Mention the word "Factoring" to most small businessman and the response is either one of two things - a blank look or a face of grimace and pain. But like all things financial, factoring has its place. For many young companies it is the only available source of outside growth capital and fortunately not as expensive as many think. The days of loan sharks and hard money lenders have long since been replaced with reputable, nationwide lenders and franchises. The all-in cost of capital for a top tier factoring company is more akin to a high interest rate loan than what historically was considered a "factor" loan.
For most new small businesses, the SBA loan programs remain the cheapest, best source of capital. But for those that do not have the requisite operating history or lack the time and talent to build a financing package, the SBA loans will not be accessible. For these companies, an asset based lender that will factor their invoices may be the next best alternative. "5%" is a common number thrown around when people talk about factoring. By this, they typically mean that for an invoice that is loaned (or factored) against and then paid 30 days later, the factor lender keeps 5% of total invoice amount. This can get expensive but still better than lost business due to lack of working capital. The good news is that some of the leading asset based lenders offer 0.75 - 1.25% factor loans for even the youngest of companies that are growing rapidly. The all-in annualized cost of capital for these loans is somewhere between 17-20%. This is certainly more expensive than an SBA 7(a) line of credit at Prime + 2%, but still more of a loan than a "stick in the eye" and of course, much better than having to sell equity. These factoring companies can become excellent bridge financing between the founders capital and a SBA loan.
March 03, 2010
December 08, 2009
A Picture is Worth...
Yesterday's WSJ had this terrific exhibit regarding the US debt markets. I think the most telling figure in this exhibit is that the junk bond market has suffered less than that for bank loans. Somehow individual and institutional investors have become comfortable with unsecured, blue sky bonds while bankers shy away from secured, cash flow loans.
December 03, 2009
Overhyped not Oversubscribed
There is lots of talk about all of the recent fiscal and monetary stimulus eventually causing an episode of massive inflation but so far nothing. Aggregate demand must exceed supply for inflation to occur. The drop in Consumption, which accounts for 70% of GDP, has been so severe that the fiscal stimulus has been left inadequate to fill that gap. As for the monetary leg of all this stimulus, it has mostly been much to do about nothing. With the exception of mortgage lending, very little of the new money supply is making it into the economy. Here are two statistics that sum it all up. The Fed's balance sheet has increased $1 trillion dollars since pre-crisis (mostly via the purchases of MBS, Federal Agency Debt and Direct Bank Loan assets) levels. The US banks on the other hand have amassed $1 trillion dollars of excess reserves; about $1 trillion dollars more than they had a year ago. Get the picture. When the Fed begins to unload (sell) all of its assets next year, they will soak up a lot of excess money supply. If the banks and their affiliates are the buyers, the monetary stimulus will have made a round trip without ever stopping at main street. The stimulus that never was.
The banks are making great on all this cheap money and for those few small businesses that are receiving credit; they are beneficiaries too. Much of the discussion and questions at today's Senate hearing with Ben Bernanke related to why banks are not lending to small business more. It was clear that no one really knew for sure but that, the answer is different for each and every bank. The only certainties offered by Mr. Bernanke is that the banks credit requirements are tougher and that, on the aggregate, the credit quality of businesses have suffered since the pre-crisis days. These two things are certainly reasonable and explain a large portion of the gap between money supply and money being supplied but they do not explain all of it. There is an element of human behavior and market friction that keeps otherwise good loans from being made. Asymmetric information or lack of information prevents the right decision from being made. This element is always present but the level of fear and aversion to risk ensure that bankers error to the side of not making the loan. For companies that are at or near the margin, it is extremely important that they instill confidence in their banker by having a well organized plan and having the ability to articulate their vision in the language of bankers - numbers. Bankers want to lend and it is their business to do so but for the moment, they are too nervous.
