Personal Finance, Loans & Insurance

This report was produced in a direct effort to provide more understandable insights about some of the most critical business finance issues effecting commercial borrowers. Our approach in this report is to describe current commercial loan circumstances in six words. We have adopted a similar model in other commercial finance reports such as “seven words to describe commercial property loans”. The “simpler is better” perspective reflects the belief that after hearing an almost endless number of reports about commercial lending difficulties, what small business owners might really need is a more concise explanation about these problems and the resulting impact on their business financing options.

Before proceeding, it is important to emphasize that small business finance options are often more complicated than anticipated by many business borrowers. It would be incorrect to assume that we are attempting to characterize business loans and working capital financing as simple and straightforward. Actually, we are making the opposite case. The unfortunate reality that most business financing processes have always been excessively complicated and that meaningful improvements are not on the way is one of our ongoing observations. We nevertheless feel that it is critical for each small business owner to have an absolute and total understanding of the entire commercial finance process in the face of the prevailing commercial lending complexity. This particular report is one of several thorough efforts on our part to help in providing more understandable insights about commercial loans and business banking problems.

“Banks are saying no more often” is our first example of six words describing business financing options. For any small business owner still unaware of this harsh reality and who might doubt this observation, a series of candid conversations with other business borrowers will probably remove all doubts. The primary point to remember is that banks are not currently providing an adequate level of business loans on a widespread basis. It is important for small businesses to realize that they are not alone when they hear their bank say no to routine requests for commercial financing.

A second observation is that “commercial property values have decreased dramatically”. There are very few exceptions. The biggest business financing impact is likely to occur with commercial refinancing situations. Many banks are aggressively recalling existing commercial real estate loans and this literally forces a borrower to seek business refinancing even if a business owner has no interest in refinancing their commercial mortgage. With decreasing commercial real estate values, business refinancing will be a challenge for most small businesses.

In another six-word description of commercial financing, “lines of credit are disappearing fast”. Even the most successful businesses need a reliable source of working capital financing, so this situation is especially serious if a business cannot replace bank financing when it suddenly disappears. Even if a business still has an adequate line of credit, it is important to realize that on a widespread basis banks are reducing and eliminating business credit lines with almost no advance notice.

“Business financing is in intensive care” is our final observation in this report. Small business owners need to be prepared to take more extreme measures such as firing their banker and finding alternative commercial funding sources. Nobody should expect that bankers will publicly announce that they are in any kind of financial trouble after recalling that they have not been sufficiently candid about commercial lending problems in the past. On the contrary, a prevailing outlook from most banks is they are lending normally to small businesses. Commercial borrowers will need a healthy amount of skepticism when dealing with any commercial lender.

As we noted, this article is one of several efforts to help small business owners survive an extremely challenging commercial lending environment. By describing commercial loan difficulties in six words, this report was intentionally designed to produce a concise overview of several complex small business finance issues. A review of related reports such as “seven words to describe business cash advances” and “six words describing working capital financing” should also contribute to a better understanding of practical business financing options for commercial borrowers.

The goal of being realistic when seeking new commercial loans and working capital financing will help commercial borrowers avoid a number of commercial finance problems. With proper preparation business owners should be in a better position to obtain new financing despite the difficult challenges impacting most working capital loans and small business financing. Nevertheless it should be anticipated that terms of financing will be different from prior commercial financing. Because of recent commercial lending difficulties, business owners actively assessing the most effective options for their small business finance decisions are likely to find the smoothest path to business loan success.

In view of volatile conditions which have recently impacted credit markets, this will not be a simple task. The extensive misinformation and confusion that there has been about business financing and working capital availability illustrates a common example of the problem. One of the most difficult challenges for commercial borrowers is obtaining more accurate information about what is realistically possible.

A number of harsh realities must be confronted by all small business owners when seeking to identify realistic choices in a confusing working capital management climate. For most current commercial financing decisions by business owners, there are several major factors to anticipate. In the first example, additional small business loan collateral is being requested by most commercial lenders. Second, many regional and local banks have discontinued lending for business financing and working capital. In a third example, businesses which are not currently profitable or not current in their debt payments will have extensive difficulties. For a fourth factor, commercial construction financing currently has a very limited availability. Fifth, lenders have eliminated unsecured commercial lines of credit for most small businesses.

