Tuesday, March 29, 2005

Live by Cash...........Die by Cash (aka Grounded in Reality)

Lately we have been trolling the market to purchase a small import/export business that fits our motto of "Buy for $1, Sell for $2".

And this being Canada, we have come across a few here and there. In association with these small businesses, we almost always come across the phrase, usually uttered by a broker, "They take a lot of cash out of the business (wink wink)" And then somehow this cash that they are "pulling" out of the business is being used to calculate the value of the business for the purpose of setting a selling price.

The problem is that as a purchaser, I can not verify the existence of this cash and hence, it becomes irrelevant to me. I can only make a judgment on information that I see, not what I imagine.

This scenario typically ends up with me remarking to the vendor or their representative that one of the cost of pulling cash out of a business and not documenting it properly is a lower valuation.

I don't have a lot of second conversations......go figure?

Tuesday, March 22, 2005

Ack!!!!!!!!!!!!!!!! Total Frustration!!!!!!!!!

How many frogs do I have to kiss! I'd rather start licking toads............at least I would get a buzz off of it.

2 deals fell apart today

Deal 1. What I thought was a great opportunity to turn some capital turned out to be a farce. Our potential "partner" had trouble understanding that if we were splitting profit 50/50 we are splitting risk 50/50. None of this "I'm not signing personally crap!" Do I look like a fool?

Deal 2. What part of "I finance invoices" is unclear? I? Finance? Invoices?
  • in·voice ( P ) (nvois)n.
    A detailed list of goods shipped or services rendered, with an account of all costs; an itemized bill.
    The goods or services itemized in an invoice.

Not buildings, not equipment, not goodwill..................invoices

Monday, March 21, 2005

Its Not About the Money......Its Always About the Money

I like risk and count myself as one of the fortunate people who get paid to do what they like..........I get paid to assume certain risks and to cut right down to it, it is because of the money (not because I want to make the world a better place).

Being that I get paid to take on certain risks, I have to develop certain strategies in order to control them. One of these strategies is called collateral control. We advance capital against certain forms of collateral, such as A/R, inventory and purchase orders, but in return we require control over said collateral. In the case of A/R, we require debtors to sign acknowledgements and directions of payment. In the case of inventory, we required debtors to maintain their inventory in a place in which can control it, typically a third party warehouse/fulfillment center.

Many of our clients have trouble getting their heads around this fact. They lose sight of the fact that we are putting up money that no one else will and this is one of the mechanisms that allows us to continue in this capacity. The typical response is why, dont you trust me? My response is that I don't want to have to trust you, it distracts us both from generating profit.

Saturday, March 19, 2005

I need a haircut.....Sort of.

I have numerous personality deficiencies........I mean idiosyncrasies, one of them is getting my hair cut. While not as paranoid about getting my hair cut as the average female (I'm sexist, so shoot me), I do have this insecurities about haircuts. It is not rational but neither are my other hang ups:
  • i'll only eat cheese if it is melted - even if it is cold;
  • There are only two uses for ketchup - french fries (not home fries) and bacon;
  • I'll only eat a tuna fish sandwich if I make it myself.

My hair cut hang up is rather ironic given that the slang term for taking a loss on a deal is "taking a haircut"

My problem arises from the fact that the guy who used to cut my hair changed salons and they will not tell me where he went.........so, if anyone from Toronto reads this and can suggest a good place for a guy to get a haircut, drop me a line. I am not above going to a fru-fru salon, so ladies feel free to contribute.

In a worst case scenario, I may just wait a little longer and shave my head bald for charity.

Thursday, March 17, 2005

Lesson Two of the Day

No matter how much money somebody owes, they will always have enough to go on vacation

Lesson of the Day

Never assume that people are rational thinkers

Tick Tock Tick Tock..............................

You know what that is? It's time ticking away. It is the same time that everyone tells me that they don't have when they call me.

