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The Truth about China's Economy

(and what we can learn about it to benefit our own businesses)

Phoenix, Arizona Team



We are constantly bombarded with stories about China's economy and how it is inevitable that it will pass the United States. In some cases, China claimed it has already supplanted the U.S. as the largest economy. Is that actually true?


The intent of this article is to show that you have to look closely at everything you hear and see. This is particularly true in business when buying or selling a business, financing a business, or pitching a new customer. Every writer or presenter has an angle and a slant. So does this article… our slant is that you have to investigate everything. Does that statement make sense? Does it add up?


Case in point China. We recently looked at the GDP rankings of the U.S. and China as listed in Wikipedia. China is listed as number one with projected GDP for 2016 of $20.8 trillion. By way of comparison, the U.S. was listed at $18.5 trillion. Well that's it then, China is already the largest economy, right? That's the end of the discussion, right? Nope, that doesn't make sense to us. We recalled a headline when China had just barely passed Japan as the number two economy in the world. It was a recent event. So we looked it up, and China just barely out-performed Japan in 2010 by topping $5 trillion dollars in GDP to Japan's $4.95 trillion GDP. This was confirmed by official communiques from the Chinese government. Many economists, including the Federal Reserve, claim that China inflates its estimates of its annual growth rate, but those writers obviously have an agenda. They claim that China's official growth rate that since 2010 has been between 7% and 10% is grossly inflated. For this article, we are going to use the higher official estimate given by China and apply it to the growth of China from 2010 to 2016 and see if the official GDP number as listed in Wikipedia holds up.


If we apply the highest average growth rate claimed by China (10%) to their official GDP at the end of 2010 over each of the 6 years since we arrive at $8.857 trillion dollars! Less than 1/2 the claimed number! To reach the amount now shown for China, the Chinese economy would have had to grow at an astounding 27% on an average annualized basis over 6 straight years. No economy has ever done that, and the Chinese government does not even claim that rate. Additionally, everyone claims that the Chinese overstate their growth rate, so the number could even be lower than the number we calculated.


What does this mean? It really means that, contrary to conventional wisdom, the U.S. economy is still the largest in the world and will be for some considerable time to come, even at the low growth rates our economy is now showing. You may have an advantage over your competitors who are all chasing the Chinese market and trying to break in; however, you can focus where they are not: the world's largest most vibrant, safest economy/market in the world - that of the United States of America!


What did the exercise teach us? It teaches us to look closely at what we see, and ask questions: Does that make sense? Where else can I get outside confirmation? It is these kinds of questions that Belmont's due diligence team asks when we perform our work for our clients making acquisitions or for the funds we represent. We take this into account when preparing business valuations as well. That's your competitive advantage whether you are seeking to acquire a company or are a fund looking to invest or lend money.



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What Wrong With Brick and Mortar Retail?

Phoenix, Arizona Team



Look around your neighborhood; are there vacant stores, shopping centers and malls? How much time do you or your family spend at the mall compared to even 5 years ago? We are betting it's much, much less. This fact is killing retail and blighting neighborhoods as these centers become dark.


Many cities are building mixed use properties where you can live, work, eat and shop. Many people see this as a great way to live, work close to home, walk to work, grab a bite to eat, pick up a few items, and return home. The problem is, the retail portion of these complexes remain empty or partially empty for years. Why is that?


Many people believe the answer is obvious: online shopping is and has killed local brick-and-mortar retail. But has it, and is it inevitable? Do you still want someplace to go or have something to do on your time off? Are all retailers dying? Does it help to try on some clothes, maybe get your clothes fitted and make a decision as you look in the mirror? The answers are yes and you do want choices of things to do, and the right kind of retail still does that well. Bass Pro Shops do very well, for example. Why is that, and what have the other retailers missed?


What does Bass Pro Shops do well? In our opinion, they make going to their store an experience, and that is what seems to be missing from most local retail stores now. Many brick and mortar retailers have missed the boat; is there really much of a difference between Neiman Marcus, Nordstrom, Bloomingdales, or Macy's? Not much. Sure the service varies, and some consumers favor one over the other, but they all look pretty much the same and offer similar products in a similar way. Here's where they've really missed the mark: they've trimmed their in-store inventories, making the consumers who are in the store wanting instant gratification have to have it shipped to them instead. So the consumer is left to think "maybe next time I'll just shop online if I have to wait anyway!"


