I consult with dozens of CEO’s from start-up’s to 20 years old small businesses, many of them have the same problems.

1. How do I get access to capital?
2. What do my financials really mean to me?
3. How do I position myself in the market?
4. How do I grow my revenue?

One could say that all businesses have more than one of these same problems. True, but small businesses make up the vast majority of the US economy and their issues tend to carry a huge weight on our daily lives. According to surveys 99% of US employers have less than 500 employees. Most of my established businesses have less than 20 employees and generate less than $2,000,000 in annual revenue. As a SCORE Mentor and Chapter Board Member I help my clients deal with these issues every week.

In this article I’ll just discuss Problem #1 – Access to Capital.

The number one reason small businesses fail is lack of capital. Most often this starts right from the very beginning when the CEO completely underestimates his/her cash flow needs for the first 18-24 months. I ask my clients to completely focus their initial understanding of financials on cash. Simply, do you have enough in your checking account to pay the bills? Developing a simple business financial plan showing revenue and expenses will help start the cash flow analysis, but as they soon find out “revenue might not mean cash”. This is often the case when a business extends payment terms, I’ll provide the products or services today and I’ll bill you tomorrow. Then guess what, the customer is slow to pay their bills and the new business owner learns a new term “accounts receivables” (A/R). The best “Access to Capital” is to get paid either in advance or immediately as the product or service is provided. In my former business, even dealing with larger institutions our standard method of payment was ACH debit, monthly. A/R was a bad “asset, I wanted cash. This, by the way, worked well and we were always flush with cash.

From a practical point of view, my smallest clients rely on good old fashion business credit cards to either provide 30 days of float or on-going credit, albeit at very high rates. They quickly learn that banks will provide them with 0% interest for say 12 months or so for either opening a new account or transferring an existing credit card balance over to them. Credit cards also provide both and audit trail and potential purchase discounts in the form of points or cash back.

Once a business gets established I encourage them to start working on a Line of Credit, specifically a Revolver. In a regular LOC, once the extended credit is paid down, it is not replenished and is therefore paid-off over a term. A RLOC, set’s a maximum amount and the company can draw against it “at will” as it makes payments. Most often a bank will ask for security to protect the RLOC, such as pledging assets or personal guarantees. Interest rates can be friendly based on the health of the business. A RLOC will require you to have a good set of financials and a relationship with the institution.

Most small businesses find it difficult to secure outright bank loans these days. Don’t misunderstand, banks in the US are sitting on huge stockpiles of cash, but are not willing to take the risk lending it to small businesses. The larger the business, more banks are will to lend to them. Large national banks fight over companies like Apple, Google and 3M, they offer low rates and highly customized services.

There are however avenues available for small businesses. For example, in my area we have Micro Loans available through the Pasco Economic Development Council (PEDC). In this case a small business works with a SCORE Mentor to develop a business and financial plan and fill out the required application that can then be submitted to the PEDC. The PEDC Loan Committee then meets with the small business to better understand their situation. Currently these loans can range up to $35,000 over 72 months at attractive interest rates.

Another source of business loans is the SBA, Small Business Administration. Although the SBA does not make loans directly to a business, they do act as a facilitator with SBA approved banks and other financial institutions. In many cases the SBA will guarantee the loans, usually the SBA is used if the business can’t qualify for traditional bank loans. Sometimes all the small business needs is a Surety Bond for example a contractor trying to bid on a job, the SBA can help with this. CEO’s looking for SBA loans can often just use the SBA LINC web site, answer a few business questions and start the process all on-line. One final comment about SBA loans, this is a government program and is subject to constant changes and modification of the rules. Not all banks partner with the SBA and provide these type of loans. In addition finding a bank and securing a SBA loan can take quite a bit of time.

The bottom line is that it is difficult for small businesses to receive access to credit to start or grow their businesses. Getting consulting services from SCORE or a business advisor may help you in your efforts. Once a CEO gets to a sufficient level of cash flow, the goal is to stay ahead of the curve. In future articles I’ll cover the other 3 Problems shown above, they too reflect back on Problem #1 – Access to Capital.

