Business Advice for Arizona

ASU Spirit of Enterprise hosted a panel discussion on “Coping with the Credit Crunch.”  The panel consisted of Phillip P. Guttilla, Corporate Attorney with Ryley Carlock & Applewhite, Lauran Lindsey, Assistant Professor of Finance at the W. P. Carey School of Business at ASU, and Dr. John Shufeldt, CEO of NextCare Urgent Care.  The moderator was Gary Naumann, Director of the Spirit of Enterprise Center at ASU. 

The program was attended by about 40 people, including bankers, CPA’s, business owners, and finance professionals.  The first part of the program was “Taking Your Financial Pulse.”  The take away from this section, is that, as a business owner, you need to know your company’s numbers.  Even if it is not your strongest suit, lenders will want you, as the owner, to present your company.  Are you monitoring you “days outstanding sales?”  When is the last time you looked at “sales per full-time equivalent employee?”  Have you been monitoring your margins, your receivables?  Have you been communicating with your suppliers?  with your banker?  Have you been doing your collections?  Your banker wants to see that you are on top of your business and that you are adjusting to the current climate.

The second section focused on “Are you prepared to go looking (for financing)?”   Have you updated your sales forecast?  Can you show where the increase is going to come from?  Is it new customers?  Is it deeper penetration into your current customer base?  What is your cash cycle?  There’s an old saying “Cash is King.”  It is always true, but it is even more true today.  Those that have watched their leverage, managed their business carefully, will be able to take advantage of opportunities that will arise.  You need to know how much cash you will need;  the rule of thumb is to ask for 18 months of cash needs — one year of cash plus an additional 6 months to line up the next financing source.

The third section focused on “Sources of Financing.”  Even though we all read the paper and watch TV as the politicians harangue the bank presidents about lending, there is money being lent.  You have to work harder to find it and you have to be prepared to show that you are credit-worthy and know how to the money that might be availabe.  Some banks are lending;  you will have to go to more than one bank.  I suggest that you go to the ones that have not been in the news;  they are the ones that have to cut their lines of credit in order to support commitments they have already made.  Try privately held banks, new banks; these banks are less likely to have as many bad loans that they are working out of.

Other types of financing — asset based lenders, factors, invoice discounters.  If you own equipment, see if you can sell it and lease it back.  SBIC’s are Small Business Investment Companies; they finance small companies with loans and equity.  If you are large enough to have $1 million in EBITDA, there is private equity capital available.

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Franklin Roosevelt said that “All we have to fear is fear itself.”  Reading today’s newspapers might bring up the comment “all we have to fear is what we read in the paper.”  Today’s environment is more difficult than a year ago, but there is financing for small businesses who sell to middle market commercial customers.  Factors look at the credit quality of the customers more than they look at the credit quality of their client.  This is especially true for spot factors, or invoice discounters, that deal with small businesses.  They have developed other risk management techniques that allow them to finance small, new businesses, businesses with uneven earnings history, for example.

Here’s a story of a small business that needed funding.  They make sport bags.  They manufacture here in the western U.S.  They have created a niche, not by being the cheapest, but by being creative, by being able to do small runs, and by have very short delivery times.  They just got a big order from one of the national sports leagues.  But they don’t have the money to purchase the raw materials to manufacture the bags.  They have been in business for many years, but they don’t qualify for bank financing because their earnings history is uneven.   But they do have receivables from other credit worthy customers, like major sports equipment manufacturers.  They can’t wait to be paid on the outstanding invoices before they need to purchase material to fill the new order.  This is a perfect case for invoice discounting/spot factoring.  They can sell the invoices that they are waiting to be paid on and use that money to start filling the new order.  The set up takes about 48 hours; they don’t have a commitment to sell any more invoices unless they want to. 

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