered executives. However, health care reform changes that. You can’t be discriminatory and you may need to cover broader classifications of people. This component has been put on hold while the IRS, the Department of Labor and the Department of Health and Human Services write regulations that outline how companies must comply.
Plans that were grandfathered — or those that have been in existence since March 23, 2010 or earlier and that haven’t changed, can continue to operate as they did, even if, under the new law, they could be considered discriminatory. But as the insurance industry moves to provide better benefits and makes changes, these plans are being redesigned and companies may have a difficult time remaining grandfathered.
Will flexible savings accounts face changes?
Previously, there weren’t any limits on how much pretax money employees could defer into FSAs, but the accounts are ‘use it or lose it’ so if the employee didn’t use the benefit the employee lost it. As a result, employees had to look ahead and figure out how much they might need to spend within a year.
Starting in 2013, there is a cap of $2,500 on FSAs. Employers will need to amend their plan documents and the IRS has issued guidance that says this can be done by 2014, as long as it operated in accordance with the law in 2013.
What will change from an administrative and reporting perspective?
For 2012, employers must report on W-2 forms the cost of the health benefits being provided to an employee. Initially, this requirement is limited to employers that issued at least 250 W-2s in the prior year, but eventually all companies will need to comply. On W-2s issued for 2012, companies must put in the actual costs, and for employers that are self-insured, they are required to put in the COBRA cost. There is concern that this is the first step toward making benefits taxable or using the information to determine who should pay a penalty for lack of coverage.
Also, the law requires employers to issue a summary of benefit coverage, a four-page paper that presents key features of the plan, the benefits, cost sharing and an explanation of what it pays for in three common claims scenarios. It also highlights deductibles and copays, who to talk with for more information and a glossary of common terms or a link to a website with that information.
The best strategies for employers is to begin examining their plans to ensure that they are in compliance when the new rules take
Dale R. Vlasek is a member and chair of the employee benefits practice group for McDonald Hopkins. Reach him at (216) 348-5452 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by McDonald Hopkins LLC
Selling your company or merging with another company is a time-consuming process that requires meticulous attention to detail. While there are practical and necessary steps to prepare for a merger or acquisition, such as obtaining counsel, choosing an investment banker and preparing your financials for review by potential buyers, there is an emotional component as well.
“A big concern a business owner has in this situation is to prepare for the reality of letting go of something he or she has had for many years,” says Robert T. Pacholewski, vice president at MelCap Partners LLC. “You can talk about a sale and all the positives associated with it, but the reality is, it can be difficult to let go.”
He says that while it is an exciting event, there can be remorse and doubt.
“Many business owners have spent more time with their business than with their own family. Letting go of that is a hard thing.”
Smart Business spoke with Pacholewski about how to complete the M&A process, both practically and emotionally.
What can trigger the M&A decision?
One of the triggers for a seller is age and impending retirement. Another trigger is that an owner might want to leave his or her current business to start a new enterprise or look for outside investors to get additional capital infused into the business.
On the acquisition side, a business owner may be looking to buy another company to enter into new markets, to capture new technologies or products, to acquire a company’s management skill set or to gain production capabilities.
Who should business owners consult before moving forward with a merger or acquisition?
Owners should consult their most trusted advisers at the time a deal is put forward. Consulting with a trusted attorney, accountant or investment banker can help owners determine if they are ready to sell or merge. Many times, an investment banker can be brought into a situation by an owner’s trusted adviser. The investment banker can more fully vet the process and talk with the business owner about what is involved in the very emotional decision of merging or selling a business.
Also, business owners on the verge of an M&A decision might benefit greatly from talking with a close personal friend who has gone through a similar process to better understand what they are getting into from a business owner’s perspective. Most private middle-market business owners will only do this once, so they need to make sure they understand what they’re getting into. It can be exciting, but it can also be very difficult letting go.
What should be discussed and put in order before moving forward with a merger or acquisition?
