Executing Your Goals and the Importance of Human Capital

20:00 16 January in Blog

It is mid January which means you have settled in on your Goals for 2014 and are reviewing them twice daily.  By now, you should be getting great ideas when you least expect them.  From experience, when engaged in non-work-related activities, the best ideas come to one’s mind.  It is important to write these ideas down and develop them so when you get to the office you can place them on your to-do list. You will then be able to focus on how to implement the ideas or discuss them with your staff or peers to determine their viability.  Unfortunately, not every great idea you will come up with will be relevant or successful idea to implement in attaining your goals.  Nevertheless, keep track of these perils of thought and use the ones that are in line with the attainment of your goals.
You should have also identified your Business Funding Sources whether they are a combination of Debt and Equity, equity or debt.  This foundation is essential so you can increase work schedules or contracts as the start dates begin without worry on how you will finance them or the Growth of Your Business.
What we haven’t discussed yet is how you Multiply Yourself to ensure that your execution tactic does not fail during this period of expansion.  You will need a few key employees that have experience in your industry.  Where do you find affordable talent in your industry with significant experience that can help multiply your time?  There are scores of underemployed veterans and baby boomers.  Because of the uneven economy many people are still looking for work.  The first place to look is a Temp Agency that handles this type of job candidate. 
Hiring a temp may seem a bit more expensive at first but what they allow you to do is try out the employee for a period of time.  If you like their performance and fit in the culture of your organization you can hire the individual full-time for a small fee to the temp agency.  You should have earned enough to cover the employee’s placement fee by the time you have to pay the fee for hiring them.  The temp agency will also allow you to layoff the employee if the job comes to an end and you do not have work for the individual.  This is a great way to incrementally add to your staff without creating long-term excessive overhead.  If you select the correct temp agencies you will have a very well qualified group of candidates to select from.
It is important to surround yourself with the people you need to run your organization successfully.  While Human Capital isn’t something you can show on your balance sheet, it is an extremely important asset to the long-term sustainability of your company.

Happy Days Are Here Again?

20:00 08 January in Blog
By now you should have committed your goals and business objectives to paper and are reviewing them twice daily.  See the blog post dated December 20, 2013 for details.
The next step for your business is to compute how much working capital you will need to meet your business goals.  Pro forma projections are typically done incorrectly.  They always show a profit which is not the point of the pro forma in the first place.  Many business owners believe that if they fail to show a profit, their pro forma projection will not be considered by a bank, finance company or factor.
The purpose of the pro forma is to determine what your cash flow needs are going to be and how you, as the business owner, are going to satisfy your cash flow needs.  There are only two solutions to this problem and neither is the final answer: debt or equity.  How will you make up your cash flow shortage for your business?
If you are fortunate enough to be in a business where the rates of return on capital are significant or exponential then you have a good chance of raising equity to cover your working capital needs.  Even with the Jobs Act you will need a significant amount of time and legal advice before you can present your equity opportunity to investors.  The question becomes where do you find equity investors?  Institutional investors want to invest in large companies or technology companies that are major disruptions.  For the rest of us, that leaves friends and family.  Again you must prepare properly and ensure that your friends and family understand the risks involved with the investment and can afford to lose their money.  Can you stand the thought of losing money invested by your friends and family? If so, then proceed with your friends and family. If not, then continue reading.
Most business owners typically lean towards debt because they have already invested personal equity in their companies.  Debt can take many forms depending on the type of business you are in.
Getting back to the point; once you develop your pro forma cash flow projections you fill in the cash shortfall with either debt, equity or a combination of both.  Once you make this decision, you are on your way to not only execute your business objectives but to also put the appropriate capital behind the initiatives to succeed.  Your pro forma projections may still indicate that you are making a profit but at least you will know what the source of your working capital will be.
On December 30, 2013 the Wall Street Journal had the following headline in its Small Business section “Small Businesses Anticipate Breakout Year Ahead” and on January 3, 2014 in the Markets section an article titled, “Biggest Lenders Keep On Growing”.  When you have time to read these articles, you will learn that small businesses have been optimistic for the last several years and by the end of the first quarter to the middle of the second quarter of 2013 the U.S. economy lost its steam.  Furthermore the larger banks are forcing the small Community Banks to consolidate to remain competitive.  These two forces cancel each other out.  Small businesses cannot grow without working capital and large banks are not funding to small businesses.  A friend of ours is a commercial banker at a community bank in New Jersey and for the last 90 days he and his staff have been training.  Do you think they were training on how to make more loans to small businesses?  If you said yes you would be incorrect.  They have been training on how to operate their bank without running a foul of Dodd Frank. 
This was startling news and demonstrates that regulation can strangle the nascent recovery everyone is expecting for 2014.  Don’t let your business plan get derailed because you cannot borrow money from a large bank or a Community Bank.  Find a secondary financial institution that can either provide an asset backed loan or an invoice factoring facility so you can grow your business and be part of the recovery.  The only other choice is to become a statistic.  January will be over before you know it.  Make it a goal to have a funding facility of some type in place by the end of the month so that you can be part of the 2014 recovery that everyone is talking about.

