Tag Archives: working capital

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Initiative Helps Veteran-Owned Small Businesses

Veterans who own small businesses in Arizona can save up to $3,000 by tapping into a new loan program called VetLoan Advantage.

The program, offered by CDC Small Business Finance, features rebates and fee waivers associated with SBA-504 loans (for commercial real estate purchases) and Community Advantage loans for working capital, equipment purchases and other needs.

According to the U.S. Small Business Administration, veterans are at least 45 percent more likely than those with no military experience to be entrepreneurs, and often times face challenges in raising capital or getting a conventional loan.

“Veteran-owned small businesses employ nearly 5.8 million people nationwide, making the need for loan assistance vital to our recovering economy, said Chris Bane, loan officer with CDC Small Business Finance. “These programs are our way of saying thanks to vets for their honorable service.”

The VetLoan Advantage programs in Arizona by CDC include:

SBA-504 – for purchasing commercial/industrial buildings or large equipment.  CDC will issue a cash rebate up to $3,000 for any funded loan to help veteran owners offset loan expenses.  The SBA-504 loan offers a low-down payment (typically 10%) and long-term fixed rates (now under 5%).

Community Advantage – provides up to $250,000 for working capital, equipment, inventory, tenant improvements and business acquisition.  CDC will waive the packaging fee for veterans, a savings of up to $2,500.

For more information visit: http://cdcloans.com/small-business/vetloan-advantage/

CDC Small Business Finance is the nation’s leader in SBA-504 loans as well as a leader in helping start-up and emerging small businesses via a variety of other SBA loan programs.

Casino.del.Sol.update

Cash is King, but Wrong Choices Can Bring Down a Contractor

You’ve heard the phrase a million times – “Cash is king.” But what are we trying to accomplish with cash? Does cash equal success? Profit? Stability? Does a lack of cash signal a problem? It all depends on your perspective.

Contractors are in a unique business where everything is based off of estimates, so revenue is recognized under the assumption that your estimates are accurate, although subject to change. For this reason you cannot afford to just focus on the profit/loss information driven by your income statement or WIP schedule.

We all know your jobs are typically not going to generate the EXACT amount of profit you estimated at bid day, so the income statement is just your “best guess” as of that day as to how your year is going. The list of why profit on jobs can fade is endless – requested change orders are performed but never approved by the owner, subcontractor issues, site conditions, weather, labor quality, project management, poor estimating, ambiguous bid specs, difficult owner, unexpected delays, etc. The point is that in addition to monitoring the status of all your jobs which will drive your profit, you must also be keenly aware of your cash position and cash flow, both now and on a projected basis.

Why should cash flow be targeted as a key measure of business performance? Because the income statement and balance sheet, although useful, have all kinds of potential biases as a result of the assumptions and estimates that are built into them. However, when you look at a company’s cash flow statement you are getting an indirect look into their bank account. In the end, cash does not lie.

As a former commercial loan officer, I had to continually advise business owners that even profitable companies can fail if they run out cash. Unfortunately, a strong income statement is not necessarily indicative of a financially healthy company. Contractors can fail from a lack of cash for a number of reasons:

  • Growing too fast without the appropriate equity or bank financing to keep up
  • Too many large projects undertaken at once with slow paying owners
  • Letting receivables get beyond 60-90 days past due
  • Working for owners with cash flow problems of their own
  • Bad debt that takes a long time to be recognized/written off
  • Purchased too much inventory or equipment using cash
  • Cash taken out of the business and loaned to shareholders/employees/other business interests
  • Excessive reliance on bank debt and leverage
  • Excessive distributions to shareholders
  • Excessive underbillings
  • Problems collecting retainage

Remember, every bank will have a limit they are willing to lend in order to support your business and cash flow needs. It’s up to you as the owner or chief financial officer to know your banking limits and compare those to your needs and identify solutions to make up any shortfalls. What are some ways you can help improve your cash position?

  • Forecast project cash flows when bidding new work to determine if there are periodic drains on cash for items like equipment or material purchases, mobilization, or peak labor periods and the delay in the outflow versus projected inflow (do you know how long the owner/GC typically pays after receipt of a submittal?).
  • Compare the project forecasts against your general cash flow forecasts to determine your cash flow needs and whether you have the available cash on hand or working capital line of credit to support the project. Be conservative in your assumptions.
  • Be sure to establish on ongoing dialogue with your banker around the size of your line of credit and understand how large of a line your bank is comfortable extending and the requirements to obtain that limit. Be sure they understand the seasonal nature of your business and cash flow cycle and that you may request an increase to your line at a time when you are cash rich and seemingly do not need the increase. It’s always better to ask for the increase before you actually need it. Typically banks do not charge a non-use fee for contractor bank lines so the additional credit limit should not come with much of a cost.
  • Discuss with your banker the ability to have a separate capital expenditure line of credit available for equipment purchases so you are not using your cash on hand or working capital line of credit to buy fixed assets.
  • Are you having a problem with getting your submittals approved the first time? This can cause unnecessary delays and impact your cash flow. Create a best practice in getting these to your owner/GC’s in a timely manner each month in the format required.
  • Are punch list items to blame for slow paying owners? Holding up retention? Again, this can often be avoided with a system of procedures to address them in a timely manner and keep the cash flowing.
  • While you need to keep your key suppliers happy, are you paying them faster than you are paid? Is this necessary? Can you work with your suppliers during a cash crunch to allow for extensions of time without an interruption of service or terms for new orders?
  • What role do your project managers play in getting paid by your client? Can they be more proactive and involved in the collection process?
  • How do you determine distributions or bonuses at year end and throughout the year? Do you analyze your cash on hand versus your cash flow forecasts to consider the impact of these items? Can they be accrued but not paid in order to conserve cash? How about deferring a portion of these payments? While we all want to reap the rewards of the most recent year, we also need to focus on the long term health of the “golden goose” so it can keep laying eggs, year after year.
  • Are you in the middle or beginning of a shareholder buyout plan? Can this be structured to be paid over time rather than cash out all at once? Are there provisions in your agreement to curtail payments in a given year if the company’s performance was below a certain target?