"Josh, I need to make payroll in 24 hours"
"I need to pay my suppliers tonight"
"The bank wants its money back"
" My girlfriend is threatening to call my wife unless I by her a diamond solitaire"
(Ok, I have yet to hear this line, but I am sure I will. My suggestion will be next time, don't give her your real number)

The funny thing is that when it comes to getting me back the documents that I need to make an informed decision, everyone takes their sweet time, regardless how urgent their situation was when they called me in the first place.

I am the first to admit that I require a large amount of paper work relative to a bank, but I am not asking people to write a thesis about their business, I am asking for information that they should be able to recite to me off of the top of their head. When people have difficulty producing financial statements, I use it as a sign that this may be a deal that I want to keep away from

Wednesday, March 16, 2005

Song of the Day? A Theme Song?

Oddly enough, I heard this song on a kids music album

Pay Me My Money Down
Lyrics: Lydia Parrish
Music: Lydia Parrish
I though I heard the Captain say
Pay me my money down
Tomorrow is our sailing day
Pay me my money down
Oh pay me, oh pay me
Pay me my money down
Pay me or go to jail
Pay me my money down

As soon as the boat was clear of the bar
Pay me my money down
The captain knocked me down with a spar
Pay me my money down
Oh pay me, oh pay me
Pay me my money down
Pay me or go to jail
Pay me my money down

I wish I was Mr. Steven's son
Pay me my money down
Sit in the shade and watch the work done

Pay me my money down
Oh pay me, oh pay me
Pay me my money down
Pay me or go to jail
Pay me my money down

I wish I was Mr. Howard's son
Pay me my money down
Sit in the shade and drink good rum
Pay me my money down

Oh pay me, oh pay me
Pay me my money down
Pay me or go to jail
Pay me my money down
Oh pay me, oh pay me
Pay me my money down
Pay me or go to jail
Pay me my money down

Bonanza!...................Well lets not get too carried away.

How is this for gushing.................it has been a positive day.

Two deals in today that hit my sweet spot. Now it is the rush to paper 'em.

Also initiated the first steps in extracting myself from that little boo boo. It is, well, in a word, unpleasant.

Had a second meeting with a potential partner in the liquidation business. Looks like it could be an excellent way to deploy some capital. In the process of doing some due diligence and figuring out how to structure a relationship.

Now, if I could only get some work done

Quote of The Day

You do it by fucking doing it! -

Sir Jack Pitman
Chairman and CEO
PITCO

Tuesday, March 15, 2005

Earning your stripes? Cutting your teeth?

Or any other cliche you can think of about gaining some experience the hard way (or is that the only way).

Had our first issue today with a client, which also coincided with another one of our clients having an issue with a vendor that did not pay them, thank God I didn't finance that invoice otherwise I would have had two issues on the same day and that would have exceeded my issue quota for the month! I would then have to put on the dunce cap and sit in the corner for half an hour.

Bad Josh! Bad Josh!

Without getting into specifics or details, I know that there is a right and wrong way to handle this situation. The right way is to listen to my instincts............and do the exact opposite!

Having the benefit of hindsight, I can reflect on the following lessons learned:
1. No good deed goes unpunished.
2. When you see liens, run.
3. If there is a train wreck, do not get on board, even if the ticket is free.

The funny thing is that while irate, I know that with a little bit of patience and guts, I will extract myself from this situation

I hear stories all day long, some unremarkable, some heartbreaking, some absolutely hilarious. The hardest ones to deal with are the heart breaking ones. Having said that, I know that for the most part, no one will give a damn about my SOB story, so why do I?


So from now on I wont!

Excuse me sir, could you spare some change for my FOREX operation

Usually the best you can hope for on a monday is that will be over. Having said that, it is moments like these that keep me entertained. Yesterday, I had the following e-mail exchange with a budding ForEx trader:

ForEx:
hi
i was seeking a loan for 24 month term of 6,000 for a small home based busniess and and want to know the eliglbity requirements
regard

JK: Tell me a little bit about your business, what products do you sell and who do you sell to?