Despite the new business financing limitations just noted, there are practical working capital options for small business owners to consider. An increasingly effective commercial financing option in the midst of an uncertain economy is a merchant cash advance program based on credit card processing activity. Even though this commercial funding option has been available for a few years, it has not been used by most small businesses. Business cash advances should be evaluated as an important tool for improving business cash flow for most businesses accepting credit cards. Small business owners wanting to pursue this financing option should consult a business financing expert who is knowledgeable about this working capital management approach as well as other small business loans.

This kind of small business financing is still in fact obtainable even though working capital loans are not as widely available as they were just a few months ago. The main change for business borrowers is the likelihood that they will be dealing with a different commercial lender since some of the largest providers have stopped making these business loans. Small business owners will benefit from finding an experienced and candid business financing expert to assist in evaluating realistic options because the most effective working capital financing providers are not aggressively marketing this capability.

As stressed above, when making commercial financing decisions it is becoming increasingly important for business owners to first determine their effective business finance funding options. This task is likely to be much more difficult than most commercial borrowers realize because of recent volatility in financial markets. It is advisable to explore commercial finance options that might be necessary if economic conditions change even further even for business owners who are satisfied with their current working capital financing arrangements. The use of Plan B contingency financing is an important tool to assist commercial borrowers in this process.

Financing a small business can be most time consuming activity for a business owner. It can be the most important part of growing a business, but one must be careful not to allow it to consume the business.  Finance is the relationship between cash, risk and value.  Manage each well and you will have healthy finance mix for your business.

Develop a business plan and loan package that has a well developed strategic plan, which in turn relates to realistic and believable financials.  Before you can finance a business, a project, an expansion or an acquisition, you must develop precisely what your finance needs are.
Finance your business from a position of strength.  As a business owner you show your confidence in the business by investing up to ten percent of your finance needs from your own coffers.  The remaining twenty to thirty percent of your cash needs can come from private investors or venture capital.  Remember, sweat equity is expected, but it is not a replacement for cash.

Depending on the valuation of your business and the risk involved, the private equity component will want on average a thirty to forty percent equity stake in your company for three to five years.  Giving up this equity position in your company, yet maintaining clear majority ownership, will give you leverage in the remaining sixty percent of your finance needs.               
The remaining finance can come in the form of long term debt, short term working capital, equipment finance and inventory finance.  By having a strong cash position in your company, a variety of lenders will be available to you.  It is advisable to hire an experienced commercial loan broker to do the finance “shopping” for you and present you with a variety of options.  It is important at this juncture that you obtain finance that fits your business needs and structures, instead of trying to force your structure into a financial instrument not ideally suited for your operations.     

Having a strong cash position in your company, the additional debt financing will not put an undue strain on your cash flow.  Sixty percent debt is a healthy. Debt finance can come in the form of unsecured finance, such as short-term debt, line of credit financing and long term debt.  Unsecured debt is typically called cash flow finance and requires credit worthiness.  Debt finance can also come in the form of secured or asset based finance, which can include accounts receivable, inventory, equipment, real estate, personal assets, letter of credit, and government guaranteed finance.  A customized mix of unsecured and secured debt, designed specifically around your company’s financial needs, is the advantage of having a strong cash position.
The cash flow statement is an important financial in tracking the effects of certain types of finance.  It is critical to have a firm handle on your monthly cash flow, along with the control and planning structure of a financial budget, to successfully plan and monitor your company’s finance.

Your finance plan is a result and part of your strategic planning process.  You need to be careful in matching your cash needs with your cash goals.  Using short term capital for long term growth and vice versa is a no-no.  Violating the matching rule can bring about high risk levels in the interest rate, re-finance possibilities and operational independence. Some deviation from this age old rule is permissible. For instance, if you have a long term need for working capital, then a permanent capital need may be warranted.  Another good finance strategy is having contingency capital on hand for freeing up your working capital needs and providing maximum flexibility.  For example, you can use a line of credit to get  into an opportunity that quickly arises and then arrange for cheaper, better suited, long term finance subsequently, planning all of this upfront with a lender.