What should retailers do? They need to build on their strengths; consumers want to enjoy the EXPERIENCE of shopping, and they want someplace to go that is fun and they want instant gratification. Retailers need to re-invent themselves to excite consumers, and they need to be creative.


Most big department stores have big advantages they aren't utilizing, and instead are trying to catch up on technology in the same manner as online retailers. Instead, they need to cater to their strengths.


Here are some ideas:


- Create an experience. Have a fashion show every day, featuring a different department.  Build a runway right in the middle of the store. Now consumers would have something to see, and you have a new way to build daily motivation and excitement for the consumers to return to your store often.


- Give exceptional service. Offer drinks and snacks to those enjoying the fashion show. Give every consumer an iPad that they would use while watching the fashion show. That would allow customers to mark the items they like and the iPad would respond with size suggestions and accessories. A sales person would set up a room so the consumer could try on the clothes directly after the show.


- Most importantly: stock all sizes! Bring instant gratification back into the store!


Online retails can not compete with the instant gratification that brick and mortar stores offer. Make your store a destination, not a place that people "stop by real quick". The more excitement you can build to bring traffic to your store, the more opportunities for sales (and cash flow) you will have.


It is this type of innovative and creative thinking that Belmont applies to our clients' businesses. Contact us and find out how we can help your business!


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Where Are All The Jobs?

Phoenix, Arizona Team



Where are all the jobs? In this Presidential Election Cycle, I'm sure you have all been hearing all of the candidates talk about the need to create jobs. Yet you hear the government statistics about how low the unemployment rate is and if you have a good job you might be wondering what all the "noise" is about. Well, we at Belmont were curious too so we began to turn our analytical eye onto job creation and the results were enlightening.


Did you know that in 45 of the 50 states, the largest employer in the state was either the state sponsored university system with a healthcare component, or Walmart? Of the remaining 5 states, one state's biggest employer was the airport (Alaska), two were large grocery store chains, and in only two was it a private employer building something! Those two states are Washington, with Boeing being the largest employer, and Massachusetts, with United Technologies being the largest employer. In the case on United Technologies, much has been said during the debates that they are moving their manufacturing to Mexico. That leaves only one.


Why is this so enlightening? To us, it points out vividly why the economy is so sluggish. It means that the largest employers are affiliated with government sponsored programs, or low paying Walmart jobs relate to selling us all something. None of these jobs are directly involved with the kind of free enterprise that built this country or that will create and build products that we can sell abroad at a profit and reduce our balance of trade deficit.


It wasn't so long ago that the US had huge trade surpluses and our largest employers in each state were companies like GM, US Steel, Caterpillar, Boeing, Carrier (now United Technologies), Honeywell, Grumman (who build our lunar landing module and the F-14 tomcat fighter plane), McDonnell Douglas, Esso (once Exxon-Mobil), Allied Signal, and Eastman Kodak. They all provided products people wanted, that we exported, and they created high paying jobs.


Make no mistake about it, the trade deficit matters. Think of the US as your household: how long can you continue to spend money outside of your household before you have personal economic collapse?


We need to create high paying jobs that produce goods and services that we can export for the benefit of America.


Interestingly the large technology companies that we value so highly, an area that America is the world leader in, are not doing that. Let's look at what they are working on: Google is working on artificial intelligence that will run driverless cars and trucks (not many jobs here, as robots will build the products- essentially robots building robots and all the truck drivers and auto drivers will lose their jobs)! Recently, Google unveiled a robot that can actually walk like a man, over rough terrain and in snow and can pick themselves up when they fall! Amazing technology certainly, but all these innovations will do is replace jobs; no need for restaurant or hotel workers either, because your robot can do it!


Amazon wants to replace UPS with computer controlled drones! They recently received licenses from the FAA to continue testing.


Think how far reaching this technology is and how invasive it is. Even those low paying Walmart and grocery store jobs aren't safe from these technologies. Nor are most of the hospital jobs too!


A country without jobs. An unemployed population? It can be either a Nirvana allowing people to innovate and create or be an unsupportable burden! The difference is the balance of trade! If the US has a massive balance of trade surplus, it can massively reduce its debt and support a population engaged in innovative and enjoyable pursuits- like the pursuit of happiness. Without it, these far-reaching changes will destroy us.


