The cost of not borrowing…

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Unused Line Fees or Commitment Fees

Everyone understands loans have an interest rate applied to the balance or the amount borrowed.  Not everyone understands business lines of credit generally come with ‘Commitment Fees’ or ‘Unused Line Fees’ applied on the amount of the line of credit not borrowed.  It is generally a relatively low rate compared to the interest rate, and it is basically the fee the bank charges to have the amount of the line of credit available for you to borrow if and when you need it, even though you are not currently using it.  Middle market CFO’s should understand the following 3 points:

(1) They may be negotiable.

(2) When comparing 2 or more loan offers, include the unused line fees in the analysis.  The difference may be substantial enough to tip the scales to one loan versus another.  If so, remember point #1.

(3) When determining the amount of the line of credit, include the unused line fees in the analysis.  While it may be best to have more credit available than you think you will need, understand the cost and factor it into your decision.

Although the reason the banks charge unused line fees is understandable and the cost is relatively small (especially compared to the amount of interest you might be paying on the portion of a term loan you don’t need), unused line fees are often a source of annoyance to many business owners and CFO’s who simply can not get used to the idea of paying the bank a fee on money they are not borrowing.  What types of fees and business expenses are the most annoying to you?

Getting more out of LinkedIn

I recently attended a workshop on advanced LinkedIn skills.  The course was conducted by Sven Johnston, Partner & Sr. VP Business Development at GigaSavvy.

Sven has over 5300 LinkedIn connections.  That is a lofty goal, but 500 is more realistic.  Once you get there, your profile shows that you have “500+” connections and people will see you as a super connector.  At the time of this writing, I have 259 so I have a way to go.

The first step is completing or improving your profile.  Think of your entire profile as a key part of your personal brand.  It is more than a resume, but done properly, it can essentially replace your resume.

  • You should have a picture of your face that will help people remember you.
  • Your headline can be more than just your title and the name of the company.  You have 140 characters to summarize your personal brand so make it memorable.
  • Use your summary to tell your story.  It can be a little more narrative and interesting than the one paragraph summary you may have on top of your resume, mainly because you have more space.
  • Experience – Does not necessarily need to be limited to paid jobs.  If you gained good experience from volunteer work or contract positions, you can include them as experience.  That will allow people you worked with in that capacity to endorse your skillset and write you a recommendation.
  • Skills & Expertise – List the top skills you want people to know you for.  Ask for endorsements from your former co-workers.  You can have up to ten skills with up to ten endorsements in each.  The goal is to have 100 little faces in the box, meaning you have ten endorsements in each of your ten skills.
  • Recommendations – You need to have at least 3 in order for LinkedIn to recognize your profile as an All-Star.  It can be uncomfortable to ask people to write you a recommendation, so make it easy for them by suggesting what to write.  You can hide recommendations if you have more than you need, but having 4 to 7 great ones on display is a good target.
  • Groups – Join groups that interest you in a mixture of local, industry specific and mass groups.  Participate by adding to the discussions.  Groups extend your network as you are able to send group members messages even if they are 2 degrees or further away from you.  I just created a group called MiddleMarketCFO.  You can be one of the first to join!

The next step is searching for new connections.  Using the Advanced Search options, you can find potential connections from your groups, schools, fields, companies, geographic areas or any combination of those options or more. When sending invitations to connect, you should personalize each message rather than using the default message LinkedIn provides.  While strong connections are best, a weak connection is better than no connection so if you find yourself wondering whether you know someone well enough to send them a invitation to connect, the answer is probably yes you do.

Lastly, review your connections regularly and stay in touch.  You can use tags to remind you who you need to schedule a lunch with or who you need to reach out to with a business opportunity.

You can see my LinkedIn profile using the button below (which you can create in LinkedIn).  If we are not already connected, send me an invitation to connect.  If you are moved to endorse my skills or write me a recommendation, even better!  If you have any additional tips to get more out of LinkedIn, leave a comment below.  I look forward to connecting with you!

View Greg Eyink's profile on LinkedIn

Business lending: Are you hot or not?

San Francisco Business Times (click here to see full article) reports that “business lending these days is a clear case of the haves vs. the have-nots. The former group has to fight off bankers eager to lend. The latter, which include many small businesses, can’t get a nibble.”

