Greenwich Associates highly regarded Market Pulse Study on SME credit availability reports that two-thirds of small businesses and 55% of middle market companies indicate that banks are failing to meet the needs of creditworthy companies. Half of the 221 small businesses participating in the latest Greenwich Market Pulse Study say it is harder to secure credit today than it was at this time last year including roughly 33% of businesses that say it is much harder to obtain loans today.
The Small Business Lending Fund (SBLF) a $30 billion program established by the Treasury Department to encourage Community Banks to step up lending to SMEs is still trying to get some traction in the marketplace. The SBLF injects capital into community banks that demonstrate an active SME lending program will take another quarter to determine its effectiveness.
Community Banks are still transitioning its small business lending focus from an over dependency on real estate development. SMEs seeking loans for capital improvements, fund operations or business expansion must provide lenders some added assurances about the financial health of the business.
SMEs can take steps to improve their credit standing and get approvals from lenders for loans and expansion for credit. SMEs must demonstrate they have an excellent understanding of the condition of their firm’s financial health, what they must do to improve profitability and how they will use the credit extended by lenders to produce an acceptable return.
Credit Redi helps SME’s demonstrate the condition of the firms financial health, the risks and opportunities that SMEs must address to improve the firms financial health and identify the initiatives that need to be funded to achieve desired profitability and growth. These are the keys bankers look for on applications for loans. Being able to demonstrate credit worthiness with an industry standard rating methodology determines weather a lender will grant you a loan, what rates you will pay and how much lending institutions will lend.
Since 2002, Sum2 has been helping SME’s manage risk and seize opportunities to grow and prosper under the most competitive market conditions. Credit Redit is the latest addition to Sum2’s series of SME risk management products.
Risk: credit, SME, capital allocation, credit rating
The recession and credit crunch have shifted financial risk from banks to small and midsized businesses (SME) that often must extend credit to customers to make a sale. When companies extend credit, in effect making unsecured loans, they’re acting like banks but without the credit management tools and experience of a banker.
Credit Redi is designed for small businesses to quickly spot customer credit risk. Small businesses typically don’t have access to information that provides transparency about customer credit worthiness. Credit Redi is a credit risk management tool for small and mid-sized businesses. It only takes one or two bad receivables to damage an SME’s financial health. Market conditions quickly change and its critical to have some type of business insight into the businesses SME’s work with.
Credit Redi is also an excellent tool to determine the financial health of critical suppliers. A key supplier going out of business could have disastrous consequences for SMEs. Credit Redi monitors the financial health of existing suppliers and help managers make wiser choices in supply chain and business partner decisions.
Risk: SME, credit risk, supply chain, partnerships, customers, receivables
What a difference a year makes. A year ago the banks came crawling to Washington begging for a massive capital infusion to avoid an Armageddon of the global financial system. They sent out an urgent SOS for a $750 billion life preserver of tax payers money to keep the banking system liquid. Our country’s chief bursar Hank Paulson, designed a craft that would help the banks remain afloat. Into the market maelstrom Mr. Paulson launched the USS TARP as the vehicle to save our distressed ship of state. The TARP would prove itself to be our arc of national economic salvation. The success of the TARP has allowed the banks to generate profits in one of the most prolific turnarounds since Rocky Balboa’s heartbreaking split decision loss to Apollo Creed. Some of the banks have repaid the TARP loans to the Fed. Now as Christmas approaches and this incredible year closes bankers have visions of sugar plum fairies dancing in their heads as they dream about how they will spend this years bonus payments based on record breaking profitability. President Obama wants the banks to show some love and return the favor by sharing more of their balance sheets by lending money to small and mid-size enterprises (SME).
