Source: San Francisco Business Times, May 15 2012

• Robert Burrick
• Date added:May 15, 2012
• Submission Type:New Hire
• Current employer:Business Capital
• Current title/position:Senior Vice President
• Industry:Banking & Financial Services
• Position level:Senior Vice President
• Position department:Sales
• Duties/responsibilities:Business Capital, a national commercial finance and business debt restructuring firm, has added Robert Burrick as Sr. VP. Bob will expand the national client base and business development efforts on the east coast. He has 30 years of expertise in finance, bankruptcy law, workouts and turnarounds representing both borrowers and lenders.

Heavy debt can sink a small business quickly. One option for business owners unable to dig out on their own but unwilling to declare bankruptcy or liquidate their business is a third-party debt-negotiation service.

How do you know when you are in too deep to help yourself? Charles Doyle, managing director at Business Capital, a San Francisco-based firm that provides debt-restructuring and negotiation services, offers these red flags:

• When you start running in the 90-day past due column with creditors.
• When you have to turn to high-interest loans to fund the business.
• When you’re running up credit card debt.
• When you start borrowing from friends and family.
• When you stop paying payroll taxes.
• When you start laying off staff.

“Most people [in these situations] are honorable people, and they try everything possible, but they just can’t service their debt,” says Doyle.

Doyle argues that declaring bankruptcy to keep the creditors at bay is almost never a good idea. “Chapter 11 is very expensive,” he says, “and most Chapter 11s end up in Chapter 7  liquidation, where most of the money goes to pay the legal fees.”

Debt negotiation, on the other hand, gives businesses a chance to work out their debts while they continue to do business. Debt negotiation is just what it sounds like: Firms such as Business Capital negotiate with creditors on behalf of the business to come up with a repayment plan that both sides can agree to.

Doyle stressed that every situation is different, but outlined three important steps of any debt negotiation.

• Monetize on the assets.
  “Can we get a loan, an accounts receivable line of credit, or a sale and lease-back of the business assets? If it’s retail, can we get a loan based on credit card receivables?” That credit can be used to pay down delinquent debt.
• Talk to all the creditors.
  Match what the creditors believe is owed to them vs. what the client can pay.
• Prioritize the creditors.
  A senior secured creditor that has a lien on business assets is in the catbird seat and therefore becomes the top priority. “The last thing [the creditor] wants to do is foreclose on a company,” says Doyle. “We talk to them about an amicable solution to keep [the debtor] in business.” Next on the priority list are companies that have secured leases on equipment, computers, etc., followed by unsecured creditors,  suppliers, vendors, credit card companies and the like. “With those [unsecured] creditors, typically we will be able to make some type of arrangement such as a permanent reduction or a payment moratorium.”

The Federal Trade Commission sounds a cautionary note on debt negotiation, warning business owners about companies that claim they can pay off unsecured debt at anywhere from 10 to 50 percent of the balance owed. Business owners should also be wary of companies that claim they can wipe the slate clean on your credit report. With debt negotiation, there are no guarantees that creditors will accept anything less than full payment.

The FTC recommends that companies considering a debt-negotiation service do a background check on the company using three sources:

• The state Attorney General.
• A local consumer protection agency.
• The Better Business Bureau.

Doyle concurs. “The first thing is to check out the company’s Better Business Bureau record,” he says. “The business should also have references are checkable and viable.” Membership in a professional organization such as the Turnaround Management Association also lends credibility, he adds.

The right partnership with a financial advisor can provide some breathing room and allow you to concentrate on your business instead of your debt. Says Doyle: “When you’re at such a critical juncture, the management team really needs to focus on business activities, not the creditors. We can focus on improving the financial situation, and the management team can focus on improving revenue.”

Rob O’Regan is a freelance writer based in Londonderry, N.H.

Business owners turned down by banks are taking out ‘hard money’ loans, often at sky-high interest rates.

