Friday, January 21, 2011

Business Tip: Have you come to terms with your bank?

As many small business owners realize, the credit crisis has re-shaped the banking industry. Local banks and trusted institutions have merged or been taken over by the government. What many owners don’t do is thoroughly review bank contracts before signing. This approach works fine in times of economic growth and easy credit but fails miserably in a recession. Taking an extra few hours to read and understand your bank’s policies, and asking them upfront and direct questions, can protect you and your business from unwelcome surprises.

#1 The Bank has a blanket lien on your business…and in many cases your personal assets:
When banks extend loans and lines of credit many have stipulations that place liens on everything you own. Even funding a small amount of inventory or equipment yields a blank lien on the business. A blanket lien means if you default you are at risk for being put out of business as well as the possibility of losing personal property since you are a guarantor on the note. Since banks also have terms that allow them to call their notes, they can force their clients to pay off their loan at any point or risk losing their assets. They can call the note if your financial ratios change, your sales drop, your credit drops, or any other variety of reasons some of which are beyond the scope of your business. For example, I had a client whose local bank had overextended themselves and were being audited by the feds. My client had been a long term client of this bank, had sales in excess of $5 million annually, and had commercial and residential mortgages with this bank. Of course they were surprised when the bank demanded they pay $200k down on their line of credit by the end of the month or risk being in default and losing their assets.  The bank didn’t care because either they got their cash or they got my clients assets…worth in excess of $200k. My client was forced to max out credit cards and borrow from friends to temporarily meet this obligation.

As an owner, be prepared for what you sign and be prepared for the worst case scenario because there is always a chance it comes true. I will post future misconceptions of how banks operate over the next few days.

Wednesday, January 19, 2011

Does your current corporate accountant work for your business...or theirs?

Having a good corporate accountant is key for the success of your business. Many business owners are surprised when they realize the accountant they have been using hasn’t been doing them justice. To evaluate your current accountant here are a few things to consider.

- Has your accountant sent you any referral business? If the answer is no, then your accountant may not have a strong enough business network to support the growth of your business. A good corporate accountant has a strong client base of growing companies and provides networking services beyond basic number crunching to help their clients succeed. If your corporate accountant doesn’t have this sort of network, then you are missing out.

-Does your accountant give you strategic tax planning advice, consult with you on your long term objectives, and accurately prepare data to help you make informed decisions?  As an owner, you need to be aware of tax changes before it is time to pay your corporate taxes…by then it is too late. If your accountant isn’t in tune with your business plan and isn’t providing valuable tax updates and reports then your business is at risk.

-If you are considering changing accountants make sure you check the local State Boards of Accountancy to investigate if your CPA is licensed as well as what disciplinary actions they may have been subject to.
When screening your new corporate accountant, ask for a specific example of how they have helped one of their clients expand their business through a referral.

Also ask what specific software and technology do they use to provide their clients with accurate reporting? What tax and strategic planning services do they provide? Are they active in the community? Do they have a network of financial institutions, bankers, and venture capital companies they utilize?
As always, a referral from your own business network may be the best lead for a strong corporate accountant. You can get insight upfront, lessen your risk, and save your own time on screening a bunch of prospects.

Monday, January 17, 2011

SBA Funding under the Jobs act expired...Now what?

The Small Business Jobs act, signed September 27, expired December 31, 2010 meaning the lenient provisions under the SBA program are gone. The previous guarantee limits were for 90% of the project…meaning a business owner would only need to come up with a 10% deposit. Since this program expired, business owners now need to come up with 25% as a deposit under an SBA program. This means on a re-finance or commercial real estate transaction, business owners are facing a significant down payment as well as higher fees from them SBA.

Any SBA loans that did not fund as part of the SBA Jobs Bill provision by the 31st are now condition red…meaning no new applications are being accepted in the loan queue as part of the jobs bill. Even those in the queue have a remote chance of funding, as an existing approved client needs to cancel their loan for someone on the waiting list to secure funds. The alternative is for those in the queue to cancel their loan and re-submit under the new guidelines.