Are You Better Off Today Than You Were A Year Ago?

20:00 20 December in Blog
Now is the time, as business slows down for the holidays, to evaluate what you have and have not accomplished in 2013 and why.  In most cases if you failed to set goals or write them down you probably are not where you thought you would be right now.
I have been a goal setter since I was in college and the military but setting a goal is not enough.  Writing them down and focusing on them every day is the only way to achieve them.  There is an old saying: “if you are not pursuing your goals you are probably pursuing someone else’s.”
From experience, I set three categories of goals: business, personal and social.  For my business goals I write specific things I want to accomplish for the companies I am responsible for.  For my personal goals, I list things I want to accomplish that will make me a better person or more accomplished.  Personal goals may include learning a second language, learning how to play an instrument, gaining a professional license of some kind, etc.  For social goals, I focus on how I can help people either by donating time, money or both to causes I feel strongly about.
I write down goals in each category and place them in two picture frames on the vanity in my bathroom.  Positioning my goals in my bathroom forces me to see them at least twice a day; when I wake up in the morning and before I go to bed at night.  When I leave for the office my goals are clear and in my head and when I go to bed they are on my mind. 
It is very easy to get distracted from pursuing your goals unless you write them down.  How many times have you looked at your smart phone on your way to work to realize that your day is not going as planned?  If you are in management your job is to solve problems.  Problems are the biggest distracters of achieving your goals.  They force you off track in some cases and delay your plans.  However, I have found that sometimes problems create opportunities and often the opportunity is masked by the problem.  If your goals are on your mind then you will have an easier time at recognizing opportunity when facing problems.  In most cases you can position yourself to move closer to your goal as you solve the problem.
I am sure you have heard the expression “How do you eat an elephant?” with the answer “one bite at a time.”  Most people who set goals get disappointed when they do not achieve their goals in a short time frame and abandon their quest immediately thereafter.  The most common form of this is the New Year’s resolution.  By the end of January many people have stopped pursuing their goals.
Often times you stop pursuing your goals because the goal you have set may be too large for the timeframe you have given yourself to achieve it in.  It is not a bad thing to fall short of a chosen goal.  I assure you that when you fall short you have accomplished something toward the goal.  The point is without the goal you would not even accomplish as much as you had in missing the goal.  I have set the same goal year after year and eventually I was able to achieve it however each year I developed the skill or knowledge to be able to accomplish the goal.
Make 2014 the best year of your life by writing down your goals and reviewing them every day.  You will be amazed at the results you achieve regardless of where you work or what the economy is like.
This will be our last posting for 2013.  Have a Merry Christmas and a Happy New Year!

Why “Big Banks” Are Turning Down Working Capital Lines of Credit at a Record Pace (Part 3 – Dodd Frank Does It Again)

