There is finance to be had, but because of the imposition of new rules, resulting from the financial crisis of the last few years, borrowers with a healthy cash flow are, contrary to what one might expect, suffering more than less fortunate companies in their attempts to borrow funds. The more strict affordability criteria today actually seems to have thrown out some common sense in assessing applications – something akin to throwing out the baby with the bath water.
In assessing whether to grant a loan, lenders had always worked on certain assumptions, whereby certain fixed costs where reasoned to be the same, or very similar, for a particular industry, or business, unrelated to the amount of the cash flow; and only sometimes related to size. Now, however, many lenders are assessing these items as a percentage of earnings, or cashflow. This means that the applicant with the greater cashflow will be disadvantaged, because, almost universally, the percentage method will result in greater amounts being deducted from the calculation of available servicing funds, than would be the case with the fixed sum. Thus, it is important for prospective borrowers to think carefully about which lender they will approach, because, effectively, some lenders will now lend less than others, based on this overall percentage approach to fixed costs.
Over the past few years, lenders have been increasingly moving away from basing lending decisions on cashflow and turnover, and the projected cash flows, and are now working on a basis of what a borrower can actually afford to pay right now.
Many lenders now use an affordability formula, either in conjunction with, or instead of, cashflow historical data and projections. All formulas now take into account the likely development of liabilities as a factor equal to, or even greater than, the cashflow situation. But, the problem is that there is some variance between these different formulas; and this make it very difficult for a company, seeking to borrow, to calculate just what should be possible. It is obvious that some knowledge of the inner workings in the light of experience is necessary to negotiate these tricky bends,
Some lenders are now requesting information on various items that would never have caused much concern in the past. Once again, what additional information is sought by one lending source may be quite different form the extra information required by another. Third party credit reports on the applicant company are now also playing a larger role than previously.
Funding is again becoming available, but the road to getting it is becoming harder to negotiate.
Some amendments to the Financial Collateral Arrangements Regulations 2003, which were designed to improve efficiencies in the taking and enforcement of financial collateral, recently came into effect in the U.K. Nonetheless, relative to floating charges, there are still uncertainties.
These Regulations are essentially the implementation of EU directives, which are said to promote the use of financial collateral within the EU. It is essentially a streamlining process, removing formalities which were required on taking and enforcing security over financial collateral (such as cash, shares and bonds). Since all these items can be used as collateral for various purposes, it is worth being aware of the changes, even though they are more of an incremental nature, which expand the scope of the regulations, and remove an anomaly regarding the availability of appropriation as a means of enforcement.
The amendments now included “credit claims” (claims arising under loans provided by deposit-taking institutions (i.e. banks)) within the definition of “financial collateral”, thus providing greater flexibility under several circumstances. They include an expanded definition of ‘possession’, in the case where financial collateral is provided by way of a credit to an account in the name of the collateral-taker, or its nominee.
One amendment clarifies the term ‘possession’ of intangible financial collateral, but uncertainty remains as to the extent to which floating charges will fall within the terms of the regulations. However, pledges, liens, and charges are now included in the definition of ‘security interests’ for the purpose of self-help appropriation, outside the regulations.
A further, new provision provides that foreign insolvency orders will not be of effect in the U.K., if, in the same circumstances, that order could not be made by UK courts, because of the provisions relating to adverse impact of insolvency law on financial collateral arrangements, as contanined in the Regulations. Whether the courts will adhere to this, or find a way around it, remains to be seen.
Despite the messages of impending doom, which still may be proven correct, and despite the ominous signs – Portugal falling under the rescue umbrella; Greece having to pay double figure interest, to be able to raise any money at all; Ireland’s present serious rumbles; and the possibility that the heavily indebted countries of the EU will have to devalue or bust – the Euro currency is, at least for now, defying all the odds, and is gathering strength. And it seems likely that it will do so for the immediate future.
