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4 Questions a Business Owner Needs to Ask at the Year-End Review…

Be certain to do a financial review of your business annually!

Be certain to do a financial review of your business annually!

It’s that time of year again! 2017 is right around the corner, and for many business owners that means doing a financial review of the progress they made in the past twelve months.

The year-end review is important for a number of reasons. It allows you to measure your business’s growth and progress so far, it gives you a benchmark for the following year’s goals, it identifies possible financial issues that exist or could potentially arise, and it helps you plan for the following year by identifying strong periods and slow ones. Here are the 4 questions that should be asked:

1. How much money did you make?
A strong sign of a healthy growing business is if your annual net profits exceed that of the previous year. You will also want to review performance on a quarterly or monthly level as well in order to determine which periods were the most profitable for your business.

2. Did sales perform better or worse than expected?
Unlike gross profit, revenue is simply the amount of money the company gained from sales activities. You should compare each period’s total sales revenue to both external and internal factors. This will allow you to determine whether or not sales varied because of factors such as new competitors entering the market or if a marketing campaign was ineffective.

3. Were your expenses on budget?
It’s important to pay close attention to your expenses because even small changes can make a significant impact to your bottom line. With this in mind you want to find out where expenses deviated from your annual budget and why. This information can then be used to reduce costs the following year or adjust your budget accordingly so that you can create more accurate goals for sales and gross profit.

4. When was cash flow the tightest?
Most businesses experience periods in the year when cash is low. You will want to know when this happened and why. Knowing when these periods occur, will allow you to create a more successful financial strategy. In any business that sells on account, cash flow lags sales by the average receivables aging. If your sales are low in the summer and increase in the fall, your cash flow will be lower as you move into your busier season and you will not have the cash available to support your growth. Here, if you want to consider adding financing options to reinvigorate cash flow, your plan should include invoice factoring financing, small business loans, and / or a combination of programs for maximum effectiveness.

These four questions will provide you with some very valuable information that will play a vital role in your plans for the upcoming year, especially if you plan to grow or expand your business. You can use these insights to determine which times of year would be the most profitable, which strategies are the most effective, and which financing solutions would be the best choice to fund new projects. PMF Bancorp’s hands on assistance and experience allows are clients to arrive more easily and solve their financial needs through are many flexible working capital programs.

Can Los Angeles Wholesalers Find Factoring Invoices to be Better than Bank Loans?

Factoring Invoices

Working Capital Is Essential

Factoring Invoice financing is not always thought of immediately by Los Angeles wholesalers because most businesses look to their local bank for loans. Local banks do not provide factoring because it costs too much to monitor and is not a product that fits their lending profiles.

Most businesses understand factoring as the conversion of invoices into immediate cash. This is correct, but some factoring companies are also commercial lenders so the local wholesaler should know all the lending services before using some other potentially more expensive ways to raise capital such as selling equity.

Here are the ways a business can fund itself….

Factoring Invoices Financing: Selling your business’s invoices can raise cash fast.

PO Financing: Funding suppliers based on credit worthy purchase order (POs) from your customers. Often, a supplier will not release your goods based on credit so having a finance company pay the supplier can be a big benefit to cash flow and timeliness of delivery.

Inventory Financing: Los Angeles wholesalers are often preferred over Chinese supplier by large customers because they keep inventory in the US for quick replenishment and can absorb service issues. However, how does a small or mid-sized wholesaler finance their inventory. With PMF Bancorp’s inventory financing, your business could use its regularly sold inventory items as eligible collateral.

Equipment Financing: Los Angeles wholesalers are constantly picking up goods at the port. They often need vehicle financing or equipment financing. PMF Bancorp has programs to assist with these credit needs as well.

Are you Counting on the Chinese Economy for your Business?

Strategies for Short, Mid and Long term…

Funding on a factoring transaction can happen as quickly as 1 to 2 days whereas traditional bank loans take months to close

Funding on a factoring transaction can happen as quickly as 1 to 2 days whereas traditional bank loans take months to close

The global economies seem to be conducting a major shift that will continue over the next two to five years with China being a major force in the shift. The China that would have supposedly overtaken the US economy in 10 to 20 years is fading fast and can only be seen as a “Dream” best described the Chinese. With the Chinese GDP at 6.9% or the weakest in a quarter of a century, there are major slowdowns in all sectors. How is your business going to weather the storm?

Asia and the Middle Eastern countries are also reeling from the lower demand for their exported goods to China. Even the BRIC countries as well as Australia are also having major fallout an ocean away as their economies are heavily tied to China based on its previous years of heavy commodity orders. With China slowing and its debt mounting as well, it cannot afford to maintain its own economy in good standing. China is heavily dependent on its real-estate markets to support much of its GDP. The real-estate market in China is also the driver for commodity orders and other goods from abroad.

