Integrate Your Finances to Navigate a Tough Economy

Business owners may feel at sea in today’s murky economic waters. They wonder which way to navigate. How temporary is this lull? Are the winds of recovery picking up? During this down time, take a look at banking services. They should be helping you make the most of your business, not costing you in lost time and hidden fees.

As credit has tightened, some business owners are finding their bank has piled on restrictions that may have nothing to do with the business owner’s credit worthiness and everything to do with rapidly changing conditions at the bank.

But there are alternatives to traditional banking. In particular, banking services are now offered by brokerages, whose array of integrated business services can meet multiple needs. Furthermore, brokerages’ financial advisors and business specialists can help business owners take advantage of these services to improve their bottom line.

Cash Management: Pulling Parts Together
Why choose a financial institution based on account fees and loan interest rates when the most expensive factor may be in managing "idle" cash balances? These are perhaps the most under-performing asset on your business’s balance sheet. No matter how briefly it sits in your account, cash can be invested. Yet many business checking accounts at a traditional bank can't earn a return on this money because the law prohibits interest-bearing business checking accounts. Nevertheless, your checking balances aren’t idle. The financial institution is investing that money and using the earnings on balances, particularly the "compensating balances" commonly required, to pay for services. When the earnings on your balance exceed the charges you incur, the financial institution retains the difference.

You could invest your working capital and offset the banking service costs by depositing some of your money in a business money market account. But that would be inefficient. First, you can write only a few checks a month on the account. Second, for ongoing disbursements, you need to move money manually from money market to checking accounts, and you could wind up over-funding the checking account, where your money is not earning dividends.

It’s also inefficient if your line of credit is separate from your business checking account and you must manually transfer funds between them. Many businesses use more of their line of credit than they really need and thus incur extra interest expense.

The Central Asset Account
A central asset account can eliminate these inefficiencies. As a single, comprehensive system that integrates checking, investing and financing, it streamlines cash management while saving time and even increasing your return compared to separate accounts.

If you have no outstanding loan balance, incoming funds can be automatically swept into a money market fund, where they earn dividends. If you do have an outstanding loan, incoming funds can go first to repay your loan balance--and thereby save you future interest expense--while the excess is swept into the money market fund. And you can invest available cash in a broad variety of appropriate investment instruments.
Your money keeps working as long as it is in your account. Outgoing funds first come from your “un-invested” cash balances and then from the money market fund. Your money can earn dividends until checks or other disbursements clear your account. If your money market fund is depleted or reaches the minimum balance you set, your line of credit is automatically accessed. You can also sell securities from your account to meet your working capital needs.

The Relationship Manager
A central asset account that integrates your business financial services is only part of the picture. To best harness smart financial strategies to your business needs, relationship managers or corporate financial advisors are key.

A good corporate financial advisor asks open-ended questions and listens attentively to your responses before providing any financial solutions. He or she should also be able to find solutions or direct you to the right person or place for them. One of the recurrent questions is whether and when to apply for credit. The earlier a business owner speaks to a financial provider about credit, the better.

A financial advisor helps business owners examine their entire financial picture, beginning with sound cash management in a central asset account, as well as different options for financing and investing. For solutions, the financial advisor can call upon a team of business specialists who can help explore options not only in cash management, but also commercial lines of credit and special kinds of financing, such as term loans, equipment leasing, and revolving credit facilities.

Let me give you an example of how a corporate financial advisor can add value for a business client. A distribution company in Atlanta, tired of transfer charges and the expenses associated with three separate accounts, had been shopping for a new bank deal for about a year. Then they tried the central asset account from Merrill Lynch Business Financial Services (MLBFS), the Working Capital Management Account® service (WCMA® account), and realized about $30,000 in the first year from saved charges and lost interest. The business owner also uses the WCMA account to pay his foreign suppliers, and Merrill Lynch performs the foreign exchange and wires funds to suppliers’ bank accounts.

We offer the business owner a single relationship manager/point of contact who thoroughly understands the business and what’s important to the individual business owner, someone who can get the job done.

To Your Credit
Business owners sometimes use credit cards to finance short-term business needs. Although convenient for routine purchases, credit cards are less satisfactory when used for financing. A line of credit offers distinct advantages and, if combined with a debit card in a central asset account, it can offer the timesaving convenience of purchasing with a card at a lower cost.

One obvious advantage is that the interest rate is typically much lower than that of a credit card, which could be as much as 10% higher or more. A line of credit also helps to strengthen your credit history. When vendors and suppliers consider what credit limits to offer you, they’ll likely extend more favorable credit terms if they see you have a line of credit at a financial institution.

When the line is tied to a central asset account, incoming funds in excess of the loan balance are swept into a money market fund. So you borrow only when necessary to minimize interest expense.

