But through this maze have emerged some very useful tools and trends, easily applied, for little (if any) cost to lenders, and without incremental lender liability. The trick is to know the right questions, be aware of what is available, and how to push the right buttons with borrowers. This article summarizes and takes note of some of the more useful trends in technology, parses out some of the marketing buzz words and hype, and helps lenders focus on the core issues and their effects on credit decisions.
The Buzz About the Cloud and Collateral Monitoring Opportunities
The “Cloud” is at its core, a marketing term. It’s been around for as long as there has been an Internet, but it didn’t have the label “Cloud.” The essential concept and question is: “Where is the computing taking place and where is the data stored?” If you have a browser you have access to the Cloud. Log into Facebook, and you are working on Facebook’s servers, making use of its software applications, and saving information on its server. That’s the Cloud. If you are working on your desktop and writing a letter on Word, and then save the file on your desktop, you are not in the Cloud. That’s pretty much it.
Same concept is true with a borrower’s records. If the company runs its business on an application in its office and/or on its desktops, it is not in the Cloud. If it runs its business on someone else’s server and saved the data there as well, then it is in the Cloud. What determines which is better for the company and for you? The answer is obvious. Anytime you have a third party maintaining applications and storing data, both borrowers and lenders will be safer as a general principle. Otherwise, a lot of things can go wrong.
The single most important monitoring benefit of the Cloud is the opportunity to monitor collateral in ways never before imagined. Lenders can simply require a user name and password for the borrower’s accounting system, and have the ability to view the record’s activity “live” (or nearly live) at all times. There is no cost to anyone for this feature. It is important that the system has “permission-based” architecture so that lenders can view the information but not have the ability to make any changes or modifications to the borrower’s books and records. Early warning signals and red flags occur sooner, and these tools can serve as a deterrent to fraudulent activities.
“As asset-based lenders continue to evolve in upgrading technology and understanding the opportunities that these upgrades offer, lenders will have yet another competitive tool to interface with clients. The old saying that we ‘want it to be easy to do business with us’ still is very powerful,” says Bruce Sprenger, group senior vice president and regional manager, Cole Taylor Business Capital, and current president of the Commercial Finance Association.
The Credit Risks of the Data Storage and Contingency Plan Business Models
One of the things that we all hear about is the safety, backup and contingency planning for the maintenance and recovery of business data. The market is flooded with so many data storage companies, that storage fees are dropping as a result. This industry is undergoing a consolidation. Data storage and the other remaining elements have become a commodity, and the differences between one company and another are hard to determine.
The basic realities for lenders to be aware of include: SAS70 compliance (www.sas70.com), Sarbanes Oxley (www.soxlaw.com), redundancy (having more than one third-party server backing up the data simultaneously) and geographic dispersion of the data centers (critical in the event of a natural disaster).
However, what is missing here is the documentation and backup of the business processes — the business rules and procedures. For example, how many times have we all heard business owners describe their business as unique and specialized? This should raise the red flag. The fundamental meaning here is that certain people in the business operate and follow specific business rules and procedures that go undocumented. This results in elevated risk and exposure that affects the continuity of operations. The sudden loss of critical, key personnel (sudden hospitalization or death, for example) can adversely impact business continuity in ways that are just as serious as the loss of data. Even worse, disgruntled employees can “hold hostage” the business owners with unreasonable demands.
Lenders should ask if the technology of the business includes rules based processes and procedures, and if these features are kept up to date, and are they backed up? By embedding these processes and procedures into the system, replacement staff can “hit the ground running” and smoothly pick up where the last person left off.
It is best to extricate the “specialized” aspects of a business along with their attendant risks. Business may appear on the surface to be specialized, when in fact much of the specialization comes from undocumented processes and procedures, very often repetitive in nature. By taking this segregated approach, businesses will rely less on critical staff and employees, trim down the costs of training replacements, lower costs for repetitive functions by segmenting out data entry and documented processes from higher level requirements of more experienced staff — build managers — staff and pay them well for their judgment and business experience/acumen. The business will be worth far more as an overall asset, and credit risks will be mitigated.
Enterprise Resource Planning and Business Management
The overwhelming majority of small- and medium-sized businesses (SMBs) maintain the business and information records with an antiquated pastiche of separate and unrelated systems strung together. For example, an inexpensive commercial package for general ledger, receivables and payables; Excel for business analysis; ACT! for contact and sales management; and project management applications. The problem with this is that these various packages, purchased separately, don’t “talk” to one another. Data is entered manually into each distinct application, and important and often-times critical information is not available on a timely basis. Management has to wait too long for reports and so do lenders.
