Archives

Category: Finance Talk

Entrepreneurial energy is heating up

Written by Mike Semanco
Thursday, 03 May 2012 19:11

After several years of survival, many entrepreneurs have found new energy and are getting back to business.  Tired of putting out fires and sitting on their hands, business owners are eager to do something – grow and build their business. 

The last few years created a conservative environment.  How many times have we heard “Just wait until the other shoe drops.”  “What other shoe?”, you ask. Could it be commercial real estate, rising gas prices, the risks of working with companies overseas, the US printing presses being refilled with ink over and over agian? 

While we could sit on our hands and wait for the other shoe to drop, many business owners have put the gloves back on and are now on the offensive.  Balance sheets have been cleaned up so financing new opportunities is easier.  Some banks are even treating 2010 as a mulligan and not asking for a 2 year track record from businesses.  Acquisition opportunities are heating up, new product lines are being develop and entrepreneurs are figuring out ways to create new revenue streams for their business.  The auto industry is back in full force with limited summer shutdowns and the pent up demand in the marketplace is translating to positive results on 2012 first quarter income statements.

For entrepreneurs, it is all about the pursuit.  The pursuit for continuous improvement and pushing forward even when you are told you don’t have a chance.  This is why our team at Hennessey Capital gets excited when we finance growing companies.  You never know when that client who asks you to finance their very first invoice turns into a $7 million company two years later.  They chose not to sit on their hands.

 

Effective Use of Credit Insurance

Written by Toby Dahm
Thursday, 19 April 2012 15:09

By Toby Dahm, Senior Vice President, Hennessey Capital
All experienced business people are familiar with this nightmare scenario:  A company has a long history of serving a customer and that customer becomes a very large part of their business.  Without warning, the customer files for bankruptcy protection and suddenly the business is in a crisis.  Its major source of cash flow has dried up, and they do not know how they will pay their bills.

This does not have to be the scenario.  An under utilized business tool called credit risk insurance can insure that companies avoid this nightmare. At the most basic level, credit insurance is designed to protect companies from unexpected losses due to the insolvency or past due default by their insured customers.  It is a proactive management tool that can be designed in a number of ways to meet the risk management needs of a business.  If a customer becomes insolvent, the insurer bears the risk, with the exception of a deductible and co-pay which are a negotiated part of the insurance policy.  For clarification, credit insurance covers accounts generated after the policy begins, which is why it is a proactive tool.  A business cannot cover past accounts by grandfathering them in under a new insurance policy.

The obvious benefit for all who have witnessed a bad debt nightmare is that credit insurance provides catastrophic loss protection for large account concentrations that have the potential to bring a company down.  But, what if a receivable concentration is so high that an insurer will not cover it all?  There is a market known as excess insurance that can provide additional coverage on these accounts.  As a general rule, the excess carrier will provide a maximum limit equal to what the primary carrier is offering and their insured percentage mirrors what you have in your primary policy.  Beyond this most obvious benefit, there are three other key benefits to using credit insurance.

The first is that it allows for safe sales expansion.  As a company grows, competition often requires that it extend substantial credit to companies that it does not know well or which do not have much credit information available.  By insuring its accounts, a growing company can largely mitigate this risk.

The second additional benefit is that you gain professional credit decision support and information on your customers.  Your insurer is a business partner whose goal is to help you avoid credit losses before they happen and back you up when they do.   Credit insurers have data, resources and expertise that other businesses cannot come close to matching.

The third is that it can allow a business to obtain additional borrowing.  Whether it is covering a high concentration account, a slow paying account, or export sales, credit insurance can help you maximize the borrowing power that you have from your accounts receivable.

Credit insurance works best for companies that have high concentration accounts, have export sales, or are in industries that have a tendency to pay slowly.

We are all concerned about cost, so what is the cost of credit insurance and how can it be managed?  The cost of credit insurance varies, based upon a number of factors including:  The client’s historical loss experience, the risk in the portfolio, the spread of risk being provided, seasonality in the portfolio and risk retention on the client’s part.  As a “ballpark” estimate, the typical annual premium runs approximately 1/10th% to 4/10ths % of covered annual sales.  A couple of ways to mitigate this cost would be to carry a larger deductible or a higher percentage of co-pay.

A good resource to perform a cost/benefit analysis can be found on the website of Global Commercial Credit  www/gccrisk.com where they have a cost benefit calculator.  You enter certain data and it shows you the anticipated cost and also the financial benefit you can gain.

