Let the Games Begin!

19:00 01 May in Blog
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

It’s the Economy, Stupid?

19:47 23 January in Blog

Everyday, depending on what consumers or employers are doing, the economy is either growing or contracting.  There are a few Economic Indicators or news announcements that you might be interested in following to come to your own conclusions: 
  1. The decision by the Federal Reserve (“Fed”) to either increase or decrease the Quantitative Easing (“QE”).
  2. Whether or not Congress or the President plans on not enforcing certain aspects of Dodd Frank,
  3. How your local Business Climate is reacting to the changing economic conditions in your region or area of operations.
The decision by the Fed to ease further or decrease their QE program is important because the program has had unintended consequences.  The original strategy behind QE was to increase the money supply to stimulate the economy.  Put simply, if banks had more money they would lend it to you, the small business owner. In turn these business funding solutions you to hire new employees and increase sales through which the economy would grow.  grow.  The reason why small business funding may have worked in the past (i.e. the early 1990’s) is because banks did not receive interest on funds deposited at the Fed.  Under the QE banks will receive interest on their deposits.  This has translated to no lending to the Small Business Community because lending to the Federal Governmentcomes without the chance of a default.  Small Businesses who take risks often default and are not as good credit risks as the Federal Government.
The “To Big to Fail Banks” are now lending to their guarantor and not to you.  These banks have been able to recover from the financial crisis without taking any risks.  During the same period of time in the early 1990’s the Prime Rate was 8% (per annum) and the Fed Funds Rate was approximately 3%.  Parking money at the Fed yielded negative 3% and lending to a good credit yielded 5%.  The banks made loans and the economy recovered all they way until 2001.  As a result of the stimulus the private sectorrecovery led to robust economic growth with limited (if any) budget deficits by the time President Bill Clinton left office.
Because the banks are lending to the Federal Government there is no inflation risk since all the excess liquidityis in the bank being borrowed by the Fed.  That’s good for a business owner and homeowner but not good for people planning to retire because more likely than not, they’ll have to go back to work to increase their nest egg or just cover living expenses.  This is why temp agencies have so many qualified candidates to hire to support the growth of your business.
When reviewing Dodd Frank headlines what you should focus on is the reserve requirements of the banks.  If it appears that the law will be amended to reduce the reserve requirements for small business loans then you could consider going back to the bank for financing.  However, you will still need audited financial statements and three years of profitable operations, personal guarantees and the rest.  You have to weigh the cost to you personally versus going to a finance company or Factor where the cost of capital may seem more expensive but the cost to you personally as the business owner is far less and there is less risk to your personal assets than at the bank.
Finally, how is the local economy doing?  Connecticut is considering developing a Port Authority,  Florida is creating a for-profit railway system, New York is building at least three new bridges,  the City of New York is in fear of being washed into New York Harbor and has initiated a $20 billion flood control plan.  I am sure if you read your local paper everyday you will find that there are significant opportunities available to you or your business.  Take a minute to cut out the article and call the reporter to ask them questions.  Who doesn’t like to talk about their work?  Contact whoever is in charge of the project; find out how you can help. 
The worst case scenario is that you prepare a presentation and you don’t get to participate in the original project it was intended for however the presentation can be utilized for a variety of other opportunities so another opportunity can be gained from poking around.  This could actually lead to multiple jobs.  Although the opportunities identified above all seem like construction projects, they need Supplies, Office Supplies, office space, etc. and they last several years.  You might not be able to change the direction of the economy, but you are able to change the direction of your company.  Set yourself up for success by working towards completing your business goals and use spot factoring to make progress by any means necessary.

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.

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

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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