Further, the Euro is doing it against a background of a rapidly improving U.S. economy. In comparison with Europe, there are many more U.S. firms earning even more than at any time since the 80s, all of which should mitigate against the Euro. On top of that, there is the ‘Atom’ situation in Japan, the rebellions in North Africa, and worries about the oil supply to the industrialized countries. Normally, under such circumstances, there would be a massive flight to the dollar.
Yet this established scenario seems no longer to hold good. In the last 3 months, the Euro has risen about 12%, from $1.28 to $1.44. That was definitely unexpected. Further, in the last weeks, the Euro has taken one hurdle after another in its stride; and thereby demonstrated a great attractiveness.
There is an unofficial rule, which maintains that trends, once established, tend to continue for a time, rather than collapse in the beginning. Hence, it seems the Euro may reach even further highs, at least in the short to medium run. Presently, the Euro seems to be swinging in an area between $1.42 and $1.45. It has been trying for a year to break through this barrier.
Last Friday, it reached $1.4440. If it can now spend a little time stabilised at $1.45, the signals are that, despite the problems of Euroland, it could then go as high as $1.50, or even $1.55. However, there is a very substantial school of thought, which maintains that the Euro cannot sustain such high levels in the long term. I am one, who tends to subscribe to that thinking.
But, more immediately, what does this all mean presently for those seeking funding? This is a situation in which potential borrowers, worldwide, may see a considerable advantage in presently applying for, and obtaining funding in Euro. If everything goes the right way, there is money to be made.
In the face of the current, international financial troubles, thee are, once again, very promising signs with respect to the availability of financing for renewable energy projects. This has apparently been spurred on by the nuclear tragedy in Japan. It seem that there is now valid cause for optimism as far as financing availability, particularly for solar energy, is concerned.
Though credit is still very tight, a clearer, more definitive line is being drawn and market tiering is taking place based on more stringent evaluations of operational, financial and credit risk. Companies that have demonstrated some success in developing projects, and/or either putting proven technologies to good use, or commercializing new technologies, will be more secure in their ability to raise short- and long-term capital.
Power utilities are again becoming willing to sign long-term power purchase agreements with renewable energy developers. This can be a good basis on which to apply for finance. Power demand is not decreasing, and now, after Fukushima, when aging power plants are rapidly being retired, and clean energy is being pursued by governments everywhere, lenders and investors are again heavily motivated to get into that area.
In some countries, even local and state governments want to secure their own, future, local power needs; and, in some cases, these governments, or their public utilities, can be persuaded to enter into arrangements, which provide the basis of an application for finance by the clean power provider. When an energy provider knows how much power it can, and will, sell, and at what price; and when that becomes formalised in either a contract or other indisputable form, then, with that in hand, the provider will almost certainly be able to raise funds.
Nicholas Shaxson, the author of the book, Treasure Islands, about offshore finance centers, says these small havens “all tend to be plagued by allegations of corruption and there are often questions about whether they are investigated properly.”
Many of these offshore centers are either ex British colonies, or, by their legal system, connected to England, and so the assumption is (which is many cases not far off the mark)that there must be some control by London, although this is meant in terms of the legal system, under which many of the appellate cases end up under English jurisdiction. For example, the Caymans, where George Town, capital of the Cayman Islands, a British overseas territory that is home to roughly 50,000 people and 70 per cent of hedge fund registrations worldwide, have the English Supreme Court (previously the House of Lords) as their ultimate Court of Appeal.
Because of their prominent roles in the world financial system, some of these so-called offshore ‘havens’ have assumed importance far bigger than their physical size would suggest. Bermuda is a leading insurance center, while the British Virgin Islands is the global capital for incorporation of offshore companies.
In recent years in respect of these ‘havens’, there has been much binding in the marsh, and large numbers of stories of intrigue, corruption, and even conspiracy. However, a lot of this bad reputation is not deserved.
In Bermuda, where Bermuda Finance employs more than 5 per cent of the population, the country established a Financial Intelligence Agency in 2008.
The British Virgin Islands has invested in legal infrastructure to deal with commercial disputes arising from its status as the leading incorporator of offshore businesses.
The Cayman Islands is a base for most of the world’s hedge funds.