The Chinese economy is tightly tied to its real-estate market with much of its internal GDP directly related to this sector. Based on my conversations with a leading Chinese real-estate agency conducting business in Shenzhen and Shanghai, the real-estate markets are still strong in the major cities (for now); however, many of the tier two cities are seeing declines in property value due to oversupply and the slowing economy. China’s major banks have loan portfolios with more than 60% real-estate related loans as estimated by the Financial Times sources today. If there is a crash, the bad debt would be crushing and the Chinese government would not have the ability to easily re-capitalize the banks like they did in 2005 when they were preparing them for public offerings.

No other country in the world sets GDP goals so why does China? The reality is that the Chinese government knows that if they do not hit a certain goal in growth that their real worries would start to materialize by losing the “Social Stability”. Social Stability is not only a key term for keeping the peace that is often used in China, but it is also a mandate for the Chinese government’s rule. There is an unsaid pact that is well known in China even though not written anywhere between the people and the government. The informal pact can be best described as the people allow the government to rule as long as the jobs, good economy, reasonable housing and food are accessible…when this stops, the music stops, and it will not be pretty bad for the people left without a seat. The Chinese government knows this and that is why they are working so aggressively to protect currency, housing, stock and other markets, and setting GDP goals.

Knowing this information, the strategy that a US business should take is not one of panic, but to start making backup plans for alternative areas to produce goods. The writing has been on the wall for a long time that China’s labor, materials, and shipping costs have been increasing significantly. I am not recommending to change your production and suppliers right away, but there should be arrangements made in the short terms to have backup plans to maintain supply chains for products and to keep your trade financing, invoice factoring, and /or letters of credit in good standing. The long term strategy for China is hard to see with perfect clarity as it will also depend on your industry as there are many opportunities still left in China. The positive side is that many of China’s licenses are becoming easier to obtain as they continue to find new ways to maintain investment flows. The service industry in China and the online services are the next big wave and will continue to attract investment. Production of any kind due to wage inflationary pressures and limited labor force especially, in port cities will be hard to manage. Reviewing alternate countries such as Vietnam, Cambodia or even the United States may be a better option. The United States can be a very competitive choice with so many redevelopment credits and tax incentives from Federal Agencies and local governments. Producing in the United States also affords better quality control and lower shipping costs, and has to be very carefully evaluated.

PMF Bancorp has long specialized in financing trade and invoice factoring financing for companies in the US with $1 to $50 million in sales. Our head office is in Los Angeles, but we have offices in China and lending licenses in Asia as well so we are a rich source of real time information and would be happy to be helpful with your business finance related questions on conducting business with China.

5 Factors in Selecting the Right Lender without Wasting Precious Time…

Call us for the latest news on our business funding services.

Call us for the latest news on our business funding services.

Almost all businesses know when they need working capital or a loan, but unfortunately, there are only a few that know where to go to find money. This is not only a problem for your small businesses, but this is an issue that plagues larger companies with sales of $1, $5 and $20 million in annual sales as well. There are 5 factors that can immediately help you to greatly narrow down and select the right lender without wasting a lot of time….