July 31, 2010|By Sharon Bernstein, Los Angeles Times

With financial help for the nation’s small businesses locked in a congressional imbroglio and bank loans still tough to get, many smaller firms are turning reluctantly to high-dollar lenders of last resort.

Across the nation, small businesses are paying private lenders annual rates of up to 36% plus fees to get the cash they need to buy inventory, pay their mortgages and meet payroll.

These private lenders say they’re supporting small businesses at a time when credit is scarce, providing loans that help borrowers fix their credit scores or buy equipment to expand.

But the extra cash can come at great cost.

The struggle for credit has led business owners who had never ventured outside the highly regulated world of banks and credit cards to seek often expensive relationships with all kinds of other lenders. Among them, so-called hard money lenders take personal property or the business itself as collateral. Others function like payday lenders, offering cash advances against a business’ anticipated revenue. There are also independent brokers, who put together applications for customers and seek loans from a variety of sources.

When a note came due on the trucking business that Thelma Standart owns with her husband in Wilmington, Calif., the couple needed more than $1 million dollars — right away. A bank loan fell through.

“We were forced to get a hard money loan,” said Standart, who now pays $14,000 a month on a loan that would probably have cost less than half that at a bank. “It’s bleeding our working capital.”

What little credit that had been available to small businesses has dropped considerably this summer, as several measures aimed at helping small businesses got caught up in partisan fighting in Congress.

On the table in the Senate is a bill to restore funding to a key Small Business Administration loan-guarantee program and set up a $30-billion fund to encourage community banks to make small-business loans. Lawmakers are also debating new tax credits for small businesses that hire workers.

Senate Democrats have failed several times to break a Republican filibuster on the bill, most recently on Wednesday and Thursday. Negotiations will continue next week.

“We’re just waiting,” said Nick Seedorf, who hopes to hire 10 people with a loan backed by the Small Business Administration. His Los Alamitos companies, NuCourse Distribution and myGearStore, were approved for a loan guarantee just before the SBA program ran out of money in late May.

“Congress is playing politics with small business,” said Roberto Barragan, president of the Valley Economic Development Center in Van Nuys.

President Obama has repeatedly called for banks to lend more to small businesses, and Ben S. Bernanke, chairman of the Federal Reserve, has also added his voice. But bank loans to small businesses remain scarce. And data from the Fed indicate that small businesses are paying more than other clients for any credit that they do get.

This expensive search for credit is a trend that alarms SBA chief Karen Mills. “This is of real concern to us,” Mills said. “This credit crisis has really hit small businesses who have to rely on banks — and banks have pulled back.”

Interest rates on private or hard-money loans can range from about 7%, or slightly more than at a bank, up to 36%, lenders interviewed for this story said.

Borrowers include all types of small businesses: a restaurant owner in Temecula, a Midwestern food processor who needs cash to buy fruit, a welding company fixing hurricane damage in Galveston, Texas.

Most say they contacted private lenders in desperation, usually after banks turned them down. They know they’re paying more for the money but say they have no other options.

At Business Capital, a brokerage in San Francisco that specializes in private loans, inquiries from small businesses have doubled this year, said Erik Ostebo, director of credit and syndication. Many of them are referred by banks.

Charles “Chuck” Doyle, managing director of Business Capital, said his company functioned much like an investment bank for small and mid-size businesses, helping them develop plans to turn their companies around if they’ve hit rough times and connecting them with cash.

For some borrowers, he finds loans at about the cost of credit from a bank. But for those with checkered credit, the loans aren’t cheap. “People get upset when they hear 9%,” said Doyle. “Once they start hearing 12% or 13% they get really upset.”

Private lenders have long been active in the world of small-business finance, offering high-cost loans to help businesses get started or funding entrepreneurs who have suffered reversals or bankruptcies.

But now their volume is way up, much of it from clients who would have been eligible for less costly forms of credit in the past.