ForEx: offer managed automated trading solutions to forex trading

JK: How can you get this off the ground for 6,000 dollars?

ForEx: the trading charts from tradestation cost $250 per month the automated software cost $950 for the year incoparating will cost me $1100.00 web hosting $100 per year and adverting $250 per month investing $3000.00 ,third month month invested will payin on going expences and the home base busniees is forex trading site www.fxcm.com trading software is www.tradestation.com and automated platform is www.traderobot.com and tradeing strategy is www.murphymorris.com/


JK: Who are you offering this service to?

ForEx: any one that is willing to 29.99 per month and invest $300.00 and up for a retun of 5% to 20% per month

JK: This is not something we would consider financing. I suggest that you look into the legal aspects of the enterprise you are planning as you may be contravening some securities law

ForEx: I have been in touch with sec(securities exchange commission) as long as I disclosure of
Risk Disclosure: Unique experiences and past performances do not guarantee future results! Testimonials herein are unsolicited and are non-representative of all clients; certain accounts may have worse performance than that indicated. Trading stocks, options and spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. Because the risk factor is high in the foreign exchange market trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that you can afford to lose, you should not trade in the foreign exchange market. No "safe" trading system has ever been devised, and no one can guarantee profits or freedom from loss.
Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under or over-compensated for the impact, if any, of certain market factors such as lack of liquidity. Hypothetical trading programs in general are benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Substantial risk is involved.
Forex trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the forex markets. Don't trade with money you can't afford to lose. Nothing in our course or website shall be deemed a solicitation or an offer to Buy/sell futures and/or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on our site. Also, the past performance of any trading methodology is not necessarily indicative of futures results. Day trading involves high risks and you can lose a lot of money.

ForEx: hi Joshua Kerbel
you are the managing director of you company your objective in your business is to find business opportunity that will bring about return to your company all I am asking you if to give me a loan to start up my business I have a job that I can afford to pay back the loan if it dose not work all I am asking you is the chance to start up my own business.the security i can give you is i have a job and can afford to pay of a loan at $400 per month for two year duration.

JK: As per my last email, this business does not fit our transaction criteria. If you can’t come up with the small amount of capital needed to buy the software, I doubt that you have the capital to engage in Forex trading.


Maybe this guy thought that it was funny that I was actually responding to him?

Sunday, March 13, 2005

The World According to ProfitGuide.com - When the bank says no

All in all........a pretty decent article, but it falls short in a few areas:

1. Discussing the practicalities and realities of the suggestions offered

  • Many times businesses put off dealing with a cash flow crunch until the last minute and I mean literally like a day before they need to come up with some money. No where in the article does it mention the time required to put one of these strategies into place.
  • The cost associated with these transactions. For many companies that are negotiating their first real commercial/corporate finance transaction, they are surprised by the commitment and due diligence fees charged by the lenders once they have issued a letter of interest. The article also does not disclose the approximate costs of hiring a financial advisor and the cost of papering an acquisition.

2. It does not use specific definitions:

  • What definition does Mr McElgunn use for "a growing company in solid financial shape" As someone who is active in financing smaller business, I see many company owners who would describe their businesses in those term only to see that while the company's revenue is growing, the company is not cash flow positive, but they do have good assets.
  • Most "non-start up" business owners see their business as "a growing company in solid financial shape", but as with the rest of life, it is all a matter of perspective. I have yet to speak with someone who thinks their business is garbage.
  • Also, what amount of revenue and/or profit must a company be generating to take advantage of these strategies. Many of the lenders mentioned in the article, such as the asset based lenders, will not look at deals under $5,000,000. In order to secure a $5,000,000 working capital facility, a company has to be doing at least $20,000,000 a year in revenue.

