Now that the politics of the Sequestration has settled in, the fall out will be felt by small business.  CFO.com, 2/28/13, Sequestration:  Growth Juice for Alternative Lenders?, David Rosenbaum states, “Small businesses face a looming working capital crisis”.

The case built by Mr. Rosenbaum in his article is partly based on the White House fact sheet that states “the automatic cuts triggered by a sequester would reduce (Small Business Administration) loan guarantees to small businesses by up to $902 million.”  With fewer SBA loan guarantees available, there will be fewer small business loans made by banks.  With fewer loans, cash is going to become increasingly hard to find and working capital needs will go unfulfilled.  

For small and mid-sized businesses (SMBs) to obtain loans from banks, their personal credit score is an integral part of the loan process.  Many small and mid-sized business owners have personally suffered through the down turn with short sales and/or foreclosures and more than a few have maxed out their credit cards.  Prior to the down turn, these actions were not very common for these business owners.  Today, it is all too prevalent and it has negatively effect their ability to land a business loan for their company.  For those who have marginal personal credit scores, an SBA loan guarantee would provide the banks with the comfort to move forward on a loan.  Without the SBA loan guarantee, these loans will likely disappear.

Even with a robust SBA loan guarantee program, since 2008 there has been a growing trend of alternative lenders.  This trend is a result of the reduction of loans made to small and mid-sized businesses.  The effect of the Sequestration will be to further fuel the growth of the alternative lending markets.  

Global Financial & Remarketing Services (GFRS) was created in 2008 for the purpose of serving these small and mid-sized businesses. GFRS has the capability to fund both bankable and non-bankable creditworthy opportunities.   GFRS has established its own equipment lease fund.   Now, as a funding source, we are able to peel back the layers of a credit request to uncover value and create a structure that will work to assist SMBs secure equipment financing. We know that not every less-than-perfect credit story may fit into the credit boxes used by banks and other financial institutions, but GFRS believes a company’s character is more than its credit rating.

Here are the new Section 179 Deduction limits for 2013:

2013 Deduction Limit = $500,000

2013 Limit on Capital Purchases = $2,000,000

2013 Bonus Depreciation = 50%

Please note the above limits are as of 1/1/2013, and are for tax year 2013. In addition, 2012′s old limit ($125,000 deduction) has now been raised to $500,000 as well. This means qualifying purchases you made in 2012 can now take advantage of the new, higher deduction limits.

Please Note:

Section 179 Deduction is available for most new and used capital equipment, and also includes certain software.

Bonus Depreciation can be taken on new equipment only (no used equipment, no software)

When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business has no taxable profit in the given tax year.

Set to take effect January 1, 2013, the 2.3% excise tax on certain medical devices, which was imposed as part of the Affordable Care Act (ACA), will pose significant challenges to the medical device industry. Although the tax will apply primarily to manufacturers and importers of medical devices, it’s safe to assume that the tax will have a far-reaching impact on the entire healthcare industry and consumers who need these devices.

Before the tax goes into effect, medical device companies need to understand which of their devices will be taxed, get and idea of how much they will owe, and deal with the compliance issues associated with the tax.

Which Devices Will Be Taxed?

The first order of business for medical device companies will be to determine if the manufacture and sale or import of a specific device is subject to this new excise tax. For planning purposes, the mindset should be that, indeed, the device will be subject to the tax. This is an important mindset because it gives companies time to budget and plan for this new cost, which more than likely will impact their pricing, salaries, and, ultimately, their bottom line.

The provisions of the excise tax on medical devices rely almost entirely on the definition of medical devices provided by Section 201(h) of the Federal Food, Drug, & Cosmetic Act to determine which devices are taxable. The tax will apply to devices that are intended for human use and will include dental instruments, dental equipment, and research-use-only devices.

There are three major categories of exemptions available:

• Devices to be further manufactured.
• Devices manufactured that are ultimately destined for export outside the United States.
• Devices intended to be sold at retail for use by the general public (referred to as the “retail exemption”).

The IRS has already provided a great deal of guidance around the retail exemption, including providing specific examples. Items such as eyeglasses and hearing aids would be exempt. It is important to keep in mind that items qualifying under the retail exemption will not necessarily be bound by FDA Class I, Class II, and Class III listings. There are many items qualifying for the retail exemption that could fall under any of the above classes, including certain bandages (Class I), pregnancy test kits (Class II), and denture adhesives (Class III).

