8 Things You Never Knew About Debt Financing

Category: Small Business Borrowing
Published: Tuesday, 25 August 2015
Written by Admin

While you may assume the best and only route to launching and scaling up your startup is through funding from VCs or angels, or maybe even crowdfunding, there is still a lot to be said about debt financing. Yes, the money has to be paid back within a designated amount of time and often with interest.

However, there are some other things you may not realize about debt financing that will have you thinking more about it as a viable option.

Theres this thing called venture debt. Some venture firms offer venture debt financing, including loans that include an interest-only period upfront followed by the start of loan repayment. This offers more time to repay the debt while creating a bridge to handle rapid startup growth. Venture debt is not for those companies in their early stages who do not have an established model or solid revenue streams in place. The interest rate on venture debt tends to be higher than other debt options. You are more likely to get venture debt financing if your startup history shows some venture equity funding at some point that illustrates that others have already invested in your company.

Friends and family count as debt financing. Its not like you are asking your friends and family for huge sums of money, but you can create a significant base of financial support. It is recommended that you create loan agreements with repayment terms, interest, and whatever else ensures you separate the personal from the business aspects of your relationships. If you go this route, make sure you treat it like any other debt and stick to the repayment plan rather than to assume that, because they love you and are passionate about what you are doing, you can skip a few months of payments. No one wants awkward holiday dinners or rifts with loved ones.

Its still possible to use credit cards to finance your startup. While the recent past showed that many people used credit cards to finance their entire lives and businesses only to default on their debt, credit card companies are tentatively opening up the loan pool again for business people to dip their toes in with some lending options. As the least expensive debt financing option, it can provide access to significant funds and provide an extra thirty days to float purchases or the cash advances you may use from these cards. Just remember to use credit cards smartly and look for those business cards that give you options for points or cash back bonuses that you can use to reduce the monthly payments. Be careful with this easy to access plastic money because it can bite back in terms of ruining your credit profile as well as cost you extra money in interest.

New lending platforms. With the emergence of crowdfunding and other online platforms, other companies have devised a way to create business models that allow various lending products for small businesses and startups. This includes OnDeck with its fast short-term loans and the long-established Lending Club, which provides a range of loan products to small businesses and consumers. Many believe these new lending platforms are really giving banks a run for their money by filling a real need for trustworthy lending options that can help businesses borrow money rather than just seek equity financing.

The Small Business Administration has new alternative loan programs. Recognizing the void that was left when many banks stopped providing loans to small businesses, the Small Business Administration (SBA) began developing new types of alternative loan programs especially directed at entrepreneurs. These loans typically have much lower or no costs at all associated with them except the interest and principle payments. You often get a longer term to pay the money back plus have minimal collateral requirements. In recent years, there have been even more SBA products and programs focused on stimulating the national economy by supporting the small business owner. One word of warning is that those entrepreneurs who may have less-than-stellar credit may not be able to qualify for some of SBAs lending options.

Banks are back to offering traditional loan products. Because interest rates seem to be remaining on the low side, there is an opportunity again to seek traditional debt financing from bank loans. However, after recent years of giving out loans to anyone, banks are once again returning to a standardized approach to ensuring as little risk as possible so be prepared to show assets, sustainable cash flow, and/or working capital to obtain bank financing. That includes showing collateral like real estate, equipment insurance policies, and accounts receivable that all could be used in case you cannot make the monthly payments.

Alternative debt financing methods include Rollovers as Business Startups (ROBs). In essence you are borrowing from yourself to start a business or purchase a franchise because ROBs take money from your retirement funds. It can be done and has proven to work for some, but this strategy does come with plenty of risk and is not for the risk-averse. ROBs are also very complicated to form and manage, so it is best to seek professional advice when considering this type of debt financing vehicle.

You can consider revolving credit or lines of credit that allow you to use debt on an as-needed basis. Also known as trade credit or vendor credit, many out there may assume that this type of debt financing is not sizable enough to help them. However, when it comes to some of the business basics, including office supplies and equipment, this type of debt financing is not a bad option to cover at least some of your expenses. Balances are also not due in full so they can be carried over time although many trade credit accounts are Net 30, so be sure you know the terms on each account you open and use to determine which offers the most value to you in terms of delaying payment and maximizing your current flow.

