Businesses usually need more than just cash: they need “smart” money. Smart money is financing that helps businesses where the financier provides not only capital, but support and expertise to the business. Smart money could be an SBA guaranteed loan that allows the shareholders to keep ownership interests intact until it reaches the stage at which owners want to sell shares of the business or asset based lending, factoring and purchase order financing. On the other hand, money that comes from letting your brother become a partner in your business because you need his $10,000 before the end of the week might be far more costly than you ever imagined.

The problem in locating “smart” money is that the capital market for small to medium size businesses is imperfect and consists of a great variety of underpublicized and poorly organized financing sources. Whether the choice is a bank, factor, purchase order financing company, asset based lender that is willing to lend money or a business “angel” who will contribute needed equity capital, the quest for financing will require owners and managers to devote the same attention to obtaining capital as to decisions involving the business’s basic product or service.

Interstate Business Solutions helps business owners and managers identify relevant traits about the business’s financing profile and understand the various financing sources that may be available, with an emphasis on practical information on selecting the most suitable sources of funding for the business.

When looking for financing, entrepreneurs and managers need to present the most attractive overall portrait of their particular business by emphasizing its strong points and explaining its weaker traits. One business may have an extremely valuable asset, e.g., a technology patent, but no track record; another business may have a sizeable initial equity investment but lack short-term cash. With small to medium sized businesses, the risk to investors and creditors is so high that each financial trait is exaggerated, and any shortcomings must be balanced by a compensating advantage. Entrepreneurs and managers need to be flexible in considering how the strengths and weaknesses of their business can be presented so that they can have access to as many different sources of financing as possible.

Interstate Business Solutions assists businesses with finding lenders or investors who will take the time and effort to consider the unique characteristics of the particular small to medium size business and may eventually view that business as a one-of-a-kind opportunity.

One of the greatest challenges and mysteries to business owners is what it takes to get financing, either equity or loans. This is because most owners are trained to run their businesses and not familiar with financing transactions. This is where a CFO is invaluable. In this article, however, I will try to simplify the mysteries of what the investors and lenders are looking for.

Business Plan - Investors and lenders want to see a business plan which projects the next two to three years. It should include details of the marketing plan, supply chain and key growth parameters of the company. Often forgotten in the plan is the amount of money the company is looking for, what it will be used for, how much equity the investor will receive and their exit plan or interest and payment terms on the loan.

Financial Statements - In addition to the business plan, the investor or lender may require audited or reviewed financial statements. If so, interview a few respected firms and make a decision. Bigger is not always better. An audit demonstrates to the outside world that the financial statements correctly reflect the current position and past operating results of the company. Sometimes, in lieu of an audit, a financial review is requested. This is where an accountant reviews the company’s financial statements for reasonableness and does not provide its assurance that the assets and liabilities of the company have been verified and all is exactly as stated. Since it requires less time, the cost is significantly less. Many companies are audited annually and reviewed quarterly or semi-annually. Typically audited statements can cost anywhere from $10,000 to $50,000 for a small to medium size company and significantly less for a review. If your company cannot afford to do an audit or a review, the financier will probably ask for the last three years of tax returns which should be similar to your internally prepared reports.

Collateral and Personal Guarantees – Most lenders will also require some collateral and personal guarantees. Collateral gives the lender some comfort that the loan will be repaid and usually includes inventory, equipment, real estate and receivables. Along with this, the lender will probably require a personal guarantee or a pledge of personal assets as mentioned above. The reasoning behind the personal guarantee is that the lender wants some assurance that if the owner takes the too much or all of the business’ assets and the company fails, he is still responsible for repayment.

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Management – Investors and lenders will look to the company’s management team to judge whether the people in charge will be able to execute the business plan. Most lenders and investors will want to interview the managers and may ask that new people, such as a CFO, be hired to ensure proper controls and ensure fiscal responsibility.

During these difficult times, financiers want to see that the company they are considering putting money into has internal policies, procedures and controls, its finances and financial statements up to date and in good order. Often, it is wise for a company to engage a part time Chief Financial Officer to help it get organized so it can put its best foot forward.  

If you are a director, an officer or business owner of a troubled company, you need to be especially careful. You now have two groups to whom you must answer: investors and creditors. As you know, these two groups have conflicting interests. Therefore, if you wrong one group over the other, you increase your chances of the offended party suing you. To keep you out of trouble, you need to know your responsibilities to each group.

Your responsibilities to investors

You have the responsibility of exercising care in your governance of the company and loyalty to the investors of the company – even if the only investor is your spouse. This is your fiduciary responsibility Here is what that means:

·         act in the best interests of the company and its investors.

·         act in good faith. You must not have any intent of fraud, deceit or misconduct.

·         decide the firm’s strategy.

·         replace top management if they have mismanaged the firm.

·         educate yourself fully about the issues facing the company so you can soundly lead the firm.

Your responsibilities to creditors

Under normal circumstance, your loan agreements and seller contracts lay out your only duties to your creditors. This changes when your firm enters the zone of insolvency. When you are in the zone of insolvency, you have the following fiduciary responsibilities to creditors:

·         act in the best interests of the creditors.