The lenders say they look at a business’ real potential when making a loan, analyzing its assets and cash flow in a way that banks do not. Loans are not made if the payments would put the business at risk, they insist.

“Some people do call us hard money lenders and loan sharks, and I take offense at that,” said Don D’Ambrosio, whose company, Oxygen Funding Inc. in Lake Forest, advances cash against a company’s billings. “We really do help a lot of businesses.”

As bank loans dried up, private lenders experienced an onslaught of interest from small businesses, said Wallace Groves, executive director of the American Assn. of Private Lenders.

The for-profit organization used to be called the National Hard Money Assn. but changed its name in March. Many of its members lost money on subprime hard money loans in the real estate crash and are repositioning themselves to serve a wider variety of business clients, Groves said.

His organization is developing a code of ethics that calls for lenders to avoid predatory and unscrupulous practices. “We are working with a lot of these lenders helping them legitimize what private lending is,” Groves said.

Terri Jennings turned to a form of private lending called “factoring” after three banks rejected her Texas welding businesses for loans. Every month, she hands over some of her invoices to Oxygen Funding, which advances her 80% of their value and holds on to the rest until her customers pay. It then deducts its fee — about 4% a month — and gives Jennings the rest.

The service is expensive, but it has kept her business afloat, she said. “It’s either that or close the doors,” Jennings said.

In the Riverside County city of Murrieta, broker John Reidy has been connecting people who don’t qualify for bank loans with private money since 1978. Reidy recently arranged two such loans for The Bank Mexican Restaurant in Temecula, and another for a liquor store that needed help meeting expenses.

The restaurant was able to refinance the hard money with a loan backed by the SBA.

But Reidy said he might have to foreclose on the liquor store. “I hope not,” he said. “But we may have to.”

sharon.bernstein@latimes.com

Times staff writer Lisa Mascaro in Washington contributed to this report.

Dollars & Sense: Getting Customers to Pay

Chuck Doyle, Managing Director of Business Capital, provides tips on how business owners can manage their receivables and make sure clients are paying their bills on time.

Chuck’s interview on the MSNBC TV show “Your Business” aired on Sunday, May 31 at 7:30 AM EST.

NoQuarter Radio — Listen to Chuck Doyle on ‘Sense on Cents’

Visit No Quarter Radio

 The biggest mistakes small businesses make when it comes to debt 

By SIMONA COVEL

Around the country, small businesses are struggling to keep their head above water in a sea of debt.

A recent survey from the National Federation of Independent Business showed the worst earnings trends for small businesses in the survey’s 35-year history. With banks too jittery to lend, credit-card companies reducing limits and investors hard to find, many small businesses find themselves struggling to stay on top of their collections and pay their own bills.

The Wall Street Journal spoke with Charles Doyle, managing director at Business Capital, a San Francisco company that helps small and midsize companies restructure their debts.

We asked him about the common mistakes small businesses make with regard to debt and what they can do to avoid having to call someone like him. Mr. Doyle says business at his company is up as much as 90% in recent months.

Here are edited excerpts from that conversation:

Alternative Sources

THE WALL STREET JOURNAL: What are the options today for smaller companies that need to borrow money?

MR. DOYLE: Factoring is really becoming in vogue. That’s when you sell your invoices outstanding to a third-party firm known as a factor in exchange for cash in the amount of the invoices minus the factor’s fees. Then, money that comes from your customers is paid directly to the factor. Typically, factors will charge a daily or bi-weekly interest rate, like 2% every 10 days. Some factors will charge other fees, too, so you could be paying as much as 30% yearly.

Then there are asset-based loans from lending companies that are lines of credit based on a company’s accounts receivable. For instance, if you shipped $1 million in goods this month, you might be able to get a loan for 80% of that amount, or $800,000. You pay interest on the number of days the money is lent out to you. The lender also may increase the loan amount based on how much your inventory, assets or real estate is worth.