The debt financing route means you do not have to share your company profits, give away an ownership percentage, or deal with someone who wants to make different strategic decisions for the direction of your startup. Just remember that debt financing requires an even greater focus on cash flow and payments are due -- regardless of whether your business succeeds or fails.

Small Businesses Were Missing From Last Week's GOP Debate

Category: Small Business Borrowing
Published: Thursday, 13 August 2015
Written by Admin

Last weeks two Republican debates covered a wide range of issues.

Donald Trump dominated. Carly Fiorina performed well. Hillary Clinton, Rosie ODonnell and Megyn Kelly were attacked. Data privacy was debated and national security was discussed. The Presidents record, from healthcare to the Iran deal was savaged. Immigration remains a hot topic and even tax reform and entitlements were briefly mentioned.

But there was something missing, wasnt there? Yes, thats right. Your business. And mine.

So far, weve heard only passing references to the economy. And I definitely didnt hear much said about the plight of small and medium-sized companies, did you? Remember the good old days of past elections that singled us out, the small business owners, as one of the countrys most important constituents, the backbone of the American economy? Nope, not this time. Of course, there are plenty of more debates to come. And Im sure well get our due. But the first debate, which many consider to be the most important as it sets the tone and establishes the leading contenders, failed to address the challenges faced by all of us running businesses. Why is that?

Because small business, and the business environment in general, just isnt a campaign issue in 2016. And its unlikely to be.

Sure, you can find trouble spots if you dig deep enough. The energy industry is hurting. Some industry groups are curtailing their forecasts. Small business optimism is dipping. Other analysts believe that the economy is getting soft again. And last weeks GDP numbers were underwhelming and more indicative of one of the weakest post-recession recoveries since World War 2.

But the restaurant industry is off to yet another great quarter. Small business borrowing is surging because capital is readily available. Activity in the US service sector has hit a ten year high. Gas prices are low. US factory orders have rebounded. The manufacturing sector continues to grow. The national unemployment rate continues to stay low. Interest rates, though likely headed for an increase in the fall, are still at historical lows. Inflation is manageable.

Yet there are so many huge issues facing businesses today. Competition from overseas. Controlling healthcare costs. Attracting and retaining good people. Adapting to the minimum wage. Responding to recent local and Federal government moves to make unionization easier and to mandate more pay for time off and overtime. Worrying over whether were classifying our independent contractors correctly in the wake of recent rulings against Uber and others in the gig economy. And of course there are other, bigger, macroeconomic issues looming that are related to our escalating national debt and stubbornly large annual deficits that will some day come home to roost and affect us in many ways, from higher taxes, increased sequestration to volatility in our financial markets, which many feel are already significantly overvalued.

These are big issues. But they were ignored in the GOP debates. Why?

Because any way you look at things, most small businesses are doing okay. Of course, some are doing better or worse than others. Regions like Texas, North Dakota and Minnesota are doing great. Others, like parts of California, Michigan and Pennsylvania are lagging. Some industries, like energy (despite recent oil price declines), technology and finance are booming. Others, like certain manufacturing, auto sales, publishing and media are not faring as well. There will always be winners and losers, regardless of how well or how poor the economy is doing. And its impossible to generalize how well the 20-30 million small businesses are faring in the US at any time because there are just too many.

But, lets generalize anyway. And, to generalize, businesses and small businesses in particular are doing OK nowadays. Not amazing. Not bad. Just OK. We grumble about the lower pay and the hours we put in. We struggle to bring in more business and put money away for our retirement. But look around: there are obviously less vacancies on Main Street. You dont hear about the plight of small business on Fox News or our troubled economy on MSNBC. We are not news. Its not a campaign issue.

My prediction is that as long as the economy continues to hobble along in its less-than-impressive-but-upwardly direction, you can expect to see more attention given to immigrants, the LGBT community, Iran and of course Donald Trumps latest bombshells and less attention to the small business community in the months ahead. Were not a campaign issue this year. And you know what? Maybe thats a good thing.

A version of this blog previously appeared on Inc.com.