 

Poll: Biggest Business Trends 2014

Trends ChartOf these four trends – Big Data, Crowdfunding, 3D Printing, Made-in-America – which will have the biggest impact on business in 2014.  Take the poll below.

BIG DATA is a big trend.  With a multitude of brilliant minds pursuing the field, new innovations emerge daily, but the biggest applications of big data are probably yet to be pondered.  Retailers are already using this data to know who you are, or at least what you look like, where you live, what you eat, what you wear, where you go on vacation, how much you spend and get paid a month, who your friends and family are and what you are saying about their products.  Plans are underway to use big data to crunch consumer credit worthiness, predict the likelihood of mergers and acquisitions, prevent the spread of disease, combat crime, alleviate traffic congestion and who knows what else.

CROWDFUNDING – In 2012, 308 crowdfunding platforms across the world raised $2.7 billion, an  81 percent increase over the amount raised in 2011, according to the annual  report released today from the Los Angeles based research firm, Massolution. The growth in 2012 represents an acceleration,  up from 64 percent growth in 2011. Looking ahead, growth is expected to reach  $5.1 billion raised in 2013, representing an expected 89 percent increase in the  dollars raised, the report predicts.  A trend is obviously developing.

As it exists, the majority of money raised with crowdfunding is still on donation or reward-based platforms, where an entrepreneur or artist raises small  sums from a large group of people in exchange for a product sample or experience. Of the $2.7 billion raised in 2012, $1.4 billion was on these  platforms, made popular by brands such as Kickstarter or Indiegogo.  Lending-based crowdfunding, where campaign leaders have to repay their  investors, equaled $1.2 billion.

Equity-based crowdfunding, where investors receive a share of the company in  exchange for funds, was the smallest sector the market in 2012, totaling only  $116 million. Until the SEC issues the regulations to allow the JOBS Act to take effect, private companies in the U.S. are only able to crowdfund from accredited  investors.  In a handful of other countries, equity-based crowdfunding is already legal.  When the JOBS Act takes effect, the distribution of funds raised from equity-based crowdfunding is likely to increase dramatically.  This will open early stage companies up to a new, much larger, group of potential investors and it will give unaccredited investors access to a new pool of investments.

3D PRINTING is not a new concept. The platform for it began with a 30-year-old technology called rapid prototyping.  Although there were cost-savings benefits to rapid prototyping, the equipment was very large and expensive and had very limited capabilities.  Fast-forward to 2013. Hardware and software advancements have modernized rapid prototyping, allowing 3D printing companies to enter the market. Today’s 3D printers provide more accuracy and precision than rapid prototyping because the design of the object is created separately in 3D software. High-end 3D printers now allow multiple materials to be fused together in one print.While the platform for 3D printing is more than 30 years old, today is the first time that 3D printers have become inexpensive enough to be used by enthusiasts and small businesses to create physical objects.  It is similar in that sense to the emergence of the personal computer, and we know the sort of impact that had on business productivity and nearly every other aspect of our lives.

The real opportunity of 3D printing is that it is giving companies the ability to produce a wide range of objects on demand, with little or no inventory costs.  Imagine a ‘virtual’ parts catalog, made up of sets of 3D files that can be printed on demand. Because the inventory is virtual, it would cost very little to offer customers an ever-expanding catalog of products and replacement parts. For a small premium, customers would have the option of creating whatever they want.  With the rapid advancement of 3D printing, we are entering an era in which it is possible and economical to produce products at a low volume and with mass customization. 3D printing has the capacity to change the definition of obsolescence, as well as the level of control that customers have over their products.

MADE IN AMERICA – This has been a trend in reverse for the past several decades, but it is already starting to change.  The labor costs have inevitably crept up in places like China, making U.S. manufacturing more competitive.  If you think this trend will be small compared to the others, consider that the other trends listed above, particularly crowdfunding and 3D printing will contribute greatly to the Made in America movement.

FASB: Gift Card Accounting

No revenue is recorded when Gift Cards are sold.  Rather, a liability is created to reflect the future obligation of the seller to deliver goods or services in exchange for the payment that was made when the gift card was purchased.  When the gift card is redeemed, the sale is recorded and the liability is eliminated.

