Alliance Advisory Group Blog

July 22, 2010

Wal-Mart’s Sam’s Club to Test Online Loans to Members

Filed under: Strategic Advisory — Tags: , , , — admin @ 7:44 pm

It’s not your father’s (or mother’s for that matter) credit and loan market anymore.

Wal-Mart Stores Inc.’s Sam’s Club unit will test an online loan program with Superior Financial Group LLC that aims to help small businesses access capital.

Sam’s Club members who qualify for loans can borrow $5,000 to $25,000 from Superior Financial, the Bentonville, Arkansas- based company said today in a statement. The program is aimed at entrepreneurs and businesses owned by minorities, women and military veterans, the membership warehouse chain said.

Almost 15 percent of Sam’s Club business members reported being denied a loan in November, up from 12 percent in April, according to a survey conducted by the retailer. Only half of small businesses in the U.S. that tried to get loans last year got all or most of what they needed, Sam’s Club said, citing research by the National Federation of Independent Business.

Under the program, a $35 annual Sam’s membership enables businesses to apply for loans at an annual interest rate of 7.5 percent for 10 years, according to the statement.

Superior Financial Group is licensed by the U.S. Small Business Administration as a non-bank lender, according to the Walnut Creek, California-based company’s website.

Sam’s Club offers credit card processing for merchants and discounts on shipping as well as early shopping hours. Wal- Mart’s U.S. stores also offer financial services, such as check cashing and a Visa debit card.

June 25, 2010

Maryland small-business loan program seen as a model

Filed under: Strategic Advisory — Tags: , , , — admin @ 5:38 pm

The U.S. House of Representatives recently approved a small-business loan measure supported by Gov. Martin O’Malley (D) and state business Secretary Christian S. Johansson, who testified in its support last month.

The legislation would provide additional funding to allow states to guarantee loans for small businesses that qualify. The national proposal is similar to a Maryland program that guarantees loans through community banks. A companion bill is pending in the Senate.

Mary Bass, vice president of Bass Machining, said a state-guaranteed loan allowed her Baltimore machinery manufacturing company to obtain a larger loan to buy needed equipment and open a line of credit to help complete a project than if the company had obtained a loan without the guarantee.

While the company’s regular lender, Bank of America, had approved a loan, it was for less and would have required more personal assets to be put up for collateral than with the state-guaranteed loan the company received through The Harbor Bank of Maryland in Baltimore, Bass said.

The loan was easier to obtain than other loans she had heard about involving the U.S. Small Business Administration.

The company, which has made parts for customers ranging from the container industry to NASA, has 13 full- and three part-time workers, she said.

The House bill would provide $20 billion for states to expand their capital access programs in addition to an additional $30 billion small-business loan program.

Last month, Johansson, of the Maryland Department of Business and Economic Development, testified that small businesses employ about half of all workers, but find it difficult to get the loans they needed to expand.

“In the aftermath of Wall Street excesses, banks have been forced to adopt significantly stricter banking practices, which have reduced the flow of credit to their Main Street clients,” Johansson said.

“Expanding the capacity of existing State and U.S. territory small business loan guarantee programs offers a shovel ready solution to restore the flow of credit to our small businesses that have been crippled by tougher lending standards and devalued collateral,” O’Malley said in a statement.

So far, two businesses have received loans through the state program, while final approval is pending on eight others, for a total of $5 million in loans through community banks such as Harbor Bank, which has provided the two loans.

June 7, 2010

Business Sellers Increasingly Play Banker

Filed under: Strategic Advisory — Tags: , , , , — admin @ 12:47 pm

During the recession, merger and acquisition activity in the lower-middle market (private companies with up to $100 million in annual sales) was anything but active. Now sharp discounts of private company valuations are again piquing buyer interest.

With the tightness of the traditional bank credit markets (historically a major provider of credit in these situations), which we have written about in this space, buyers are increasingly turning to sellers to fill the funding gap.