We need to create world class products and services that we build in America and export overseas. Those are the industries in which we need to create jobs now, but another social media platform to gain more marketing insight into what consumers are buying in order to sell product to an increasingly-impoverished American worker is not what we need!


So, in this election cycle focus on the candidate you feel will bring jobs home and will negotiate great trade deals for us. All of America's other ills can be cured through a trade surplus, and reduction of taxes to encourage growth and bring investment dollars home. Then we have the financial where-with-all to tackle anything.


Clarify your investing focus; we suggest that you invest in growing companies that create products and services that people want, that we can build here and export abroad. This will create great jobs and help our balance of trade.


At Belmont, while we are industry agnostic, we favor the types of companies we are discussing here. We have innovative financing techniques and relationships that can help smaller growing companies when most banks and other traditional sources won't lend or invest!


If you are a company poised for growth with at least $100,000 in monthly gross sales, public or private, we want to talk to you.


Our revolving credit product can give you a revolving line of credit of up to 10 times your monthly sales and your initial advance of up to 3 times your monthly sales and allow you to grow!


For small public companies we offer our TEAM product whereby our partners will buy equity as you request "At the Market" just like the big companies can do!


We specialize in the "tough" deal!


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Invoice Discounting – NOT Your Father’s Factoring

By Chuck Schultz, of the Interface Financial Group



One of the biggest challenges for business owners in today’s credit-restricted economy is accelerating cash flow. Many large companies are unilaterally extending their normal course of business payments considerably past the invoice terms. Therefore, it is more important than ever for business owners to know that there are multiple viable alternatives for obtaining the working capital they need to speed up their cash flow. Awareness and research are vital. If a business fails, many times it is because the owner neglected to investigate and obtain the appropriate financing at the appropriate time.


Most entrepreneurs assume that simply “selling” their product or service will generate their needed cash flow. They rarely recognize that growth will always demand more capital. It is a fundamental cycle - the more a business grows, the more capital it needs, and the more capital injected into a business the more the business grows.


When personal resources are exhausted and family and friends have made their last contribution, most entrepreneurs feel going to the bank is the obvious thing to do. After all, banks exist to finance business. However, banks often turn down applications because businesses are too young, lack a solid balance sheet, or have insufficient cash flow; banks rarely lend to businesses today.


For this reason, businesses must be aware of options other than the bank, but it is essential to research alternative funding sources and connect with a suitable provider before they become desperate.


Accounts receivable financing is an alternative for businesses that invoice other businesses for their products/services and collect on terms. This form of financing secures fast working capital using your company’s accounts receivable as collateral. Most businesses that serve larger, more powerful customers, have felt the constraints associated with waiting for payment on their invoices.  The wait can negatively impact a company’s cash flow, making it hard to produce new orders, bid on new contracts, and/or provide services to valuable customers. This obstacle is removed by selling outstanding invoices (receivables) at a discount.


Factoring – Yesterday and Today

Factoring is arguably the most well-known form of accounts receivable financing. Factoring has been evolving for 4,000 years, since the beginning of commerce. The first documented use of factoring in the U.S. occurred before the revolution, when commodities were shipped from the colonies to Europe. Merchant bankers in London advanced funds to the colonists so they could continue to harvest their new land. Those factors made advances against the colonists’ accounts receivable, enabling them to continue to work by accelerating their cash flow.


Modern factoring is normally a lending arrangement whereby the factor contracts for the assignment of all receivables. The factor requires certain ongoing minimum monthly sales of invoices, usually for a 12 - 24 month period. The factor also assumes much or all of the internal administration, including day-to-day contact with customers, and collection as they see fit.


A New Approach

Another option for business-to-business companies is invoice discounting, also known as spot factoring. What sets invoice discounting apart from the more familiar factoring is that clients choose how and when to use the service, strictly according to their own cash flow needs. Invoice discounting is quick and straightforward with a minimum of paperwork.


The process starts when goods or services are delivered or provided, and an invoice is created. The invoice discounter purchases the invoice and releases cash to the company, usually within a matter of hours. The company and the invoice discounter work together in terms of the administration and collection of the purchased receivable, ensuring there is no disruption in the supplier-customer relationship.


Invoice discounting is a “use-it-as-you-need-it” arrangement, specifically designed to act as a bridge to meet the needs of small businesses during their formative and rapid growth periods.