Julian Puckett

BORROWER, BEWARE Charles Doyle of Business Capital

Some third-party financing companies will also allow you to refinance equipment or provide financing based on inventory or equipment. But you’ve got to have equipment that has a reasonable liquidation value. They will come in and repossess the equipment and auction it off if they have to. It’s going to be expensive money, but there are people out there who will lend. You can bank on paying upward of 15% interest.

WSJ: What are some tips for finding a factor or asset-based lender?

MR. DOYLE: Sometimes people start to panic, and they’ll go on the Internet and get involved with a factor they don’t know. References should be available, and check the Better Business Bureau. Some of these companies you see on the Internet have a rap sheet a mile long. If it seems too good to be true, it probably is.

Do your homework to make sure you know what you’re going to be paying. If you’re only making a 10% margin on your products and the money is costing you 30%, every time you ship a product you’re losing. Some of our clients build that cost of financing into the cost of the product.

WSJ: When you’re tight for cash, how should you set your priorities in terms of deciding where your money goes?

MR. DOYLE: Don’t get in a situation where you’re not paying payroll taxes or sales tax. Once you start paying penalties to the IRS — that’s expensive money.

Then, if you have a situation where you do have a bank that’s lending to you at a good rate, make sure they’re getting paid at the beginning of the month. They’re looking for any reason to pull credit lines, so make sure you pay them before you pay the guy you get printing services from, for example. Then pay your critical vendors, and explain to them where you are financially.

WSJ: What mistakes do business owners often make when they face this situation?

MR. DOYLE: Collecting accounts receivable has been a big problem for a lot of clients and then they have trouble paying vendors. Partner with vendors and keep communication open. What’s tough to do is to prioritize your creditors. Many times, businesses will pay the vendor who’s the squeaky wheel — the one who’s bugging them the most — to the detriment of key vendors or suppliers whom they have a relationship with. It should be the other way around. Keeping an eye on those relationships is critical [so they'll work with you].

If it’s not too late, companies should put together an emergency plan for financing — before it’s needed. How we’re going to deal with creditors, with financing, what options do I have if my credit line gets pulled. It’s time to educate yourself on what kinds of credit are going to be available to you, so you’re not operating at a critical time with no plan in place.

Raising Money

WSJ: What does a restructuring company like Business Capital do?

MR. DOYLE: We’re hired to raise money for the company and to pay the creditors. Some companies think it’s like a debt-consolidation loan. They say, ‘So can you pay off all of my creditors and I’ll just have one loan with you?’ That’s not how it works. There are definitely very hard conversations. You’re going to have to take a pay cut, let employees go. Restructuring is not a painless process. We can get you a million-dollar credit line, but if the company has a million dollars in debt, a lender will want a plan of how all of these creditors are going to get paid.

Sometimes we find there’s no way to help a company. If they’re in a situation where they’ve waited too long — they’re not shipping product or providing services and there are no receivables to manage — you’re looking at a wind-down.

WSJ: What’s the typical scenario for a small company that decides to file for bankruptcy protection?

MR. DOYLE: Chapter 11 bankruptcy protection is very expensive. It’s tough, especially these days where there’s no bankruptcy financing available. There are lawyers and auditors and accountants, and liquidation companies and valuation companies. All of these people are getting paid in Chapter 11. That can consume all of a company’s cash. It’s still the case where the majority of Chapter 11 filers end up in Chapter 7 liquidation.

-Ms. Covel is a staff reporter of The Wall Street Journal in South Brunswick, N.J.

Business Capital Exec Appointed to Board of Turnaround Management Association

Business Wire

| 17 Feb 2009 | 06:00 AM ET

SAN FRANCISCO, Feb 17, 2009 (BUSINESS WIRE) — Business Capital (www.bizcap.com) announced today that the Turnaround Management Association (TMA) has elected Chuck Doyle to the Board of the Northern California Chapter.