We turned to Greg Caruso (a strategic partner of Alliance Advisory Group), President of Harvest Associates, LLC, a noted local expert in the M&A community to provide his insights regarding this situation. Here are his thoughts:

“Seller take-back is an essential component of getting a transaction done today because of the lack of bank financing. In evaluating an offer where substantial seller financing is involved we recommend the following be considered:

1. What will the price be without the financing? Often the price without the seller financing will be very close to the amount being put down by the buyer with financing. Buyers only have the cash they have. The internal rate of return on 3rd party equity is cost prohibitive. If you must sell in this environment what is your real risk from taking a note when the alternative is a guaranteed $0 ?

2. On a more positive note the buyer must be carefully underwritten and transaction structures sometimes must be modified to reduce the risk of taking a buyer note. We recommend that the seller consider – **The buyer’s experience with business in general. Ownership experience is highly preferred. Owning a business is just different than even being the 2nd in command and not an owner. I equate it to the difference between riding a bike and being in the bike seat. Seems the same to the person in the bike seat but it is not. Of course, the buyer’s experience in the exact industry is also helpful. **Additional resources from other sources of cash such as investments, other businesses etc. Remember to consider the likelihood that those sources of cash could become a cash drain and what that would mean. **Collateral such as outside real estate, security in the business assets etc.

3. The seller may have to stay involved with the business for 1-5 years to make sure the buyer can manage the business and pay the note. If the buyer can’t pay the note at least the seller will have a shot at taking the business back over.

None of this is as simple as a bank taking the financing risk. What it means is sellers need to be prepared to share in the risk to gain the upside and sell earlier so they have the energy to stay involved if they want full value. Unfortunately it may be the only way to get full value for your business for quite a while.”

If you are a buyer or seller in this, or any, market it is important that you have a strong advisory team supporting you in the area’s of strategic advisory, legal, accounting, risk management/assessment, etc. The dollars you spend on the front end will save you a tremendous amount of money and heartache in the long run.

May 11, 2010

Access to small business credit remains tight

Filed under: Strategic Advisory — Tags: , , , , — admin @ 1:14 pm

Anyone who has gone out into the market to find new small business credit or hold on to what they already have has probably experienced the new lending environment.

From our perspective two things are happening that has turned the lending spigot to a small drip. First the banks are licking their wounds from the excess (some would say reckless) lending they engaged in before the big meltdown. This has made their appetite for new loans virtually non-existent.

Second the regulators are now ruling the day in determining the risk levels banks can engage in, even if the bank was interested in extending credit. From our perspective this is somewhat a case of closing the barn door once the horse has escaped. Obviously the regulators should have been doing a better job of monitoring the lending and overall risk profiles of the institutions they oversaw during the hey day.

A couple of good articles on the current state of the lending market have recently come out and are worth a quick glance. Here are links to each, C&I Lending to Stay in Doldrums and Big Banks’ Small-Business Lending Promises.

What kind of action plan should you put in place now to ensure continuing access to operating capital?

* Use rational thought and planning to avoid knee-jerk reactions.
* Prepare a weekly cash-flow plan for at least three months (preferably six months) to see what your cash flow needs will be and how you will cover them.
* Reassure your banker of your company’s financial viability. Ask what you can expect of the bank in the coming months.
* Start courting other banks to ensure that you are not left high and dry if you experience a problem with your primary lender.
* Examine your accounts receivable for potential problem customers and begin aggressive collection and work-out activities.
* Look at exporting as a market strategy. The dollar is likely to be weak for a while and U.S. goods and services will be a bargain abroad.
* Trim excesses in your operations and hold on to internal cash.
* Get external help from turnaround experts who can help you develop a survival plan.
* Be optimistic—the economic crisis will pass in time. The key is to anticipate carefully and take intelligent action.

Planning and flexibility are key to successfully navigating these difficult times. Thinking outside the box is called for as well. Think beyond traditional commercial financing sources if necessary. Other areas to consider might be credit unions, grants, credit cards, angel investors, venture capitalists, factoring (selling a business’s receivables), friends and family, and microlenders. Each of these alternatives has pros and cons associated with them so be sure to carefully evaluate each option and which is best suited for your needs.

March 27, 2010

Obama Administration Announces enhancements for TARP Initiative for Community Development Financial institutions

Filed under: Strategic Advisory — Tags: , , , — admin @ 1:07 pm

As we begin to recover from the credit markets meltdown we are beginning to see changes in the lending landscape that will have a profound and lasting impact in the marketplace, particularly as it pertains to the small business community.