Yesterday President Obama held a banking summit in Washington DC. Mr. Obama wanted to use the occasion to shame the “fat cat bankers” to expand their lending activities to SMEs. A few of the bigger cats were no shows. They got fogged in at Kennedy Airport. They called in to attend the summit by phone. Clearly shame was not the correct motivational devise to encourage the bankers to begin lending to SMEs. Perhaps the President should have appealed to the bankers sense of patriotism; because now is the time that all good bankers must come to the aid of their country. Failing that, perhaps Mr. Obama should make a business case that SME lending is good for profits. A vibrant SME sector is a powerful driver for wealth creation and economic recovery. A beneficial and perhaps unintended consequence of this endeavor is the economic security and political stability of the nation. These are the worthy concerns of all true patriots and form a common ground where bankers and government can engage the issues that undermine our national security.
The President had a full agenda to cover with the bank executives. Executive compensation, residential mortgage defaults, TARP repayment plans, bank capitalization and small business lending were some of the key topics. Mr. Obama was intent on chastising the reprobate bankers about their penny pinching credit policies toward small businesses. Mr. Obama conveyed to bankers that the country was still confronted with major economic problems. Now that the banks capital base has been stabilized with Treasury supplied funding they must get some skin into the game and belly up to the bar by making more loans to SMEs.
According to the FDIC, lending by U.S. banks fell by 2.8 percent in the third quarter. This is the largest drop since 1984 and the fifth consecutive quarter in which banks have reduced lending. The decline in lending is a serious barrier to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations. The TARP was intended to spur new lending and the FDIC observed that the largest recipients of aid were responsible for a disproportionate share of the decline in lending. FDIC Chairman Sheila C. Bair stated, “We need to see banks making more loans to their business customers.”
The withdrawal of $210 billion in credit from the market is a major impediment for economic growth. The trend to delever credit exposures is a consequence of the credit bubble and is a sign of prudent management of credit risk. But the reduction of lending activity impedes economic activity and poses barriers to SME capital formation. If the third quarter reduction in credit withdrawal were annualized the amount of capital removed from the credit markets is about 7% of GDP. This coupled with the declining business revenues due to recession creates a huge headwind for SMEs. It is believed that 14% of SMEs are in distress and without expanded access to credit, defaults and bankruptcies will continue to rise. Massive business failures by SMEs shrinks market opportunities for banks and threatens their financial health and long term sustainability.
The number one reason why financial institutions turn down a SME for business loans is due to risk assessment. A bank will look at a number of factors to determine how likely a business will or will not be able to return the money it has borrowed.
SME business managers must conduct a thorough risk assessment if it wishes to attract loan capital from banks. Uncovering the risks and opportunities associated with products and markets, business functions, macroeconomic risks and understanding the critical success factors and measurements that create competitive advantage are cornerstones of effective risk management. Bankers need assurances that managers understand the market dynamics and risk factors present in their business and how they will be managed to repay credit providers. Bankers need confidence that managers have identified the key initiatives that maintain profitability. Bankers will gladly extend credit to SMEs that can validate that credit capital is being deployed effectively by astute managers. Bankers will approve loans when they are confident that SME managers are making prudent capital allocation decisions that are based on a diligent risk/reward assessment.
Sum2 offers products that combine qualitative risk assessment applications with Z-Score quantitative metrics to assess the risk profile and financial health of SMEs. The Profit|Optimizer calibrates qualitative and quantitative risk scoring tools; placing a powerful business management tool into the hands of SME managers. SME managers can demonstrate to bankers that their requests for credit capital is based on a thorough risk assessment and opportunity discovery exercise and will be effective stewards of loan capital.
On a macro level SME managers must vastly improve their risk management and corporate governance cultures to attract the credit capital of banks. Using programs like the Profit|Optimizer, SME’s can position themselves to participate in credit markets with the full faith of friendly bankers. SME lending is a critical pillar to a sustained economic recovery and stability of our banking system. Now is the time for all bankers to come to the aid of their country by opening up credit channels to SMEs to restore economic growth and the wealth of our nation.
