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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.

The Cost of NOT Financing

Small business financing Los Angeles

Starting 2016 right!

Savvy business entrepreneurs often feel that financing adds additional cost and try to stay away from the need of financing. It is normal to think of financing as a cost center. However, the very successful entrepreneurs that grow their businesses beyond $10 million typically understand the value of financing. In fact, financing is often used to grow the infrastructure and improve the overall value of a business.

On the other hand, many businesses do not qualify for traditional bank financing because of the bank’s stringent lending requirements and the business principles? own credit standing. Even when the business qualifies, it often does not receive a large enough line of credit to properly grow. Alternative financing such as factoring purchase order of financing, trade financing are often available as short term working capital to businesses whether they qualify at a traditional bank or not. These short term working capital lines of credit for business with strong management and purchase orders from strong clients can make a large difference in the overall sales volume on a yearly basis and the profitability of the business.

PMF Bancorp has financed businesses for over 30 years as a commercial lender and we have seen entrepreneurs decline financing at the expense of their growth many times. PMF Bancorp has observed that there are large costs to not having the right financing in place as well as forgoing financing that albeit, may not be perfect but allows the business to continue its growth momentum.

The following are the cost of not financing when growth is available:

  1. Loss of sales
  2. Inability to service large customers
  3. Inability to take on new customers
  4. Inability to buy new inventory
  5. Inability to hire proper talent
  6. Loss of enterprise value

Small Business Financing

Some of these costs like not having enough working capital or declining financing are obvious but I would like to discuss the damage that number 6 causes which most entrepreneurs do not think about because they are caught up in day-to-day operations, working capital needs, and customer service issues. The dream of many business owners is to eventually build a business that has value and that can be sold for a large profit but few entrepreneurs with fast growing businesses take the time to build the infrastructure or think of the strategy that maximizes the enterprise value or shareholder value. This is often and exercise that corporate America takes because of the rigorous quarter-to-quarter reporting of Wall Street, but small businesses do not have this oversight or push for quarterly reporting. In fact smaller businesses often run emotionally and based on decisions that are made quickly.

Small owners of businesses should realize that the value of their business is often charged by the size of their sales volume even if profitability is not perfect. Businesses that are very profitable but small are of no use to buyers in most cases so understanding enterprise value can only come when the small business owner starts thinking like corporate America. It is important to achieve a critical mass in sales for smaller business so that it can make the cross over to a larger businesses. Only then will you be on the road to creating enterprise value for another buyer.

All I Want for Christmas is Cash Flow

All I Want for Christmas is Cash Flow

All I Want for Christmas is Cash Flow

As our children create their Christmas lists of toys they want the most, business owners are creating lists of their own. While they may also include some toys, perhaps Google Glass or the Apple Watch, a healthy and successful business is #1 on the list for most.

One of the best ways of measuring business health is cash flow. Healthy cash flow doesn’t necessarily mean making a lot of sales – although that helps. What you should be seeing when you look at your cash flow is more cash flowing in versus flowing out. This signifies healthy cash flow and solid working capital.

For many business owners, the holidays represent increased demand on working capital. Customers are buying more online and in stores as part of the holiday gift-giving tradition. This often means buying on credit versus paying with cash. While increased accounts receivable look good on the balance sheet, it does not equate to cash in hand. Instead, you are paying more for production, labor, inventory and related operational costs, while waiting to get paid. Hence, more cash is flowing out than coming in.

Fortunately, there are multiple ways a business owner can alleviate much of the stress that comes with this seasonal imbalance in cash flow.

  1. Have a Plan | The most efficient way is to have a plan. Spending decisions should always be made with caution in business. By planning strategically ahead of time for periods where you expect cash flow demands to be heavier, you can be better prepared to handle it financially.
  2. Negotiate with Suppliers | Negotiating supplier credit is another way to reduce cash flow demands. Making purchases on credit allows you to continue to meet customer demand, but with a lower immediate cost, freeing up cash flow.
  3. Leverage Accounts Receivables | Work with a factoring company such as PMF Bancorp. Instead of waiting for accounts receivable to be paid off, invoice factoring allows you to gain immediate access to that cash flow. Not only does this increase your working capital, but it also reduces the risk of unpaid invoices.