Mr. Doyle is the Managing Director of Business Capital, a leading commercial financial and turnaround firm, based in San Francisco and Connecticut. With over 20 years in the business and finance industry, Chuck is well equipped to join a board comprised of professionals directly and indirectly involved in turning around businesses in various stages of distress and/or underperformance.

“It is a privilege and honor to serve on the board of an organization whose membership is uniquely positioned to assist distressed companies at this unprecedented time in the world economy,” said Doyle. “We can really make a difference.” Pamela Hayley, current board president for the Northern California chapter of TMA, was instrumental in making this recommendation to the board. “I have personally worked with Chuck and his company, Business Capital, and can attest to his commitment to helping his clients and raising the bar for the turnaround industry as a whole. We look forward to the added value Chuck will bring the TMA board and anticipate further effective collaboration within our organization,” she said.

Board appointments are selective and made to ensure balance across TMA’s prospective constituents. Members are global professionals and include a combination of a lawyer, accountants, a turnaround consultant or private equity investor, an academic, a workout banker and a non-bank financier. TMA is an international organization with more than 8,300 members in 43 chapters, including 31 in North America.

Business Capital offers a vast spectrum of services, including debt restructuring, asset based lending, asset securitization, capital raising, business turnaround and liquidation. Combining a unique blend of traditional and progressive financing methods, the firm provides clients with individualized programs to deliver successful results.

SOURCE: Business Capital CONTACT: Business Capital Jen McCarthy, 415-989-0970 or 203-292-5474 jmccarthy@bizcap.com Copyright Business Wire 2009 -0- KEYWORD: United States

North America

California INDUSTRY KEYWORD: Professional Services

Finance SUBJECT CODE: Personnel

URL: http://www.cnbc.com/id/29232661/

• JANUARY 22, 2009

By SIMONA COVEL and KELLY K. SPORS
Small businesses, hit by a wave of customers postponing payments because of the recession, are struggling to find ways to come up with enough cash to stay alive.

The companies are hugely dependent on their cash flows. But if they push their slow payers too hard, they risk losing customers. Hiring collection attorneys is also expensive, and if late payers are pushed into bankruptcy, their small-business creditors may find themselves empty-handed, waiting at the end of a long queue.

“The last thing you want to do is get in an adversarial position with your great clients; they’re your lifeline,” says Charles Doyle, managing director at Business Capital, a San Francisco company that helps businesses restructure their debts.

That’s why many businesses that are owed money are relying on cooperation rather than strong-arm tactics. “If you’re going to make it through the next 18 to 24 months, you’ve got to be open for alternative ways to get paid or you’re not being a realist,” Mr. Doyle says.

Last fall, more than half of the customers of UnitedCompanies Inc., a Houston-based handler of plastic resin, were more than 30 days past due on their bills. The company’s bank had slashed its credit line 20%, to $2.4 million. UnitedCompanies was paying its own bills late, because of the cash-flow crunch.

Marc Levine, chief executive of the company, which has 350 employees and $40 million in revenue, began personally calling customers who were more than 30 days past due. He says he explained that he needed to be paid because his business was suffering, too.

“I made sure I told them how much we loved them,” he says, “but in order to do a fine job in serving them, I needed them to accelerate payment and return my cash flow to where it was in summer ’08 and prior.”

Mr. Levine says his personal approach worked, and many of the customers paid up after his call. He adds that he also stopped shipping for some small, financially weak customers until they began paying within 30 days. And he made some cost cuts, including laying off about 50 employees.

Some companies have been forced to take drastic steps with longtime clients. Peter J. Bredlau Jr., president of heating and air-conditioning company Quality Service Associates Inc., says he started seeing more of his customers paying late over the summer, with payments stretching to 45 to 60 days from 30 to 45 days. Today, more than half of the Roselle Park, N.J., company’s clientele of office managers, building owners and general contractors are overdue on their payments.

“That extra 15 to 20 days that people are not paying has had a pretty significant impact on my ability to keep up with my vendors,” Mr. Bredlau says. “It just slows the cycle down.”