·         act in good faith and not have any intent of fraud, deceit or misconduct.

·         decide the firm’s strategy.

·         replace top management if they have mismanaged the firm.

·          educate yourself fully about the issues facing the company so you can soundly lead the firm.

As you can see by looking at the two sets of fiduciary duties, your responsibilities are the same except you must act in the best interest of both investors and creditors. This is a difficult task. It is the reason your personal liability increases significantly when your firm gets into trouble.

Business Judgment Rule

Before receiving my recommendations on how to deal with your increased liability, you must get some information about the Business Judgment Rule. Fiduciary duties do not require the business owners, CEOs, directors or officers to be perfect or mistake free when running the company. Otherwise, there would be D&O lawsuits every time a company had a slight upset or did not grow as much as some “expert” expected.

This protection from ordinary mistakes is the Business Judgment Rule. Under it, the business leaders are not liable for poor decisions if they have acted in the following ways:

·          without any intent to defraud or deceive

·          with enough information

·          in the best interests of the investors.

·          in the best interests of the creditors if the firm is insolvent or close to insolvent

Therefore, if you acted as above, your investors and creditors cannot hold you liable for the firm getting into trouble. Your main concern is to run the firm in the best interests of both the investors and the creditors so neither party sues you.

Increase your Director & Officer Liability coverage if your firm is a corporation or LLC. Get as much as you can afford. If the premiums are too expensive for your firm right now, you and your directors and officers should consider paying for the policy out of your own pockets. The peace of mind is worth the money. In addition, ask your insurance agent or broker about exercising the “tail” of the D&O policy. Most D&O policies have extended coverage called the “tail.” This coverage remains in force to cover D&O suits after the firm has shut its doors. Usually, you pay this tail in a lump sum before shutting down the firm or declaring bankruptcy and the coverage lasts three to five years.

Be aware that resigning from the board and running away from the firm’s troubles can hurt you. If you are not present, the other directors and officers could blame you for the firm’s troubles. They can name you as the main culprit of the firm’s mismanagement in any lawsuit. By resigning, you also will have no say in any settlements to which the board agrees. Such settlements may affect both your investment in the firm and your personal liability.

The first step is to let your vendors and creditors know your financial situation as well as the cause of the problems. Being honest and open with them about your situation helps the chances of your problems being solved rather than hiding it with no chance at all to be remedied. Communicate with the people you owe money, explain your problems and they will understand and respect you for your honesty. Your honesty gives them fair chances to get back what you owe them. It makes them more willing to reduce and negotiate your debts down to a level you can afford.

Hard work spells out trust from your suppliers to give you the best deals for your supplies and raw materials. Considerable terms are extended to hardworking businessmen for even suppliers themselves are businessmen who try acquire dependable clients. Suppliers know that it is much easier to keep an existing customer than to acquire a new one. Also, suppliers know that customers will appreciate the suppliers’ patience and remain loyal to them in the future as gratitude for their help. Obtaining favorable payment terms on your outstanding business debts helps keeps more money from flowing out of your business each month, and keeps your business moving until you can turn it around. Negotiate with vendors to reduce debts or suspend payments to them for a certain time until your struggling business comes back to life.

Negotiating business debts is a thing you could master over time but it is worth starting now. Contact your creditors and convince them that by reducing your debt, you will be in better shape to pay them and it will allow you to continue with the business. At the end of the discussions, vendors should believe that you have a good chance to stay in business and will pay them sooner than expected if your business would recover through better cash flow assisted by the easy terms agreed with the creditors.

Negotiation not only yields favorable results, collection calls are also reduced which is to the creditors advantage by minimizing agony of futile collection efforts and saving on resources. Negotiation and reducing business debts is the best alternative for all sides. (askthecfo.com)

Step 1. Shelving Anger
A successful resolution specialist acts like a neutral third party who can persuade parties to shelve their anger by going beyond egos and hurt feelings to look at the real issues.
Step 2. Finding Common Ground
The second step of a resolution specialist is to help both parties find something they can agree upon. When this happens, parties are able to communicate the issues quicker and ultimately come to a fair settlement.
Step 3. Building Bridges
The best resolution specialists are like marriage counselors. They act as informal referees who make recommendations as opposed to judges who hand down orders.
Step 4. Using Problem−Solving Techniques
People in disputes are more cooperative with each other when they know their position is being communicated in a non−combative, on−aggressive manner. By using consensus−building techniques, more is resolved in less time and with less stress.
Step 5. Communicating With Clarity
When people are emotionally frustrated, it’ s easy not to listen. As a result, issues can be misunderstood. Successful resolution specialists will communicate with clarity their client’ s financial position while giving the other side the opportunity to respond to the facts, as they understand them.
Step 6. Finding Creative Solutions
Dispute resolution creates a compromise that will satisfy both sides. And because it’ s not a court settlement, the results can be fairer and uniquely tailored to suit both parties.