International expansion is a great way to grow as the U.S. economy slowly recovers, and the population and per capita gross domestic product of countries such as India and China continue to rise. But finding funding for exports can be difficult, unless you leverage a government-backed program.
“Why turn away sales when you can get working capital assistance through government programs to penetrate red hot foreign markets?” says Alfred Ho, vice president and enhanced credit specialist at California Bank & Trust.
Smart Business spoke with Ho about the benefits of leveraging guaranteed export financing.
What is the working capital guarantee program?
U.S. manufacturers were struggling to compete overseas, as foreign sales and receivables are generally excluded from traditional lending programs. So, to spur exports and domestic hiring, the federal government offers guaranteed financing programs administered by the Small Business Administration (SBA) and the Export-Import Bank of the United States (Ex-Im Bank).
The loan proceeds under these programs can be used to purchase supplies and equipment, hire staff or, in the case of the SBA’s Export Express program, even attend an overseas trade show. And because the terms are flexible, owners can use the loan proceeds to fulfill a large contract or several small deals.
How do the programs help small businesses?
The programs encourage banks to lend to small businesses by guaranteeing 90 percent of the loan amount and allow loan officers to consider foreign receivables and work-in-progress during the underwriting process.
Plus, if a standby letter of credit is required to support a bid bond, advance payment guarantee or performance bond, the collateral requirement to have one issued is only 25 percent, instead of the 100 percent in traditional cases. This provides an edge for a U.S. company in its quest for overseas contracts.
How much can companies borrow and what does it cost?
The SBA export working capital program permits loans below $5 million. It charges an upfront fee of 0.25 percent of the loan amount and an annual utilization fee of 0.55 percent, which is assessed monthly.
There’s no limit to how much you can borrow from Ex-Im Bank, and its upfront fees range from 1 to 1.5 percent of the loan amount. The loan interest rate is based on the prime lending rate plus a spread. Interest rates for larger loans are based on the London Interbank Offered Rate,
which is currently hovering around a 52-week low.
What are the eligibility requirements?
Requirements differ among the programs but they all require a firm purchase order prior to advance and, minimally, shipment from a U.S. port to a country acceptable to Ex-Im Bank. Goods and services shipped must have at least 51 percent U.S. contents. Certain products are excluded from the programs. A company must also have a positive net worth and be profitable for the last three years to qualify.
For other qualifications and restrictions, talk to your lender or visit the SBA or Ex-Im Bank websites.
How can business owners find a participating lender?
Your local SBA or Ex-Im representative can provide referrals, but you can look for a Delegated Authority Lender who has the ability to expedite your loan.
Your banker can walk you through the lending process and share helpful ideas. The banker should be able to suggest ways to lower the risk of international commerce.
The important thing is: Don’t venture into the international marketplace alone. Find a competent banker to serve as your guide.
Alfred Ho is vice president, enhanced credit specialist at California Bank & Trust. Reach him at (213) 593-2118 or firstname.lastname@example.org.
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Whether your wish list includes manufacturing, medical, transportation or technology equipment, how you finance major purchases may not only impact the return on your investment but the success of your entire company.
“Financing decisions impact cash flow and a company’s ability to capitalize on opportunities or respond to adversity,” says David Beckstead, Pacific Region sales manager for the Equipment Financing Division at California Bank & Trust. “Executives need to weigh their options carefully before making a decision.”
Smart Business spoke with Beckstead about the need for prudent financing decisions when purchasing machinery and equipment.
What should executives consider as they are reviewing various financing options?
The rule of thumb is to match the financing terms to the life of the asset. In other words, it’s best to use short-term financing for short-term business needs, and longer-term financing for long-term business assets such as equipment that will generate revenue or reduce operating costs for the foreseeable future.
You can avoid finance charges and interest by paying cash, but leasing the equipment or borrowing the funds lets companies preserve capital for other purposes. You should also consider the tax implications and the ultimate cost of the equipment along with your ability to make a substantial down payment to secure a traditional bank loan.
When does leasing make sense?
Leasing makes sense when companies want to preserve cash for future growth or expansion, they need flexibility or they don’t have a lot of cash to put down. Since leasing companies usually maintain ownership of the asset, companies can upgrade or return the equipment should their needs change. For example, you can align the lease terms with a customer agreement or upgrade to a bigger, faster model as your company grows. Plus, most leasing companies don’t require a down payment and it may be possible to negotiate a longer-term payment plan, improving cash flow.
With leasing you can usually deduct the lease payments as a business expense on your tax return, and on short-term leases the rental expense may provide a better tax benefit than depreciating the asset. You may be able to transfer the risk of ownership to the leasing company depending on the type of lease.
How can executives research the market and secure favorable leasing terms?