In the event that your business is going through an expansion, launching a new product or entering into new markets, make sure that it has had enough time to come to fruition before deciding to sell. It could create a potential problem wherein the buyer might believe that the plan could be too difficult to complete if the sale is announced during such an event.
Furthermore, it is important to get your facilities in order. This can be simple housekeeping, such as making sure facilities are clean and putting on a coat of paint.
Also make sure your company is in compliance with all laws and regulations that govern how you do business. You don’t want any negative surprises.
Once the decision to move forward is made, what are the steps that follow until the M&A process is complete?
First, determine the goals and objectives you want to achieve through the sale process and hire an investment banker whom you expect will meet them. It is not uncommon for business owners to think their company is worth more than it actually is in the market. An investment banker will evaluate the business and present a range of value for the business. Business owners have to evaluate their goals and objectives realistically and have people around them who can help them meet their goals. A sale process can take six to 12 months to complete and it would be a major setback if expectations were unrealistic and not met.
Then put together basic information on your business, such as sales, production, customers and suppliers to create your confidential sales memorandum. This may require looking ahead two or three years and back four to five years to put all the projections and historical data together for prospective buyers.
After all the information is gathered, the investment banker will put together a group of potential buyers and market the business. Eventually, you will enter into a letter of intent with one buyer to allow that entity to complete due diligence. It typically takes 90 days to complete the transaction.
How can business owners brace employees for the change?
Usually, the sale is kept confidential from employees until the business is sold, with the exception of key managers. When communicating that the business has been sold, it is critical to talk with your employees about the process because they want to know what it means to them. For instance, do they still have a job? Both the management team and your employees are vital to your business going forward. Make sure you communicate with them at the appropriate time.
How you present the news can vary from company to company, but generally, it’s best to talk with them in a way that is consistent with your style and philosophy.
Making the companywide announcement can be very emotional. If you’ve owned and operated a business for 30 years, your employees can become like family, and it can be a very emotional conversation.
Whatever your delivery, the general message should be that a lot of careful thought and consideration went in to the sale and you’ve found the right buyer to allow the company to move forward and prosper in the future.
Robert T. Pacholewski is vice president at MelCap Partners LLC. Reach him at (330) 239-1990 or email@example.com.
Insights Mergers & Acquisitions is brought to you by MelCap
While the new wave of banking regulation may portend of doom and gloom to some, there is still a light at the end of the tunnel for many businesses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed two years ago as a result of the economic downturn, contains about 400 new regulations for the banking industry.
“That’s a significant increase in regulation for the industry,” says Paul Murphy, president and CEO of Cadence Bancorp LLC. Some of these regulations, he says, go beyond where the problems existed and into areas that were already well regulated, which could potentially lead to over-regulation. In addition, Basel III, the new capital standards guidelines for the international banking community, will begin to be phased in over the next three years. By 2015, all banks will be required to have the same definition of and same types of capital requirements, which theoretically will create more stability in the system. This means that banks will need more capital to do the same amount of business that they did prior to the changes.
“The question becomes, ‘How are you going to raise the capital required to be in compliance?’” says Murphy. “Over time, banks will have to charge a little more than they have been and their net interest margins will have to be wider to provide for the additional capital requirements. And while we are concerned about too much regulation, the safety of the financial system is key to America’s growth. I believe the regulators are aware of these issues as we move through this process.”
Smart Business spoke with Murphy about the regulatory climate for banks and how it will impact small- to mid-sized businesses seeking loans.
What has been happening to small banks?
The number of banks sold in 2010 was 130, and 118 of those had less than $1 billion in assets. In 2011, 124 banks were sold, and 112 of them had less than $1 billion in assets. This year so far, 83 banks have sold, and 74 had less than $1 billion in assets.
The trend is compelling — small banks are going away and very few new ones are being chartered. Banks are getting bigger because they can effectively spread the cost of regulations across their base of assets. Bankers are in the midst of coping with these regulations, which ultimately will continue to drive banks to merge or to acquire smaller banks because the cost of compliance is significant.
