Like many small Northeast Ohio businesses, the Rutledge Group has been cutting costs to make it through the economic recession. After years of double-digit growth, the independent insurance company has seen business fall by 7 percent so far this year as customers drop their auto, home or health insurance policies to save precious dollars.
“When customers stop paying their insurance premiums, it impacts our cash flow,” says Deborah Rutledge, chief operating officer. “That forced us to get more capital to take care of immediate cash-flow needs over the next few months until our cost-cutting measures kicked in.”
The recession means businesses are facing the same cash-flow dilemma: When customers take more than 60 days to pay invoices or stop paying altogether, companies struggle to pay bills, including their lines of credit. And today, banks are quick to cut off credit when payments are missed.
“I feel for companies that are losing their credit lines and don’t have the ability to recover from that,” says Steve Millard, president and executive director of the Council of Smaller Enterprises. “But if they have a good, functioning business model, they should be able to access capital. They just have to look for it differently.”
Indeed, there are many financing options that can help your company through the tough economy. It just takes some strategic, creative thinking.
Think small. Rutledge, who has run the company for eight years with her husband, Darwin, became concerned about securing new capital.
She heard the ominous news that banks, particularly large financial institutions hit hard by the subprime mortgage crisis, were tightening credit, slowing down loans and increasing interest rates and fees.
The Rutledge Group holds a credit line with one of those large banks. But instead of asking the bank for more credit to cover her cash-flow loss, she approached a small credit union.
“We’re pleased we had this option, because it’s more cost effective for our business, and it gives us more flexibility,” she says.
Many of Northeast Ohio’s small community banks and credit unions — those with assets of less than $1 billion — are aggressively pursuing new opportunities with consumers and businesses.
“We are in a very good condition as far as our ability to lend,” says William Valerian, chairman and CEO of Liberty Bank NA. In fact, the bank expects to double its lending from last year. “Our business is relatively simple: We only lend based on the deposits we take in. We don’t loan any more than $3.4 million to any one customer, and that customer is usually a local business that is growing and has the cash flow to repay their loan.”
Nevertheless, there’s a widely held public perception that all banks are no longer loaning money, says Daniel Klimas, CEO of Lorain-based LNB Bancorp Inc.
“We’re trying to counter that perception with our advertising campaign to let consumers and businesses know we have money to lend,” says Klimas.
From December 2007 to December 2008, LNB’s portfolio loans increased by $50 million to $803.6 million while total deposits jumped by $64 million to $921 million. Klimas has seen an increase of inquiries from companies that have traditionally done their banking with larger institutions.
“I think business owners are finding a higher comfort level with community banks,” he says. “They know our decisions are made locally, and we have the time to learn and understand their business.”
Factor it in. Accounts receivable financing, or factoring, may be an option for some companies to produce cash flow. For example, Liquid Capital Group of Northeast Ohio will give a cash advance based on 75 to 80 percent of the value of the company’s monthly accounts receivable. The remaining 20 to 25 percent is placed in a reserve fund to cover contingencies.
“When Liquid Capital collects that invoice, the money in reserves is returned to the company,” says John Doucette, president.
Liquid Capital’s cut for the service ranges from 3 to 5 percent, based on the value of the invoices. If the transaction is large and your customers pay promptly, the cut is closer to 3 percent.
“The advantage of our service is that we can collect on the bills more quickly because we do it consistently and professionally,” Doucette says. “The down side is the stigma attached to factoring. Some customers may think your company is in trouble because you are using a factoring service. In most cases that isn’t true, and we help our customers overcome that issue if it comes up.”
Mezzanine musings. For midsize companies that generate annual revenues of $10 million to $100 million, mezzanine funding may be a good option when the bank says no, says Peter Constantino, a partner for C&P Advisors’ management advisory service.
Typically, mezzanine financing is offered by a group of private investors. This type of loan requires no collateral, which means the interest rates can be as high as 20 percent to 30 percent.
Although mezzanine lenders usually don’t get involved in the management of a company, they reserve the right to convert their interest to an equity or ownership position if the company fails to repay the loan.