20:20 11 December in Blog
Community Banks are closing their doors because of the cost of compliance.  Small Business pays with less access to credit.  Unintended consequence of one size fits all regulation schemes.
WSJ Headline “Tally of US Banks Sinks to Record Low” on December 3, 2013.  There were many banks that failed as a result of the financial crisis, but-the real impact of the reduction of banks in the US is on small businesses that rely on credit from Community Banks.  This means less credit for small businesses who rely on the Community Banking network for working capital and lines of credit
Community Banks are bearing the brunt of Dodd Frank because of the costs of compliance with the new regulations and are closing as a result.  The new regulations are being enforced through out the banking system even though throughout the financial crisis Community Banks were not the cause of the crisis or nor even a significant portion of the crisis could be attributed to Community Banks.
Community Banks are smaller banks with several hundred million dollars in assets that are typically formed by successful local businessmen and women.  Their typical business plan is to stimulate the local economy by lending to other small businesses that large banks tend to avoid.  These smaller businesses require more support than a typical money center or regional bank is able to provide.  However, their presence in small markets and even in major metropolitan areas such as New York City is vital to the strength of small business and their ability to grow.  They provide accounts receivable lines of credit, equipment loans, real estate loans and in some cases even accounts receivable factoring.
Community bankers work on the principal of the Three C’s: Credit, Collateral and Character.  Large banks work off of computer models that determine whether or not you will be granted a credit line.  In most cases cyclical business, which many small businesses are characterized as, do not stand a chance against the money center or regional bank’s computer models as they are regularly rejected.  The beauty of a Community Bank pre Dodd Frank was that the small business owner could sit down with their local community banker to review the collateral, demonstrate they have good credit and character and establish a credit facility to help grow their business.  In the alternative, if there was not a chance that the bank could lend to a small business they would let them know immediately.  There is a benefit to a fast “No”.
We see this time and time again in our business at Capstone Capital Group, LLC.  Clients tell us they our factoring services as a backup to the line of credit they are applying for.  We can see immediately that there is no chance they will be approved by the money center or regional bank’s computer model.  However they go to the bank and apply through a business officer who is not trained to prequalify the applicant.  Several weeks are wasted in preparing and presenting all sorts of information that is required as part of the application process.  Once the loan request is denied, the business owner cannot make up for the lost time consumed by the lengthy application process that resulted in a denial of credit. 
Most non-bank financial institutions that support small business act like the pre Dodd-Frank community banker in many ways.  The Three C’s are employed because they take the time to understand the customer’s business and attempt to craft a program that will help the customer grow. 
Speaking from experience, we were in need of a $10,000,000 letter of credit facility to support our trade finance business.  We went to one of the large banks that you see on every corner in New York City where Capstone Capital Group, LLC has its operating accounts.  We advised the bank that we did not want to borrow from them, but instead we wanted to give them money so our letters of credit were cash collateralized.  You would think this is a pretty safe credit facility; after all we are giving them cash as collateral.  Although we were using our own cash to collateralize the “credit facility” we still had to provide a significant amount of both business and personal information.  This was understood since they are regulated by the federal government. 
What we were not prepared for was the approval process.  The bank actually wanted us to put up $20,000,000 for a $10,000,000 credit facility.  The process would work in the following manner:
  • A $10,000,000 deposit would be used to establish the letter of credit facility 
  • When letters of credit documents were presented we were not able to use the $10,000,000 that had already posted as collateral to pay for the goods purchased under the letter of credit. 
  • New funds would constantly be needed to provided the bank to cover the drawings under the various letters of credit issued so the $10,000,000 in collateral would always be on deposit. 
We inquired as to the logic of this approach and we were advised that their system is completely automated and in fact there was no human intervention whatsoever. To ensure that they did not extend us credit without cash collateral we were required to have twice the value of the letter of credit facility available to the bank.  Needless to say we took our business elsewhere where the credit terms made more sense. 

The federal government wants small business to thrive and grow and hire new employees to reduce the unemployment rate.  However, the federal government’s policies have unintended consequences that actually stymie progress for small businesses.  Could you imagine the growth rates of small business in the U.S. if the regulations that restrict their growth and ability to borrow were relaxed?  There would be one hell of an economic recovery underway!!Visit our website or connect with us on LinkedIn or respond below should you wish to discuss this further.

Why “Big Banks” Are Turning Down Working Capital Lines of Credit at a Record Pace (Part 2)