Sometimes gift cards are used to scrape ice off your windshield or they are cut into slices to keep the collars of your shirts nice and pointy.  Other times they are not used for anything at all, which means the liability on the books of the seller never gets eliminated.  FASB is working on a new revenue recognition standard that will require companies to estimate the amount that will not be redeemed, which is called breakage, and record it into revenue.

To read the Journal of Accountancy article, click here.

The Ins and Outs of Financial Covenants

Loans generally come with covenants that serve as protections for the lender to ensure that the borrower meets certain levels of financial strength and performance.  There are a variety of ratios or calculations that can be used, but in general they are all designed to predict your ability to repay your loan. The most common types are asset-to-liability ratios such as the current ratio, or income-to-financing costs such as the Fixed Charge Coverage Ratio.  The types of ratios used are pretty standard, but the minimum or maximum restrictions vary and may be open to negotiation.

They are generally reported quarterly to the bank. For internal purposes, they should be reported more frequently and should be forecasted at least two quarters in advance. This will allow time to arrange alternatives in the event that your forecast falls out of compliance with the covenant restrictions.

Covenants are generally designed to change over the life of the loan, and can be adjusted later as well if your situation changes. The loan documents generally contain language that specifically spells out events of default as well as how each covenant is to be calculated. Take the time to study the language so you completely understand it.

In summary:

  • Be aware of the covenants before closing the loan.  That’s the best time to negotiate as much flexibility as possible for your company.
  • Create an easy to use template to calculate the covenants and report them to the bank as required.  Be aware the covenants change over the life of the loan, so build those dates and changes into the template.
  • Build covenant calculations into your financial forecasts.  Predict and internally report covenant compliance at least two quarters in advance.  Graphics and conditional formatting help to highlight potential non-compliance issues.
  • If your business is going through significant changes that may affect your ability to stay in compliance with covenants, consider going back to the bank to attempt to have them adjusted.
  • Understand the events of default, including any events that can occur even if you are in compliance with the covenants, and have a plan in place to deal with it long before you need it.

Those are the ins and outs of financial covenants.  If I left anything out, please add your comments below.

 

Hedging with Derivatives; Part 3 of 3: Commodity or Product Input Risk

Companies that depend heavily on raw-material inputs or commodities are sensitive, sometimes significantly, to the price change of the inputs.  For example, energy intensive manufacturers and transportation companies can be sensitive to the price of gas.  Food product companies can be sensitive to fluctuations in the price of certain agricultural commodities.  Futures contracts on commodities can mitigate a portion of this type of risk.

Futures contracts are sometimes confused with forward contracts.  While similar, they are not at all the same.  A forward contract is an agreement between two parties (such as a wheat farmer and a cereal manufacturer) in which the seller (the farmer) agrees to deliver to the buyer (cereal manufacturer) a specified quantity and quality of wheat at a specified future date at an agreed-upon price.  It is a privately negotiated contract that is not conducted in an organized         marketplace or exchange.

Futures contracts, while similar to forward contracts, have certain features that make them more useful for risk management.  Futures contracts have standardized terms established by the exchange. These include the volume of the commodity, delivery months, delivery location and accepted qualities and grades. The contract specifications differ depending on the commodity in question, but this is the general idea:

A flour miller is concerned about the risk of wheat price increases for wheat to be purchased in November. Wheat futures for December delivery are currently trading at $4.20/Bu, and the typical basis at the miller’s location is $0.15 over futures. The miller hedges this risk by taking a long position (buying) the December wheat future at $4.20. In November, the futures price has increased to $4.40, and wheat is selling locally for $4.55. The miller lifts the hedge by selling back the futures position at $4.40, resulting in a profit of $0.20/Bu. This profit is then applied to the cash purchase cost of $4.55/Bu, resulting in a net cost of $4.35, which is the price expected when the hedge was placed.

For companies sensitive to raw material prices, raw material price variances should be isolated and included in your KPI reporting.  Implementing an effective commodity hedge strategy can minimize these price variances, and the effectiveness of your hedge strategy should be measured and included in the reporting

This concludes the 3 part series explaining how middle market companies can hedge their risks with derivatives.  Happy hedging!

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