“This type of financing is expensive because there is more risk involved, but for some companies, this could be an option to secure needed operating capital to help them navigate through these troubling times,” Constantino says.
Consider Chapter 11. Filing a Chapter 11 bankruptcy is a financing option if your company can no longer pay its debt. Chapter 11 will temporarily hold off your creditors, giving you more time to restructure your business, negotiate your debt with creditors and create a new plan to emerge from bankruptcy and stay in business. It can be an expensive process, but it may be worth the pain if your company has a lot of assets to protect.
“We are seeing very good companies going into Chapter 11 bankruptcy, so it won’t have the stigma in 2009 as it may have had in prior years,” says Nicholas George, partner of Buckingham Doolittle & Burroughs. “Yes, Chapter 11 will impact your company’s credit score, but it gives you the opportunity to stay in business during incredibly difficult times."
ACCOUNTING PROFILES
Dan Zittnan
Managing partner
Grant Thornton LLP
The Halle Building
1228 Euclid Ave., Suite 800
Cleveland, OH 44115
(216) 858-3720
dan.zittnan@gt.com
Dan is the managing partner of Grant Thornton’s Cleveland office. Previously, he served as the professional standards partner for the firm’s Chicago office, as well as the Midwest region. Dan’s 25-plus years of experience includes significant interaction with both privately and publicly held entrepreneurial, high-growth companies in the manufacturing, distribution and professional services industries.
Jeff Robinson
Audit partner
Grant Thornton LLP
The Halle Building
1228 Euclid Ave., Suite 800
Cleveland, OH 44115
(216) 858-3659
jeffrey.robinson@gt.com
Jeff is an audit partner in Grant Thornton’s Cleveland Office and has more than 16 years of experience serving companies in the manufacturing, distribution and technology industries. He works with both public and privately held middle-market companies and has experience with mergers and acquisitions.
John Rose, CPA
Partner, employee benefit plan practice
Ciuni & Panichi Inc.
25201 Chagrin Blvd., Suite 200
Cleveland, OH 44122
(216) 831-7171
jrose@cp-advisors.com
John oversees the employee benefit plan practice and works with for-profit and not-for-profit clients. He provides benefit plan services to various plans sponsored by both closely and publicly held companies. He is a member of various organizations, including the American Institute of Certified Public Accountants Employee Benefits Quality Center.
Darice Sebera-Ensman, CPA, CFE
Principal
Howard, Wershbale & Co.
23240 Chagrin Blvd, Suite 700
Cleveland, OH 44122-5450
(216) 378-7292
sebera-ensman@hwco.com
Darcy is director of real estate services. She is accomplished in the fields of real estate, partnerships, closely held businesses and U.S. Housing and Urban Development projects. Sebera-Ensman also is a certified fraud examiner and has been a member of the practice since 1980.
Barry E. Thoman
Vice president
Meaden & Moore
One GOJO Plaza, Suite 275
Akron, OH 44311
(330) 535-5149
bthoman@meadenmoore.com
Barry brings extensive experience in technical accounting and auditing to every engagement. He has spent several years working with closely held and public companies in various industries. Barry has significant knowledge of corporate tax matters and has defended clients to the IRS and state tax examiners. He also has expertise with acquisitions and divestures of businesses.
Kenneth J. Douglas, CPA
Audit partner
Bruner-Cox LLP
AES Campus Building
388 S. Main St., Suite 403
Akron, OH 44311
(330) 376-0100
ken.douglas@brunercox.com
Ken had 26 years of Big Four experience before joining Bruner-Cox LLP and is currently the leader of the Bruner-Cox’s hospital and pension plan audit practices. He has developed specific expertise in Department of Labor employee benefit issues, financial accounting and process improvement studies.
Lawrence J. Evans, CPA
Director of state and local tax services
Meaden & Moore
1100 Superior Ave., Suite 1100
Cleveland, OH 44114
(216) 241-3272
levans@meadenmoore.com
Larry specializes in state and local taxation. He has extensive experience with income, sales, property and employment taxes, credits and incentives. He helps companies with multistate tax planning and compliance, audits, appeals, risk management and process improvement. Larry’s proactive service approach results in significant prospective and retrospective value creation.