You can research our Florida SCORE chapter here: https://pascohernando.score.org/

Investors looking for higher yields in this stagnate market may want to understand how closed end funds work and how they differ from Mutual Funds and ETF’s. See my current CEF holdings at the end of this article.

Summary:

1. Closed end funds are quite different than Mutual Funds (open end funds). A CEF raises a fixed amount of money and issues a fixed number of shares. A Mutual Fund continues to raise money and adds shares as people invest.
2. CEF’s typically are used by institutions and private investors as a way to generate steady income.
3. CEF’s typically trade at a discount to their Net Asset Value, NAV. This offers investors enhanced potential gains. Mutual Funds are revalued each evening to their NAV.
4. All CEF’s are actively managed, most Mutual Funds are tied to an index and are much more passive.
5. A CEF trades just like a regular stock, bid/ask pricing, this means that market demand determines the price. A Mutual Fund determine an actual price at 4 PM each day as the market closes. CEF’s tend to be much more transparent.
6. A CEF’s actual holdings portfolio might be almost identical to an ETF or Mutual Fund portfolio.

Details:
A closed-end fund is a publicly traded investment company that raises a fixed amount of money through an initial public offering (IPO). The fund then trades its fixed number of shares like a regular stock in the market. CEF’s normally have a specialized portfolio of securities and all have active investment advisors.

Let’s compare a Mutual Fund with a CEF in our current market. If there is a market panic, investors may sell any particular stock or segment of stocks in masse. With a huge wave of sell orders and needing to raise money for redemptions, the manager of an Mutual Fund may be forced to sell stocks he would rather keep, and keep stocks he would rather sell, because of liquidity concerns (selling too much of any one stock causes the price to drop disproportionately). By comparison an investor pulling out of a closed-end fund must sell it on the market to another buyer, so the manager need not sell any of the underlying stock.

Closed-end funds are designed to pay investors a set monthly or quarterly distribution. With more and of us either reaching retirement age or retired, a steady income stream is increasingly important. Since the CEF is market price driven, not necessarily the NAV, unlike Mutual Funds. For example, a CEF with a 10% discount to NAV means a CEF is paying you 10% more than you would get if you bought the same stock portfolio directly. You can buy a $1,000 worth of stock for only $900, and get a healthy dividend.

My current CEF’s:

BSL
Blackstone/GSO Senior Floating Rate Term (BSL) sells for a 4% discount to NAV. With a current yield of 7.5% and a maturity of 4 years due to mandatory liquidation in 2020. Therefore Blackstone/GSO Senior Floating Rate Term (BSL) has an effective yield to maturity of nearly 12%. With this great dividend and a fixed repayment date, this can be an attractive place to ride out a rough market while waiting for interest rates to rise. This CEF pays dividends monthly.

JPC
Nuveen Preferred Income Opportunities Fund invests in Preferred Stock shares, another of my favorite, conservative sectors. It trades at a 1% discount to NAV and generates 8% yield. This CEF pays dividends monthly.

BUI
BlackRock Utility and Infrastructure Trust (BUI): I like this CEF because no matter who wins the election in November, the demand for water, energy and improved roads and bridges will keep need to be addressed. This CEF sells for a 1% discount to NAV and has a 7% yield. This CEF pays dividends monthly.

On my shopping list is:

GAB
Gabelli Equity Trust GAB) is has very diversified portfolio. It has a 11% yield and sells at a 4% discount to NAV. It top 10 holdings are pretty blue chip, Rollins, Honeywell, MasterCard, Swedish Match, Cablevision, Berkshire Hathaway, Twenty-First Century Fox, American Express, Genuine Parts and O’Reilly Automotive. This CEF pays dividends quarterly.