The majority of small businesses reported that their business financials have remained stable or improved, with 44 percent reporting improved financial position compared to a year ago. However, small business perceptions regarding local economic conditions remain relatively unchanged.

“This quarter’s survey results suggest that business is generally holding steady for small businesses,” said Capital One president of retail and direct banking Jon Witter in a statement. “The current economic environment and overall business performance continue to hold their own or improve, and while hiring is far short of pre-recession levels, we’re seeing small businesses making plans to hire new employees in numbers that are among the highest we’ve seen in the past two years.”

Economic conditions for small businesses nationally are holding steady. Nearly half (45 percent) of the small businesses surveyed reported that economic conditions for their business are about the same, a 2 point increase from the previous quarter and one point lower than in the second quarter of 2011. More than a third (38 percent) of small businesses reported improving economic conditions, 1 point lower than last quarter and 6 points lower than the two-year high of 44 percent in the second quarter of last year.

While a majority of small businesses believe economic conditions are the same or improving, a sizable portion of small businesses (17 percent) believe economic conditions are getting worse. The majority of small businesses said they are in a better financial position than last year.

Forty-four percent of small businesses said their financial position is better than a year ago. This represents a 2 point increase from the previous quarter, and higher than those who say that their position is about the same (40 percent). Only 15 percent of small businesses said their financial position has gotten worse. This is 2 points lower than the previous quarter, but is still 6 points higher than the two-year low of 9 percent set in Q2 2011.

Small business perceptions of the economic outlook for business prospects over the next six months show that owners are mildly optimistic. The national business outlook is a measure of business prospects over the next six months on a scale of significantly worse (1) to significantly better (10). Even though they are faced with favorable economic conditions and better financial performance, small businesses rate the national business outlook at 6.0 out of 10 points, 0.4 points lower than the 6.4 from the previous quarter. Conversely, all business indicators are having a larger impact on business prospects than last quarter. Price margins are expected to have the most impact on business prospects, also having the largest change since last quarter (0.7-point increase).

Across the country, more small businesses are forecasting increases in hiring employees in the next six months. More than a third (37 percent) of small businesses plan to hire additional employees, a two-year high. This is two points higher than last year (Q2 2011) and 3 points higher than last quarter (Q1 2012). Difficulty in finding the right talent to fill available openings remains relatively consistent with last quarter. Sixteen percent of small businesses said they have job openings they are unable to fill, up 1 point from the previous quarter.

The majority of small businesses plan to keep spending, business development and investment consistent. Seven in ten of the country’s small businesses plan to keep spending at the same levels, the highest amount in the last two years. This is a nine-point increase from the previous quarter and five points higher than it was one year ago. This shift parallels the decrease of small businesses that plan to increase spending. Only 15 percent of small businesses forecast increasing business development and investment spending, 10 points lower than the previous quarter and 12 points lower than the two-year high of 27 percent one year ago.

In the second-quarter survey, a quarter of U.S. small businesses reported they have tried to obtain financing in the last 12 months. This figure, the highest it has been over the last nine quarters of survey data, is 2 points higher than the previous quarter and 9 points higher than one year ago in the second quarter of 2011.

Among businesses seeking to obtain financing over the last 12 months, the manufacturing and construction sectors represent the highest percentage of those seeking the extra support. More than two-fifths (42 percent) of small businesses report that obtaining financing is harder than it was six months ago, a decrease of 10 points from the previous quarter. Only 9 percent of small businesses reported that obtaining financing is easier than it was six months ago, a decrease of 5 points from the previous quarter.

The outlook for equipment financing in the venture-backed start-up segment looks favorable over the next year. Independent lessors and equipment lenders continue to play a special role, bringing creative solutions that allow lessees to acquire the equipment, working capital, and growth capital that they need.

The following is an excerpt of an article authored by GFR Services CEO, Jim Jenks.  It appeared in the May/June edition of NEFA’s NewsLine magazine:

Four years ago, I was given a $200,000 financing opportunity on some medical equipment.  The lessee was five years old and had lost money for most of those years.  They were just turning the corner.  I solicited nearly 20 funding resources to get this opportunity approved:  Banks said that they like medical equipment, financial institutions said they like difficult credits.  Surprisingly, not one source would provide an approval in any way, shape or form.  As the downturn gained momentum, that is when I decided to start Global Financial.  We did end up funding the transaction ourselves.  To date, the company has made everyone of their payments.