U.S. small-business borrowing surges in June: PayNet

Category: Small Business Borrowing
Published: Wednesday, 12 August 2015
Written by Admin

Thomson ReutersA woman counts US dollars at a money changer in Yangon

By Ann Saphir

(Reuters) - Borrowing by US small businesses jumped to a record in June, an index released Wednesday showed, signaling tighter labor conditions that may help build the case for the Federal Reserves first interest-rate increase in nearly a decade.   

The Thomson Reuters/PayNet Small Business Lending Index rose to 143.3 in June from an upwardly revised May reading of 131. It was the highest level since the index was launched in 2005, and was up 19 percent from the level a year earlier.

The increase is a signal of some fundamental, underlying strength in private companies that is really not being registered anywhere else, PayNet founder Bill Phelan said. Job openings are going to be harder to fill. ... (Companies) will have to raise compensation to attract workers.

Such signs are exactly what Fed officials have been waiting for, as they gauge the right time to lift short-term borrowing costs from near zero, where they have been for 6-1/2 years.

The small-business borrowing index has historically tracked ahead of US gross domestic product growth by two to five months, and is a good predictor of capital spending and job growth, Phelan said.

US GDP expanded at a 2.6 percent annual rate last quarter, buoyed by consumer spending.

Last week, the US central bank said it would need to see some further improvement in the labor market and more confidence on the inflation outlook before it will raise rates.

The delinquency rate on loans more than 30 days past due ticked down in June to 1.49 percent, separate data from PayNet showed, suggesting that the increase in borrowing by small businesses has not come at the expense of their financial health.

PayNet collects real-time loan information such as originations and delinquencies from more than 250 leading US lenders.

(Reporting by Ann Saphir; Editing by Richard Chang)

Read the original article on Reuters. Copyright 2015. Follow Reuters on Twitter.

Top Picks from Robert McWhirter: Celestica, Descartes Systems Group, and ...

Category: Small Business Borrowing
Published: Saturday, 08 August 2015
Written by Admin

Robert McWhirter, president, Selective Asset Management

FOCUS: Canadian and Technology stocks


The Samp;P 500 Composite Index has been trading in narrow band (2050 to 2130) since the end of January 2015. While the price of oil has declined 53 percent since the end of August 2014 US gasoline prices have declined less than half as much. While US consumers have benefitted they continue to be cautious. Costco's year over year same store sales in July were unchanged. On a more positive note US small business borrowing rose to a record high in June as measured by Thomson Reuters' PayNet Small Business Lending Index .This is viewed favourably as PayNet notes that the index typically leads US GDP and capital spending by 2 to 5 months. The Samp;P/TSX Composite Index's earnings and cash flow are forecast to decline in 2016 by 11 percent and 14 percent respectively as a result individual stock selection will be key.

Top Picks:

Celestica (CLS.TO)

Celestica is a contract manufacturer for computer equipment for communications, health care and aerospace sectors. Celestica appears attractively priced at 11x enterprise value to forecast 2016 median earnings of $2.26 and earnings growth of 15 percent giving an EV/EPS to earnings growth ratio of .73x In addition to a four quarter free cash flow yield of 6.7 percent and a 14 percent forecast ROE from a technical analysis perspective Celestica's shares appear headed higher.

Descartes Systems Group (DSG.TO)

Descartes Systems uses a cloud based network to improve productivity, performance and security for transportation companies. Descartes continues to grow organically and via acquisitions. A four quarter trailing free cash flow yield of 3.3 percent and 12 percent forecast ROE appear attractive. Earnings are forecast to grow 15 percent in FY2017 (Feb.). Descartes has a high percentage of recurring revenue so investors are willing to pay an above average valuation of 25X enterprise value to February 2017 forecast earnings of $1.07.

ProMetic Life Sciences (PLI.TO)

ProMetic is a biopharmaceutical company that uses its Ligand technology to purify compounds or extract proteins from (blood) plasma. Prometic is also developing PBI-4050 an interesting drug for treating fibrosis in many organs. In early August the European Commission followed the US FDA's March 2013 lead and granted orphan drug status to Prometic's plasma derived plasminogen drug. ProMetic is currently investigating the safety, tolerability and pharmacokinetics of its plasminogen in patients suffering from plasminogen deficiency. Prometic expects to provide a preliminary report on its program in August of this year.