The banks are making great on all this cheap money and for those few small businesses that are receiving credit; they are beneficiaries too. Much of the discussion and questions at today's Senate hearing with Ben Bernanke related to why banks are not lending to small business more. It was clear that no one really knew for sure but that, the answer is different for each and every bank. The only certainties offered by Mr. Bernanke is that the banks credit requirements are tougher and that, on the aggregate, the credit quality of businesses have suffered since the pre-crisis days. These two things are certainly reasonable and explain a large portion of the gap between money supply and money being supplied but they do not explain all of it. There is an element of human behavior and market friction that keeps otherwise good loans from being made. Asymmetric information or lack of information prevents the right decision from being made. This element is always present but the level of fear and aversion to risk ensure that bankers error to the side of not making the loan. For companies that are at or near the margin, it is extremely important that they instill confidence in their banker by having a well organized plan and having the ability to articulate their vision in the language of bankers - numbers. Bankers want to lend and it is their business to do so but for the moment, they are too nervous.
October 26, 2009
Public Knowledge
Continuing on my theme of the value of debt restructuring and recapitalization, I wanted to make note of a recent transaction by the public telecommunications company Knology. Knology recently closed on a credit facility amendment that extended the term of its facility by two years and increased its unused revolver by 40%. The result: it's market cap (market value of its equity) increased approximately 35+%. All this, even though the interest rate was increased by more than a full percentage. Ohh but wait, the new terms allow for dividends and stock re-purchases; read recapitalization. The market run-up is an endorsement for the value of longer-term debt and flexible terms (money security) over lower rates (money expense).
While the typical small business is not managing their balance sheet for the public markets, there is a lesson to be learned here. If a company's current bank has increased their credit line review frequency to quarterly and the LOC is at risk despite positive financial performance; the equity value is being squeezed. If a small company can find another lender willing to extend longer-term loans conventionally or via an SBA program, management could add significant value to the equity of the company just by restructuring the debt even in the face of higher rates. This is no easy task these days but not impossible.
While the typical small business is not managing their balance sheet for the public markets, there is a lesson to be learned here. If a company's current bank has increased their credit line review frequency to quarterly and the LOC is at risk despite positive financial performance; the equity value is being squeezed. If a small company can find another lender willing to extend longer-term loans conventionally or via an SBA program, management could add significant value to the equity of the company just by restructuring the debt even in the face of higher rates. This is no easy task these days but not impossible.
October 13, 2009
Market Confirmation
In my previous blog I advocated small businesses and even individuals using debt to fund investments or even build a cash reserve for the potential double dip recession on the premise that money is extremely cheap and since its being subsidized by YOU; be sure to get your slice. Seems other folks agree with this view. According to Dealogic, for the first 9 months of 2009, of all debt issued by non financial companies, only 9 of the 100 largest bond deals globally and only 6 of the 100 biggest US deals, were for expansion, capital expenditures, investments or project finance, while 65 of the top 100 US deals were for refinancing or working capital. When companies issue debt, they tell investors why they're doing it in the prospectus they file. Most of these companies explanations suggest they are hoarding cash or repairing finances. Many also listed "acquisitions" as a use. When companies borrow debt without an immediate opportunity for a return on investment that exceeds the cost of capital, it is a good sign they either fear things could get worse (and capital will dry up) or they believe debt is so cheap that it is better to get your hands on it while it last and figure out what to do with it later.
October 06, 2009
Your Slice of Stimulus
For most individuals and small businesses, the easiest way to benefit from the stimulus efforts is to borrow. Whether it be refinancing a home mortgage or applying for a SBA loan, their has never been a better time to access cheap debt. 30 year fixed rate mortgages are under 5% and SBA loan fees, which can be 2-3% of the principal amount have been waived until years-end. The absence of fees and increase of federal guarantees to 90% LTV through the end of this year makes the 7(a) and 504 programs very attractive sources of financing. 504 loans can be 20-year amortizations with rates below 5.5%.
The Fed's balance sheet has grown well over a trillion dollars over the past year in an effort to stabilize credit markets and keep capital accessible. The Fed owns $692B of mortgage back securities and represents over 70% of this market's activity. Fed activity combined with huge inflows of private money into short-term bond funds continues to keep rates down. If there is inflation anywhere, it exists in fixed income assets. Money market funds yield near zero, high yield bond spreads are below pre-Lehman levels and some Bond ETF's are trading at up to 5% premiums to their Net Asset Values. Is there an asset bubble in debt securities? Low yields means high prices for debt. To borrow is to sell debt and there is never a better time to sell than when buyers are paying too much. Best of all, if the critics of the Fed are correct and we suffer from rampant inflation and higher taxes, your debt obligation balance declines in real terms without doing a thing and the interest tax deduction becomes more valuable.