3. The article doesn't really give an outline of the criteria by which the lenders in the article make lending decisions:

  • Deal Size: Already touched on that topic above. From a lender's point of view, it almost the same amount of effort goes in to a $1,000,000 as a $10,000,000 so all things being equal, lenders will gravitate towards the larger deals. As a financier of small business transactions, the time involved with many small transaction is huge. Something that should take 2 days ends up taking 2 weeks and for most lenders, they just don't see the return on their time for the small deals.
  • Most asset based lenders will not lend against inventory alone. They will usually want to have a first position on the receivables as well.
  • In practice, most other lenders, especially sub-debt lenders like to see positive cash flow from operation. Also, depending on the size of the sub debt loan, it will cost a company upwards of 17 to 25% a year.
  • Most vendor take back notes are actually mis-priced, as per this excerpt from VanCity's Newsletter (which is also on my blog):
    Vendor financing typically commands little or no interest and has a fully subordinated claim on both the cash flow and assets of the business. As an asset class it consistently defies the typical relationship between risk and expected return in that the vendor essentially faces an equity risk level and generates at best a return (0% to 8% interest) commensurate with a fully secured debt position.Additionally, it makes little sense from the vendor's personal portfolio perspective. Often when a business is sold it is because the vendor seeks to retire. In retirement one typically wants to hold an investment portfolio that is relatively low risk, liquid and diversified. A sizable vendor note meets none of these objectives as it is a high risk, illiquid investment in a single private company that the vendor no longer controls

I think that readers of the article would be better served if they new the specific characteristics of the company that this advice was best suited for. Based on professional experience, if a company is doing under $3,000,000 a year in sales, almost all of the strategies are out of reach for them. That is not to say that these businesses are hopeless, it is just to say that going out and buying another business isn't really an option. I think that the topic of dealing with cash flow crunches and non-VC growth financing for businesses doing between $250,000 and $3,000,000 a year in revenue (and there are thousands of them.....this is Canada after all) is not adequately addressed in the Canadian business literature.

Another Good Purchase Order Financing Article

A great article on Purchase Order Financing from entrepreneur Magazine's web site. Why is it that business magazines in Canada do not run articles like this. The only thing that I ever see in Profit Magazine is how to land VC money or negotiate a better deal with the bank..........something that is close to irrelevant for most small Canadian businesses............

Oh wait.....they just posted an article on dealing with cash crunches. Let take a read of their suggestions of where to go when the bank says no.

Saturday, March 12, 2005

You Mean I Need to Fill Out Paper Work?

In a word...............YES!

Financing is a paper intensive sport, even more so when you move outside of traditional financing models associated with standard bank lending. In other words, no I can't just give you $50,000 because you are a good guy.

We don't ask our client's to fill out applications and submit specific information because we like seeing people run around in circles and distract them from their day to day business activities. We ask our clients for all of the paper work because we need it to make an informed decision.

I assume that most companies have certain procedures in place to determine if they want to do business with a particular customer? Do these get waived if someone just doesn't feel like filling out the paperwork?

Im So Un-Original

Being new to blogs, I was taking a look at the online writings of others when I stumbled up that of Tim Draper of Draper Fisher Jurvetson and his offer to fund the next high tech wunderkind.

Its quite ambitious, impressive.............and way out of my league.

Never the less, I can make a similar offer to people out there who run average "low tech" business - manufacturing, metal finishing, import/export - who think that they can build a bigger business if they only had a little more money.

If you run a small manufacturing, distribution or service business and you are itching to grow, I want to hear from you.

If you want to start an importing business, I want to talk to you.

If you need $1 million to build a prototype..........then I am not your man (try Tim Draper.....do not use my name.....I do not know him).

Give me a pitch, post to my blog, send me a one pager, pick up the phone (416 345 0032) or send me an email . Within 20 minutes we can determine if there is a fit and if there is, we can have you funded in 7 days.

Josh

Friday, March 11, 2005

Oh my Gawd..............it's fan mail!