Download and read the full article here. 

“The July filings continue to reflect the effects of sustained low interest rates and weak consumer spending,” said ABI Executive Director Samuel J. Gerdano. “We are still on pace for perhaps the lowest total new bankruptcies since before the financial crisis in 2008.”

July bankruptcy filings also represented slight decreases from June as total filings were down 2 percent from June’s total of 99,086. Commercial filings decreased 3 percent in July from the June total of 4,645, and noncommercial filings decreased 2 percent from the June total of 94,441.

Total commercial chapter 11 filings saw slight increases in July. Overall, the July commercial chapter 11 filing total of 599 represented a 1 percent increase from July 2011’s total of 596, and a 10 percent increase over the June 2012 total of 543.

The average nationwide per capita bankruptcy-filing rate for the first seven calendar months of 2012 (Jan. 1-July 31) decreased to 4.04 (total filings per 1,000 per population) from the 4.08 rate for the first six months of the year, and the average total filings per day in July 2012 was 3,131, a 12 percent decrease from the 3,554 total daily filings in July 2011.

States with the highest per capita filing rate (total filings per 1,000 population) through the first seven months of 2012 were:

1. Nevada (7.00)
2. Tennessee (6.97)
3. Georgia (6.46)
4. Utah (6.06)
5. Alabama (5.89)

ABI has partnered with Epiq Systems, Inc. in order to provide the most current bankruptcy filing data for analysts, researchers and members of the news media. Epiq Systems is a leading provider of managed technology for the global legal profession.
ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 13,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org.

When asked about the outlook for the future, MCI survey respondent Russell D. Nelson, President, Farm Credit Leasing Services Corporation, said, “Continued volatility/uncertainty at home and abroad may inhibit planned/needed capital expenditures during the next six months, but low interest rates and tax incentives will enable our industry to generate modest increases in asset volume and profitability through the remainder of 2012.”  He added, “Improving credit quality, stable earnings, and demand for innovative/creative lease and loan products should position our industry for improved growth in 2013 and beyond.”
July 2012 Survey Results:

The overall MCI-EFI is 51.5, up from the June index of 48.5.

• When asked to assess their business conditions over the next four months, 6.5% of executives responding said they believe business conditions will improve over the next four months, down from 8.1% in June. 71% of respondents believe business conditions will remain the same over the next four months, up from 64.9% in June. 22.6% believe business conditions will worsen, down from 27% the previous month.
• 12.9% of survey respondents believe demand for leases and loans to fund capital expenditures (capex) will increase over the next four months, an increase from 8.1% in June. 71% believe demand will “remain the same” during the same four-month time period, up from 64.9% the previous month. 16.1% believe demand will decline, down from 27% in June.
• 19.4% of executives expect more access to capital to fund equipment acquisitions over the next four months, up from 10.8% in June. 77.4% of survey respondents indicate they expect the “same” access to capital to fund business, a decrease from 86.5% the previous month. 3.2% survey respondents expect “less” access to capital, up from 2.7% who expected less access in June.
• When asked, 35.5% of the executives reported they expect to hire more employees over the next four months, up from 24.3% in June. 64.5% expect no change in headcount over the next four months, virtually unchanged from 64.9% last month, while no one expects fewer employees, down from 10.8% in June.
• 71% of the leadership evaluates the current U.S. economy as “fair,” down from 78.4% last month. 29% rate it as “poor,” up from 21.6% in June.
• 9.7% of survey respondents believe that U.S. economic conditions will get “better” over the next six months, up from 8.1% in June. 71% of survey respondents indicate they believe the U.S. economy will “stay the same” over the next six months, up from 64.9% in June. 19.4% believe economic conditions in the U.S. will worsen over the next six months, a decrease from 27% who believed so last month.
• In July, 25.8% of respondents indicate they believe their company will increase spending on business development activities during the next six months, down from 29.7% in June. 71% believe there will be “no change” in business development spending, up slightly from 70.3% last month, and 3.2% believe there will be a decrease in spending, up from no one who believed so last month.

July 2012 MCI Survey Comments from Industry Executive Leadership: Depending on the market segment they represent, executives have differing points of view on the current and future outlook for the industry.