Of course, don't borrow just for the sake of borrowing, but small business owners with solid investment or growth opportunities should not pass them by on the assumption that no one is lending. The SBA loan volume in its most recent financial quarter was up 18% from the previous year and nearly as high as 2007 quarterly levels. Again, this market is supported by the Fed's TALF buying whose balance has risen from $6B in April 2009 t0 $42B at the end of September. Sure, lending standards have tightened and reporting requirements have risen, but if a small business has good financial management and planning and a compelling business case, the lending markets are open. If the Fed buying activity winds down and SBA fee waivers are not extended, this window of opportunity may close.
The Fed's balance sheet has grown well over a trillion dollars over the past year in an effort to stabilize credit markets and keep capital accessible. The Fed owns $692B of mortgage back securities and represents over 70% of this market's activity. Fed activity combined with huge inflows of private money into short-term bond funds continues to keep rates down. If there is inflation anywhere, it exists in fixed income assets. Money market funds yield near zero, high yield bond spreads are below pre-Lehman levels and some Bond ETF's are trading at up to 5% premiums to their Net Asset Values. Is there an asset bubble in debt securities? Low yields means high prices for debt. To borrow is to sell debt and there is never a better time to sell than when buyers are paying too much. Best of all, if the critics of the Fed are correct and we suffer from rampant inflation and higher taxes, your debt obligation balance declines in real terms without doing a thing and the interest tax deduction becomes more valuable.
Of course, don't borrow just for the sake of borrowing, but small business owners with solid investment or growth opportunities should not pass them by on the assumption that no one is lending. The SBA loan volume in its most recent financial quarter was up 18% from the previous year and nearly as high as 2007 quarterly levels. Again, this market is supported by the Fed's TALF buying whose balance has risen from $6B in April 2009 t0 $42B at the end of September. Sure, lending standards have tightened and reporting requirements have risen, but if a small business has good financial management and planning and a compelling business case, the lending markets are open. If the Fed buying activity winds down and SBA fee waivers are not extended, this window of opportunity may close.
October 01, 2009
The Twighlight Zone
This weekend marked the 50th anniversary of the show, The Twilight Zone. For those of you who have seen an episode or two, you know that the magic of the show was that you could never really be sure of what was reality and what wasn't. And the answers didn't come at the close of the show, either. During a NPR story about the show's anniversary this past Friday, the guest remarked, "what The Twilight Zone was doing was providing this extraordinary timely, and I think prophetic, transition between the kind of secure era of the Eisenhower period and what would become known as the 60's, when we would completely challenge everything that we normally thought was true and solid and established." Feel familiar? As I heard these words, I immediately thought of today's economic uncertainty.
Forget for a moment the guiding ideological differences in past administrations; since the 1980's, there has been a familiar mix of monetary and fiscal policy used to control inflation, exit recessions and guide the economy. Combine that with American ingenuity and the entrepreneurial spirit (and lots of easy credit - it turns out) and you always had confidence things would get back on trend whenever we hit bumps in the road. This time feels different, more uncertain.
Long-term, I'm optimistic but for now, the September jobs report points to the only certainty I can find. Employment is going to be slow to rebound and when it does, it will be accompanied by a wage & benefit reset for many American workers. While a reset would be good for getting back to full employment, understanding what that and less credit means to US consumption and GDP feels like passing through the Twilight Zone.
Forget for a moment the guiding ideological differences in past administrations; since the 1980's, there has been a familiar mix of monetary and fiscal policy used to control inflation, exit recessions and guide the economy. Combine that with American ingenuity and the entrepreneurial spirit (and lots of easy credit - it turns out) and you always had confidence things would get back on trend whenever we hit bumps in the road. This time feels different, more uncertain.
Long-term, I'm optimistic but for now, the September jobs report points to the only certainty I can find. Employment is going to be slow to rebound and when it does, it will be accompanied by a wage & benefit reset for many American workers. While a reset would be good for getting back to full employment, understanding what that and less credit means to US consumption and GDP feels like passing through the Twilight Zone.
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