Unless a new bill is passed, owners need to be prepared for higher down payments this year on commercial real estate purchases and re-financing. The chance of a new bill being pass is low as congress is trying to cut costs to fight the budget.

Expect the commercial real estate market to remain weak as most businesses do not have the capital to commit to a hefty down payment. However if you are planning on moving and have the capital you will find desparate owners willing to negotiate to try to move their property.

Sunday, January 16, 2011

If you don't know your competition, you don't know anything!

Do you truly know your competition? If you aren’t investing time to keep up on what your competition you are putting your business at risk. Researching your competition takes diligence and constant effort. As an owner, you need to know your company’s strengths, your competitor’s weaknesses, and how to capitalize on both aspects in your sales strategy. The obvious metric is price, however many consumers and purchasers are motivated by more than price and you need to know your customer’s pain points to sell affectively against your competition.

If you have a true understanding of your competition but do not have a decisive strategy to sell against them then you may need to re-evaluate your business plan. For example, I have a client in manufacturing that makes a specific part for defense contractors. This part is a precision piece that needs strict quality, quick turnaround, and competitive pricing. Now as an owner in this market, if you are not able to improve upon what is important to your customer then you will not be able to take business from the competition. In this case, my client was able to generate a quicker turnaround time and better quality. Although their price was slightly higher, they won the business since their guaranteed failure rate on the part was significantly less than the competitors. In the precision manufacturing industry, this is a key component and can lead to overall lower production costs.

If you can’t beat your competition, then you need to focus to a market where you can succeed.

Friday, January 14, 2011

Where is the recovery for business owners?

There are a number of conflicting reports on the direction of the economy. Bernanke says 3-4% growth this year however every indication I have is this is wishful thinking. Based on my daily conversations with business owners, I can tell you that although conditions have improved the mood for 2011 is subdued. Most clients I have talked to have no plans to hire employees in the next 12 months. Under the current adminstration, owners would rather add equipment or pay overtime than take on another employee expense. It is simpler and more cost affective then having to lay off an employee and pay unemployment benefits.

In fact, many owners are evaluating outsourcing more of their HR and accounting functions to further reduce headcount. As any economist will tell you, to have sustained growth in a consumer driven economy the US will need to have job growth. Based on this mornings jobless claims report, and the prospect of massive layoffs by over budget state governments, we have a long road to travel.

The best advice I have heard for the next few months is to account for every dollar spent, re-evaluate how to further trim costs, and make sure any equipment investment had a payback of 18 months or less.

Wednesday, January 12, 2011

5 tips to protect your business from $5 gas

Gas and Oil prices are rising and forecasted to possibly hit $5 per gallon by summer time. Business owners need to be proactive to stay ahead of their competition in fighting this new reality. If your business heavily relies on transportation, whether you do it in house or outsource, you need to be prepared. Here are a few ways you can protect your business, as well as potentially profit, from rising energy costs:
-hedge your costs by buying futures in oil contracts
-buy a storage tank to stockpile gas/diesel while oil prices are low
-buy stocks in oil exploration and refining...as the price of oil increases so will the value of your stocks
-Look for fuel efficient ways to manage your fleet, reward drivers through an incentive program for lowest fuel mileage in the fleet
-Upgrade older less efficient vehicles

If you have another strategy that has worked well for your business feel free to comment and share with other owners outside of your area that may benefit.