How will the new regulations impact businesses?
The concern for business owners is that, as banks become more regulated, it stifles the industry, inhibiting banks from taking reasonable risks, and reasonable is an important word. You want a banker to believe in your business and support you with good loans at good rates. But if banks become too concerned about regulations, it could limit their ability to provide credit products.
Credit is the lifeblood of our economy. A healthy banking industry that is well capitalized and responsive is desirable because loans to businesses mean jobs. Banks are a critical part of our economy, and having healthy banks can lead to job creation. It is understandable why some people think there is less credit available today than there was in 2007. What is likely the case, however, is that, prior to 2007, the United States experienced credit excess, and today, we’ve settled back into modest credit availability. While some start-up businesses might not qualify for certain loans based on their risk profile, good borrowers and healthy businesses are still being funded.
How can the consolidation of banks to strong regional enterprises help small- to mid-sized businesses in this highly regulated environment?
Regional banks are big enough to have a range of products and services, work in diverse geographies and have strong capital that leads to a larger loan limits. Further, regional banks are well hedged across investments, which offer a stable, balanced platform. The size of these institutions also results in more competitive pricing when compared to smaller banks.
Also, in today’s economy, technology is critical to businesses. Regional banks can afford to invest in technology because they can spread the cost over a larger base of customers and they’re incentivized to make further investments because it can lower the customer’s cost of doing business. Banks can be true technology partners.
How can a bank help businesses operate more efficiently?
Banks can help businesses though the smart, effective use of technology. Technology lowers costs, improves controls, reduces paperwork and mitigates risks such as fraud.
For example, business owners who worry about security over the Internet should be aware that the 128-bit encryption has not been broken and has protected banking and many other data transfers across the Web safely and effectively. Further, with technology, you can have fraud protection software scanning for irregular transactions. Generally, data moves faster, account balances post quicker and more information is available to the owner of the accounts, which ultimately means greater security.
Knowing what is happening with your accounts on a more timely basis allows you to mitigate fraud. Banks can also ensure a company’s money is working for that company all the time, whether it is through such enhancements as an accounts receivable lock box or an accounts payable lock box.
Outside of banks, how else can a business acquire the capital it needs?
Another primary channel for small- to mid-sized business loans is in the private equity investment community, where you go to a group of investors who have raised capital for the sole purpose of investing. There are also angel investors, which can include family and friends willing to invest in your company.
Businesses can also get financing through factoring companies and leasing companies, which provide capital for equipment.
Paul Murphy is president and CEO of Cadence Bancorp LLC. Reach him at (713) 871-3901.
Insights Banking & Finance is brought to you by Cadence Bank
The impact of intellectual property litigation can devastate a small business, as it is an extremely expensive and there are many steps involved in preparing a defense.
“The most important thing is to not ignore the complaint,” says Jude A. Fry, a partner with Fay Sharpe LLP. “When a complaint is delivered, you typically have 21 days to answer or to file a motion to dismiss. Don’t just sit on it for two weeks and then decide you have to act because there is a lot you need to do immediately,” she says.
Smart Business spoke with Fry about how to defend yourself against intellectual property infringement lawsuits both before and after a complaint has been filed.
When a suit is filed, how much time can pass before a company needs to take action and should you assert potential defenses?
Act immediately. Contact and retain legal counsel as soon as possible. Preferably, hire an attorney who specializes in patent, trademark or copyright law who can help you figure out the strength of the complaint and your potential defenses.
However, chances are that the attorney you hire will want a retainer. Ask him or her for an estimate of the attorney’s fees you may expend over the course of the litigation so that you’re aware of the potential costs of the suit. Talk with your general counsel to get a recommendation for someone who could handle the case.