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Risk: banking, credit, SME
BearingPoints Chapter 11 filing represents a watershed type event.
The filing by the global consulting firm BearingPoint puts it on life support or at the very least in an intensive care unit. BearingPoint the bulge bracket consulting firm that was spun off from KPMG due to regulatory mandates concerning the separation of accounting and advisory businesses is in serious trouble. It has been struggling under a mountain of debt and the bankruptcy filing will give the firm protection from creditors while it seeks to reorganize its business.
BearingPoint’s filing is an interesting metaphor about the deflation of intellectual capital. Ideas, creativity, knowledge, productivity and innovation are some of the words that that we closely associate with intellectual capital. Once we may have even thought this form of capital to be immune from the vicissitudes of the banality of markets. I surmise that the recent business cycle exposes that idea as based more in our narcissistic prejudices then the cold objective realities of efficient markets. As we witnessed radical capitalism’s continued drive of extreme rationalization through monetization we discovered the price of anything but seriously lost sight of the value of everything.
During the 1990’s I remember always being impressed and astonished by the reports of the rising productivity of the American workforce. Year in year out the rising productivity was the proud boast and confirmation of American managerial brilliance. But today that claim looks spurious at best. Rethinking this proclamation may reveal this was accomplished not by brilliant management innovation but by outsourcing operational functions to subsistence based economies; and some artful balance sheet wizardry that aligned business performance ratios to maximize shareholder returns; particularly senior managers whose stock options were critical design considerations as to how those ratios were engineered. Indeed if productivity is a proxy for innovation, the productivity of American capitalism was outpacing the most aggressive predictions of Moore’s Law. True technology contributed to massive gains in productivity but in many ways was an economic rent seeking agent that enabled a flawed economy to sustain itself through over leveraged economic and misdirected intellectual capital.
Today we are confronted with the evaporation of massive social wealth that the IMF estimates to be almost $4.1 trillion in the financial service sector. I suspect a good portion of this value was carried on the balance sheet as good will. And anyone that has been living close the plant earth the past couple of years can attest to how the good will of corporations has been severely discounted. Perhaps this wealth never really existed and as the saying goes “you can’t lose what you never had”. We can take comfort in that and perhaps we can look on the bemused folly of central governments eagerly trying to stimulate economic growth to levels of our recent unsustainable past. I must admit that my sympathies and conviction stand with the Keynesian but I am beginning to wonder if they are chasing the long tails of ghostly economic shadows cast by AIG’s worthless CDS franchise. Once considered a revolutionary innovation cooked up by the finest minds of the capital markets financial engineers are now perplexing conundrums wrapped in a riddle and remain valuation Level Three FAS 157 mysteries.
To be sure intellectual capital deflation is a huge subject. I must also admit that this blogger lacks the time, skill and brain power to elucidate and articulate the numerous nuances and depth this assertion deserves and requires. I guess we could sum it up in a sound bite like the “dumbing down of America” but I believe that merely addresses the race to the bottom marketers skillfully cultivated to gobble up a greater portion of that ever fickle and fluid market share pie. In a way the deflation we speak of turns this dumbing down on its head and now claims the purveyors of fine ideas and clever tactics devised by the corporate marketing geniuses who were able to enrich themselves by conceiving the brilliant plans to convince us to buy so they can sell as much useless junk to as many people as possible.
The monetization of intellectual capital by incorporated consultants are increasingly becoming inefficient. New technologies that are enablers of strategic thinking has large consultancies disappearing into the computing cloud. Large bull pens of gray matter are inefficient as innovation in small firms are more efficient purveyors of thinking large to solve small problems or thinking small to solve larger problems. The large corporate dinosaurs that protected bloated bureaucracies enmeshed in group think stasis increasing showed an inability to be agents of innovation. They boldly proclaimed best practices to justify and position themselves in the executive office but now that the large corporations have been decapitalized their value creation mantras dissipated as markets capitalization fell.
