Working Capital Tag

Now Trending! Outlook is Good for Start Up Businesses in the U.S.

19:16 26 June in Blog
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According to a recent report detailed in a publication entitled “Global Entrepreneurship Monitor”, 2013 was an optimal year for start up businesses. The report was based on a survey of adult American entrepreneurs between April and June of last year.  The report reflected a steady increase of new business creation since the recession leading up to 2014.
 
A Washington, D.C. economist attributed increases in business creation with access and availability of startup capital, whether from banks, angel investors or family members.  Likewise, in a downturn where credit markets are frozen and capital is more difficult to come by, this consideration is reflected in the overall number of startup ventures in any given period.
 
While the above reflects an optimistic outlook for budding entrepreneurs ready and able to start new business ventures, a different study, conducted by the Ewing Marion Kauffman Foundation (“Kauffman study”), painted an entirely different picture. 
 
The Kauffman study, which based its data from the U.S. Census Bureau and the Labor Department, concluded a lesser percentage of new business startups were created in 2013; and an even lesser amount of startups were created in 2011 and 2012.  A researcher for Kauffman attributed the conclusions of the study to the lower number of “new entrepreneurs coming out of unemployment” or “necessity-driven entrepreneurs” who, out of sheer necessity, are forced to start businesses because they are unable to find full time employment. 
 
Despite the disparity between the two reports, there does appear to be a trend towards economic recovery in the U.S. and an aim by the government, factoring companies like Capstone Capital Group, LLC, and others to help new business start, grow and thrive. Capstone prides itself as a factor whose objective is to help its clients succeed. As your factoring partner, we offer commercial financingsingle invoice factoring, which can provide you with the capital you need to accelerate your cash flow and help your business continue to grow and thrive in today’s market on a more flexible basis than other factoring companies.

 

Optimism in a free market society seems to be the catalyst which spurs economic growth in most cases.   Let’s hope the optimism continues to grow and investment capital remains steady in years to come.

 

For more information on how Capstone can help, please email [email protected] or call 347-821-3400 to speak with a representative today.

 

Feds Streamline Lending Standards: A Good Idea Or Will History Repeat Itself?

18:35 19 June in Blog
130
In an effort to assist minority entrepreneurs to borrower funds for business ventures, the federal government recently announced it would be streamlining its lending standards in connection with Small Business Administration (“SBA”) Loans.  In order to increase the percentage of loans made to African American business owners, the SBA will no longer require lenders to perform an analysis of cash flow or debt service coverage on loans of $350,000 or less.  The changes will begin starting July 1, 2014 and according to the SBA, these modifications in qualifying guidelines are aimed at simplifying and streamlining the lending process in an effort to incentivize banks to do more small-dollar loans in order to get more loans into the hands of traditionally underserved entrepreneurs. 
 
We at Capstone Capital Group, LLC find this change in criteria alarming.  As a private financial institution that assists its clients in accelerating their cash flow through Factoring accounts receivable it is our goal to increase access to capital for all qualified business borrowers.  However, providing access to capital to unqualified borrowers who do not have the ability repay will ultimately cause further problems down the line.  Once these no cash flow loans begin to default, Congress will have to act because taxpayer money is at stake.  The laws they ultimately will put in place will end up hurting small businesses access to conventional bank financing as Dodd-Frank has.
 
If history has taught us anything, it is that relaxing underwriting guidelines in an effort to extend loans to “underserving” individuals is not necessarily a good idea.  Like sub-prime commercial lenders in the past that offered small balance, stated income/stated asset with no debt service coverage, commercial loans to business owners who would not necessarily qualify for traditional financing, the government may be going down a dangerous slope with its new underwriting guidelines on SBA loans aimed at what they term as “underserved”.  The government lowering its lending standards to spur loan demand is a recipe we have seen all too often in this country, which ultimately has led to defaults and often times foreclosures. 
 
Recent events in the student loan market support the ultimate end game using relaxed standards.  Prior to the government handling student loans they were administered and underwritten by banks.  Now college graduates are graduating with mountains of debt because the ability to repay is not taken into account.  The tax payers will ultimately bear the burden of paying all of these poorly underwritten student loans back as more and more graduates are under employed and cannot pay their debts.
 
Further, and even more unsettling, is that commercial banks aren’t given similar consideration as they are prohibited from doing the same under Dodd-Frank.  As much as the government may believe loosening lending standards on SBA loans to spur lending to the undeserved is a good idea, these loans may very well be like the recent student loan crisis the government has created. 
 