It’s possible to assert a counterclaim against the other side to try to leverage a settlement. For example, the products of the entity filing the suit could be examined to determine if any infringe on your patents. You can also assert counterclaims that the other side's intellectual property is invalid or unenforceable, assuming you have a basis for making these claims. Once the other party is under the gun, it may not want to pursue the lawsuit.
The counterclaims that you assert are going to be related to the facts that are alleged against you in the complaint. There are times when the other side may try to file a motion to strike your counterclaims or remove them to a new litigation, but typically they are going to be part of your answer to the complaint.
Can claims contained in the complaint be covered by insurance?
Yes. Particularly if the claims include an advertising component, they could be covered under an ‘advertising injury’ provision of a comprehensive general liability insurance policy. While this type of provision is often part of a policy, it usually has exclusions.
Immediately contact your insurance agent and send him or her a copy of the complaint. The insurance company could agree to defend you in the suit and cover your attorney’s fees. However, it may retain counsel of its own choosing to defend you, and you might want to dispute their choice.
The insurance company may also pay the other side to settle the matter or pay any judgment against you, although this is often only the case when you’ve included previously such a clause in your policy. Either way, it’s worth the time to determine whether your insurance will cover any part of this.
Should documents and emails related to the complaint be destroyed?
Definitely not, because the court is likely going to discover you did so and will sanction you. As a result, you will either have to pay damages or the court could presume that you have done something wrong. Destroying evidence could be devastating to your case.
Contact your IT department and place a preservation hold on documents, including emails that may pertain to the litigation. Take affirmative steps to make sure all evidence is maintained and put steps in place to ensure that you identify and protect documents that, without intervention, could be destroyed.
Have an attorney speak with key people who may have knowledge or documents that pertain to the litigation and advise them of the necessity to preserve evidence.
How can a company assess its potential exposure in a lawsuit?
Work with your lawyer to see what types of damages could be available to the other side, such as monetary damages that could include an award of your profits, a reasonable royalty on sales of infringing products and actual damages to the other side. Also, estimate your sales of the product that has been accused and the profit that you made from those sales.
Statutory damages could also be available in copyright infringement cases. Statutory damages can be applied if fault is established without proof that the claimant has been damaged or that it lost sales to you. Damages claimed can range from $750 to a maximum of $150,000 if willful infringement can be proved.
Also, consider the business implications of an injunction enjoining the sale of the accused product. This could result in an injunction that prevents you from selling the product associated with the violation, which could mean the end of your business.
What steps can a company taketo avoid this type of litigation?
Do your research and determine whether competitive products are protected. Examine packaging, advertising and websites for trademark and copyright symbols and references to patent numbers. If a party is holding a similar product out as covered by intellectual property, talk to an Intellectual Property lawyer prior to selling or manufacturing your product. While there is always the chance that regardless of the precautions you take, you could still get sued, consulting with counsel in the early stages can better position you to disprove a claim that you intentionally infringed a copyright, trademark or patent.
Also, apply for your own intellectual property protection. In addition, if you are working with independent contractors, make sure you have agreements in place to ensure you own all the rights in the work and that your employees execute agreements assigning all rights in IP to you.
Jude A. Fry is a partner with Fay Sharpe LLP. Reach her at (216) 363-9000 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Fay Sharpe LLP.
In lending, there are different ways to garner a real estate loan. Typically, people think only of banks, but loans are available from multiple sources, including pension funds, life insurance companies, credit unions, Wall Street and the government.
“There are lots of ways to get loans,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis.
Depending on the size and type of the investment you want to make, there are many different loan vehicles to help fund your commercial real estate purchase, he says.
Smart Business spoke with Coyne about what options exist to fund a commercial real estate purchase, from both an investor’s and an owner/occupier’s perspective.
What is important to know when it comes to financing commercial property?
In the commercial property market, if you’re an investor, you have a different goal than if you are an owner/occupier. An owner/occupier is much more interested in paying off the building and getting rid of debt, while an investor is more interested in cash flow.