In appears that the bulge bracket firms viability were dependent on knowledge transfer initiatives to underdeveloped economies to support outsourcing; and rent seeking business models dependent on regulatory mandates of Sarbanes Oxley, GBLA, COBIT, EURO conversions, Basel II, Y2K, PATRIOT ACT, HIPAA, FISMA etc etc. Their business models profited from significant business drivers of the past two decades the reallocation of capital to emerging markets and the guarantee of market protection due to governmental regulatory mandates. In both instances value creation from the deployment of intellectual capital proved to be unsustainable.
Consider the financial services industry and hedge funds. Hedge funds claim to offer uncorrelated investment products but most of the hedge funds performance fell in lock step with the market index averages. Investors pay premiums to participate in absolute return strategies offered by hedge funds. Fund managers make the claim of absolute returns based on their superior insights that their intellectual capital confers on their investment strategies. Last year that claim was demolished to devastating effect.
Newspaper publishers are also experiencing a decline in the portfolio value of their intellectual capital. But many believe that it is more of a question of their antiquated business model and once they figure out how to Googlize their business model to sufficiently monetize its intellectual capital shareholders will once again be rewarded with an appreciation in its investment and the true value of their intellectual capital will be realized.
The markets are dramatically changing. Today the question is not so much about ideas and strategy its a question of execution. Just as in the recent past it was about raising capital and acquiring assets now its about making informed capital allocation decisions and liquidity. Its true you need the target to shoot at but you also need munitions, a good scope with adjusted cross hairs and a gun. The value proposition of consultants is quickly becoming marginalized.
Its a poor business model. It scales poorly, its racked with inefficiencies, its built on protected markets and knowledge segregation. Now that those barriers are falling and more and more MBAs are out of work the value of this form of intellectual capital continues to fall.
Consultants all to often are beholden to their process biases. They find it difficult to get out of the box and routinely ask their engagements to climb into the box with them. That said it is an absolute necessity that business redefines its business model to address current market realities. It needs to do so with dispassionate dispatch and it needs to create a unique value proposition that differentiates the brand and adds identifiable alpha in an expanded value delivery chain.
Its a big challenge that many professional services firms need to confront. Our firm went through that transition 6 years ago. We went from a strategic sound practices consulting firm to a product creation and marketing firm dedicated to the commercial application of sound practices. For Sum2 creating value was a very different value proposition then delivering value. The need to build equity in our business was our principal concern. Building and marketing tangible product value is how you create a sustainable business model.
Corporations are becoming disenthralled of their self perceived cleverness. Many believe that major investments in applied intelligence create a culture of insularity that hedges all risks and builds enterprise value. In the past it allowed executives to hide behind a wall of opaqueness. They bought the best and brightest minds from our esteemed business schools convinced that this treasure of intellectual capital would protect them. They believed the digital blips of risk models to be sparkling Rosetta Stones containing the secrets that unlock the mysteries of effective risk management, value creation and business sustainability. The codified results of these algorithmic exercises are revered as holy Dead Sea Scrolls that offers the protection of an supernatural mojo. This is the thinking of a bankrupt brain trust.
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Risk: Group Think, sustainable business model, value creation
Sum2 is please to report the final results of the IRS Audit Risk Survey for Fund Managers. Sum2 has commissioned the survey to determine financial services industry awareness and readiness for IRS audit risk factors. The survey sought to determine industry awareness and readiness to address IRS Industry Focus Issue (IFI) risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.
Due to the pressing revenue requirements of the United States Treasury and the need to raise funds by recognizing new sources of taxable revenue; hedge funds, private equity firms, CTA’s and other corporations that utilize elaborate corporate structures, engage in sophisticated transactions and recognize uncommon forms of revenue, losses and tax credits will increasingly fall under the considered focus of the IRS.