Money Headaches

• Small businesses average $1,500 in overdue payments from customers each month.
• 42% of small businesses say “getting paid quickly” is a key issue keeping them up at night.
• Nearly 40% of small-business owners have invoices that exceed 30 days.

Source: Intuit Inc.
Note: Based on a 2008 Decifer Inc. survey of 751 businesses with fewer than 10 employees.

With longtime customers, he makes a point of handling the late payments himself. “Those relationships have gone back to the ’80s with my father,” he says. “They still operate on a handshake and a promise, which is a great way to do business as long as you get paid.”

With customers who aren’t paying on time, an accounts-receivable clerk chases the money every day. Ultimately, those who don’t pay lose the ability to make emergency calls to the service department. When the customer tries to call, the call is intercepted by the accounts-receivable clerk, who tells them to have a check ready when the technician shows up.

Many small companies are trying to strike a balance between aggressively pursuing late accounts and adopting policies that help their customers get up to speed.

Vanguard Services Inc., an Indianapolis-based company that contracts out truck drivers and had about $42 million in 2008 revenue, began a more aggressive collections process when it started noticing payments slowing down last April. Instead of mailing invoices, it began emailing them so that customers would receive them sooner. The company, which rarely made collection calls before, now calls customers within a day or two of a payment being late.

It also tries to develop several personal contacts within a company. “The more points of contacts you have and the more you know these people personally, the more trust you’re going to have,” says Chief Executive Jim Malarney.

At the same time, the company began giving customers more payment options. For instance, it let customers pay using American Express in exchange for a 3.5% transaction fee, and it offered to let them pay via wire transfers — which can sometimes be more convenient for the payer, as well as speeding up payments for Vanguard.

Since it started the new collection procedures, Vanguard has reduced its past-due accounts to 7% to 8% from 25%.

The smallest companies often feel they’re especially at the mercy of bigger customers. Susana Ortiz, president and chief executive of specialty baked-goods company Caroline’s Desserts in Redmond, Wash., says she was surprised that as many larger retail customers as smaller boutique customers were paying late. About 18% of the company’s accounts are late — up from 1% or 2% a few months ago. If you’re small, she says, big companies think they can wait to pay you.

Ms. Ortiz has had to delay hiring and buying new equipment because of the lack of cash flow, and she has been forced to use personal funds to pay bills. Nonetheless, she says, she’s “working with people when they have issues,” adjusting terms.

The more pressing problems, she says, involve newer clients who don’t have a relationship with her. In a handful of cases, new clients placed three or four orders over a couple of months and never paid. Then they stopped ordering and stopped answering their phones. As many as two dozen invoices — some as large as $2,000 or $3,000 — are 90 to 120 days old and may never be collectable.

Ms. Ortiz says she is considering suing to recover the money, but she adds that she knows that the cost of the suit may well be more than she would be able to recover.

-Raymund Flandez contributed to this article.Write to Simona Covel at simona.covel@wsj.com and Kelly K. Spors at kelly.spors@wsj.com

As the economy falters, experts say small businesses must recognize runaway costs early and start making modest cuts