Owner/occupiers are at the top of the pyramid as far as desirability to a lender because lenders like owner-occupied buildings. It gives them the security that the loan was used for the purpose for which it was intended and that there isn’t an absentee landlord. In addition to conventional bank loans, owner/occupiers can also harness life insurance, pension funds, commercial mortgage-backed securities, Small Business Administration loans and possibly opportunities from the state government, depending on the intended use of the commercial property. For instance, if you’re a manufacturer, you might qualify for the Ohio Enterprise Bond Fund, which is tax free.
How can owner/occupiers determine the right funding vehicle for their situation?
Typically, you will have a relationship with a bank, and that will help you get financing. There are also mortgage brokers who are paid to handle your entire transaction. There are many different companies in Northeast Ohio you can go to that will handle all of the applications and work with banks and other resources to come up with a solution.
But it really depends on your goal. For owner/occupiers, the bank you use for your daily needs is typically going to give you the best loan. That lender is often hard to beat because it knows you and wants to expand the relationship. However, you will probably end up with a recourse loan, which means you’re signing personally and the bank can come after you for your personal assets in the event of nonpayment. While bank loans will have the lowest interest rate and the highest loan-to-value, they’ll also typically have the highest risk because you’re signing personally.
How can investors assist?
Investors that are buying a building that is fully occupied will have many of the same options as an owner/occupier but will likely be looking for a lower interest rate. Because you’re an investor, you’re used to putting equity in a deal, so you’re likely willing to live with a lower loan-to-value. Banks will give you more money — typically a higher loan-to-value — than life insurance companies and pension funds because you’re typically not signing personally, so they need to protect themselves. They’re making a loan purely against the real estate and not against your ability to pay.
What are the pros and cons of each lending product?
Typically, bank loans have a lower interest rate with a higher loan-to-value than other products, but you’ll likely have to sign recourse. Also, the prepayment penalty, or the penalty for paying off the balance of the loan early, can be an issue.
Life insurance and pension fund money are going to have competitive interest rates that are comparable to those offered by banks but have a lower loan-to-value. Although less money is being advanced on the loan, you’re not obligated to sign a personal guarantee.
Another aspect is the amortization. If you go to a bank, it wants to amortize the loan as short as possible — 15 to 20 years maximum. A life insurance company will, in some instances, go 30 years, so your payments will be much smaller.
SBA loans are government-backed and made through a bank. They offer a greater loan-to-value than any other product and have very compelling interest rates. Also, you’d likely get a greater advance.
Commercial mortgage backed securities are loans from an entity that sells loans as a bond, which can be publicly owned. These bonds comprise hundreds of loans, of which a person owns a share. This market was huge until the crash, when it was discovered that no one knew what types of loans — or the ratings the loans had — that were inside these bonds. The commercial real estate side, however, wasn’t guilty of concocting crazy loans packages like the residential side was.
This market is back in a big way. It offers cheap money with very good terms on loan-to-value, which could be comparable to what a bank might offer, with similar interest rates and more amortization. The downside is that you can’t prepay, because they’ve guaranteed the bond’s investors a return. This means that if you sell your building soon after purchase, you won’t be able to pay off the entirety of the balance immediately without going through a complex process.
Lastly, there are lenders that are not regulated but that have private funds, hedge or otherwise, that will lend money for commercial real estate. They act like other lenders, but you’re usually going to them because you have a unique need that can’t be met by conventional lenders.
A mortgage or commercial real estate broker could help you tap into this type of financing.
Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at (216) 453-3001 or email@example.com.
Insights Real Estate is brought to you by Grubb & Ellis
In today’s economic environment, businesses have to get the most out of their employees and remote banking allows employees to focus on tasks that benefit the business. By eliminating the need for them to leave the office to make deposits and handle other banking tasks, businesses can save time and increase productivity, says Stephen Klumb, senior vice president and chief lending officer for National Bank & Trust.