Case Study

A Las Vegas area manufacturer benefiting from invoice discounting is LV Hangers, Inc., a supplier of wire hangers to the dry cleaning industry. The largest expense and most vital element in the process is ensuring there is sufficient raw material to keep production moving.


For LV Hangers, payment for finished goods is invoiced for 30 days after the sale. This puts a heavy strain on cash flow.  The long wait for funds creates an inability to purchase raw material, and stops production completely. “It is really hard to grow the business when you need to stay closed half the time,” says owner, Dmitriy Melnik.


With invoice discounting, “We were able to increase the cash flow and improve the supply of the raw material thus increasing our output and revenue.”


Invoice discounting has “greatly helped my business grow. We have increased our output and sales.” The additional cash flow has allowed Melnik to buy new machinery and stock up on raw materials. He no longer has to stop production between orders.  “[Invoice discounting] has changed my business and provided me with higher hopes and opportunities.”


Another Opportunity for Invoice Discounting

Another opportunity for using invoice discounting (spot factoring) services is when a company is actually seeking long-term financing but needs working capital until their new loan closes. Spot factoring requires no long-term commitment. Each invoice and each transaction is treated as an individual funding with no commitment to complete another transaction in the future. Therefore, working capital requirements can be satisfied during the secured lending process with no penalty for early termination of the invoice discounting relationship. Due to the speed with which the invoice discounter can complete the entire underwriting process, application to cash can be as quick as 3-5 business days depending on the motivation of the business owner.


Taking Business to the Next Level

There are several reasons for a business-business company to consider invoice discounting:

Speed. The relationship with an invoice discounter can be set up within days and once established, funding can happen within 48 hours.

Credit History. Most decisions are based on the credit of the business’ customer.

Available Funding. Funding can grow in line with the receivables of the business.

Not a Loan. Invoice discounting is a simple buy/sell, off balance sheet transaction.

Cost. The cost is based on the number of days the invoice is outstanding; there are no long-term commitments, no extra fees or charges.

Growth. Having access to capital improves the financial position of a growing business. While invoice discounting is a short-term solution, it ultimately leads to conventional bank financing because the credit and trade history of the business is improved.


Lessons Learned

Invoice discounting works for business-to-business industries in the same way as the consumer industry increases working capital by accepting credit cards. When traditional financing is not available to a new or expanding business, there are other options. It is important to remember that growth will always demand more capital - the successful entrepreneur is the one who finds that all-important cash without going into debt or being restricted by burdensome service contracts.


Chuck Schultz of The Interface Financial Group (IFG)


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The True Cost of Capital &

How To Judge What Is Right For Your Company

Phoenix, Arizona Team



We often hear complaints from entrepreneurs who claim that capital is too costly today. While it is true that capital is difficult to get and more costly than ever before, the way to truly evaluate the cost of any capital is to analyze what that capital or its availability can do for your company. No two types of capital are ever exactly the same, so while it might appear that a 5.5% APR line of credit from your bank is better for your company than the 30% APR private capital that has been made available to you, the correct analysis and answer might surprise you.


In a superficial examination, the bank capital, dollar for dollar is absolutely far cheaper than any other source.  The Bank borrows from the Federal Reserve or from depositors at such a low rate that no other source can match their cost of funds. But banks are under other constraints, especially since the "great recession of 2008", and have to be even more conservative with their lending than ever before. The old adage that says "A bank only lends you money when you don't need it." is more true today than ever. Therefore, in order to give you this "cheap money", banks will put a lot of constraints on you; strict financial covenants, covenants against merging or acquiring other companies, covenants against leasing equipment or vehicles, and requirements that you "rest your line" for 30 days at some point during your commitment period. They will also base a large part of their credit decision on your personal FICO (credit score) score. The amount they will lend you will be a lot lower and they will be loath to increase the amount for 12 months or more.  The banks also often require audited financial statements or, at the very least, reviewed financial statements. Finally, when and if they do lend you any money, you would find that the amount of capital and constraints upon its uses do not allow you to use the new money to grow your business effectively.  You might also find the bank to be inflexible about allowing you to source additional capital either from the bank itself or from other third-party sources.