Source for Article:  Business Week, October 24, 2008

By John Tozzi

Back in 2002, Scott Chatel’s business remodeling brownstones and apartments in Brooklyn and Manhattan was so good that he set a goal to increase annual sales from $2 million to $5 million by 2005. He signed a three-year lease and renovated new office space, expanded his staff, and printed four-color brochures. His firm, Chatel Contracting, was busier than ever, but the costs of expansion erased Chatel’s profits, leading him to take on debt. “It was the overhead that was doing us in. The jobs were always profitable,” Chatel says. By the end of his lease in 2005, Chatel dropped his expansion plans and went into cost-cutting mode.Many small business owners may soon find themselves in Chatel’s situation, with rising costs and stagnant sales in a sour economy. Recent surveys of economic trends by the National Federation of Independent Business found weak levels of capital spending over the past six months. And in its latest survey, conducted in September, just 21% of respondents expected to make capital purchases in the next few months. The survey also found businesses reducing inventories, with a net 12% cutting stock rather than adding. While business owners are nervous about the economy, many have refrained from more drastic cuts or layoffs, says Jennifer Rockne, director of the American Independent Business Alliance, based in Bozeman, Mont. “The local folks are typically very reluctant to lay anybody off because a lot of their employees tend to be longtime employees,” she says. Still, by recognizing the problem early and making moderate reductions, small firms can avoid more severe cuts later on, financial experts say. Companies that ignore warning signs can erode their profits with rising costs, and those that borrow to meet those costs can wind up insolvent.

Financial Ratios Give Warning

Chatel took serious steps to cut his overhead. He gave up his office space—gutting the $50,000 renovation he had done when he moved in—and moved the office back into his home. Instead of laying people off, Chatel left vacant positions unfilled until his staff shrank from 15 to five—about the number of employees he had before expanding. He went from doing 60 jobs a year to just 13, and he cherry-picked the most profitable ones that wouldn’t require subcontractors. With the help of a workout firm, Paramus (N.J.)-based Corporate Turnaround, he negotiated payment plans with his creditors. Today Chatel’s sales are down to $700,000, but the firm is far more profitable because of his cost-cutting measures. Eliminating the office saved $500,000 a year in expenses. “Sooner or later you have to know when to say enough’s enough,” he says. Chatel counts himself lucky for acting when he did, but many small business owners don’t see their financial troubles coming. “A lot of [businesses] are financially ill but don’t even know it until it’s too late,” says Sam Bornstein, a CPA and professor of accounting at Kean University in Union, N.J. Bornstein advocates using financial ratios as an “early warning system” to signal when a business should cut costs or make other adjustments. Comparing indicators like the gross profit ratio—which shows the proportion of profits to total sales—to industry averages can tell business owners whether their costs are too high or their prices are too low. Other ratios can show whether overhead costs are too high, even if individual transactions are profitable. Bornstein says having an accountant check such figures annually will show business owners signs of trouble before they take on too much debt to cover growing costs.

Taking New Measures

Robert Welton wishes he had acted to cut costs earlier. His eight-year-old company, WelTec, based in Egg Harbor Township, N.J., builds and maintains infrastructure for telecom and cable companies. His business was doing well in early 2006, with sales of $3.6 million, 90 employees, and plenty of work repairing systems in New Orleans damaged by Hurricane Katrina. But later that year, when a customer failed to pay for a job, he says he turned to factoring (BusinessWeek.com, 10/3/08) to keep his business going. “Instead of taking the hint that if I’m having to factor my receivables I really need to scale back, I just kind of went forward,” Welton says. He resisted layoffs at first because he didn’t want to put people out of work. “These people have families that depend on their job,” he says. But he has had to cut anyway, shrinking his staff to just 20 people now. He is taking other measures, too. WelTec uses GPS devices in company trucks (BusinessWeek SmallBiz, 8/22/08), and has started charging workers for any personal use of business vehicles. Welton has also pulled some trucks off the road so he does not have to insure them. He hasn’t turned on the heat yet. And he stopped taking a salary last month, even though he’s facing home foreclosure.

Avoiding the “Death Spiral”

Companies that fail to control costs often run up debts, and then servicing that debt then becomes another cost that cuts into profits further, says Chuck Doyle, managing director of Business Capital, a San Francisco turnaround firm working with WelTec. “Some of these people, they just wait too long until there’s nothing left to give,” Doyle says. “You get into a situation where you’re in a death spiral unless you do something.” Welton hopes to keep his business going and repay his creditors. Chatel, the housing contractor, says he was lucky to recognize his problem and abandon his expansion plans at the end of his three-year lease. Shrinking the company turned out to be more profitable than trying to expand it. “As soon as you eliminate all that waste, it trickles down straight to the bottom line,” he says.