Remote banking also offers a high degree of accuracy and control because you’re handling your own transactions, you are able to keep a close watch on which transactions have occurred and when they are finalized.
“It’s almost like being your own banker,” says Klumb. “You’re making transactions, moving your money around, setting up automatic bill paying and handling your own deposits, all from your own office.”
Smart Business spoke with Klumb about the benefits of remote banking and how it frees businesses to customize their banking relationship.
Are companies limited to banking at the nearest location?
Some people have the mindset that walking into a physical location to service their banking needs is necessary. That may be true for retail customers, but from a commercial perspective, it really isn’t. Our commercial team goes to customer locations, and thanks to technology, we can do far more for them. Commercial customers can, for example, use a remote capture system to make deposits. With remote capture, a small machine at your business allows you to run checks through and get credit for the amount at your bank the same day.
Another remote banking option is Automated Clearing House, or ACH. This secure payment system allows your customers to send payments they owe you electronically from their bank directly to your bank account, speeding up your accounts receivable. You can also set up the reverse, allowing transactions to leave your account and be automatically received by your vendors.
How can a business keep track of its remote transfers?
Commercial banking customers can track their transfers with online banking. Those customers can sit at their computer, sign onto the bank’s website with total confidence that their information is secure and discrete, and transfer money and make payments.
When it comes to payroll, Positive Pay is an option in which no checks are paid until you release them, which helps eliminate the possibility of fraud. You can also get involved in Bill Payer, which sets up regular, automatic payments of bills, similar to what consumers use for personal use. Further, just as consumers can access cash and make deposits 24 hours a day through ATMs, so can businesses. Commercial customers can also use mobile banking on a phone for their business needs, and new apps are making this method increasingly popular.
Is there any reason a business owner would need a physical bank?
In regard to having a need for a physical bank, your commercial lender should set up meetings once per quarter to keep up with what’s going on with your accounts both past and present. But you can also go online, pull up your accounts, your transactions and your balances, and you’ll see the same things a branch manager sees. This service, and others, like Remote Capture, will minimize the trips made to a banking office.
In the event that you’d like to discuss a grievance, there is a number you can call that will put you in touch with a representative to handle it.
Most borrowers don’t call a branch if they have a problem with their commercial loan, they call their commercial lender. Your assigned commercial loan officer is available to handle any issues, typically within 24 hours, and can be accessed by cell phone and email.
Today, when closing loans, many lenders will go to the customer, as a lender’s office is usually his or her cell phone. Lenders will most often meet business owners where they work to close loans or review documents. There also may be occasions when a business owner might not want employees to know he or she is working with a bank, so lenders can meet them anywhere they’d like.
Are there costs associated with remote banking services?
Often, the costs associated with remote banking services are absorbed by the time and extra costs often incurred when not performing these activities electronically. Other costs may vary depending on banking activity and account relationships. Overall, most customers find remote banking services to be a very cost effective part of their financial practices.
How computer savvy do a company’s employees need to be to utilize electronic banking services?
Most companies on the commercial side have accountants or managers who are very knowledgeable when it comes to these things. And once they’re trained to use the systems, the benefits most often outweigh any anxiety.
However, to ensure a smooth transition, when a bank sells the service, it generally teaches customers how to operate them. For example, with remote capture, bank representatives will explain how to operate the machine when they bring it to the client’s place of business and they’ll leave a phone number for questions.
With online banking, there is a tutorial available to walk the user through the program, and in some cases, the person selling the service will take along a laptop to show those at the business who will be using the service how the programs work.
Stephen Klumb is senior vice president and chief lending officer with National Bank & Trust. Reach him at (800) 837-3011.
Insights Banking & Finance is brought to you by National Bank and Trust
If you’re a business owner looking to purchase a building to house or expand your business, you have a lot to consider. You’ve come to realize buying is better than leasing, and building equity in your own property is better than building equity for your landlord.
However, your real estate experience might only extend to purchasing a residential property, leaving you with questions regarding the potential benefits and misconceptions, if your business will qualify for financing and what is involved in the application process.