Capstone Capital Group, LLC prides itself as a factor whose objective is to help its clients grow. As an alternative, we offer purchase order factoringsingle invoice factoring which can provide you with the capital you need to accelerate your cash flow and get your business back on track without undertaking debt you are unable to repay.

 

For more information on how Capstone can help, please email [email protected] or call 347-821-3400 to speak with a representative today.

 

Considering funding your business by financing your home with a HELOC? You may want to reconsider.

19:17 12 June in Blog
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As banks have tightened up lending standards making it more difficult for small to mid-sized businesses to acquire the necessary financing they need in order to sustain and/or grow their organizations, business owners have considered alternative financing options.  One such alternative is the pledging of the equity in their own homes as collateral for the extension of a loan.  It may seem a bit drastic, but business owners will do anything to save and grow a business.  Especially ones they have devoted their blood, sweat and tears into.
 
Business owners who have been denied a small business loan by their bank, will quite often look at taking out secondary financing against their home to save their struggling business.  One such vehicle which will allow them to do this is a home-equity line of credit, more commonly referred to as a (“HELOC”) loan.  Business owners believe these loans are just the life line they need to keep their business afloat.  Nothing may be further from the truth.   
 
Despite the sluggish economic recovery, home prices are again on the rise and banks have once again begun to increase HELOC lending.  Some business owners may be thinking a HELOC is the way to go for their business capital needs.  They may want to rethink this and consider their options-here’s why:
Risks involved with HELOC loans
There are significant risks involved with relying on a HELOC to save your struggling business.  The major risk with HELOCs is its exposure to interest rate adjustment and fluctuations.  All HELOCs are adjustable rate mortgages (ARMs), but they are much riskier than standard ARMs. Changes in the market impact a HELOC very quickly. If the prime rate changes on April 30, the HELOC rate will change effective May 1. An exception is HELOCs that have a guaranteed introductory rate, but these hold for only a few months.  Standard ARMs, in contrast, are available with initial fixed-rate periods as long as 10 years.
HELOC rates are often tied to the prime rate, which some argue is more stable than the indexes used by standard ARMs. This is a misconception however, due to the fact that the prime rate doesn’t change from day to day. In 2003, it changed only once, to a low of 4% on June 27. However, it changed 17 times in the next three years-.25% each time, reaching 8.25% on June 29, 2006.  In 1980, it changed 38 times, and ranged between 11.25% and 20%.
In addition, most standard ARMs have rate adjustment caps, which limit the size of any rate change;  and they typically have maximum rates 5-6% above the initial rates.  HELOCs generally do not have adjustment caps, and their maximum rate is 18% except in North Carolina, where it is 16%.
Recent problems with HELOC loans
More recently, the problems with HELOCs aren’t so much with interest rate fluctuations but instead have to do with the fact that a majority of these loans were interest only for the first 10 years before any principal was required to be paid.  A majority of these loans were made during the refinance boom in early 2000 when the value of real estate was at an all-time high.  A good number of these loans are set to recast within the coming year which means that the borrower’s monthly payment is likely to increase substantially.  
A business owner who decided to take out a HELOC against his home 10 years ago may be in for the shock of their life when his or her monthly payment jumps from say, $250 to $560.  That additional $310 could have been used to purchase additional equipment for the business, or to take the family on that long awaited vacation.  In addition, because a HELOC’s rate is adjustable, there is a likelihood the monthly payment could increase even more if the interest rate moves up.  
Should the borrower want to refinance the first and second HELOC loan in order to reduce his payment shock, there may be enough equity in the property to do so.   Thus the borrower is stuck with the higher payments until such time the HELOC is substantially paid down and/or the value of the property increases enough to justify a refinance.

 

With the uncertainty of the market, and constant fluctuations in the interest rate, as well as corresponding increases in the monthly payment, a HELOC loan doesn’t really make good business sense in the long term.  There are much better alternatives for business owners such as “Factoring” which can give a small business the necessary influx of working capital it needs to sustain and grow.  Capstone Capital Group, LLC specializes in Single Invoice Factoring for firms in need of immediate cash. Single Invoice Factoring provides flexible, no contract invoice selling in exchange for working capital from Capstone Capital Group, LLC.
 
For more information on how Capstone can help, please email at [email protected]or call 347-821-3400 to speak with a representative today.