In the words of Sally Fields at the 85 Academy Awards..........You like me! You like me!

" I really dont know what I'd do without you guys.... I'm very happy with our business relationship Josh....and I'm thankful you fellas are taking time to help little guys like me."

He may be little now.............give him 5 years and he will be huge. He knows the value of cash!

I Think You Need to Restructure............but, I Don't Want To Restructure!

Nobody WANTS to restructure in as much as nobody WANTS a root canal.

But sometimes you need one!

Just finished reviewing the financial statements of a growing (aka on the brink of financial ruin) manufacturing concern. The company generated solid profits on paper but the balance sheet was a nightmare.

Basically these guys had sunk about 6 million in cash into another project they were working on, defaulted on all of their loan covenants and now had to come up with about 4.9 million dollars to refinance their working capital and term loan facilities.

On top of this the company owed its suppliers a tad under $4 million...............

Problem is that the company only has about 6 million dollars worth of assets (and I am being generous here). And assuming that you can leverage your assets 70%, we are looking about about $4.2 million dollars to pay off the creditors...............and this ignores the capital need to run the business on a day to day basis

So the company needs to work something out with the creditors or put some more cash into the company.

But the company doesn't want to restructure despite the fact that no one will lend them dollar one in their current state.

So they can keep flogging a dead horse or bite the bullet and take some painful action. Anyone who has spent anytime in business has been in a similar situation.

At this point in time, this company has decided to keep riding their dead donkey, hoping to get away from their creditors. The problem is that dead donkies don't run very fast!

Free and Clear?

Free and Clear?.............it is a question that you will often hear me ask of anyone looking to discount their invoices. Basically what I want to know is has a company owner posted his A/R for any form of credit facility.

You would be surprised how many people don't know.

The other thing that many people often ignore when sitting down to fill out our application is...........................LEGAL ACTION AGAINST THEIR COMPANY. Legal action against a client applying to our company for financing doesn't not always kill the deal; Not telling us about it until after we find out about it through another source does!

Remember, when applying for financing...........FULL DISCLOSURE

Thursday, March 10, 2005

Another Day........More People

The one thing that has amazed me in this business is the amount of paper that can come across your desk and nothing comes of it. Looked at one deal today that was more of a salvage mission than anything else.............and I'll have to take a pass on that thank you. I 've learned that no good deed goes unpunished.


Had an excellent lunch meeting with an accountant out in Brampton.

Spoke with a broker who has been trying to show me a deal for 3 months but his client can't get his stuff together. I often wonder how hard it is to produce a set of financial statements in the computer age. Long story short, I passed him off to an accounting service to assist him in getting his affairs in order.

Got some additional information back from the client I am representing on a $3 million ABL deal......finally. The most amazing thing about some businessmen is that they manage to succeed in spite of themselves.......I hope to be that lucky!

Bottom line......unproductive day

Wednesday, March 09, 2005

Ack.......The Day in Review!

The question I often ask myself some days is when did business stop being about making money.

Anyways, enough philosophy.

Got one potential deal in today.......and lets just say that the five minutes I spent reviewing the documentation was five minutes I won't have back.

Had a few decent meetings today.......looking forward to tomorrow and putting some money into play

A Fancy New Name For Invoice Discounting and Purchase Order Financing

Capital Ideas: A Little Cash'll Do Ya

Facing narrowing funding options, some successful small businesses hit an inventory-financing wall when they're about to grow. One new-old solution: venture merchant financing.

Venture Merchant Financing?

Some creative spin on the age old practice of invoice discounting and purchase order financing..............from CFO.com. Wish I had thought of that!

Oh Please! - Air Canada Posts Profit After Currency Gain

Air Canada Posts Profit After Currency Gain

ACE said it earned C$15 million ($12.4 million), or 17 Canadian cents a share in the quarter. That compared with a loss of C$768 million, or C$6.39 a share a year earlier, which included C$560 million of reorganization and restructuring charges. .................