Prioritize your needs, and then search for the best combination of rates, terms, flexibility and customer service by contacting several firms. Bank leasing companies usually have high underwriting standards but lower rates, while finance companies can be more lenient lenders but generally charge higher rates. Vendor finance companies are a third option and are generally the most flexible about taking back or exchanging equipment. However, they usually charge higher rates.
Beware of upfront payments and fees, hefty residual payments, pay-off fees and other clauses that may boost the overall cost of the equipment. In fact, it’s a good idea to ask a knowledgeable third party to review the agreement so you don’t forsake the benefits of leasing by accepting disadvantageous terms.
What should executives look for in a leasing firm?
Always consider a firm’s reputation, check its references and read its contract before requesting a quote. Contracts differ between companies and impact everything from tax deductions and residuals due at the end of the lease to the responsibility for servicing the equipment. Finally, select someone you trust. Your financing partner should provide funding and be committed to your success.
David Beckstead is Pacific Region sales manager for California Bank & Trust Equipment Finance. Reach him at (949) 457-0458 or email@example.com.
Website: Business owners and entrepreneurs can visit our Business Resource Center.
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A truly great bank will go beyond standard financial services and provide value-added assistance in partnership with client businesses.
“I think the lost art in banking is the bank being a partner. It isn’t just about taking deposits, doing loans and putting people in a box. If you’re really doing your job you should provide far more than just your standard services, which, frankly, every service provider should do,” says Ed Lambert, senior vice president, marketing manager, Technology Banking Group at Bridge Bank.
Smart Business spoke with Lambert about what it means to be partners and what you should look for when choosing a bank.
What criteria should someone use in evaluating a bank?
The first question a bank should be asking is, ‘How are you doing as a company?’ Not, ‘Who are your investors?’ or, ‘Are you profitable?’ The bank you chose to work with should want to learn as much as they can about your company so they can find ways to meet your needs.
The banker should sit down with you and listen to your background and then, and only then, respond. What you don’t want is a banker who walks in and opens the conversation by talking about their bank and what it provides without having a conversation and getting to know something, anything, about you.
The second criterion for evaluating a bank is, ‘Do they have answers for me?’
The third criterion is whether the banker is limiting his or her answers to what benefits him or her and his or her bank. If there is a need they cannot fulfill directly, they should be able to tell you that and point you in the direction of someone who can help. They should be ready to provide a solution to your problem, whether directly or indirectly.
What kind of added value should business owners expect in a banking relationship?
A bank should be in a position to provide solutions to whatever situational issues could divert you from focusing on growth. It could be banking issues such as how to best manage your cash or what kind of debt works for your business, or possibly an overall solution process. It also could be something as mundane as finding a solution to the problem of you not liking your CPA or attorney. There have been horror stories about the CFO of a company making 30 phone calls to find a new CPA, taking a lot of time to find answers that a bank should be able to provide in terms of what their Rolodex holds.
If a bank is really providing a good level of service, those things should inherently be part of what they offer to its customers. The supposition is that the bank has been doing this for a long time and has built up a substantial list of contacts, so why should it not share that with its customers?
The bottom line is this: What a company should be looking for in a bank, as well as in any other service being provided to it, is what they bring to the table beyond the array of services that one would assume are standard.
If credit decisions are based on numbers, why would a good banking relationship matter?
The banker’s job is to tell the client ‘yes;’ ‘not yet, and here’s how to make it a yes;’ or ‘here’s somebody who can help you where you are today.’ Those are really the only three acceptable answers that a banker should be providing to his or her clients.
The role of a bank should be to solve issues for its clients that go well beyond just managing deposits and credits. Banks should really be a resource for a company to have at any stage of its life because each phase has a different set of needs. A truly good bank provides for those needs, even if that means telling a business owner something he or she doesn’t want to hear.
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In today’s regulatory environment, banks are no longer lending based on collateral; they are focusing more on business history, the owners, their future plans and how they’ll repay the loan.
“A business plan is an excellent way to tell bankers about the story behind the numbers and let them know you have a good handle on the future of your business,” says Betty Uribe, executive vice president for California Bank & Trust.
Smart Business spoke with Uribe about how to develop a business plan to increase your chances of obtaining a business loan.
Why are business plans important?
When presenting a loan package to a lender, an organized, well-thought-out business plan can make the difference between getting and not getting the loan.
A business plan will show the lender if the business has a chance of making a profit and in what time frame. It also provides a well-thought-out estimate of how much the business needs to grow and defines the market, customers and the percentage of the market the business plans to reach, providing a clear revenue estimate. Importantly, a business plan can convince the lender to fund your business and show them potential issues and how they’ll be addressed.