 

Let the Borrower Beware

20:38 29 May in Blog
160
Capstone Capital Group, LLC prides itself on providing funding for its clients that run viable businesses but are in need of working capital and will grow as a result of funding.  Unfortunately, there are new lenders who pop up every day to take advantage of the latest trends in high yield lending that do not always have their client’s best interests at heart.

 

The most recent trend is called “Merchant Cash Advance”.  This segment of the lending industry dates back to the early 1990’s, but did not hit widespread acceptance until about five years ago.

 

When the Merchant Cash Advance business began, it was a method of providing liquidity to retail businesses that did not have significant assets that could be pledged to a bank in exchange for a line of credit.  The idea was to make an advance to a business in exchange for an assignment of the credit card receipts that were typical for the business.  For example, if a restaurant had monthly sales of $500,000 and needed $300,000, the Merchant Advance lender would structure a payment of $15,000 to $17,000 twice a week for 12 to 16 weeks.  These payments did not starve the company of its cash flow and as long as business was consistent and stable, the business owner who could not get a loan anywhere else had access to a willing lender.  If all went well, the lender would be paid back and the restaurateur could return to the lender at a later date and borrow again.  If the lender was not paid back, the company would be pursued by the lender to the extent the lender thought it prudent. With this method, more than the entire portfolio losses on one account could be covered by gains on many other accounts.

 

18 years later the business has now morphed into a high risk high return lending process with full recourse.  In the Sunday Bergen Record, the newspaper highlights the trials and tribulations of borrowers who fall prey to unscrupulous lenders in this market.  Like all businesses, there are those who operate ethically and those who are only in it for the money.  The Bergen Record article highlights what the pitfalls are of getting in bed with the bad apples of the industry. The article also explains why so many companies are entering the space and what their backgrounds might be.

 

Capstone Capital Group, LLC prides itself as a factor whose objective is to help its clients grow.  Unlike the merchant cash advance companies, we are able to factor sums from millions to hundreds of thousands with no personal guaranties or the pledging of real property, automobiles, etc.

 

Capstone specializes in Single Invoice Factoring (“Spot Factoring”) for firms in need of immediate cash. Single Invoice Factoring provides flexible, no contract invoice selling in exchange for working capital from Capstone Capital Group, LLC.

 

The next time you are looking for business funding solutions, be careful.  Our process may take five business days while theirs only takes one hour, but we will help you grow your business through our funding process.  Depending on whom you contract with in that business could mean the end of yours.

 

 
For more information on how Capstone can help, please email [email protected] or call 347-821-3400 to speak with a representative today.

Let the Games Begin!

19:00 01 May in Blog
120
The Federal Reserve (“Fed”) has now entered into its fourth month of reducing the impact of quantitative easing on the economy. 
The original theory behind quantitative easing was that if the Fed purchased bonds, it could sustain lower interest rates for borrowers. Therefore, more companies would borrow, which in turn, would help the economy with import finance.  Once small businesses started borrowing, they would expand their plant and equipment, hire new employees and have more profit.  However, the theory of quantitative easing did not work that way in a practical sense. 
What actually happened was the banks lent the money they could borrow from the Fed back to the Fed by depositing funds with them in return for an interest rate with no risk to their capital, unlike a small business loan. These business funding solutions were done at such high levels (i.e. tens of trillions of dollars) that the banks have been able to restore their capital base without having to pay any interest to their depositors (we don’t consider a quarter or one percent per year interest to a saver “interest”.) 
Without banks having to pay significant interest rates to their depositors, there was no driving force to encourage the underwriting of small business loans and take the risk.  The Fortune 1000 and companies of the sort that were cash rich over the last six years could borrow all they wanted from banks. However, those companies decided to go to the bond market where they could negotiate better terms. Because of this, the banks made loans to this group of companies and very few of the companies actually needed the loans and thus did not down on their credit facilities.
Because of the reduction in quantitative easing, the pundit and economists are projecting a mere 3.5% growth for the economy.  The Fed is lowering its quantitative easing by $10 billion per month (no typo here.)  The theory is that the banks will now begin to make small business loans because the Fed is no longer their biggest customer.  Interest rates will start to tick upward so the banks can price the new small business loans commensurate with the change in credit from the Fed to the mom and pop operator around the corner from your house.
But just in the nick of time, Dodd-Frank banking regulations have become effective which require the banks to do the exact opposite of what the reduction of quantitative easing should bring to the economy – growth.
Dodd-Frank is also known as the “Too Big to Fail” legislation.  This legislation was designed to reduce the impact on taxpayers when banks take risks with their depositor’s money.   Just when the Fed took a step to help the economy, Dodd-Frank will be applying the brakes again to small businesses.  For this reason, we have been trying to reach out and explain why factoring your accounts receivable with Capstone Capital Group, LLC to generate working capital is a step forward to accomplishing your business goals for 2014 and beyond

