How to Help Business Clients Unlock Wealth
April 29th, 2014
by Bob Veres
When you work with small business owners, you typically find that they’re not holding a diversified mix of assets. “It is not uncommon for many entrepreneurial businesses to have all their wealth locked up in their company,” says Gordon Tunstall, of Tunstall Consulting in Tampa, FL. “And even if the company is prosperous and growing, the bank’s credit requirements are such that they require a certain debt-to-net-worth ratio. So the business owner keeps leaving the profits in the business, because the banks require it. It exposes the entrepreneur to a lot of business and personal risk, if a disruptive competitor comes along, if there’s a lawsuit or the market dries up.”
According to a recent interview, Corsair Capital's founder Jay Petschek did not plan to be a hedge fund manager. After holding various roles on Wall Street, Petschek decided to launch the fund in January 1991, when his family and friends were asking him to buy equities on their behalf. He realized the best structure for Read More
Advisors are also asked to help a business owner fund new sources of financing when he or she encounters an opportunity that could dramatically increase the size of the business.
Is there a way to help your business clients diversify their holdings, take some risk off the table and create a side investment portfolio that will sustain them if their business runs into trouble? Is there a way you can help your clients find capital when they need it most?
Banking by the hour
The traditional solutions – a venture capitalist or a bank – come with drawbacks. The venture capitalist is going to want equity and control in return for financing, and is typically looking for a 50% annualized rate of return on the money. The bank, meanwhile, wants to see collateral greater than the amount of the loan, which won’t be there for the expansion opportunity and may not be available if the line of credit is already fully-tapped.
Is there a third option? Tunstall has been described as a “banker by the hour;” his job is to provide customized searches for financing on a fee basis rather than working for a commission. This is very different from the traditional loan brokers, who take 10% of the deal if they raise equity or a 2% commission on the loans they bring in – creating conflicts of interest that favor the funding organization.
“We’re paid by the hour,” Tunstall says. “It doesn’t matter what the size of the transaction is; we would sit down with the client, see what kind of financial statements and information he has, and put together a package to send to the lenders.”
This is where the situation gets interesting. Tunstall says that in the past five years, two new sources of capital have emerged to provide funding for business owners. “Ever since 2008, when the banks started to clam up on extending credit, all the smart guys on Wall Street developed two types of funds,” says Tunstall. “The first kind, which we call a non-regulated bank or nonbank bank, loans to the company and takes a first lien on assets. These companies don’t fall under a bank’s regulatory supervision because they get their money from pension funds, insurance companies, hedge funds, endowments and/or family offices.”
Full article via: advisorperspectives