From Inside the Vault...

Are you Under-banked?  3 Sources You Must Consider

Posted by Bill McDermott on Fri, Oct 2, 2015 @ 11:10 AM

Are you under-banked?  If so, you're not alone.  A recent article I read indicated that among CFO's, being under-banked has landed on the growing list of challenges most CFO's face.  Here's why:

  • A recent report stated the financial landscape for small to medium sized businesses (SMB's)has changed significantly.
  • Credit markets have become increasingly biased toward bigger businesses.
  • 89% of SMB's report having the enthusiasm to execute growth strategies, yet just 52% have the necessary financial resources to successfully do so.  
  • The National Small Business Associaton reports that 31% of small businesses are without the capital they need.  That translates into over 10 millon businesses nationwide.

So, what does under-banked really mean? And how do SMB's get creative to find the capital they need?

Traditional banks rely on the credit worthiness of the SMB (not the owner) to determine when and how to lend, and at what rate.  With pressure from the regulators after the passing of Dodd-Frank, banks have been tightening commercial lending standards again.  With lending from commercial banks hard to find, many are seeking financing from alternative capital sources, as banks struggle to compete in that space.  Here are some alternative sources to consider:

  1. Asset based lending: ABL is lending against the value of the collateral, not the balance sheet of the business.  It's expensive (often overall cost between 18-24%). Most ABL lenders will advance between 80-90% of accounts receivable, depending on the quality of the receivable.  They often will use a lockbox where all your AR comes in to a lockbox to the lender (which is unknown to your clients).  That way they can control advances and payments to your line of credit.  The monitoring required is fairly heavy.  An ABL lender will charge a service fee for administration, typically 1-1.5% per month and will charge interest at Prime plus 3 (give or take 1%) for the period of time the money is outstanding.  
  2. Non-Bank SBA lenders: To fill the gap in the SBA lending space vacated by banks, several non-banks that are privately funded will do SBA loans on similar terms to banks.  They don't have the same regulatory reporting/pressure that banks receive.  So, they are less conservative than many commercial banks.  If you're buying a business, the SBA provides a 10 year ammortization and can typcially finance about 80% of the business subject to an appraisal.  There are SBA programs that also finance up to 90% of commercial real estate on favorable terms.
  3. Private Debt and/or Equity: Many individuals or family offices are tired of receiving less than 1% on their short term money accounts or mutual funds.  So, they are willing to allocate a portion of their wealth toward investing in business ventures.  This is high risk lending because these businesses can't receive credit from other sources.  However, the returns are high (typically in the 18% range and there's a fee to the person or company that raises the money.  Some of these sources will also require a portion of the company (referred to as an equity kicker).  This is common when a company is in a growth phase and will sell to a strategic buyer or do an IPO.  The equity kicker provides an increase in the overall return due to the increase in value they received from the stock at the sale.

Given an environment where available sources come in all shapes and sizes, the smart choice may be to seek an experienced advisor that knows the market and can create the best outcome for you and your company.


Topics: balance sheet, debt, SBA loan, small business, small business loans, cash flow, finance, collateral, credit, bank loans, banking, growth, line of credit

3 Ways to Manage Sales and Growth for Long Term Success

Posted by Bill McDermott on Fri, Sep 25, 2015 @ 13:09 PM

Have you ever had the experience where sales and growth were either happening way too fast or not fast enough?  The success of both requires management on the part of the owner and his or her management team.  The size of the business will determine what the division of labor is for these management tasks.  Here are three ways to manage both:

  1. Sales management-Do you have a person who is accountable for the strategy and execution of your company sales goals?  Having managed sales people in the banking industry for over two decades, it requires attention to specific metrics. How many calls are they making? What's their close rate? What's their average sale?  In their execution of the process, you have to be sure they've properly identified an opportunity, determine if they have the resources to handle the opportunity, if they're talking to the decision maker(s) and have they got the decision maker to the point of saying yes or no. The maybes can kill you!  Having or not having someone accountable the process and the execution will be a determining factor in your success.
  2. Financial management-Do you have a person who is accountable for making sure you have the cash required to handle the growth? Growth always requires cash. Can the cash come from internal funds (profits) or is a line of credit needed? You also need to be mindful of how much you can borrow on your line of credit. If you finance your growth with debt, there will come a time when you become so leveraged that you're no longer bankable. As you grow, you will watch your gross and net margins.  Often, growth will come at the expense of margin and it will take more sales to make up for the loss of margin.  At that point, you may decide to raise prices or slow down to avoid profit erosion.
  3. Operations management-Do you have a person who is accountable for productivity and process analysis, managing the operations workforce, facility layout and purchasing and inventory management?  Often, when sales go up quality can go down. And if you don't have the right people in place, your reputation as a provider can suffer in the marketplace.  Also, if you don't have someone watching the overal quality of your people, processes and execution in your product or service delivery, the operation can become less effective and efficient.  

Having a balanced approach and having people accountable in sales, financial and operations management are key to managing sales and growth long term.  When growth occurs, it always requires cash and increases the complexity of the organization.  People need to be hired and processes and execution change along with strategy.  It's up to the management to constantly monitor their efficiency and effectiveness in these areas.  Often this will include establishing key performance indicators in each of these areas.  We will discuss those in our next blog.

Topics: strategic planning, cash flow, profitability coaching, cash flow planning, growth, profitability, line of credit

How to Pace Sales and Growth for Long Term Success

Posted by Bill McDermott on Tue, Sep 15, 2015 @ 15:09 PM

Success should not come as a surprise. It’s something you’ve planned for. You have the right people in place with good processes and execution.

However, sales growth can happen rapidly. Sometimes it can get out of control and even become unmanageable. When that happens, it can hurt your clients, your employees and your business reputation.

Here are a couple of things to consider so your pace of sales and growth don’t get out of control. There’s a fallacy many business owners belive. Growth is good, but rapid growth is better. The truth is too much of a good thing can be a very bad thing. Many business owners are caught off guard by rapid sales growth. They choose to borrow money to support that growth which adds interest expense and cuts in to profitability. The money they borrow also adds leverage to the balance sheet, which if not managed properly, can create significant issues for the business.

As in most instances, failing to plan is planning to fail. Any manager should know their tipping point, when more sales switches from a good thing to a bad thing. Here are some things to consider:

  • Have a plan and work it. Analyze your sales forecasts and revise them as you see sales increase.
  • If you see a tipping point coming reallocate sales resources and processes to keep growth manageable.
  • Growth will come at a price. It will change the way you operate, it will often change your employee culture and create new management challenges.
  • It may take you outside your comfort zone and do the same with your management team and employees.

Many managers use the Sustainable Growth Rate as a tool for growth. The premise is how much sales growth can I sustain without increasing the leverage of my business. To calculate it, you take your Return on Equity (ROE) and multiply it by 1- your distribution/dividend rate.

So, is your ROE is 25% and you distribute 25% of the profits, then you sustain a growth rate of 18.75% (25% x 1-25% or 75% ) 25% x 75% =18.75%

You might be thinking I’d like to grow more than that. Well, you have a few choices.

  1. Take on a little debt. Just don’t get crazy. Most banks are comfortable lending up to a leverage ratio (total debt/total net worth) of 3-1 debt to equity.
  2. Increase your profitability. If you can raise prices/volume or cut expenses, you increase your profitability which should increase your ROE in the short term.
  3. Reduce your distribution/dividend policy. If you take a large amount out of the company in distributions, consider reducing it. The more you leave in the company the more you have to finance your growth.

Many companies are facing growth challenges in the current economy. Formulate a plan, watch out for your tipping point and consider some strategies to increase your ROE and reduce your distribution policy to enhance your growth opportunities.