“Over 80 percent of applicants we work with are first-time commercial building buyers. Many come to us with a baseline level of knowledge of real estate, which is often limited to residential only,” says Ken Mannina, senior vice president and regional sales manager for Bridge Bank. “What these applicants learn during the loan process is that their objectives are consistent with those of the lender. The applicant wants a loan to purchase a sound economic asset that has utility and tangible value, and the lender wants to have as collateral for their loan the exact same thing.”
Smart Business spoke with Mannina about what business owners should understand about the process of purchasing commercial real estate.
What is the profile of a typical commercial real estate financing applicant?
They are business owners who seek financing for the purchase or construction of a building to house their business. About half of the applicants request additional financing for construction to go with the purchase. Most of them own closely held businesses that are not publicly traded but are owned by one or two individuals or a group of family members. They’re seeking to stabilize their occupancy costs and eliminate their exposure to escalating rents and dealing with landlords.
What types of businesses are looking for commercial real estate financing and why?
Banks work with all types of businesses, including manufacturers, service businesses, retailers, distributors, contractors and investors. These business owners have some commercial real estate objective in mind — buy a building, refinance a building, improvements or repairs, or buy out a partner in the building. As owner/users, there is heavy emphasis on U.S. Small Business Administration lending. In that type of lending, the leverage, or debt to equity ratio, that’s available to the borrower is high — up to 90 percent — which means you get more debt and require less equity.
When do the lender’s and applicant’s objectives coincide?
There are several that center on the property they’re buying. The lender will review a title report and order an appraisal and environmental report and possibly structural or mechanical reports. These reports provide the lender with data that will support or reject the negotiated purchase price while providing a good sense of the integrity of the property. For buyers, these reports will give them assurance that what they’re buying can, at some point, be sold and financed by a new buyer, thereby returning their initial investment; though that hinges on the market conditions at the time.
The lender’s approach to analyzing the property and assessing its value will involve quantifying the amount of rental income it can generate and reviewing the lease and sales comparables that are presented in the appraisal to confirm that they are suitable for valuing the property.
How can a business owner best prepare to purchase a commercial building?
The best way is with pre-qualification from your lender. In the case of a business owner, the underwriting and analysis focus on the business he or she owns. When they’re trying to purchase a building to house their business, their commercial real estate broker will require them to get a pre-qualification letter, which will be submitted with an offer to purchase. Much like residential real estate, a prospective buyer who is prepared and can demonstrate his or her capacity to borrow will be better received by sellers and brokers.
Are there misconceptions about commercial real estate financing?
Yes, one is that you need to make a 30 percent down payment to get a commercial real estate loan. However, through the SBA, you can get a loan with only 10 percent down.
Another misconception is that commercial real estate is too costly. When compared to residential real estate, commercial costs more because of its larger size, but the return on your investment may be greater. Also, a rent-versus-buy comparison that takes into account the tax benefits of ownership often reveals commercial real estate occupancy costs are less than renting.
Finally, there is a misconception about the importance of location. While it is critical in retail, it isn’t otherwise because commercial properties are purchased for their utility and income, not location or aesthetics.
What does a first-time buyer need to understand about financing a commercial real estate purchase?
When selecting a lender, clearly you’ll be looking at rates and fees, but first timers need to be educated on how they’re qualifying, how the transaction is going to proceed and what’s going to be asked of them. They can use the answers to those questions to set their expectations realistically regarding how much money they’re going to have to invest on the front end and how they’ll transition from a leased property to a purchased property.
The buyer also should be mindful of the fact that the due diligence performed by the bank during the underwriting process, like the appraisal and environmental reports, will server buyers’ needs as well as the bank’s needs. They can look to their lender to advise them on all those things.
Ken Mannina is senior vice president and regional sales manager for Bridge Bank. Reach him at (408) 556-8336 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by Bridge Bank