The Turks and Caicos Islands is largely a center for offshore trusts. The U.K. imposed direct rule in 2009 after a report found a “high probability of systemic corruption”. However, the investigative team soon discounted the initial allegations leaked by the police.
In recent times, all these jurisdictions have come under fire, or had allegations made about them in one respect or other, and, as a result, whatever may be the real facts about some of the more obtuse allegations, various questions were raised in London, particularly about the rule of law in Cayman – and the network of close relationships that dominates the elite of this, and other small, British territories. The case also goes to the heart of the U.K.’s somewhat dysfunctional relationship with the “pink dots on the map” that are both imperial relics, and, at the same time, significant operators in world finance.
Mr Umunna, the MP who is also parliamentary private secretary to Ed Miliband, UK opposition Labour party leader, says: “Britain should certainly be using its influence and the leverage that flows from that to encourage better standards of financial probity and governance to be adopted.”
The UK government has promised “further measures for promoting good governance and preventing corruption” in overseas territories. The Foreign Office concedes there “may be individual incidences where governance has been a concern” but denies there is “systematic or widespread” problems across the islands.
One attraction of these ‘havens’ – often for lenders, and sometmes for borrowers – is their usual, very strict secrecy laws. However, pressure for transparency persists, as the havens begin to yield billions to G20 treasuries.
When leaders of the world’s biggest economies met in London in April 2009, they issued an ultimatum to tax havens, writes Vanessa Houlder. “The era of banking secrecy is over,” they declared. The Group of 20 summit triggered a scramble by almost all offshore centers to meet their bigger neighbours’ demands. “Tax havens are disappearing,” French president Nicolas Sarkozy – one of their fiercest critics – said last summer, after 500 tax information exchange agreements had been signed.
However – and many non-government entities say fortunately – results do not live up to the hype. Skepticism about the will to enforce relentlessly such reforms was reinforced by recently unveiled German and British plans to negotiate a withholding tax for undeclared funds in Switzerland, rather than forcing account holders to open up everything.
Offshore centers continue to face questions about their role in the financial crisis, in what International Financial Centers Forum, a lobby group, says is “a politically expedient distraction from regulatory failures in the major onshore capital markets”.
Whatever the difficulties of securing a consensus, interest in the role of tax havens at a time of widespread austerity is likely to persist. With Mr Sarkozy at the helm at the November G20 summit in Cannes, they face another turbulent year.
Nonetheless those holders of deposits in these jurisdictions, still need something to do with those deposit, both to justify their existence, as well as to provide their depositors with expected profits.
In overview, even if, from time to time, a few rogue operators have surfaced (which have relatively quickly been exposed and deposed) the offshore lending industry continues to be maligned by innuendo, while at the same time remaining a viable source of funding for those prepared to roll with the punches.
A business plan is a document describing a company’s principal activities, or products, or services, its environment, and the objectives and strategies of management, backed up with suitable financial information.
Purpose and advantages of having a business plan
The plan is a presentation of a company and its opportunities.
It can serve as the basis for strategic planning and as a management and control tool.
It enables an investor or financier to evaluate a company, and assess the risks and prospects for return on investment.
It requires fact-finding, and forces the management to be realistic and to put theories to the test.
It should prove the management team’s planning capabilities and reduce the time required to study and negotiate financing.
Presentation of the business plan
A plan should be prefaced by a summary of the business opportunity and the key aspects of the firm, including information on:
- desirability of products or services; or
- feasibility of the project (such as in the case of real estate development) markets (if applicable);
- management team;
- financial projections;
- amount and nature of funding required and the estimated return this will produce.
The plan must include enough information to enable an investor or financier to make a decision, but it must not be overloaded with superfluous or irrelevant detail.
Precautions in writing a business plan
Ideally, and at least initially, the entrepreneur or the management team should prepare the plan themselves, simply because they, of all people, know their project best. . They should, of course,d seek outside help in areas where they lack expertise.
It is certainly useful to have the plan evaluated by a knowledgeable outsider before presenting it to potential investors or funders.
