Saturday, April 30, 2005

Give me and "F:..........F!

Give me an "R"..........R!
Give me an "A"..........A!
Give me a "U"............U!
Give me a "D"............D!


What does that spell...........FRAUD!

Just spent a few hours this past week looking over some documents someone had presented to us in conjunction with a transaction. Lots of big impressive names, convoluted deal structure and a request for a initial pre payment equal to 10% of the loan amount in addition to a 3% commitment fee (which is standard in most deals, one of the few things about the documentation that didn't spook me). This 10% was to be used to purchase some unspecified insurance guarantees that would "make the whole deal work".

Given the "risk" of the underlying transaction associated with this loan, both the pricing of the loan and its equity requirement of the borrower were substantially deviant from standard commercial terms.

If a deal smells fishy, it is (Oh Josh, you are a sucker for cliche). Having seen an advance fee scam run on a contact of mine (and they fell for it hook, line and sinker), I am pretty well versed in how these things get pulled off.

Typically the victim is looking to undertake a project that is well beyond their financial means and have been unable to secure financing from traditional sources, due to the fact that they cannot come up with the equity portion of the deal.

They are then approached by "someone who knows someone who know someone" who will fund the deal, but not before the prospective borrower has coughed up a few hundred thousand dollars in fees (that has typically been borrowed from friends, retirement savings and against real estate). At this point, the prospective borrower is in a desperate state and will believe anything (except the reality of the situation), sometimes unwittingly becoming a party to a crime themselves. Having seen a business dream go down the tubes once in a while, I know that it brutally hard to walk away, but sometimes you have to. In the end it is only money, and I can think of few things worse than spending some time in the slammer for a crime you didn't realize you were committing and not having anything to show for it.

In almost any deal, fees are a normal part of the process, however, what is different in the advance fee scam is the scale of the fees and the type of financing that is being sought. Most intermediaries will charge a small up front fee and a success fee on the close of the deal. Most lenders will charge a due diligence and commitment fee (these typically range from .5% to 3% of the capital being lent).

The bottom line is that if you have never been a party to a large transaction, get advice from someone who has. Speak to a lawyer, accountant, even your bank manager. If something is too good to be true, it is (I know, it is a cliche)!

If you want a good primer on fraud, check out FraudAid

Thursday, April 28, 2005

Personal Guarantee...................Can you tell me what it means to me!

We are just in the process of putting together a small deal for a client when the topic of personal guarantees came up.

And as a total surprise to me, the potential borrower didn't have an issue with putting his personal guarantee on the capital he is looking to borrow. Typically, this is always a bone of contention with borrowers and lenders.

Borrowers take the position that their business is "no risk at all" and lenders take the position that "if your business is no risk, you shouldn't have a problem putting your name on the loan".

The long and short of it is that for most smaller borrowers, in most situations, there will be personal guarantees involved. Yes there are exceptions to the rule, but typically when they occur, the cost of funds will be higher.

Putting your guarantee on a loan give the lender confidence that you have some faith in the business. Arguing about it typically puts up red flags and makes lenders hesitant about doing the deal .

Friday, April 22, 2005

Toooooooo Much Communication (WAY OFF TOPIC)

Has anyone ever sat back and thought that the recent revolution in telecommunication has encouraged a little bit too much communication between people, to the point where people communicate, not for the sake of conveying information to one another, but simply for the sake of communicating.

I mean so what if I can send an email from my combination watch/phone/camera/PDA while sitting in a cafe drinking a latte. If you really need to send that email, should you really be sitting in a cafe drinking a latte? While I understand that many people find surfing the internet a relaxing and enjoyable endeavors, don't most of us get enough of that crap at work.


I can't even count the number of verbose and pointless emails I have gotten from friends, relatives and acquaintances telling me how wonderful their new house, new pet, vacation, new boyfriend, new mistress or new breasts are (ok, you can tell me all you want about how wonderful your new breasts are). A word to the wise, if it isn't something you would pick up the phone and tell me about, don't send me an email about it, especially a group email!

Otherwise be prepared to get a daily dose of pictures of my kid doing things that I think are cute, but you probably couldn't care less about! I take high resolution digital images so I can clog up your email for a little bit!

Thursday, April 21, 2005

Don't Go To The Bank.............It could kill your business!

Just got off the phone with an entrepreneur who actually understands the value of cash and it is a refreshing change, but her situation highlighted the dangerous situations that a growing small business may find themselves in by making the neighborhood bank their source of financing.

The point of this post is not to slag banks for being conservative and risk adverse..........I prefer that banks stay that way. They work on small spreads and need substantial amounts of security.

It is a bank's requirement for substantial amounts of security that often makes them incompatible for the growth nature of small business. The end result is that banks cannot extend as much credit to small businesses as the small businesses think they deserve, so what you end up with is an underfinanced company, that while it is not paying a lot for its financing, doesn't have the financing it needs (think using a screwdriver to tighten a bolt..........it just doesn't work).

What the business owner should be looking at is cash liquidity. So assuming that a business that does about $1.2 million a year in sales and carries about 60 days of sales in its A/Rs, it has the option of going to a bank, who if they are comfortable with the company's financial health AND the personal net worth of the owner, they may get a line of credit for 40 to 60,000 or they can go to a factor, whose primary interest is the A/Rs and get access to about $150,000 to put into the business.

You tell me what the right decision is!

Tuesday, April 19, 2005

The Little Finance Company That Could!

Prescott Thackery has reached a milestone in its life...........................we are starting to advertise! Stay tuned to hear the results!

My Favorite Story

As someone who is "active" in financing small businesses, I tend to hear the same stories over and over again, typically from financial intermediaries who haven't taken the time to learn the basics of finance beyond - "I think this start up company is going to conquer the market, if it only had $1 million, so would you please give us $1 million."

Here is my favorite:

" I think there is a basis of high risk lending for companies that have the potential and the takeout in the end from the investors.... I have a couple of really keen companies right now that I would throw money into if I had the resources. Companies that are newest(sic) ( is that a word?) with no positive cash flow but good bank-able deals on the ideas and execution they have. They don't have the assets to get funding and banks don't look outside the box. Companies like yours help businesses a lot and that's the kind of thinking I agree with."

Absolute gobbly-gook but managed to hit my hot button with the phrase "IF I HAD THE RESOURCES". It is easy to talk the talk darling but try walking the walk. Mortgage your house and put your skin in the game.............You are obviously not willing to take that sort of risk, so why should my firm

And this person claimed to have worked for a bank! Bank-able Ideas? I mean come on! In the world of reality, ideas are not "bank-able". I do not want my bank looking outside that box, that is not their job.

My typical response to this sort of pitch is as follows:

"As someone who regularly writes the cheques to small business, I agree with you in theory, but not in practice. From the funder's point of view, the time required to do a proper due diligence and the fees associated with due diligence make this segment of the market almost "un-invest-able" for a profesional investor. In almost all commercial transactions, the borrower pays for all of the due diligence fees and in most situations, these small companies cannot afford the costs of doing the transaction (typically 5 to 7% of the capital raised), most of which is spend just papering the deal.

We just did a small buyout deal on which we spent about 40 to 50 hours just working on the paper work. We charged (or should I say way undercharged) about 1000.00 for this work, which included all of the credit work and registrations. Many of the companies we deal with have trouble scraping together the fees for our due diligence and I think that many companies are in this situation"

Tuesday, April 12, 2005

What's in a name?

Apparently quite a bit, especially when they are on legal documents!

Yikes!

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