The traditional lenders that this community used to rely on are beginning to change and like any change that impacts your business and its viability you need to be aware of it.

The emergence of Community Development Financial Institutions or CDFI’s are changing this landscape in many ways. What is a CDFI? A certified CDFI is a financial institution that works in markets that are underserved by traditional financial institutions. CDFIs are certified by the Department of the Treasury’s CDFI Fund, which was created for the purpose of promoting economic revitalization and community development in low-income communities. CDFIs offer a wide range of traditional and innovative financial products and services designed to help their customers access the financial system, build wealth and improve their lives and the communities in which they live. To be certified as a CDFI, an organization must demonstrate that it meets each of the following requirements:

• Be a legal entity at the time of certification application;

• Have a primary mission of promoting community development;

• Be a financing entity;

• Primarily serve one or more target markets;

• Provide development services in conjunction with its financing activities;

• Maintain accountability to its defined target market; and

• Be a non-government entity and not be under control of any government entity (Tribal governments excluded).

The Obama Administration has recently announced a new initiative, http://bit.ly/9WKjRS, aimed at CDFI’s. Under this program, CDFI banks, thrifts and credit unions – which have been certified by Treasury as targeting more than 60 percent of their small business lending and other economic development activities to underserved communities – would be eligible to receive capital investments at a dividend rate of 2 percent.

As you plan for your growth financing and capital needs make sure you are considering all available resources and not the ones you have historically relied upon. This is a brave new world of finance we are entering into and the successful company’s will understand that and act accordingly.

Corporate Balance Sheets Show Surprising Strength

Filed under: Strategic Advisory — Tags: , , , — admin @ 12:53 pm

A recent Business Week article, http://bit.ly/duusrO, discusses how large cap companies have restructured their balances sheets in light of the economic slowdown, namely deleveraging.

Whether this was voluntary or forced upon them it was obviously the right thing to do in light of falling revenues and squeezed margins.

We have been leading many of our clients through the same sort of exercise but in a much more strategic and focused fashion.

Engaging in a process to actually measure a firm’s financial health we help them understand where they are, where they should or need to be and, more importantly, the specific steps they need to take to get there.

The raw numbers on your balance sheet, income statement and cash flow statement are just that. They only have value when tracked and measured against some standard of performance (either internally oriented or externally generated). The secret to effective financial management lies in knowing which ratios to track and what they tell you about the state of your business.

Unlike the profit and loss (income) statement, which is a historical recording that never changes, the balance sheet is a living, breathing document that changes on a daily basis. Three important balance sheet ratios to track are:

* Current ratio (Current assets/current liabilities)
* Quick ratio ([Cash + receivables]/current liabilities)
* Debt-to-equity ratio (Net worth/total liabilities)

The P&L statement focuses on revenues, expenses and net income (or loss) over a defined period of time. It measures the company’s ability to turn sales/revenues into profits, a key ingredient for long-term success. Key P&L ratio’s to track would include:

* Gross income (Revenues – cost of goods sold)
* Gross margin (Net sales – cost of goods sold)
* Net operating profit (Gross margin – SG&A expenses)
* Net profit (Net operating profit + income) – (other expenses + taxes)

Gross margin the most important ratio on the P&L. If you lose the gross margin battle you can do a lot of other things right and still go out of business.

Key operating ratios combine information from the balance sheet and income statement to provide a more sophisticated look at what is happening with the business. These include:

* Gross profit ratio (Gross profit/sales)
* Pretax profit ratio (Pretax profit/sales)
* Sales-to-assets ratio (Total assets/sales)
* Return on assets ratio (Pretax profits/total assets)
* Return on equity ratio (Pretax profit/equity)
* Inventory turnover ratio (Cost of goods sold/inventory)
* Days in inventory ratio (Inventory turnover/365 days)
* Accounts receivable turnover ratio (Sales/accounts receivable)
* Collection period ratio (Accounts receivable turnover/365 days)
* Accounts payable turnover ratio (Cost of goods sold/accounts payable)
* Payable period ratio (Accounts payable turnover/365 days)

You should track and measure your performance ratio’s at least monthly and compare them to internally generated standards of performance (i.e. budget) or against an external source of data (i.e. peer comparisons for your industry)

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