The more appropriate commercial or private lending source may be more lax in their financial convents, will be anxious to "buy into" your growth story, will be much less concerned about your personal credit score, and if they have the capacity to do so, would want to provide more capital to continue to fuel that growth as your efforts prove themselves out. So while the all-in cost might be 30% APR the opportunities you might be able to take advantage of could greatly outweigh the cost.


If you are looking for capital to just occasionally cover unexpected operating expenses or provide cash in a timely fashion to cover a late payment on a good trade receivable, then a bank line (if you can get it) is the best bet for you.


However, if you are experiencing or expecting explosive growth which requires significant amounts of capital, and have opportunities to transact significantly more business if you "only had the capital", then maybe that more expensive commercial or private source is the right answer.


Without mentioning any names, let's look at a real world situation that Belmont had been involved with that fully illustrates our thesis: Our client had experienced 3 years of explosive growth. They were growing by more than 30% per year. Currently they were averaging about $500,000 per month in revenue, their receivables averaged about 45 days to collect (which translates into approximately $750,000 in current receivables on their A/R aging), and they have 24% gross margins. They had $100,000 cash in the bank and $250,000 in Inventory on hand.


The Bank Offer:

A one year revolving line of credit capped at $1.0 million dollars with 5.5% annual interest and a 2.5% commitment fee on the full line amount plus an assortment of other fees.


It is based on 80% of receivables and 50% of inventory. Total availability would be 80% of the receivables ($600,000) plus 50% of inventory ($125,000) equaling $725,000.


There are all of the usual financial covenants and restrictions. It would take about 3 months to close, as that is how long with would take the CPA's to complete the audit.


The owner estimated that with this money he would increase sales the usual 30% without much increase in overhead. So sales would increase from $6 million annually to $7.8 million annually a $1.8 million increase, which with a 24% gross margin, the company would earn an additional $432,000 less cost of capital of $84,000 (which includes interest, commitment fees, audit fees and such), so the Company would net an additional $348,000.


The Commercial Finance Offer:

A one year extendable line of credit of $7.5 million dollars and the first advance was $1.5 million (based on 3 times average monthly revenue), with commitment fees only based on the money received, not on the total line. No need for audited financials and closes in approximately 6 weeks with an all in cost of 28.64%.


The Company took the commercial line of credit because:

  1. They initially received more money
  2. They received it faster
  3. The only financial covenant was that they meet 75% of their projections
  4. The $7.5 million line limit could be used to prove to prospective customers that they had the wherewithal to take on new business
  5. They had access to considerably more capital at the beginning when they needed it, and the term automatically extended each time they took additional, capital allowing the company to focus on growth.


The Results:

The Company used some of the extra funds to purchase some equipment that made them more efficient, raising their gross margins from 24%to 28%. They used some of the extra funds to hire two more sales people, who each drove $500,000 in additional revenue, they were able to secure a few larger contracts because of the higher credit line limits, and they nearly doubled their business doing $11.2 million dollars at a 28% gross margin.


That’s 4% more margin on the existing $6 million in revenue, and 28% on the $5.2 million in new revenue generated, for a total increase of $1,696,000.


They ended the year with a $2.2 million outstanding loan balance, and the blended financing cost for that capital over the 12 months in dollars was $501,200. Therefore, with this "high cost of capital" availability, the company netted $1,194,800, or nearly 3 times as much as if they had taken the bank line! $846,800 more! The Company grew its top line by almost 87%! The Company never faced a cash crunch, and is poised to have another dramatic year with sufficient cash available under their extended line of credit to focus on their business.


Clearly, there is much more to look at in regards to the perceived cost of capital than just the interest rate. As a business person, you need to evaluate what you and your business can do with the capital offered, and decide if the benefits will outweigh the costs. If the Company couldn’t deploy the extra capital effectively to grow the business effectively, then the bank line would not have been the best option.


Another thing to consider is where your company sits in the typical business life cycle. While you might not like the high cost of capital being offered, it might be the right capital for a company in your current situation. Currently, you may not be showing the profitability and/or positive cash flow that is large enough to repay a loan under standard banking guidelines, or you might have some credit dings on your personal credit report. In either of these cases, and many other situations like these, your business couldn't qualify for "cheaper money", so we at Belmont believe it’s best to match your company and its prospects to the capital that will best help you reach your goals.


If you want to discuss plans, or to just understand your best options, contact your Belmont representative and let us help you sort through the confusing world of debt finance… it’s what we do best!


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