20:57 03 December in Blog
The Wall Street Journal reported on November 22 that “New Loan Rules Are on Tap.”  Small businesses who use Deposit Advance loans to even out their working capital shortfalls will now face restrictions as the Office of the Comptroller of the Currency will increase scrutiny on banks that make these types of loans.  The WSJ further reported that the implementation of these guidelines will push borrowers to payday lenders, pawn shops and others outside the banking system.  This regulation is a negative development for small business because most small businesses avail themselves of consumer debt programs that can be garnered by the owner for working capital.  This development will unfortunately increase the cost of capital and further limit small businesses access to capital.  With a bit of planning we can work around this legislation.
Going to a payday lender or pawnshop for financing should not be your first choice.  There are many secondary lenders and factors in the market that are reputable and in most cases are more flexible than banks.  These institutions are well capitalized, highly professional and would be very pleased to work with small businesses that have working capital needs and are growing.
An example is Capstone Capital Group, LLC (of which I am a Principal) provides Working Capital by purchasing your Accounts Receivables and unlike other companies in the same line of business, there are no long terms contracts.  Capstone provides working capital at your request, only when you need it.  Our clients grow rapidly once they learn how to effectively deploy the capital we provide.
One of our clients is an electrical contractor.  Prior to working with us the company struggled to achieve sales of $5,000,000 per year.  The company was notified last year that its $1,500,000 revolving line of credit would be termed out to a 60 month term loan.  Just like we discussed in last week’s post, the bank was facing the option of classifying the loan or converting it to a term loan.  Following the conversion of the credit facility into a term loan we established a factoring facility for our client. 
For those who don’t know, factoring is a financial arrangement where a company (in this case, Capstone) purchases accounts receivable from another company.  The purchaser advances funds and assumes the credit risk.  Once the invoice is paid, the purchaser sends the balance collected less their fee to the company that sold the accounts receivable in the first place.
We negotiated a Limited Subordination Agreement with the client’s bank and began factoring their accounts receivable.  During the first few months of the relationship, the client factored selected invoices and began to bid on projects they could not bid on before due to their line of credit limitations (which prevented the client from taking on new jobs prior to previous jobs being paid).  Part of the bidding process requires disclosures regarding how companies will fund contracts if awarded.  Normally, a contractor indicates his available credit on his bank line.  However, by using Capstone, our clients can write “unlimited” because our credit approval process is based on the credit of the general contractor or the owner of the project, not solely our client. 
What seems like a minor change in the way our clients conduct their business have significant positive results.  From our prior example, Capstone knew the outcome would be positive but our client had no idea.  In summary:
  • Our client’s business changed from job to job (due to cash flow limitations) to a significant backlog of work.
  • Multiple contracts were awarded at good margins and suppliers were paid in advance of terms creating payment discount opportunities and increasing profit margins on already profitable jobs. 
  • Sales went through the roof.  Typically, Capstone’s clients grow on average by 15% to 20% per year.  This client went from $5,000,000 in sales per year to $13,000,000 in sales per year. 
  • Remember that pesky term loan for $1,500,000?  The loan balance as of the end of the 3rd quarter was below of $750,000.  The bank was (and still is) happy to have us involved and began referring other clients to us who had similar problems.  
  • Fortunately for us, this is the norm for our clients rather than the exception. 
What is your back up plan if your bank decides to term out your credit line or you are denied a working capital line of credit?  Lay off some of your valuable staff?  Turn away good and profitable business?  You can turn a negative event into an opportunity to grow your company with Capstone Capital Group, LLC.
Visit our website or connect with us on LinkedIn or respond below should you wish to discuss this further.

Why “Big Banks” Are Turning Down Working Capital Lines of Credit at a Record Pace

17:42 19 November in Blog
Has your request for a Working Capital loan ever been declined or converted to a term loan restricting your ability to grow?  Many construction subcontractors who have expanded bidding opportunities are running into problems finding working capital due to significant restrictions put in place by the Dodd-Frank law.
Below is a  response Capstone Capital Group, LLC received from a global financial institution on behalf of a client for whom Capstone Capital Group, LLC was seeking a Limited Subordination Agreement (LSA) so that we could Factor their Construction Accounts Receivable and accelerate their working capital to pay essential expenses like rent and payroll in a timely manner.  All references to names or places have been deleted  to protect the privacy of the client and the “big bank”.

 

“The request has been declined based on the reasons provided below:
The subordination of the receivables mentioned in the attachment will diminish the overall value of our UCC filing as it requires us to take junior position to the Factoring company.  This relationship is already considered high risk as the line is currently in process of being termed out due to EW concerns (High Utilization, Insufficient Liquidity, and # of recent inquiries).  In addition further concern was noted due to recent review of financials indicating a decline in revenues between 2011 and 2012 with negative taxable income for 2012.”

 

This “big bank” response is typical in today’s banking climate.  Dodd-Frank, which created the “too big to fail” banking syndicate, has resulted in small businesses being frozen out of the working capital loan markets because they are deemed to risky.  Cyclical businesses are no longer welcome at America’s “big banks”.  Dodd-Frank requires banks who continue with these loans to put as much as 30% of the loan value up as cash collateral due to the loan’s risk rating.  Revolving credit facilities are being termed out, locking up the flexibility that many business owners need to grow their business and hire more employees.  Business owners in need of working capital seem to have limited options for obtaining working capital.
To help small businesses (or business owners) secure working capital in a manner that is compliant with federal law, Capstone Capital Group, LLC provides a LSA which only requires the “big bank” to subordinate only on an individual invoice-by-invoice basis.  Unlike the quote and typical subordination agreements, Capstone Capital Group, LLC does not seek subordination on all of the small business’ assets, only on a single invoice factoring, thereby maintaining the senior lien position for the “big bank” on all of assets of the small business.
Capstone Capital Group, LLC has observed that through the use of the LSA, our clients grow rapidly and are able to reduce the term debt owed to their bank ahead of schedule and in many cases in half the time. For more on this topic – check out our article from The Secured Lender Magazine – Debt Hangover Relief
Visit our website or connect with us on LinkedIn or respond below should you wish to discuss this further.

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