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Recovery is Slow for Small Business Lending

17:46 21 August in Blog
While the economy slogs along at a snail’s pace and businesses of all sizes continue to persevere, banks remain steadfast in reigning back loans for small businesses.  Even though loans to small businesses were up 1% from last September, they are still 18% less than what they were in 2008 according to the Federal Deposit Insurance Corporation.
 
Traditionally, small businesses were able to obtain necessary working capital loans through small local banks.  For decades, local business owners sat down with bank executives and built relationships that were beneficial for both the bank and the business.  However, since the housing bust in 2007 which caused numerous bank failures, many of the surviving banks have changed their underwriting practices and have literally converted loan approvals into a checklist. Relationship lending is virtually gone now and small business owners have had to consider alternate forms of financing to maintain their livelihood. 
 
Some business owners have tapped into their savings or retirement plans, mortgaged their homes, asked money from family and friends, and some have even turned to high cost, short term loans to keep their entrepreneurial hopes alive for just a little bit longer.  While a majority of these borrowers have good credit and more than two years history of being in business, local bank failures over the past few years and the Dodd Frank to big to fail bank legislation have caused the remaining banks to shy away from small business funding.  Instead of developing the necessary expertise to handle small businesses accounts, they instead choose to penalize small businesses by showing them the door.
 
Although some small business owners have found it difficult to obtain the necessary capital they need to maintain and grow their businesses from their local bank, options do exist.  Fortunately, Capstone Capital Group, LLC has the solution. 
 
Capstone Capital Group, LLC has been helping small to mid-sized businesses for years obtain the necessary working capital they need to sustain and grow during uncertain economic times without all the red tape you normally get a bank.  Capstone Capital Group, LLC specializes in Single Invoice Factoring (“Spot Factoring”) for firms in need of immediate cash. Spot Factoring provides flexible, no contract invoice selling in exchange for working capital from Capstone Capital Group. Call Capstone at (212) 755-3636 and speak with a representative today.
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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.
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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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