Since 2007 the IRS began to transition its organizational posture from a benign customer service resource to a more activist posture that is intent on assuring compliance and enforcement of US tax laws. Specifically the IRS has invested in its Large and Mid-Size Business Division (LMSB) to enhance its expertise and resources to more effectively address the tax audit challenges that the complexity and sophistication of investment management complexes present. The IRS has developed its industry issue competencies within its LMSB Division. It has developed a focused organizational structure that assigns issue ownership to specific executives and issue management teams. This vertical expertise is further enhanced with issue specialists to deepen the agencies competency capital and industry issue coordinators that lends administrative and agency management efficiency by ranking and coordinating responses to specific industry issues. IRS is building up its portfolio of skills and industry expertise to address the sophisticated agility of hedge fund industry tax professionals.
To better focus the resources of the agency the IRS has developed a Three Tiered Industry Focus Issues (IFI). Tier I issues are deemed most worthy of indepth examinations and any fund management company with exposure in these areas need to exercise more diligence in its preparation and response. Tier I issues are ranked by the IRS as being of high strategic importance when opening an audit examination. This is followed by Tier II and Tier III focus issues that include examination issues ranked according to strategic tax compliance risk and significance to the market vertical. Clearly the IRS is investing significant organizational and human capital to address complex tax issues of the industry. The IRS is making a significant institutional investment to discover potentially lucrative tax revenue streams that will help to address the massive budget deficits of the federal government.
The survey was open to fund management executives, corporate treasury, tax managers and industry service providers. CPAs, tax attorneys, compliance professions, administrators, custodians and prime brokers were also invited to participate in the study. The survey was viewed by 478 people. The survey was completed by 43% of participants who began the survey.
Geographical breakdown of the survey participants were as follows:
- North America 73%
- Europe 21%
- Asia 6%
The survey asked nine questions. The questions asked participants about their awareness of IFI that pertain to their fund or fund management practice and potential mitigation actions that they are considering to address audit risk.
The survey posed the following questions:
- Are you aware of the Industry Focus Issues (IFI) the IRS has developed to determine a fund managers audit risk profile?
- Are you aware of the organizational changes the IRS has made and how it may effect your firms response during an audit?
- Are you aware of the Three IFI Tiers the IRS has developed to assess a funds audit risk profile?
- Are you aware of how the Three IFI Tiers may affect your audit risk exposures?
- Have you conducted any special planning sessions with internal staff to prepare for IFI audit risk exposures?
- Has your outside auditor or tax attorney notified you of the potential impact of IFI risk?
- Have you held any special planning meetings with your outside auditors or tax attorneys to mitigate IFI risk?
- Have you had meetings with your prime brokers, custodians and administrators to address the information requirements of IFI risk?
- Have you or do you plan to communicate the potential impact of IFI risk exposures to fund partners and investors?
Survey highlights included:
- 21% of survey participants were aware of IFI
- 7% of survey respondents planned to implement specific strategies to address IFI audit risk
- 6% of survey respondents have received action alerts from CPA’s and tax attorney’s concerning IFI audit risk
- 26% of survey respondents plan to alert fund investors to potential impact of IFI audit risk
Sum2 believes that survey results indicate extremely low awareness of IFI audit risk. Considering the recent trauma of the credit crisis, sensational fraud events and the devastating impact of last years adverse market conditions; fund managers and industry service providers must remain vigilant to mitigate this emerging risk factor. These market developments and the prevailing political climate surrounding the financial services sector will bring the industry under heightened scrutiny by tax authorities and regulatory agencies. Unregulated hedge funds may be immune from some regulatory issues but added compliance and disclosure discipline may be imposed by significant counter-parties, such as prime brokers and custodians that are regulated institutions.
Market and regulatory developments has clearly raised the tax compliance and regulatory risk factors for hedge funds and other fund managers. Issues concerning FAS 157 security valuation, partnership domiciles and structure, fund liquidation and restructuring and complex transactions has increased the audit risk profile for the industry. Significant tax liabilities, penalties and expenses can be incurred if this risk factor is not met with well a well considered risk management program.