Topics: entrepreneurship, small business, strategic planning, cash flow, finance, profitability coaching, business owners, cash flow planning, growth, profitability

5 Signs You're Growing Too Fast

Posted by Bill McDermott on Wed, Sep 9, 2015 @ 14:09 PM

The Great Recession is clearly a thing of the past. The economy appears to be expanding. Businesses are seeing sales, growth, and profits. Entrepreneurs are experimenting with new products and markets, starting new divisions and making investments in people.

Growth is good. But too much of a good thing can become bad. So how do you know if you’re growing too fast? Here are five signs that you might be growing too fast.

1) You’re just about out of cash. Growth always requires cash and increases complexity. Growing companies always run in to unforeseen costs. A growing company will run tight on cash as expenditures outpace sales. Companies with inventory or receivables will run in to this situation particularly fast.

2) Management is stretched way too thin. Sooner or later, a company will grow beyond the core management team’s ability to micromanage it. As a CEO, the company you founded may be doing quite well, but you’ve never had to share decision making authority with someone else. Delegating is the number 1 challenge for CEO’s in most small businesses. Whether your company is stretched in sales, operations or financial management, you may need to delegate those responsibilities to someone who can take your company to the next level.

3) You haven’t revised your projections. You may have done projections annually, but a fast growing company should revise their projections multiple times annually as management sees major deviations (good or bad) in collections and expenditures. This updating will tell management when to slow down growth or cut expenses so you don’t run out of cash.

4) You stopped planning for taxes. As your company becomes more profitable, it’s tax bill will likely increase at a higher rate than anticipated because it will move into a higher tax bracket. Don’t get surprised a month before April 15th that you have a big tax payment to make with no cash to make it.

5) Profits fall of the radar. When a company is expanding quickly, it’s very easy to become excited about rapidly rising sales and lose track of profits. This is particularly true when the company reaches a stage where it has many managers. It's important to keep an eye on margins.

So what’s the right amount of growth? Many financial managers use the sustainable growth rate calculation to come up with that answer. This is the maximum growth rate a firm can sustain without increasing leverage. It’s calculated as return on equity x 1 – dividend/distribution payout ratio.

So if your ROE (return on equity) is 20% and you pay out 50% of your profits as dividends or distributions, then your sustainable growth rate is 20 x .5 or 10%.

Topics: small business, cash flow, finance, business owners, cash flow planning, growth, profitability

5 Things to Know about Cash Basis vs Accrual Basis Financials

Posted by Bill McDermott on Tue, Aug 25, 2015 @ 10:08 AM

When you first start your business and begin recording business transactions, you must decide whether to use cash basis or accrual basis accounting.  The big difference is in how you record your cash transactions.  Many people use cash basis accounting for taxes and accrual basis for managing the business.  Here are 5 things you must know when considering which to use.


  1. Cash basis accounting means you record all transacations when cash changes hands (revenue and expenses).  Cash basis does a good job of tracking cash flow, but a poor job of matching revenue with expenses.  Accrual basis does the opposite, it does a great job of matching revenue and expenses, but a poor job of tracking cash flow.
  2. It’s difficult to use cash basis accounting if you buy or sell on credit because you may have revenue or expenses with no offset until a later period.
  3. Many business owners use accrual basis accounting to manage their business because it does a good job of matching revenue and expenses even if no cash changes hands.  This becomes even more important as the business grows.
  4. Many companies that use accrual account will use a cash flow report to monitor cash on a weekly basis to be sure they have enough cash on hand to operate the business.
  5. Should your business be on an accrual or cash basis for your tax return? The answer is “it depends.” The quick answer depends on whether your selling terms are to pay immediately. You want to have expenses to offset the revenue, so you might elect the accrual basis.  However, if your business sells on credit, but incurs cost before revenue is received, then cash basis might be better.  Please consult your CPA for specifics before landing on an answer.


To manage your business effectively, you need to be sure that you’re profitable.  So, accrual basis financials that match revenue and expenses are critical. However, you also need to be mindful of what cash you have in the bank and what bills need to paid this week/month. Therefore, a cash flow report is needed to manage that effectively.