Revolving Credit
Some specialized credit facilities can save you even more. MLBFS has developed the WCMA Reducing RevolverSM loan, which combines term financing with the characteristics of a revolving-credit facility. For the term of the loan, the line of credit is decreased each month by the amount that would be payable if it were a conventional term loan with a standard amortization.

The borrower thereby continually reduces interest expense as the principal is reduced through the account. Plus, there is no penalty for prepayment, and the borrower can reuse any funds up to the amortized amount on a revolving basis without re-applying for credit.

We applied this lending solution for an Atlanta retailer with multiple locations, who had historically financed growth through traditional term loans with local banks. The company had heavy seasonal cash flow, building large cash balances for several months each year before purchasing inventory for the following season. This left them holding both cash and debt balances at the same time for several months. The WCMA Reducing Revolver provided the business owner the same time commitment of a traditional term loan. However, it allowed the business to prepay its loan commitment with its seasonal cash and then re-borrow those amounts that had been prepaid by simply writing a
check--or moving funds on-line when they were actually needed later in the year. This solution enabled the business to capitalize on its seasonal buildup of cash and dramatically reduce its interest expense.

Securities-Based Lending
Working with business specialists, a relationship manager can also help you determine how well your business can support the cost of a loan. Preparing a good cash-flow analysis is an essential first step. You should also consider other assets as sources for credit. Finance specialists can work with an owner to determine what credit facility best suits his or her needs. One option is securities-based lending, which uses the owner’s investment portfolio to back financing.

Sometimes good business opportunities arise suddenly and you need capital to seize them and grow; but you may not have enough on hand. Liquidating some assets may provide the needed funds, although certain circumstances or restrictions can make this inadvisable.

In these cases, securities-based financing may be an alternative. Instead of liquidating your assets, consider borrowing against eligible securities you own (stocks, bonds, mutual funds, Treasuries, or certificates of deposit), allowing your portfolio to remain intact. Your interest rate may be lower than for credit card or unsecured loans and your interest expense, if the loan is for business purposes, may be tax-deductible.

As you consider this option, however, it is important to remember that securities-based loans are subject to market influences. A decrease in the market value of the pledges of securities and other investment assets may require you to deposit additional funds or liquidate some or all of the pledged securities and assets. Securities-based loans and using stock as collateral involve a high degree of risk, so you should read the loan agreement carefully to understand your obligations. Market conditions can magnify any potential for loss. If the market turns downward, you will be required to deposit additional securities and/or cash in the account, and the securities in the account may be sold to meet margin/maintenance calls. Further, the brokerage can sell your securities without contacting you. Some or all of the securities pledged as collateral may be sold at prices higher than what they cost you to acquire them initially. If that happens, you may suffer adverse tax consequences, so you should consult a tax advisor to understand fully the tax implications associated with pledging securities as loan collateral.

With these cautions in mind, consider that securities-based financing allows you to borrow up to a certain percentage of the current market value of your eligible securities. (For example, 50% to 95%. Percentages vary with lenders and programs.) To activate your loan, you deposit the assets you are borrowing against in a pledge account, generally held at your lending institution. Any dividends, interest or capital appreciation continues to accrue for your benefit. You may even be able to buy and sell securities in your account as long as your portfolio retains the required collateral value.
Choose securities-based lending that suits your needs, from fixed- or variable-interest rates, term financing, or a line of credit. Some lenders offer flexible repayment schedules, including interest-only payments (with principal due at maturity) or interest-and-principal payments.

Leasing
In giving your company a competitive edge, sometimes leasing instead of purchasing equipment makes more sense. Leasing doesn’t disrupt your cash flow the way purchasing equipment or other forms of financing can. Terms of a typical lease arrangement can range from 12 to 60 months or more—generally, the longer the term, the lower your monthly lease payment. (By locking in fixed payments now, you avoid the risk of future inflation.) Besides offering cash management and potential tax benefits, it can help keep your equipment from becoming obsolete and your company from losing competitive ground.

And with monthly payments, you can use your equipment immediately for a fraction of its purchase price. You may be able to include “soft” costs such as shipping, installation, software and training in your lease agreement, apportioning these costs equally over the term of the lease, so you more accurately forecast your cash flow.
The Central Key

Efficiency and cost savings are essential to business success in these times when your pricing power has been reduced. A central asset account that combines all your financial service needs, with the assistance of a relationship manager and a team of business specialists, can make the difference in your charting a successful course through a tough economy.

Linda Stirling, a Merrill Lynch first vice president, certified financial manager, has been with Merrill Lynch for 15 years. She is based in San Diego, Calif., managing individual and corporate clients with minimum portfolios of $1 million. Ms. Stirling earned a Bachelor’s degree in Science and Business at Occidental College in Los Angeles and a Graduate degree from the University of Southern California