What are the steps involved in creating a good business plan?
Start with an outline and fill in the blanks as you learn more about the process. Your plan should be only as big as necessary for your firm to run smoothly. In fact, the outline alone may suffice, particularly if you are not submitting the plan in a package to obtain financing.
Many seasoned entrepreneurs calculate a break-even analysis to predict future viability in their respective fields. This is a formula based on the relationship between revenue, fixed costs, variable costs and profit. The analysis can show you how much money you must bring in to stay solvent.
Another preliminary tool is a feasibility plan, a basic document that features a summary, mission statement, market analysis and required success factors. It also might include an initial cost analysis addressing pricing and potential expenses. This can help you determine whether starting a business can work for you.
What resources are available to help?
An abundance of user-friendly business planning software is available that is designed to help strategize, sort and calculate related financial data.
Also, agencies like the Small Business Administration and SCORE, the Service Corp of Retired Executives, offer detailed information on developing a solid plan.
How do you get started?
Most experts outline 10 key components for a basic business plan. Key components include:
• Cover sheet
• Table of contents
• Executive summary
• Company description
• Product or service description
• Market analysis
• Strategy and implementation
• Management team
• Financial analysis
What should a business owner do with the business plan once it’s written?
Start by recording overall business or long-term goals on a spreadsheet, setting the bar high enough to grow. Make sure your goals are specific, measurable, attainable, relevant and time-bound (SMART). They must be easily identified, quantified and understood by you and your management team or you won’t know when you reach them. Also, set quarterly, monthly, weekly and daily objectives, then record your progress but don’t share or discuss goals with negative individuals who might impede progress. Lastly, keep asking yourself, ‘Does this decision take me closer to my goal?’
Growing a business takes commitment and systematic planning. Educate yourself. The more you learn about your industry, competitors, finances and time management, the greater your chances of success.
Betty Uribe is executive vice president at California Bank & Trust.
For a full scope of tools and information through to help businesses get started, visit www.calbanktrust.com/team. Another valuable source of information for business owners is at www.calbank trust.sbresources.com.
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Small business owners are increasingly concerned about obtaining long-term or short-term business loans, according to a survey by the National Federation of Independent Business. However, by showing enthusiasm and understanding for your business, you can get started in a good way with your banking relationship, thereby increasing your changes of securing a loan.
“Build a support group, have good financial understanding and really keep your books in the best possible order that you can,” says Hank Holmes, president, Texas Region, of Cadence Bank.
Smart Business spoke with Holmes about how business owners can use good financial practices and a trusted relationship with their bank as a foundation for future lending needs.
What does a bank look for in a good borrower?
It’s important for borrowers to be prepared and understand their business as much as possible, including the risks. Often you can talk about the upside — what you can do to generate new revenue — but you also need to understand what could cause you to miss your revenue goals, such as increased expenses from health care or a change in the industry’s environment.
Additionally, many times credit decisions are a function of a small or mid-sized business owner’s personal financial performance and credit history. So, as you’re developing your business, it’s important to maintain your personal financial affairs.
How do you find the right bank?
Start developing a relationship with your current bank. The earlier you can develop that trust and understanding with your banker, the better.
You want a bank that meets your needs and understands it’s a relationship-driven business. That way the banker can alert you when your business could be impacted by trends in other industries. If you have a banker that you’ve dealt with — that you’ve developed a relationship with — typically he or she will know that kind of thing is happening at the same time as you do. They can see when there’s an improvement versus a potential bump in the road.
As a business owner, you also can use your contacts in trade organizations or the industry to reach out and find a bank that understands your industry.
What steps can you take to best prepare for meeting with your prospective banker?
• Have your financial statements in order. Understand the revenue/expense side of your business — have a good grasp of the things that are going to positively and negatively impact your company. There are a number of good options, such as QuickBooks, that can be used to maintain your finances at the highest level you possibly can.
• Be able to explain what your business is and what would influence your financial statements. Is it the price of oil and gas? Is it the cost of electricity? Are you going to be able to get the inventory you need in order to meet the revenue needs of your clients?
• Be aware of your personal capacity and credit worthiness. It’s important to not only be able to run and understand your business, but also maintain your personal credit worthiness as positively as you can. In general, if you’re a company that has revenue of a million dollars or less, banks look at the individual who is driving that business, who is there on a day-to-day basis. And, it’s important for that person to show his or her capacity and support for that credit.
When you build and maintain a relationship with your banker, especially one who understands your business, you can take it one step further. If for some reason you get turned down for a loan, then find out why in order to determine what you can do on the next effort.
Hank Holmes is president, Texas Region, at Cadence Bank. Reach him at (713) 871-3913 or firstname.lastname@example.org.
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