The plan must demonstrate that the project is able to meet the funder’s criteria, such as:
- the management is qualified;
- the description of the market and marketing methods is well established and realistic (if applicable);
- the property has a sufficient valuation (if real estate) the projected new funding will be adequate;
- the product is competitive; or
- the project is profitable (for example, in the case of real estate development) the production capacity will be adequate (if applicable);
- the probability of an attractive return on investment is high.
The funding applicant should:
- prepare a 3 to 5-year plan;
- undertake and document a specific feasibility, and, if applicable, marketing study;
- be prepared to make a personal financial commitment;
- divide large-scale plan into phases;
- provide a list of users, suppliers, clients, etc. who are ready to act as references;
- include both strengths and weaknesses of the business plan (this adds credibility and underlines the practical knowledge of management);
More Detail for the Business Plan
The plan must be adapted to the situation. Nevertheless, certain basic information is necessary in all cases. This includes the company’s major objectives, opportunities and profit targets, any assumptions made, resulting forecasts, special risks, and resumes of the management team.
Of course, not all the following items will be applicable to every application. For example, often in the case of a real estate development or acquisition, matters relating to production etc. would not be applicable.
Provide a general introduction to the business plan
Describe the development of the company to date, and indicate products and target markets, capital required and profits expected.
Provide an idea of the schedule of the program and elaborate on objectives. Mention the unique qualities of the business, why it would make a good investment, and identify the individuals involved.
Management details for the business plan
- provide a complete curriculum vitae for each member of management;
- emphasise achievements, duties and references;
- supply current and proposed organisational charts with a description of the duties of management;
- give full details pertaining to remuneration of management;
- give details of shareholders’ participation;
- explain non-monetary contributions;
- give objectives and main motivation of shareholders and how they view their contribution to the organisation’s success
Manpower in the business plan
- indicate skills required and manpower availability;
- provide statistics
- turnover, productivity, etc; comment on mechanisation or automation.
Marketing in the business plan
- describe products,indicating characteristics;
- explain product policies;
- provide sales brochures, photos and the results of market analyses;
- explain advantages of company’s products over competitors’ lines;
- indicate profit contribution of each line of products;
- describe the present and projected marketing policy:
- what are the target segments and customers?
- What are the most attractive opportunities?
- provide a breakdown of sales by customer, territory and product group;
- explain supply channels; describe market characteristics and potential for existing and future products;
- what is the expected market share (per product line) what substitute products can/or could be found?
Production as described in the business plan
- explain the production process;
- provide equipment requirements;
- indicate necessary investment
- describe available fixed assets;
- provide actual manufacturing capacity;
- explain possible improvements;
- list the raw materials used and major suppliers;
- how do the prices of supplies fluctuate?
- explain quality control methods used
Business plan – Product research and development
The plan must indicate whether or not the business has the technology necessary to create and develop products (if this is part of its strategy).
- indicate the originality of the process or product;
- provide technical reports to support the firm’s case;
- indicate costs related to development and the manufacture of prototypes;
- summarise a schedule for development;
- indicate time and costs necessary for accelerated production;
- indicate patents available and names of patent holders
Financial information for the business plan
This part of the plan should summarise the financial structure of the company. A financial plan generally includes:
- financial statements for most recent three to five years, if available;
- recent monthly financial statements, if available;
- projected income statements and balance sheets for the next three to five years, indicating all assumptions;
- cash flow projections for the first two years, prepared on a monthly basis;
- breakdown of fixed and variable costs; details of costing system;
- break-even point analysis; a list of all loans, financial obligations, and their terms and conditions;
- details of customer backlog; breakdown of inventory into raw materials, work in progress and finished goods
Additional information for the business plan
- description of authorised and issued share capital;
- complete list of shareholders, including number and percentage of shares held;
- incorporating documents;
- existing shareholders’ agreements;
- names of lawyers, accountants and consultants;
- names of bankers and other lenders;
- information on any past or current litigation;
- information on any former and/or affiliated company;
- information on any important rules and regulations concerning the firm’s operations:
- anti-pollution laws, government standards, etc.;
- information on important contracts:
- franchise agreements, distribution/supply contracts, grants, etc.;
- contracts related to industrial technology (patents, licenses, trademarks, etc.).