Friday, January 7, 2011

Mistake #5: Why using your line of credit puts your business at risk

Since interest rates are extremely low, most business owners think putting equipment on a line of credit is a good idea....it's simple to do and doesn't appear to entail much risk. However, unless you have plans to pay off your line within the next few months this mindset can drastically affect your ability to expand.
Interest rates are forecasted to rise dramatically in the next few years due to the massive debt our government is in. When you tie up your line of credit you are taking a large gamble on either being able to pay back your line quickly or betting that interest rates won't rise. A more prudent way to fund the growth of your business is to lock in as many fixed payments as possible over as long of a period as possible. Whether it be an equipment lease or loan make sure the payments are fixed to protect your business from rising interest rates. Save your line of credit for emergencies only ie. if your boiler goes out and you need a quick fix.
A perfect example is a client of mine that utilized their line of credit a year ago to purchase $500k in equipment. They used their line since it was the easy thing to do and interest rates were cheap. The problem is that although interest rates are cheap, their bank accelerated the terms on the line of credit making their monthly payment jump from a few thousand a month to over 20k a month. Now they are in a bind, they can't refinance because their ratios are extremely leveraged and they appear to carry too much short term debt.  In addition, their line of credit has a blanket lien on all the company assets so if they end up defaulting they lose their commercial building as well as all of their equipment.

Wednesday, January 5, 2011

Mistake #4, Your Employees are stealing from you.

If you don't have an understanding and checks/balances in place with your accounts payable, CFO, or anyone else that manages your money you run the risk of massive theft. When times are tough you can't trust your CFO our accountant to do the honorable thing. Many business owners put too much trust in the people they hire...they focus on the growth of their business and become complacent about what their accounting people are doing. For example, I have a client that had his CFO (who had been with him for 5 years), steal over $800k from the company account. They did this over the period of 2 years by mismanaging company accounts, pretending to pay bills, and falsifying invoices. The way the owner found out was when he had a lien from the IRS slapped on the business for not being current on his previous years taxes. He is still liable to the IRS and the court costs to fight the case are too large for him to afford in his current business condition.

No matter the size of your corporation do not think you are insulated from theft within the corporation. The highest risk companies have 20-100 employees. To protect yourself and the health of your business ask your bank about positive pay features and fraud protection. Also, get your business bank statements sent to your house so you can review personally all checks cut over the last month.

Tuesday, January 4, 2011

Mistake #3 that jeopardizes the growth of your business

The third major mistake business owners make is not managing their Dun and Bradstreet rating properly. Dun and Bradstreet is essentially a corporate credit report that details the strength and payment history of your company. I have dealt with many clients that made the mistake of not checking their report periodically for errors. One mistake on a large account can affect the health of your business for over a year. Common mistakes are large suppliers you are on net terms with making an error and reporting you late. This can result from their accounting department mis-applying a payment and reporting you 30/60/90 days late. Unless you keep up to tabs you will never know until you seek funding...and by then it is typically too late to get the error corrected.

Another common mistake is old tax liens and judgements showing as outstanding. Although these might have been satisfied years ago your company report may never have been updated. It is best to get this taken care of quickly by sending written proof these issues are satisfied. I have had more than one client get declined for funding simply because their lawsuit information was so old they couldn't come up with the proof showing satisfaction.

Monday, January 3, 2011

Top Mistakes Small Business Owners make that damages their ability to expand.

I deal with business owners daily and am amazed at the common misconceptions business owners have. Most owners aren't aware of how their personal credit, business credit, and outstanding lines of credit dramatically effect their business. Since the credit markets are extremely tight, successful owners need to have an understanding of how to make themselves appear bankable to the underwriters and have access to the best funding possible.

Mistake #1. Not managing your business credit cards properly. In most cases, these credit cards report to an owners personal credit and 1 or 2 late payments can have a dramatic effect on your scores. In some cases, owners trust an accounts payable person to manage these bills. The issue arises when the Accountant doesn't pay attention and is late on a payment. If the accountant gets these bills directly the owner is never aware until they seek funding for an aquisition. Company vehicles typically report to personal credit as well so these accounts also need to be closely monitored.

Mistake #2. Thinking that your credit card interest is too high and trying to renegotiate with the credit card issuer by going late on your card on purpose. The mindset here is that if I am late on my card the credit card company will be more likely to lower my interest rate to keep me from defaulting. I had a customer recently who did this on a small 8k in credit card debt, this dropped their credit scores a massive amount, and now any lending institutions consider them too high risk to lend to. Keep in mind, late payments stay on for at least 2 years...trying to save a few bucks short term while jeopardizing the health of your business doesn't make financial sense.

I will be posting additional mistakes over the next few weeks to keep owners better informed about how they can protect themselves.