The holidays are time to celebrate, not worry about your business’s health. By planning ahead and having the right strategies in hand you can make it through the end of the year on a positive note and start the New Year off right.

Where did my Working Capital Go? -The secret to Growing Sales by 3x with no money…

End Cash Flow Problems With Invoice Financing

Grow your sales with 1st PMF Bancorp

Contrary to our first thoughts, “Where did my working capital go?” is often the question that a “Successful” business owner asks.  Most people look at a successful business and immediately think that the business must be loaded with cash.  Unfortunately, this is not the case for most midsize businesses.  Having a successful business is a wonderful thing, but it is also a cash hog in many cases.  Take a moment to think about businesses such as a wholesaler, a manufacture, or even a doctor’s office.  All these businesses can be very successful if managed correctly, but they also take working capital to run so your money tends to disappear very quickly when the businesses are in growth modes.  This article will describe how working capital problems frequently occur, the planning & preparation needed to manage it, and the financing & factoring invoice strategy as a solution…

So you get your tax return and there appears to be a nice profit (and a nice tax bill as well), but your bank account does not show any more money, and potentially could show less than the previous year.  So, where did your money go?

The simple answer is that your money is not gone as long as you have been profitable…  The two biggest areas that money or working capital tends to disappear is inventory and receivables.  Monitoring your balance sheet on a monthly basis is a great way to watch your inventory and invoice trends, but this is not always as easy as it sounds so let’s discuss some practical examples.

A successful entrepreneur that has achieved the next level of sales can sometimes best be described in cliché terms as a “victim of their own success.”  Let’s analyze a company’s need for working capital through the following examples.  A company that has sold goods with total annual sale of $1 million or less often can use their own resources, but when sales move to the next level such as $2 or $3 million per year, a whole new level of working capital and management is often needed.  Technically, if your customers are ordering $100k per month with 30 day terms, then sales of $1 million per year can be typically maintained with approximately $200k in working capital (a little more is needed for other items as well but these numbers can manually added).  In our example, $100k is used for current invoices and the other $100k is used for production of incoming goods (aka inventory) for the following month.  Now, if sales move to $2 million per year, then $400k in working capital would be needed.  And with $3 million in sales, one would need $600k in working capital at minimum.  Now, let’s say your customer(s) needed 60 or 90 day terms to pay their invoices, such as Walmart, Pepboys or other larger retailers.  This would double or triple the estimated working capital needed.  For example, selling Pepboys $3 million per year with 90 day terms would require approximately $1.8 million in working capital.  Therefore, growing sales from $1 to $3 million can be very painful if the right amount of working capital or financing is not in place.

Often, a small to medium size business does not have enough working capital to meet its fast growth needs, so how does it tackle this issue.  Factoring invoices can be a suitable solution to provide working capital for a fast growing business.  Factoring is the process of converting invoices into cash.  So based on our Pepboys example above, the $1.8 million working capital requirement to sell to Pepboys could be reduced by $1.5 million.  Therefore, the entrepreneur selling to Pepboys could reduce its need from $1.8 million to $350k.   There are other financing tools that commercial lenders that can provide such as purchase order financing that could further reduce the business’s working capital needs to approximately $100k.  The take home message of this story is that if the right commercial lender is used, then a company could grow to $3 million in sales using approximately same amount of working capital that a company doing $1 million in sales uses.  This is the efficiency and power of alternative financing not found at banks.  There are few specialty commercial lenders such as PMF Bancorp that offer all of the working capital tools like invoice factoring, purchase order financing, lines of credit, and credit protection which are all the tools needed to grow sales by 3x without needing more working capital.

PMF Bancorp/ How to Find the Right Money?

16320768_sHow to Raise the “Right Money” for Your Business….