Topics: cash flow, finance, profitability coaching, cash flow planning, profitability

3 Ways to Get Your Business Acquisition Financed

Posted by Bill McDermott on Tue, Aug 11, 2015 @ 11:08 AM

There seems to be a lot of business acquisition activity in the marketplace right now. I have several clients that are in various stages of this process. Depending on whether you're on the buy side or the sell side, here are three ways the acquisition can get financed.


1) Bank Financing- This may be a limited option for a couple of reasons. In the typical business acquisition (asset purchase) when the purchase prices is allocated over the assets of the business, there's usually an asset called goodwill that gives banks heartburn. This is due to the fact that there's usually no collateral to cover it. In addition, most banks are only willing to go 3-5 years on the term of a conventional loan for this purpose, so the payments are quite high. However, depending on your circumstances, if you can stand the payments and have additional collateral to support the loan, this could be an option.

2) Seller Financing-This can be a good option for a couple of reasons. If the seller is willing to finance the purchase, then that takes the bank out of the picture entirely. You will probably still have to come up with some cash to put skin in the game to induce the seller to take back the loan. Check with your CPA, but if you're the seller, you should be able to take installment sales method and pay the gain on the sale over the life of the loan vs paying it all in the tax year the business is sold if you take cash.

3) SBA Financing-While this is still bank financing, the SBA has the 7a program which can be used for business acquisition. Typically, a 20% down payment is required but the bank will finance the remainder and obtain a 75% guaranty from the SBA. The guaranty allows them to give the buyer a 10 year term vs 3-5 years for a conventional loan. While there is still a collateral shortfall, the lender will usually put forth " best efforts" to fully secure the loan with personal assets if there is a shortfall of company assets to secure the loan. There is an SBA guaranty fee which is passed on to the borrower, usually 3% of the loan amount, but most lenders will finance the fee in with the loan proceeds. These are the most common options, however some instances will include a combination of seller financing (subordinated to the bank) and either a conventional or SBA loan to make the deal work. It's important to discuss the structure of the sale/purchase and all the terms and conditions with your CPA and attorney to address any legal issues or tax consequences.

Topics: financial statements, debt, SBA loan, small business, SBA loans, small business loans, strategic planning, cash flow, collateral, bank loans, business owners, taxes, cash flow planning, growth

How Much Debt is Too Much?

Posted by Bill McDermott on Fri, Jul 31, 2015 @ 16:07 PM

Some people are risk takers and don’t mind going in to debt and some are totally debt averse.  They don’t borrow at all. 

But how much debt is too much?

The easy answer is don’t borrow more than you can afford to pay back or don’t borrow more than a lender is willing to loan you. They may not be the same amount.  Do you want to use up all your borrowing power on this transaction or do you want to keep some in reserve? Here are some things to consider:

how much debt is too much?


  • Assume for the moment that you will use terms loans with monthly principal and interest payments for any borrowing need: working capital, equipment real estate or business acquisition.
  • Each loan will probably have a different term. Working capital is 2-3 years, equipment is 3-5 years, real estate is 15-25 years and business acquisition up to 10 years.
  • Calculate the total amount of your loan payments and make sure you have cash flow to cover those payments with a 25-30% cushion.  100,000 in payments requires $125,000-130,000 in cash flow.
  • Cash flow is typically defined as EBITDA: earnings before interest, taxes, depreciation and amortization.


Remember the higher the cushion (50-100% vs 25-30%) the more wiggle room you have for owner’s distributions for taxes and or other personal expenses. 


Here’s the tough part.  Let’s pretend you’ve maxed out your borrowing capacity.  All of a sudden there’s a great opportunity to buy out a competitor.  You’re forced to either fund it yourself (if you even have the resources) or take on an investor.  More often than not, the investor will seize the opportunity to take a bigger piece of your company than you want to give up.  It may be a good idea to save some of your borrowing capacity for the future. 


Another way to look at how much debt is too much is look at the leverage ratio or debt to equity ratio. 