In a statement, Robert Milton, president, chief executive and chairman of ACE, said the company exceeded its target of C$1.1 billion of earnings before interest, taxes, depreciation and aircraft rental (EBITDAR) in 2004 and remained committed to increasing that figure to C$1.6 billion for 2005.

As if the term EBITDA doesnt sound dumb enough...........now EBITDAR?

.............The last time I looked, aircrafts were an essential part of an airline. Trying to separate this figure from the cost of operations looks a little like window dressing to me.

Tell me about the cash..............its all about the cash flow!

First Road Block of the Day

As part of the invoice discounting process, we require that our client's customers acknowledge that they have received the goods that they requested and that they are in good working order.

Typically, this is not a problem..............however there is a first for everything.

Just got a call from a client whose customer refuses to acknowledge that they have received their goods. This is more surprising due to the fact that the company has already acknowledged that they should be sending us the payments for the products.

Live and learn

The Great Thing About the 'Net!

The great thing about the net is that it is 24 hours a day of communication.

Overnight we got an email about a small Toronto based company going through a cash crunch. The company does about $800,000 a year and is getting stretched by its clients.

.................Now I just have to hope that the company isn't in the home renovation business

Tuesday, March 08, 2005

Wednesday's Game Plan

Got a few potential deals on the go.

Have to get the rest of the financial information for the metal shop deal I am working on. A solid ABL deal for around $3 million. Deal is dragging a bit due to the fact that the my client's controller is overworked.


Have a meeting with client in the afternoon tomorrow. Looks like a great opportunity to deploy some capital and get it working.

Make 10 calls to people who could help me bring in deals.

Already confirmed my Thursday lunch appointment with an accountant out in Brampton

Vendor Financing

A great article........could not have said it better myself

Vendor Madness - An article from VanCity

When a business is sold there is often a vendor financing component to the transaction – i.e. a portion of the purchase price that the seller is willing to receive over a period of time. In many cases the level of vendor financing can be considerable…which prompts the question "just what are vendors thinking?!"

Vendor financing typically commands little or no interest and has a fully subordinated claim on both the cash flow and assets of the business. As an asset class it consistently defies the typical relationship between risk and expected return in that the vendor essentially faces an equity risk level and generates at best a return (0% to 8% interest) commensurate with a fully secured debt position.

Additionally, it makes little sense from the vendor’s personal portfolio perspective. Often when a business is sold it is because the vendor seeks to retire. In retirement one typically wants to hold an investment portfolio that is relatively low risk, liquid and diversified. A sizable vendor note meets none of these objectives as it is a high risk, illiquid investment in a single private company that the vendor no longer controls. So why do vendors do it? Likely one of three reasons:

1. They don’t price for risk. After all, they’re not finance geeks…and thus may not fully understand the true price of risk. Generating a 7% return might sound OK when GICs are paying 2%...if you don’t realize the price of equity risk is 30%.
2. They underestimate the level of risk. The vendors know the businesses they are selling intimately and often feel very comfortable that the businesses will be successful going forward – classic entrepreneur’s bias. Since they perceive there to be little or no risk they are comfortable accepting a lower return. However, a subordinated investment in any small to medium sized private company is risky…particularly in one where the vendor no longer has a controlling interest.
3. They have to provide significant vendor financing in order to close the sale. In some circumstances this may be a valid reason. However, in today’s market there are more buyers than sellers so the vendor is typically in a strong negotiating position. Additionally, there are institutional financing tools such as subordinated debt that are ideally suited to financing the goodwill component of a transaction and thus can substantially reduce the need for vendor financing.

So to the vendors out there…don’t carry more than you have to…call Vancity Capital before you complete your deal - it could mean a lot more cash for you at closing!

Used with permission

Daily Tally

Activities for a Tuesday:

Had 5 inquires for financing today. Two have potential
One killer deal fell apart due to blissful ignorance.....Unfortunately it wasn't mine. Another got bogged down due to the owner of the company not understanding what the term working capital financing means

Made 10 random contacts today....5 of them told me to go away.