Hence, Enterprise Resource Planning (ERP) systems are now becoming available and increasingly popular in the SMB market — not just for Fortune 1,000 companies. A good ERP system will result in single points of data entry and an integrated manner of creating and maintaining information. Reporting and accountability will be facile and responsive — accessible from anywhere and on any device with Internet access. Borrowers and lenders benefit from the availability and use of such comprehensive systems. All aspects (i.e., modules) of a business “talk” to one another.
The Next Generation of Collateral Monitoring — API Interface, Rolling Borrowing Base Certificates and Collateral Values
Wikipedia defines an application programming interface (API) as “a source code based specification intended to be used as an interface by software components to communicate with each other. An API may include specifications forroutines, data structures, object classes and variables.” This commonly available technology provides opportunities for borrowers with open source and open architecture systems to interface with third-party providers utilized by lenders. There are a handful of popular systems for monitoring collateral on a daily basis by secured lenders. Many of these systems have APIs that can communicate with borrower’s accounting records and provide up-to-the minute information on lender’s collateral. Borrowing base certificates can be viewed live, or near live, in the “Cloud,” including detailed perpetual inventory information.
Appraisal and liquidation firms also maintain significant database information on asset values, both historical and current, that can be “matched” electronically via APIs so that desktop appraisals for inventory and fixed assets can occur at the push of a button.
According to Andrew H. Moser, President, Salus Capital Partners, “A critical success factor for any collateral or asset-based lender is to remain vigilant in their approach to monitoring collateral. That said, in our business, we embrace any new technology or methods, which allow us to execute at the highest levels and above all, remain focused on preservation of capital. We advocate a progressive approach in monitoring techniques and those that allow us to be as “real time” informed as possible so that when timely intervention comes into play, we can be armed with the most critical and relevant data necessary in order to manage our business effectively.
Outsourcing Models and Lowered Credit Risks
Payroll companies like ADP and Paychex are among the early leaders in business process outsourcing (BPO). Businesses then had the option for internal staff of companies performing mundane and repetitive payroll chores to be replaced by third-party service bureaus with offshore staff, bundled software and lower costs. The newest trend for SMBs is Business Processing as a Service (BPaas), a natural extension of the payroll outsourcing model to include entire accounting and bookkeeping departments.
Standard and “specialized” business processes are documented, retained and assigned to a large and diversified pool of managed staff, thereby lowering risk for businesses and lenders. The latest in Cloud technology solutions are brought to bear, including advanced image technology (“going green”), open architecture that allows for inexpensive customization and state-of-the-art ERP systems. In a few years, companies as large if not larger than ADP will emerge and become the norm in back office processing for SMBs.
Contrary to the knee-jerk reaction of some that may say these trends result in fewer jobs, in actuality, these business models create jobs. According to Peter Drucker, (1909-2005), American management guru and author, “Few companies that installed computers to reduce the employment of clerks have realized their expectations . . . They now need more and more expensive clerks even though they call them ‘operators’ or ‘programmers . . . new technologies do not reduce employment; they simply raise the level of skill required to be employed.”
Cloud computing and BPaas present opportunities for considerable cost savings and efficiencies. These savings are almost invariably cycled back (i.e. reinvested) in the enterprise, and the return on investment is considerable. There is a significant multiplier effect here, and that makes for better businesses with lower credit risks.
James J. Clark is CEO and a founder of OpenPro, Inc., a provider in open source-based ERP software, delivering Web-based ERP software solutions to small- and mid-sized companies and international enterprises since 1998. OpenPro offers a complete enterprise resource planning (ERP) software solution, including financials, distribution, manufacturing, CRM, e-commerce and advanced system functions such as workflow and document imaging. Clark can be reached at JimC@openpro.com. For more information visit www.openpro.com.
Steven R. Lebetkin is managing director and co-founder of OpenPro BOSS (back office service solutions). BOSS is a provider in BPaas for small- and medium-sized businesses, with offices throughout the world. Prior to forming OpenPro BOSS, Lebetkin spent 20 years in the commercial finance industry as an intermediary. He can be reached at SteveL@openpro.com.