Unfortunately finance is not typically addressed until a company is in crisis.  Plan ahead with an effective business plan and loan package.  Equity finance does not stress cash flow as debt can and gives lenders confidence to do business with your company.  Good financial structuring reduces the costs of capital and the finance risks. Consider using a business consultant, finance professional or loan broker to help you with your finance plan.

Through the debate on reforming health insurance for small businesses, an important piece of information was missing: Policymakers had little data on why only some young companies offer their employees health insurance. Common sense and much research indicate that cost plays a big role in business owners’ health insurance decisions. Why do some entrepreneurs choose to incur this cost while others do not?

Back in March, Congress passed the Affordable Care Act, which in 2014 will require all Americans to have health insurance or pay a penalty. Although many people would now like to put discussion of employer health insurance behind them, the question of why only some founders of small businesses offer insurance remains an important one. Its answer will influence how much of a role government will play in providing employee health insurance for years to come.

One part of the new law is a set of tax credits and penalties designed to encourage employers to provide insurance.The problem is that for most young small businesses, it won’t work.That’s the conclusion I reached, based on research I conducted with Alicia Robb of the Ewing Marion Kauffman Foundation.We examined the decisions of founders of young companies on whether or not to offer health insurance, using information from the Kauffman Firm Survey, which tracks a cohort of nearly 5,000 new businesses started in 2004.

The data show that very few new businesses offer employee health insurance. Nearly two-thirds of companies with employees did not offer employee health insurance at any time during their first five years of operation. Moreover, only one in five offered insurance to their workers in all of the years.
insurance: no performance benefits

The few young small businesses that offered health insurance differed dramatically from those that didn’t: They tended to be larger and higher-paying, structured as partnerships and corporations, and they offered their employees a wide variety of benefits. Most young businesses don’t fit this profile. The majority are sole proprietorships with few, modestly paid employees. Only a handful of young companies grow dramatically. A minority shift from sole proprietorships to other legal structures. Few ever add a lot of benefits. This means that only a small portion of young small businesses are health-insurance-providing types. Most are not.

One argument that’s often made to justify giving employees health insurance is that doing so helps companies perform better. Those that offer employee health insurance, the argument goes, get better and harder-working employees. We examined whether the provision of employee health insurance provides any performance benefits to young companies. We found that it does not.

Controlling for a variety of other firm and founder characteristics, we saw no significant effect from providing employee health insurance on firm survival, growth in assets, growth in sales, growth in profits, or growth in employment during the first five years of operation. Stated differently, offering employee health insurance doesn’t appear to do anything to improve the performances of young companies, despite what some observers argue. We shouldn’t claim that the new law will benefit small business owners by making their companies more successful.
low-paying, sole proprietorships

The data offer three key takeaways for policymakers. First, only a minority of new businesses offer health insurance to employees, even by age five. Fewer still move from not offering insurance to providing it. When thinking about how to manage small business health insurance, policymakers need to keep in mind that offering insurance isn’t something that young companies naturally evolve to do as they mature. Consequently, most of the employees at new businesses that don’t offer health insurance will need to be covered by government programs and state exchanges.

Second, new companies that don’t offer insurance tend to be smaller, lower-paying, sole proprietorships with a large share of part-time workers. These offer employees limited benefits. Policy makers need to recognize that offering employee health insurance is something that fits certain kinds of new companies and not others. Small business owners who don’t offer employee health insurance aren’t being heartless. They are responding to the economics of the industries they are in and the business models they are pursuing.

Third, offering employee health insurance doesn’t improve the financial performance of new companies. Policymakers need to understand that despite the many reasons why they want the founders of all businesses to offer health insurance to employees, requiring that entrepreneurs provide such insurance won’t benefit many of the business owners.

Hundreds of thousands of new businesses with employees are founded in the U.S. every year. Few of these companies are large enough, pay enough, or are structured in a way that would lead them to offer employee health insurance. Moreover, few will turn into businesses that provide health care coverage to their workers. As a consequence, most of the several million workers hired by young businesses annually will be getting their insurance from government programs and state exchanges for years to come.