Independent, Micro Ticket
“The long view is bullish for our industry.  In the short run, however, I believe we will see sluggish demand unless and until the consumer side of our economy feels more secure about their financial well being and starts to spend more freely.” Paul Menzel, President and CEO, Financial Pacific Leasing, LLC

Independent, Small Ticket
“Businesses are showing some reluctance to expand or invest in new capital equipment due to the extremely slow economic recovery. It seems like we are in a wait-and-see mode.” David T. Schaefer, President, Orion First Financial, LLC
Bank, Middle Ticket

“For 2012, I would expect the industry to finish slightly above 2011 levels. However, long-term prosperity for equipment finance and the economy in general will hinge upon the outcome of the November election.” Anonymous

Survey results are posted on the Foundation website, http://www.leasefoundation.org/IndRsrcs/MCI/, included in the Foundation Forecast newsletter and included in press releases. Survey respondent demographics and additional information about the MCI are also available at the link above.

One of the lingering negative effects of the recession on companies has been the decreased availability of access to capital.  A January 2012 study of small and mid-sized business owners reported that 49 percent of survey respondents said lack of bank loans restricted growth opportunities.

For small and medium-sized equipment manufacturers and vendors, the credit crunch has squeezed them from both ends.  Their access to capital to acquire equipment has been reduced, and at the same time their customers have less access to capital to buy their products.

As a result, many equipment manufacturers and vendors have learned the benefits of equipment financing as a way to acquire equipment for themselves.  However, many don’t realize that there are options available that can help them expand their markets to businesses that do not have cash readily available or have traditionally used bank lines of credit.  By establishing a captive finance capability, you can open up a valuable opportunity to grow your business through one of the following financing models:

• Developing financing capabilities in-house
• Creating a formal partnership with one or more finance sources
• Creating an informal partnership with multiple finance sources for one-off transactions.

Following are five key reasons to consider offering financing to your customers.

1.  It’s a Growing Trend A study by the Equipment Leasing & Finance Foundation shows that among manufacturers who offer financing for their equipment, approximately 30 percent of all equipment sales are financed by the manufacturer or its finance partner.  That rate is increasing each year as the financing division plays a more important role in the organization’s overall strategy. According to the same study, of all manufacturers who offer a financing option to their customers, 67 percent expect equipment financing will increase as a percentage of their manufacturer sales.  The growth of this trend is largely due to the benefits derived from offering financing and its business impact.

2. It Builds Customer Relationships Building customer relationships and improving customer retention are key benefits of establishing a finance capability.  It allows you to build rapport and trust in addressing customers’ financial issues, as well as answering their questions about the equipment.  It also extends the relationship into future transactions since it provides opportunities to offer advice and assistance with end-of-lease/financing term decisions such as whether to purchase new or existing equipment.  In addition to developing follow-up selling opportunities, it helps build long-term relationships for repeat business.

3.  It Provides Incremental Income Providing a financing option can provide benefits including facilitating equipment sales and generating additional revenue. In addition to an increase in interest income, additional revenue may be generated if the equipment can be sold for more than its remaining book value at the end of lease.

4. It Creates Value Offering financing creates value for your customers by saving them money, getting them better terms and helping them stay current.  One way they save money is through the manufacturer’s knowledge of the equipment and ability to resell pre-owned equipment.  This may enable the manufacturer to take additional risks on the residual value which lowers the customer’s monthly payment.

Customers may get better terms when they purchase equipment that might be otherwise delayed because of lack of financing elsewhere, and the manufacturer is willing to provide better financing terms.  Additionally, value is created when a customer takes advantage of leasing/financing since it eliminates the risk of them owning equipment that is technologically obsolete.

5.  Industry Expertise is Available to Assist You An important consideration about offering financing is that there is plenty of assistance that can help you determine and establish the captive financing option that’s appropriate for your business.   The non-profit Equipment Leasing and Finance Association has an online Manufacturer & Vendor Resource Center which contains strategic, legal, financial and operational topics manufacturers should consider when developing or enhancing their finance capability.  The website also contains searchable databases to find financing partners and service providers to assist you.

Increasing knowledge of captive financing among small and medium-sized manufacturers and vendors will prepare the way to greater growth opportunities for their businesses and the economy. _________________________________________________________________ William G. Sutton, CAE, is President and CEO of the Equipment Leasing and Finance Association, the trade association that represents companies in the $628 billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods.  ELFA has been equipping business for success for more than 50 years.  For more information, please visit www.ELFAOnline.org.

Sutton Addresses Arizona Association