In response to this industry threat, Sum2 has developed an IRS Audit Risk Program (IARP) that prepares fund management CFO’s and industry service tax professionals to ascertain, manage and mitigate its IRS risk exposures within the Three IFI Tiers.
The IARP provides a threat scoring methodology to ascertain risk levels for each IFI risk factor and aggregates overall IFI Tier exposures. The IARP uses a scoring methodology to determine level of preparedness to meet each of the 36 audit risk factors. The IARP helps managers to outline mitigation actions required to address audit risk factors and determine potential exposures of each risk. The IARP calculates expenses associated with mitigation initiatives and assigns mitigation responsibility to staff members or service providers.
The IARP links users to issue specific IRS resources, forms and documentation that will help you determine an IFI risk relevancy and the resources you need to address it. The IARP will prove a valuable resource to help you manage your response to a tax audit. It will also prove itself to be a critical tool to coordinate and align internal and external resources to expeditiously manage and close protracted audit engagements, arbitration or litigation events.
The IARP product is a vertical application of Sum2’s Profit|Optimizer product series. The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and spot opportunities to maintain profitability and sustainable growth.
The IARP product is available for down load on Amazon.com.
The product can also be purchased with a PayPal account: Sum2 e-commerce
Sum2 wishes to thank all who anonymously took part in the survey.
If you have any questions or would like to order an IARP please contact Sum2, LLC at 973.287.7535 or by email at email@example.com.
Sum2 has commissioned a survey to determine financial services industry awareness and readiness for IRS audit risk factors. The survey seeks to determine industry awareness of IRS Industry Focus Issue risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.
The survey is open to fund management executives, corporate treasury, tax managers and industry service providers. CPAs, tax attorneys, compliance professions, administrators, custodians and prime brokers are welcome to take the study.
The study’s purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IRS Industry Focus Issue risk.
The goal of the survey is to help Sum2 better respond to the critical needs of fund managers and the alternative investment management industry by improving our just released IRS Audit Risk Program (IARP) for fund managers.
Product information on IARP can be accessed here.
If you are unaware of the issues raised in this study, IRS background information can be found here.
Sum2 has also posted a series of alerts on the subject on our Credit Redi blog which can be found here.
This survey asks ten questions. The questions concern participants awareness about IFI that pertain to their fund or fund management practice. The survey seeks to determine overall industry risk awareness, awareness of potential risk exposure to IFI risk factors and any mitigation initiatives managers may plan to address IFI risk factors. It should take no more then 5 minutes to complete the questionnaire.
Participation in this study is completely voluntary. There are no foreseeable risks associated with this project. If participants feel uncomfortable answering any questions, they can withdraw from the survey at any point. It is very important for us to learn your opinions.
Survey responses will be strictly confidential and data from this research will be reported only in the aggregate. Respondent data will be coded and will remain confidential. If you have questions at any time about the survey or the procedures, you may contact Sum2, LLC at 973.287.7535 or by email at firstname.lastname@example.org.
Thank you for your time and support.
Please start with the survey by clicking here: IRS Audit Risk Study
Credit Redi is a company sponsored blog of Sum2. The purpose of Credit Redi is to help small and mid-size enterprises (SMEs) protect and improve their ability to access credit and equity financing from banks , shareholders and other funding sources.
Sum2 is dedicated to the commercial application of sound practices. Our sound practices program and products address:
- corporate governance
- risk management
- stakeholder communications
- regulatory compliance
Sum2 believes that all enterprises enhance their equity value by implementing a sound practice program. Sound practices are principal value drivers for corporate and product brands. Practitioners are awarded with healthy profit margins, attraction of high end clientele, enterprise risk mitigation and premium equity valuation.
Sum2 looks forward to helping you address the pressing challenges of the current business cycle.
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