I have seen my business clients raise money in many ways to grow their companies, but they have made many mistakes. Having been a commercial lender for 20 years and being focused on helping companies from typically $1-20 million in sales raise capital, I can provide special insight on how to raise the “Right” kind of money. Raising Equity is really a decision for the owner to make and is very subjective so let’s focus on raising money through various loan products common in the market.

Here is how to start finding the “Right Money” for your business….

Finding the “Right Money” from Banks. Having an A+ Credit score definitely helps, but does not guarantee you will raise the “Right” kind of money or loan. Many good companies look at SBA (or aka the Small Business Administration program) loans which are loan programs that many banks use. These loans are supposed to be easier to get because the US government is guaranteeing 90% of the loan; however, banks still underwrite these loans with their same strict criteria so unfortunately these loans are still tough to qualify for.

The SBA has a 7A loan product which is typically based on a business’s cash flow and the 504 program which is typically an SBA loan based on real-estate. So you are thinking, if I qualify for the loan, then I am set…right? No, wrong. It is important to get the “Right” money and the “Right” loan for your business. The SBA is designed for a small, relatively stable business that grows in small increments. If your business is set to grow quickly, you need to look at another financing product or the SBA loan could really damage your business. There is nothing worse than getting a loan that is too small for growth and ties all your assets up…this is what an SBA loan is. For the faster growing companies, we need to look for the “Right” money. Large lines of credit for larger companies have more flexibility, but these kind of loans are set aside for A+ credits where the company is doing at least $10-$20 million in sales per year.

Finding the “Right Money” from a Cash Advance Company or a Small Business Loan Lender

For a small business with limited credit, there are good alternatives to a traditional bank loan, but there are pitfalls here too. Merchant Cash Advance or Small Business Lenders that offer money overnight are good in the sense that you can get a quick sums of $50,000 to $200,000, but the impact on improving your cash flow can be very temporary. Merchant Cash Advance will lend against your credit card sales and typically ACH money out your account daily to repay the advances. The Small Business Lenders lend against your ongoing operations, but their repayment schedule really hurts cash flow as they take money every day out of your checking account via ACH. Loans that have heavy repayment schedules are typically not the “Right” money for a business because most businesses need a better cash flow solution, whether they know it or not.

Find the “Right Money” from Invoice Financing (aka Factoring invoices)

Small and large businesses can often benefit from a factoring company’s services if they have invoices and customers they sell to, with 30 or 60 day terms. Factoring your invoices is actually the process of selling your invoice for cash for a discount. The discount is typically much less expensive than the Merchant Card Advance or small business loan that the overnight lender’s charge. Raising the “Right” money from factoring accounts receivable are predicated on your business having accounts receivable. Large to small businesses use a/r financing (or aka factoring) because it provides large amounts of money right away and it does not hurt cash flow like the other business lenders such as Merchant Card Advance or Small Business loans.

The reason invoice financing works more smoothly is that you receive a high advance rate on your collateral and there is no ACHing your bank every day. Additionally, the factoring company is repaid only when your customer(s) pays so you don’t have to worry about scheduling a repayment to the factoring company for any of the money your business was advanced. Factoring is also a great way to raise cash without increasing your debt. Yes, it’s true that when you factor an invoice, there is no extra debt or loan booked … your factored advances can be shown as an increase to your cash without the liability to your balance sheet. Factoring with a flexible commercial lender can also bring many other lending products to a growing business like trade financing, inventory, PO finance, and more due to the maturity of the industry.

At the end of the day, I have learned as I have underwritten 1000s of companies that each business, even when in the same industry, have their own unique issues and solutions so taking your time to understand where to find the “Right Money” will pay huge dividends in the future. Just remember that Cash Flow is King and your goals is to build your enterprise value (aka sales & organization infrastructure)…if it costs a little on the way up, then you are in good company with the thousands of other successful entrepreneurs in the U.S. Best of Luck!

Stephen Perl, CEO/CFO
1st PMF Bancorp