The banking-industry crisis is having an immediate impact on at least one group of small and midsize businesses: those that were built to provide products and services to a booming financial sector.
The effect on these companies “has been nothing short of devastating,” says Charles Doyle, managing director at Business Capital, a San Francisco company that provides financing and restructuring services for distressed companies. “It is complete carnage.”
Many of Mr. Doyle’s clients — mostly small-business executives — have already cut staff and borrowed against their assets, he says. Some are using credit cards to survive and have stopped taking paychecks themselves. He adds that many of their accounts receivable are so far past due that they are considered uncollectible by lenders, which can limit a company’s borrowing options.
Ken Goldstein, an economist at the Conference Board, a New York think tank, estimates that each finance job probably supported two to three other jobs. The cash-rich finance industry was known for consuming more lavish services — including limousines, corporate gifts and fancy technology — than many other sectors.
Over the 25-year life of computer-supply company E-Mediaplus, more and more of the company’s business came from the finance sector each year, says President and Chief Operating Officer Jim Jarman — in part because of the company’s Hackensack, N.J., location, which is near New York. Mr. Jarman declines to name individual clients, citing nondisclosure agreements, but says the company has lost hundreds of thousands of dollars of business over the past few months as big banks and finance companies have merged or disappeared. Business has fallen off so sharply that a few months ago, sales were growing at about 20% over last year’s rate, and now Mr. Jarman expects to post a 15% decline for the year.
The company is working to build other parts of its business, including computer-tape recycling and data destruction. But when a single Wall Street bank provided $800,000 in revenue annually, “it’s going to be tough to find another account that’s going to give you a couple million [dollars] over two years,” he says. E-Media is down to 19 staff members, compared with 35 a year and a half ago.
Tim Bartek thought the banking sector would help his business, Integra Software Systems LLC in Franklin, Tenn. The company, which provides software for lending, watched a fifth of its mortgage-banking customers disappear this year and last. So the company expanded its clientele to include consumer-and commercial-lending institutions. Now, banks and credit unions that talked about expanding consumer and commercial lending “have put it on the back burner,” says Mr. Bartek, Integra’s senior vice president for sales and marketing. In some cases, the company was midway through a deal cycle when the customer returned to say, “We’re pushing it back to ‘X’ date,” Mr. Bartek says, adding, “I have no idea when ‘X’ is.”
In the meantime, Integra has cut its staff more than 20%, to 30 people, through attrition and layoffs.
The problems are growing even for companies that are more diversified. About 15% of Per Annum Inc.’s business came from big Wall Street companies, which ordered the custom-publishing concern’s calendars and city guides as corporate gifts.
Over the past few months, Alicia Settle, Per Annum’s founder and president, has watched that business slip away. When Merrill Lynch & Co. was acquired, a $50,000 order disappeared. Bear Stearns Cos., which was also gobbled up, had been a big client, too.
Other accounts remain up in the air as Ms. Settle waits to see if the remaining big banks place their annual holiday orders.
She is not optimistic, though. “Most people right now are shying away from corporate gifts,” she says.
When business took a dive in the months after the Sept. 11, 2001, attacks, Ms. Settle says, she was able to put her own money into the New York-based company to keep it afloat.
This time, she says, her personal investment portfolio is down 25% and she is not sure she can do that again.
Instead, she is working with her vendors, which have agreed to longer payment terms and, in some cases, to send items directly to the end customer so Per Annum doesn’t have to preorder and hold lots of expensive inventory.
With a continuing stream of bad news from global markets, Ms. Settle doesn’t see corporate gift-giving picking up anytime soon. And though the company has made a concerted effort to increase its retail business in recent years — it’s about half of the total now — consumers are pulling back, too.
“Quite frankly,” Ms. Settle says, “I don’t know what we’re going to do.”

Write to Simona Covel at simona.covel@wsj.com