If time is taken to understand the cash flow needs of your business, the return on that investment in time can be considerable. In difficult times like these, it could likely mean the difference between success and failure. You must keep track of your effectiveness and timeliness in turning profit into cash. This will also allow you to see early warning signs of trouble and take appropriate action. Being able to proactively manage your cash needs is critical to the short and long term success of your business. Don’t forget though that you may experience times when you have good cash flow even without profit. Look at your statement of cash flows to determine the sources of your cash. A large reduction in A/R or increase to overbillings may boost your cash positions temporarily, but the income statement or backlog schedule may be painting a different picture. Be prudent with your funds as you determine how best to deploy you cash and always keep one eye on future needs.

Mike Marsella is a Surety Producer for MJ Insurance. www.mjinsurance.com

 

 

money pile

Raising Capital In A Financial Drought Is Tough, But Not Impossible

In today’s turbulent economic environment, many companies are finding their cash flows temporarily reduced due to difficult business conditions. Less cash flow generated from operations can cause a working capital squeeze or make existing lenders uncomfortable and/or uncooperative, particularly if the company has violated a loan covenant or agreement. In the past year, we have witnessed a dramatic pullback on the part of all lenders, especially banks. If a bank has the power in its relationship with a borrower due to a broken agreement or covenant, a company could find itself in real trouble unless it is able to raise capital from another source.

What types of capital are currently available?
The answers vary based on the company’s size (revenue, profits, assets, etc.), history of financial results, strength of its management team, and industry.

In general, there is debt and equity (i.e., stock), but capital should be considered on a spectrum from senior to junior. The most senior capital is typically a bank loan secured by a first lien on all the assets of a company, followed by second lien debt and then unsecured debt. As a general rule, the more junior the capital, the riskier and more expensive it is.

No matter the interest rate, senior debt will be cheaper than other capital. In the current market, cash flow-based senior lending has all but dried up. It seems that cash flow senior loans are available only to those companies with strong cash flows — in other words, those that don’t really need the money. On the other hand, if a company has significant assets and is not already leveraged, the owners should check with their bankers; interest rates may be higher and advance rates lower, but senior debt may be available.

Let’s assume bank debt is not available — that leaves equity (common and preferred stock) and subordinated debt (sometimes called mezzanine debt because it comes between senior debt and equity in the capital structure). It will be least expensive if owners are able to access friends and family as investors. That said, many entrepreneurs prefer to keep business and family separate, so that leaves high net worth individuals (angel investors) and institutional investors.

How can business owners prepare to raise capital?
Regardless of the type and source of capital a company chooses to pursue, there are several steps to take to ensure the capital-raising process runs smoothly and, more importantly, maximizes the chances for success.

Prepare an executive summary of the business. Describe the company and how it makes money, be sure to discuss products and services and talk about the company’s challenges and opportunities. Also provide biographies of key members of the management team. Use charts and graphs to make strong points about financial performance and industry dynamics.

Assemble a historical financial information package. Include at least three full years of historical financial statements. Audited financial statements are best, but statements reviewed or compiled by a recognized accounting firm likely will suffice. Also, include monthly financial statements for the last fiscal year and the year-to-date period. It is helpful to include information such as sales and gross margin by customer and/or product to help investors consider concentration risk. In addition, provide a detailed breakdown of costs and expenses, including information regarding capital expenditures. Try to break down capex by expenses required to maintain the business and those that contributed to growth.

Assemble a financial planning package. Include the current-year budget and a forecast for the coming year. A detailed bottom-up analysis is essential to creating credibility with investors. Future growth will be the decisive factor for equity investors. Include projections for the next five years if possible, even if they are just a best guess driven by top-line growth rates and margin assumptions; they will be helpful for investors who want to understand the potential of the business.

Select an online data room provider and begin uploading documents for investors to review. Be sure to include all key contracts, credit agreements, charter documents, board minutes, tax returns, etc. An online data room will streamline the due diligence process significantly, requiring less of the management team’s time and shortening the overall time to close.

Prepare a PowerPoint presentation that walks investors through the business, its historical results, challenges, opportunities and projections. Include details regarding the use of proceeds. Invite the most interested investors to visit the company and use this presentation as a basis for discussion.


Where do business owners go to find capital?

The best advice for owners and management teams is: Do not underestimate the time required and the complexities involved with undertaking a capital raise. Never be afraid to admit that you are in over your head and need the help of professional advisers. Investors, particularly institutional investors, are currently at an advantage. In today’s business environment, capital is scarce and at a premium. To get the best deal for your company you need to bring your A-Game and your A-Team. A variety of corporate and/or business advisers such as attorneys and accountants may be able to help business owners determine the best sources of capital and recommend an investment bank to assist with a more comprehensive review of capital-raising alternatives, as well as sources of potential capital. It could be the difference between using a watering can versus an industrial sprinkler when combating your company’s capital drought.