Christopher M. Felice
Shareholder
Maloney + Novotny LLC
1111 Superior Ave., Suite 700
Cleveland, OH 44114
(216) 344-5249
cfelice@maloneynovotny.com
Chris is the chairperson of the firm’s commercial and industrial group, servicing manufacturing, distribution and professional service organizations. He has extensive experience with a wide spectrum of accounting services including attest services, mergers and acquisitions and corporate and individual taxation. Chris is considered a valued business adviser.
Timothy Novotny
Shareholder
Maloney + Novotny LLC
1111 Superior Ave., Suite 700
Cleveland, OH 44114
(216) 344-5226
tnovotny@maloneynovotny.com
Tim is shareholder-in-charge of the not-for-profit services group with special expertise serving educational institutions. His sharp business acumen and specialized industry experience translate into practical and profitable results. Tim is a frequent guest lecturer, presenting numerous seminars related to a variety of educational and not-for-profit issues locally and nationally.
Jim Komos, CPA
Partner, real estate services group
Ciuni & Panichi Inc.
25201 Chagrin Blvd., Suite 200
Cleveland, OH 44122
(216) 831-7171
jkomos@cp-advisors.com
Jim has extensive experience in the real estate industry and its unique rules and planning opportunities for property owners. He has spoken frequently on tax planning and related issues at events sponsored by real estate industry organizations and has had several articles published in real estate industry publications.
Danielle B. Gisondo, CPA
Principal
Skoda Minotti
6685 Beta Drive
Mayfield Village, OH 44143
(440) 449-6800
dgisondo@skodaminotti.com
Dani works with a variety of small and mid-sized companies performing audits, reviews, compilations and other business advisory services. In addition, she is the principal-in-charge of Skoda Minotti’s employee benefit plan audit department and works on numerous defined benefit, contribution, health and welfare plan audits.
James J. Carnovale
Principal
Howard, Wershbale & Co.
23240 Chagrin Blvd., Suite 700
Cleveland, OH 44122-5450
(216) 378-7250
carnovale@hwco.com
Jim’s practice concentrates on accounting and auditing issues, internal control, compliance, financial and operational consulting and tax planning for family-owned, closely held businesses and nonprofit organizations. In addition, Jim coordinates the provision of the firm’s accounting and auditing services to its health care clients.
Robin Baum, CPA
Managing partner
Zinner & Co. LLP
29125 Chagrin Blvd.
Cleveland, OH 44122
(216) 831-0733
rbaum@zinnerco.com
With more than 20 years of experience, Robin works with family-owned businesses and has extensive knowledge of financial statement and tax preparation, financial analysis for startups, business profitability, succession planning and trust taxation. She is a member of the American Institute of CPAs and the Ohio Society of CPAs.
David Janosek
Director
CBIZ MHM LLC
6050 Oak Tree Blvd. S., Suite 500
Cleveland, OH 44131
(330) 670-7235
djanosek@cbiz.com
Dave’s expertise and strategic tax and business advice is a valuable asset to private equity funds, individuals and closely held businesses. He focuses on delivering services to diverse industry groups such as construction, real estate, automotive, hospitality, wholesale trade, professional services and manufacturing.
John Troyer, CPA
Partner, construction services group
Ciuni & Panichi Inc.
25201 Chagrin Blvd., Suite 200
Cleveland, OH 44122
(216) 831-7171
jtroyer@cp-advisors.com
John is Ciuni & Panichi’s partner-in-charge of the audit and accounting services department and leads the construction services group. He understands the challenges construction companies face in a business that is both highly competitive and project driven. John has many years experience helping construction companies maximize their profits.
Christopher G. Sivak, CPA
Partner
Skoda Minotti
3875 Embassy Parkway, Suite 200
Fairlawn, OH 44333
(330) 668-1100
csivak@skodaminotti.com
Chris is a partner with Skoda Minotti's Akron office. He has more than 20 years of experience specializing in corporate and partnership taxation, mergers and acquisitions and practices primarily in the real estate, construction and manufacturing industries. Chris serves on the School of Accountancy Advisory Board at the University of Akron.