And that, in a nutshell, is the makings of a great business plan.
I am, quite surprisingly, often asked what is hard money. I say surprisingly, because there is a huge amount of information about hard money out there on the Internet. If you look at Wikipedia, you will find the following definition.
“A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.”
The term ‘hard’ refers just as much to the terms of the loan, as to the money, which is loaned. One of the main drawbacks for many borrowers in a hard money loan situation is the usually severe limitation on the extent of the funding, expressed as a percentage of the security – which has to be ‘hard’ security, most often bricks and mortar, although there can be the occasional exception.
Hard money is made available as privately-held funds, and provided in cash as private, unconventional loans. This is why hard money is also referred to as “private money”. The money funds are neither encumbered by extensive regulations or processes used by government-backed conventional loans, nor subject to the stringent requirements of the banks vis-a-vis the borrower him or herself. These loans concern themselves most substantially with security. Therefore, hard money loans are more attractive for financing that has to close quickly with few, if any obstacles. Hard money loans can overcome problems that can delay needed funding and provide relatively fast exchange of funds. So, where does it come from?
Hard money is provided by investors that are interested in leveraging real estate transactions that yield them a greater return for the use of their money than conventional forms of investing. The investors are usually real estate savvy and enjoy the benefits of providing private funding with relatively small risks, since the hard money transactions are sufficiently sheltered behind a tangible property and it’s equity. The hard money exchange is a good investment move for both parties – the borrower enjoys fast turn-around that is wanted or needed for their business property needs and the investor enjoys a greater return for the use of his hard money loan.
I am very pleased to be able to report in this post that, on 01. April 2011, we will begin a cooperation with a new, hard money source. This is an established source, well respected for many years for providing no nonsense, hard money loans. These funds will be available internationally, but the range of jurisdictions may be limited on a case by case basis.
Typical purposes for which hard money loans can be made available are as follows:
- acquisition loans
- bridge loans
- development loans
- gap financing
- interim financing
- mezzanine financing
- short term credit resolution
- emergency project funding
- factoring of accounts receivable
- undeveloped land funding
Comparatively fast funding can be made available, if necessary, for most types of commercial real estate projects.
For full details, visit our main web site under Services, and then Hard Money Loans in the menu bar.
This follows from my first post about cross guarantee financing.
The second gross guarantee concept was also conceived years ago, and was designed for use within the banking system itself. It’s initial aim was more or less to privatise banking regulation and the relevant deposit insurance risk. It was intended to create a cross guarantee contract for banking type institutions, which would protect all their deposits, non deposit funding, counterparty risks and balances owed to clearing houses and payment systems.
The institution would enter into such a contract, voluntarily, with a syndicate of other similar institutions, which were assembled much like an underwriting syndicate, to assume the risks specified in the contract. In some ways, it was a form of re-insurance. The practical effect of the cross guarantee contract was to unbundle the liabilities side, of the institutions balance sheet, in that it shifted the residual insolvency risk to the institutions direct guarantors. That removed the risk from the shoulders of the creditors, who in fact then become guaranteed under the cross guarantee contract. The idea was that the on-balance-sheet equity capital of the institution being guaranteed wold then serve as an insurance, deductible for cross guarantee purposes.
Thus, in a sense, that particular cross guarantee concept is the obverse – note, I said obverse, not converse – of asset securitisation, thus effectively liability securitisation. Hence, that particular cross guarantee concept protects against the loss of the funding and other liabilities of the institution, which is being guaranteed.
Also this concept was well removed from any practical application relating to obtaining commercial funding. The question was whether there was any use in keeping these concepts in mind, when trying to derive something innovate, which would make an almost impossible financing problem, quite possible. Something more was needed, to give a potential funder a healthy appetite for the transaction; and so thoughts turned elsewhere.
For more on the further development of the final concept, stay tuned.