One alternative to credit insurance is the use of a put option.  This can be useful to cover the risk in a single account, particularly when the insurance market is reluctant to insure it.  This program involves a non-cancelable contract whereby the option seller agrees to buy qualifying accounts receivable at a pre-determined amount if your protected customer goes insolvent during the contract period.  The protection would be provided by a financially strong counterparty.  Put options can be arranged through credit insurance brokers.

Due to the very specialized nature of credit insurance, the use of a broker is highly recommended.  A good broker will know the major insurers and their appetites to secure certain risks and the nuances of their policies.  Their solid relationships with the insurers enable them to negotiate on your behalf using leverage that you simply do not have.

 

Selecting Trusted Advisors for Your Start-Up

Written by John Seeley
Wednesday, 14 March 2012 17:35

By John Seeley, Senior Business Development Officer, Hennessey Capital

Congratulations! You are starting your own company, and you have exciting times ahead.  You are obviously confident in your product or service that you are selling to your customers, and I applaud your decision to venture out on your own.  As a three-time business owner, I would offer this advice: there are key service personnel that will prove to be extremely valuable, and could contribute greatly to your company’s success, so choose them wisely.  These people are essential for running a business smoothly, no matter what industry you are in.  I encourage you to conduct in-depth due diligence to make sure you have a strong partner in each category.  Family and friends are always a good sounding board for your ideas, and they are often the source of initial capital, but you need unbiased  providers, so do not hire them for these services:

Attorney: Your attorney is a valuable resource for ensuring that you conduct your business in the best possible manner.  Just like you tell your doctor about every ache, pain and rash, no matter how embarrassing, you need to make sure your lawyer knows everything.  From the very first legal documents to create your business, until the final sale or dissolution of your business, your attorney will be your advisor on all legal matters, and you should maintain a friendly, professional relationship.  Ask  his or her advice on a constant basis, such as what type of entity you should form for your business, and make sure they approve all sales contracts, vendor agreements and employee agreements.  Your first discussion with your attorney about an issue should not start with, “I received this notice in the mail…”  Attorneys can offer a wealth of knowledge about business based on what they have seen with their other clients. They can foresee obstacles and provide valuable insight that is hard to find elsewhere.

Bookkeeper and Accountant:  Given the significant difference in fee structure and their expertise, these should not be the same person.  When you first start your company, you will want to interview a few accountants.  It’s a good idea to pick one that will treat you like an important client. Choosing an accountant at a very large firm can sound appealing but may not be ideal for a start-up since you will not bring much revenue to them in the beginning, which means very little attention.  Ideally, pick an accountant that has worked with start-ups and has experience working with business owners in various stages of their company’s life cycle, and it is also a plus, but not necessary, for them to have experience with clients in your industry.  Like your attorney, it is important that you share everything with your accountant so that you do not find out later that money is tight because expenses crept up on you and killed your profit without you realizing it.  Your bookkeeper should be someone that you trust to input and maintain all of your financial information and provide up-to-date tracking of your company’s financial health, while your accountant will prepare your taxes and provide high-level guidance.

Banker: It is highly unlikely that you will qualify for a business loan to start your business, but you should always be planning for the time when you will.  Choose a bank that has a history of lending to small businesses in your industry, and meet the bankers and work with the one that you like.  Bankers frequently move to different positions within their own bank or to a competitor, so make sure you are in contact with more than one, and always ‘replace’ the banker that leaves with another so you have two at that bank.  However, stay in touch with the banker that left, for that person will be able to offer a competitive bid when you are finally ready for a bank loan.  You will likely need someone at the bank to ‘champion’ your deal through the ranks, and it is helpful when they can say, “I have known John for years, ever since he started his business.”

Alternative Lender: Since banks will only lend to a business with a financial track record, it is smart to look early for an alternative lender to provide your company with the necessary working capital to grow your business.  Cash is critical for any business, but especially start-ups, where there are wild and unpredictable peaks and valleys in revenue and expenses.  Your lender will be able to increase the funding to your company through extreme growth and perhaps even through unprofitable times.  The alternative lender is a means to get your company to the lofty plateau of sustained profitability, when a bank will likely take over your funding.

It is quite possible that these service personnel will become your top advisors, contributing their knowledge and experience to your success.  Taking the time to find the right people in these key positions can pay off in many ways. Get to know and trust them, and they could help take your company to a level of success you didn’t even dream of.  As Mel Brooks once said, “It’s good to be the King!”  Just don’t be alone.

 

Copyright © 2011 · Hennessey Capital