Tomorrow looks good. Have a meeting with the owner of a great little business who actually wants to work with an invoice discounter!

Why Small Businesses Stay Small!

I wanted to share with all of you the response of a small business owner to our offer to finance his company.

"Hi Josh, I do not want to waste your time with this factoring thing as I am positive I do not like the way it works as were my reservations when you were here. I would be more than willing to show your company any financial info you wish too see if we are talking a vested financial investment in XXXX XXXXXX Inc.
I am not willing to share the profits of my hard work with anyone that does not have a financial investment with the company. As I believe that this is not an option for you or your company I want to thank you and your associates for thinking of XXXX XXXXX.
At this time I am declining any factoring proposal that you can offer as there are literally hundreds of companies that want a no risk financial gain from my hard work. If you have something better or more substantial that can be proposed or offered than I am willing to listen. I hope you do not feel I have wasted your time as that was not my intention. It was nice to meet you the other day.

Regards, XXXXX XXXXXXX"


Something better?
So here we have a company that is starved for cash, misses $50,000 to $60,000 of additional sales a month due to poor cash flow and is stretched out by his customers for 60 to 70 days before he sees payment........a perfect company for the Small Business Working Capital Fund.

He sells us his A/R, we give him cash and he retains 100% ownership of the company, along with all of its profits. Seemed like a no brainer, right?
Looks like we were wrong, it seems he would rather sell a portion of his company, along with the future profits, plus deal with all of the headaches of locating and then dealing with a partner on an on going basis.

And we were ready finance this company with a facility for upwards of $100,000 so he could quickly ramp his $800,000 a year of revenue company up to about $1,450,000 and drive his gross margin from $256,000 to over $500,000. The cost of financing would have been around $42,000, all of which is tax deductible. And just for those of you who are counting, the increase in gross margin, about $244,000, is a 580% return on the cost of financing!

With potential like this, why in the world would anyone want a partner?

Cash Flow, Cash Flow, Cash Flow!

I just got off the phone with the CFO of a small or rather I should say, micro company. The company has been hemorrhaging cash like a stuck pig. Having said that, the balance sheet looked pretty decent and I told them I could set them up with $100,000 invoice discounting facility if they made it through our due diligence process in one piece. If everything went as planned, I could cut them a cheque by the end of the week

The problem was that the CFO wanted the financing structured as a term loan at an attractive interest rate (the CFO's words, not mine) with some sort of stock conversion provision. I pointed out that no one in their right mind would provide a company with annual revenues of $1.5 million and annual cash losses from operations of $500,000 with a term loan as there is no cash with which to service the loan.

Here I am offering to finance the company with out any additional dilution of equity and the CFO is trying to get me to take a chunk of the business for absolutely no good reason I explained to the CFO the difference between cash flow financing, which is what the banks specialize in, and asset based financing, which the Prescott Thackery Merchant Group specializes in.

The CFO's response was "I don't really care.....................Now there is someone I'd like to put my capital behind!

The point of this story is that owner/operators of small business should care! As a rule of thumb, if your business doesn't generate positive cash flow from operations, you will not secure a term loan unless you have the personal assets to back it up. If you company lacks cash flow, think asset-based financing. It is more expensive, but provides cash when you need it.

Who am I? Why should you care?

Josh Kerbel's the name and finance is the game! More specifically, I run a firm by the name of Prescott Thackery Merchant Group Ltd and we finance small Canadian businesses. By virtue of our work as invoice discounters, we have the privilege of seeing what is right and wrong with the approach that small Canadian businesses take to financing their businesses.

Rather than an academic's 30,000 foot view of small business in Canada, we get the view from ground zero. Our goal is to use this blog to help separate fact from fiction when it comes to financing for the small business. Please feel free to contribute, challenge and rant!

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