  • Most lenders like to see the ratio of $3-4 of debt to every $1 of equity on the balance sheet. 
  • This is a 3 or 4 to 1 debt to equity ratio. 
  • Think of it this way. Your creditors have put up credit for 75-80% of your assets and you’ve put up 20-25% in equity. 
  • Beyond this level, most lenders feel they’re taking more than their share of the risk.  
I hope these tips will be helpful the next time you think about borrowing. Now you'll know whether it's the right time to borrow.

Topics: debt, strategic planning, cash flow, credit, business owners, cash flow planning, line of credit

3 Things to Know Before you Refinance your Business Loan

Posted by Bill McDermott on Wed, Jul 22, 2015 @ 15:07 PM

Businesses that took out debt a year ago or even 3 years ago may find themselves in a situation where the cash flow used for the loan or the purpose of the loan has changed.  Many businesses find themselves in a situation where a refinance makes sense because they either want to reduce their loan payments to use cash flow for growth or they may want to increase the loan amount because their business is expanding.  Businesses are dynamic, but a loan repayment is usually static due to the fixed term of the loan. A floating rate loan is the exception.

loan refinance

Before you refinance your business loan, there are three things you must consider:

  1. Is there a prepayment penalty on your current loan and have you factored in the cost to your refinance?  This is especially important if you have a fixed rate conventional loan or an SBA loan.  Many SBA loans will have prepayment penalties for payment in full on a refinance.  Depending on the type of loan and the length of the amortization, they can range from 3-10% in the first year and will burn off to 0 over a time period ranging from 3-10 years.  If it's a large loan, like a commercial mortgage or business acquisition loan, then the prepayment penalty can be high. While it's not technically a prepayment penalty, there are many fixed rate loans offerred through a derivatives product called an interest rate swap (you and the bank swap rates, you want fixed and the bank wants floating).  If you cancel the swap early, the intermediary is entitled to a make whole payment either to you or the bank depending on where interest rates are relative to the swap rate when the deal was consummated.  
  2. Are your loans cross collateralized?  If you only have 1 loan with your bank then disregard this point.  But if you have a line of credit and a second loan (building mortgage or equipment loan) then check the fine print of your loan agreement.  If your loans are cross collateralized then it's possible the bank will ask you to refinance both loans rather than just one.  Sometimes there's a collateral shortfall that the bank handles by doing this.  Other times this is just put in the small print of your loan agreement to make it hard for you to change banks.  Before you look at refinancing your loan make sure this language is not in your loan agreement or note.
  3. You can't payoff an SBA loan with another SBA loan.  Many business owners don't know the SBA guidelines when it comes to loan amortizations.  SBA loans are made on the most favorable terms for bank financing in the marketplace (10 years for working capital and business acquisition or 25 years for real estate).  Therefore, the SBA won't extend the term of a loan beyond it's original amortization.  While there may be 1-2 exceptions, you would be paying off your SBA loan with a conventional bank loan and the payments and interest rate could be higher.  As an alternative, you could take out a second SBA loan (limit is around $5 million aggregate).  However, you would be making 2 payments where you would prefer to make one and it be a lower amount.
Before you jump in with both feet on a refinance, check out these three things to be sure you don't find a "gotcha" down the road that makes your refinance a no go.

Topics: small business, small business loans, cash flow, collateral, credit, bank loans, bank loan covenants, loan covenant, cross collateralize, banking, business owners, cash flow planning

4 Must Haves to Get a Loan From Your Bank

Posted by Bill McDermott on Tue, Jul 14, 2015 @ 09:07 AM

Securing financing for your business can be challenging.  Whether you're borrowing money for the first time to start your business or you're looking for a loan to grow, the lending criteria banks use can be rigorous.  It's important to know what are the must haves that a bank is looking for to approve your loan.  Here are the top 4:

3 must haves for loan approval


  1. Financial statements that are timely and accurate.  Some clients have one or the other, but you need both.  Financial statements are the language that bankers speak to obtain credit.  If you can't provide them within 30 days of month end or you can't produce them accurately then take a hard look at your people or process that is required to get you there.  
  2. Cash flow sufficient to repay the loan with a cushion, usually 25-30% cushion. If you've heard bankers talk about debt coverage of 1.25 or 1.3-1, this is what they're talking about.  Make sure you understand how they calculate it. Does it include or exclude owner distributions or taxes. On a line of credit, is it interest only or does the bank term out a principal portion of the line in their calculation?  Since this is a ratio, make sure you understand both the numerator-cash flow and the denominator-loan payments.
  3. Collateral sufficent to cover the loan amount that is margined.  What is an appropriate margin?  For most real estate, equipment and accounts receivable, the margin is 20-25% meaning the lender can loan up to 75-80% of the value.  However, if you want to borrow $500,000 and your only have $300,000 of margined collateral, then the lender will be looking for you to secure the difference.
  4. Good credit is a personal credit score above approximately 680.  Since your credit score is based on a variety of factors, good credit excludes bankruptcy, liens, judgments, garnishments, and foreclosures.
When you go to the bank, these items will be what they're looking for to approve your loan. You can also read about 3 deal breakers for financing

Topics: business loans, interim financials, debt, SBA loan, strategic planning, cash flow, collateral, credit, bank loans, income statement, finding financing, banking, business owners, cash flow planning, line of credit

3 Deal Breakers for Start up Financing

Posted by Bill McDermott on Fri, Jul 10, 2015 @ 09:07 AM

If you're thinking about starting a business, you know you're going to need financing. Some banks like lending to start ups, some don't. You've heard of the 5 C's of credit:

  • Character
  • Cash flow
  • Collateral
  • Credit
  • Conditions 

But most banks like to see a balance sheet that is:

  • Liquid (plenty of cash)
  • Not leveraged (less than $3 of debt to every $1 of equity)
  • And three years of profitable operations historically 
But you may want to know what are the absolute deal breakers where the banks won't lend under any circumstances.

startup financing

As an aside, most start ups are financed through an SBA program (most often the 7a program). So, the SBA has specific guidelines which the bank combines with their own to make the loan.

1) Poor credit- About two thirds of your credit score is based on payment history of your credit obligations. So, if you've had a history of slow payments that could be a deal breaker. Also, if you've had a prior bankruptcy, liens, garnishments or judgments that will also affect your ability to borrow. Generally, banks are willing to loan to individuals with a credit score of 680 or above. Below that, it becomes increasingly unclear whether a bank will loan or not. If this is you, consider either a co signer or guarantor (with a good credit score) or talk to a professional about what you can do to improve your credit score.

2) Lack of collateral- A little know fact about the SBA 7a program is that the lender has to put forth best efforts to fully secured the loan with margined collateral. If the business doesn't have sufficient collateral to secure the loan, the bank is required to obtain additional collateral from the owner's personal assets. For example, if the loan amount is $500,000, then you need between $625,000 and $666,000 of assets with a 20-25% margin to get the loan. Each type of asset has a different margin requirement (SBA has their guidelines and so does each bank). Most banks will loan 75-80% on real estate, accounts receivable or equipment. In rare circumstances, banks do make loans that are slightly undersecured.

3) No business plan or 2 years of projections- About 80% of the businesses started fail in the first five years. The number one reason is that they are undercapitalized. So, a bank is looking for you to do a full business plan explaining the business, the market, the competition, the management team and two years of projections that are based on sound assumptions consistent with the industry performance and trends. Banks are not venture capitalists because they loan their depositors money, not their own. The business plan and projections along with the other factors involved need to show a high likelihood of business success with acceptable risk for the bank.

Lending to start ups is very risky because there is no historical performance of the company. This is not an exhaustive list of deal breakers, but these are three that bankers incur most often. Do your homework before you go see the banker to be sure your request doesn't have one of these.

Topics: debt, loan package, SBA loan, small business, SBA loans, small business loans, strategic planning, cash flow, collateral, credit, bank loans, finding financing, banking, business owners, cash flow planning, line of credit