  1. Be realistic:
    For example, if you are a small company and you have been in business less than 3 yrs with limited or no profitability, then a traditional bank is not going to be a good source for a loan or ar financing. If you are a sizable company (but still under $10 mill in sales), you need to have well kept financials… but even with ok performance, you are in what I call in “No Man’s Land” (this is an idiom that of course refers to both Women and Men for my intended use). “No Man’s Land” is where your loan size is too big for the easy to qualify small SBA loan, and too small for the traditional bankers who are mostly interested in loans greater than $4 million. Again, most of America falls into this “No Man’s Land” area so knowing non-traditional bank lending sources is a great way to make sure cash flow is maintained for growth. Knowing about alternative lending sources like factoring companies, a/r financing, invoice factoring, and /or inventory purchase order financing is really important. Most businesses in the US and abroad have little experience with alternative bank sources.
  2. Evaluate Your Collateral:
    Is you collateral real-estate, accounts receivable, inventory, WIP, Letters of Credit, or some other item? For example, if you have a combination of receivables and inventory, then it is recommended to have an Asset Based or ar financing Line which is ideal for providing flexibility during growth periods. If your company has been profitable for at least 3 yrs and has sales above $3 million at least, then an Asset Based Line is the way to go. If you have sales under $1 or $2 million and your credit is good, then an SBA is your best route if your company is not expecting large growth and is free from liens. If you have real-estate then there are many choices if there is at least 30-40% equity in the property. If your company is not profitable, but growing, then you need a non-traditional bank lender that can provide an alternative financing structure like factoring invoices, ar financing, accounts receivable factoring, inventory financing, etc. 1st PMF Bancorp has offered these types of non-traditional invoice factoring or inventory financing lines for years.
  3. Evaluate the Bank Closely:
    Many bankers will gladly welcome your small business to complete a loan application, but few loan applications make it to the finish line so let’s save some brain damage by selecting our bank accordingly. If you have a small community bank that you know or have a currently relationship in the form of a bank account, then they should be the most likely candidate to provide flexible terms to smaller businesses. They will not offer alternative lending like invoice factoring or purchase order financing; however, they will often have SBA programs. These SBA programs often require you to pledge all your collateral and provide a personal guarantee. A personal guarantee is typical but you should get assurances that if they make a loan that you can have your accounts receivable subordinated to another lender for additional working capital as you grow because 99% of banks cannot increase SBA loans significantly to meet a company’s sales when grow expands rapidly. 1st PMF Bancorp has been advising its clients to make sure their receivables are not permanently collateralized when SBA loans are made so PMF can provide additional working capital lines for growth. Finding a non-traditional bank like 1st PMF Bancorp that can provide the ar financing and a traditional lender is optimal for a small business’s growth as it gives the business a layer of longer term debt as well as the shorter term invoice financing / working capital debt that can be used to quickly expand for new customers or opportunities.
  4. Relationship verse Price:
    Everyone I speak to today has a lender pricing story where they brag about how they received a 1/2 percent less from their lender verses the going market rate; however, there is so much more than pricing to a loan or an ar financing line. For example, business loans or account receivable factoring at the lowest rates are great if you can get them, but if your borrowing base or covenants are so strict, then you might end up with the best priced loan that you are never able to use (or that the loan is so limited it does not really help). How good is a cheap $1 million line of credit where you can only draw down $100k? Also, getting a lender with 1/2% less in cost per yr sounds great, but if they don’t lend on inventory (or they are limited in this area), then how does this help your company grow? Remember, 1/2%,1%, or even 3% difference in pricing is really not material to many companies with 30-40% gross margins…just get the money to grow when you need it and then find a better source later. Don’t get stuck in an “Accountant’s World” where a dollar saved on interest is more meaningful than the big picture of growing your company, and increasing its enterprise value which only translates. Often a factoring company charges a little more, but offers a greatly expanded opportunity to increase sales and your company’s enterprise value which far outweighs immaterial extra interest costs you may spend in a year. Alternative bank lenders like 1st PMF Bancorp offers ar financing, invoices factoring and other lines of credit for growth. Start building a relationship that is valuable with the right lender now.
  5. Know Where Your Company is on the Food Chain:
    If your company is a larger firm, then larger lines with more flexibility are in order, but if you are a smaller company, then you need to look to smaller banks and lenders. If your priority is growing sales, then finding a commercial lender with limited credit covenants that can lend on receivables, inventory, and equipment like 1st PMF Bancorp so you are not capped by traditional bank limits and their regulations; however, if you are a smaller company with good credit that is looking for just a small loan, then an SBA Express Loan or SBA 7A loan are great if your needs are fixed and your business is not set to expand too quickly. Banks like Bank of America and small community banks can process SBAs quite well…just remember to ask them for a covenant in your loan that states if you are in good standing that your loan can be subordinated for future additional working capital needs, and then you will be in perfect shape.

Good Luck loan hunting!  For more updates on getting loans and finding the right lender follow us on twitter @pmfbancorp or PMF Bancorp on Facebook

China’s 3rd Plenum and President Xi’s New Powers

China is becoming more intriguing all the time because as it moves towards a stronger capitalistic economy, the government is apparently consolidating power in their President’s position.  This could be seen as a move for more centralized power, or alternatively an attempt at copying the US’s system and the President’s powers in the US.  It is no secret that the Chinese have modeled many of their systems, roads, infrastructure projects, etc. after the US.  The Chinese feel the US has been tremendously successful and there is no reason to copy any other (however, its only my opinion, but they may want to pass on copying our health care system and retirement system).

In simple terms, what did this Third (3rd) Plenum achieve… the top line statement given after the meeting was that China’s leadership would make more decisive movements toward a free market system, while maintaining a firm central state grip on the overall picture…not sure about you but I am confused.  However, in contrast to the past 2 Chinese President’s,  the 3rd Plenum did appear to have granted President Xi the following new powers:

1.  Control over Military, Foreign Affairs, Intelligence, and Economic Officials (not quite like the US Reserve model)

2. Creation of a National Security Council

3. Control over most of Domestic Security issues

4. Control Foreign Defense without Leadership approval

There are many similarities to the US…too many to comment on but this is probably a good thing as having a President with too little power can create more problems and frustrations so another ally that is aligned with our business interests can only be a good thing for the overall future for both countries and the world.

by Stephen Perl, MS, MBA

Author of “Dancing with the Dragon: Doing Business with China (2012)