Get By With A Little Help From Your Friends

20:30 24 April in Blog
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Big Firms Fill Funding Gap was the headline on April 22, 2014’s CFO Journal section of The Wall Street Journal.  The article confirms our predictions that the unintended consequence of Dodd-Frank is the reduction of capital available for small companies.  The article describes how large companies who rely on smaller companies are financing their expansion of plant and equipment to supply their larger counterpart with goods under a long term supply agreement.  Typically, the supply agreement provides the capital to payback the loan made by the larger company to the smaller company.
The article goes on to describe how accounts receivable factoring has become a mainstream method of financing the working capital needs of small business.  At one time, factoring was a financing methodology only used by desperate companies.  Dodd-Frank has changed all of that.  At Capstone Capital Group, LLC we have seen our factoring business grow exponentially over the last 18 months.
One of our factoring clients has made a great case study that proves the benefits of both factoring and a large company financing a small company.  The company is located in the Midwest and is a co-packer for fresh and frozen bakery products for major name brand food products companies.  Last year, the company entered into a new contract with a multi-billion dollar company.  Our client did such a great job as a co-packer their client came to them and offered to purchase equipment that would enhance their production facility.  Our client’s management agreed and the food company made an interest free loan for the new equipment which will be paid back over 18 months.  The payment plan requires no money, just a discount off of the case price of a product they will sell to their customer.  The incremental increase in business each year will be a minimum of $2,000,000 per month.  That is a home run.
There are no strings attached.  Our client can produce a similar product with a different recipe for other clients.  This, combined with the invoice factoring program we have put in place, has enabled the company to increase its employees, operate more efficiently and increase their gross margin.
In business, there are times when out of the box solutions are necessary to accomplish your goals.  Factoring with Capstone Capital Group, LLC may be the out of the box solution you need to get you to the next level.  Once your customers see the direction you’ve set for your business, they too will offer out of the box solutions to increase your business and create benefits for both of you.  Start Spot factoring your receivables today and continue to pursue your business goals.  Once you have committed them to paper one way or another you will find out how to attain them even if it is with a little help from your friends.

Deceptive Headlines: Read the Fine Print

19:30 06 February in Blog
160
A headline from the Money & Investing section of The Wall Street Journal on January 30, 2014 was “U.S. Banks Start to Ease Limits on Lending”.  What a casual observer would glean from such a headline is that the banks are open for new Business Loans.  The article starts out very hopeful by describing how the new bank lending standards will “underpin” economic growth.  As the data illustrates the positive trend of underwriting standard easement, the reporter waits until the very end to point out that “The trend extended to credit-card, auto and large corporate loans…”
Ironically, large corporate borrowers are the ones fortunate enough with access to the corporate bond market for long-term inexpensive debt capital.  These borrowers have no need for Bank Loans unless they are making an acquisition or have a short-term borrowing need that was not accounted for when budgets were formulated for the upcoming fiscal year. 
Most readers of this blog are small business owners.  Small business owners end up being the ones with very limited options when it comes to Bank Financing.  Typically under pressure for immediate financing, these businesses are more likely to be rejected while going through a bank’s underwriting process for a multitude of reasons related to risk, balance sheet, and other financial issues.  Undoubtedly the first and foremost priority of banks is compliance with banking regulators which is discouraging to these enterprises.  The demographic relies on second tier financing companies like Capstone Capital Group, LLC to help with Working Capital and Contract Funding requirements.
The article goes on to say that small businesses have been hesitant to borrow because of uncertainty related to the Affordable Care Act and rising taxes.  On the contrary, most companies want to grow regardless of the regulation coming out of Washington D.C.  The reason why Small Business Funding have been trending down is that more and more banks are not able to offer them.  As a consequence, Alternative Financing has been the driving force that is providing working capital to small businesses.  This financing comes in the form of Factoring, Purchase Order Funding, and Trade Finance solutions.  Clients who are able to use these funding and financing techniques are growing and thriving regardless of the economic environment.  It is one of the true bright spots in the uneven economic recovery we have all experienced from time to time over the last six years as we run our business operations and try to grow.

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

20:57 03 December in Blog
100
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
110
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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