The stock market has been very volatile for the last 12 months. So, what is a nice safe investment to add to your portfolio that will provide high yield income?

REIT’s – Real Estate Investment Trusts

A REIT is a way to invest in real estate without actually owning the property. A REIT is a company that owns and operates income generating real estate. REITs can own commercial properties from office and apartment buildings to hospitals, retirement homes, warehouses, hotels, shopping centers, cell phone towers and timberlands. REITs are also a major factor in financing the housing market. REIT, similar to BDC’s pay little or no corporate income tax and must distribute at least 90 percent of taxable income as dividends to investors. This results in many cases in both capital growth and high-yields. REIT’s trade just like stocks.

There are two basic types of REIT’s Equity REITs and Mortgage REITs. An Equity REIT owns property like office buildings, shopping malls, hotels, warehouses, hospitals, etc. A Mortgage REIT invests in mortgages of property.

According to a study, nearly half of all publicly traded REIT shares are held in pension plans and retirement accounts. Public and private pension plans and 401(k)s account for 29.1 percent of REIT shares, while investors with IRAs hold an additional 18.1 percent of REIT shares.

The performance of a REIT follows the real estate market more closely than it follows the stock market. Dividends are taxed at the same rate as income, so the higher dividends mean you will likely pay more taxes unless you hold them in a tax-deferred account like your IRA or 401K.

On September 1, 2016 Real Estate will become a separate sector in the S&P, previously RE was grouped in with Financials and had very little visibility. Mutual funds will be buying REIT’s ahead of this change to make sure they are positioned to hold some of the new index.

I’ll also warn you that like all other high-yielding investments that are subject to the volatility of changing interest rates, REIT’s can be also. In general REIT’s won’t be effected too much as long as rates don’t rise quickly.

Here are my current REIT Holdings (about 5-6% of my portfolio):

Hospitality Properties Trust (HPT) Healthcare  7.81% yield

HCP, Inc (HCP) Healthcare   6.88%  yield

American Capital Agency (AGNC)  MReit 12.53% yield

Annaly (NLY)  MReit  11.15% yield

Stag Industrials (STAG)  Industrial Warehouses 6.28% yield

Realty Income Corp (O)  3.92% yield  Triple Net REIT, ***** Great Capital Appreciation ******

Great web site: http://www.dividendyieldhunter.com/

I also follow http://seekingalpha.com/   Brad Thomas, research analyst and he currently writes weekly for Forbes and Seeking Alpha where he maintains research on many publicly-listed REITs.

Summary

1. Everything has changed in retirement planning in just the past few years.
2. Formerly financial planners would recommend “laddered bonds” that would allow you to have a steady income stream with little risk.
3. Bonds worldwide no longer pay the interest necessary to support the typical 4% retirement drawdown many people need to retire. Some bonds pay negative interest.
4. The situation may not change in the next 10 years.
5. There are alternatives, but you need to understand them.

Today, the 10 year US Treasury is paying about 1.8%, a very far cry from 5% – 15% they paid from 1968 to 2009. Even at 1.8% the US 10 year is viewed as very attractive to the rest of the world when many bonds are paying much less or negative yields.

For an entire generation, financial planners helping people develop their retirement plans counted on bonds to provide not only safety but also fixed income. The planner would suggest “laddering” bonds or even high yield CD’s. Many time they would just put you into bond mutual funds that did the laddering for you automatically. Laddering meant that you would start by buying say a 1 year bond, a 5 year and a 10 year bond or Treasury note. When the 1^st bond expired you would just roll it over into a 2nd bond, etc. This way every few years you had a bond expire (called away) and you could hopefully buy the next one at higher rate. If you owned enough bonds with different maturity dates you could count on a steady stream of income that allowed you to draw down your 4% a year and still accommodate for inflation. This was the most recommended and preferred retirement investment strategy. This doesn’t work anymore. Here is what the 10 Year Treasury yielded from 1950 to 2016.

Today however, with such a low bond yield worldwide there is new generation of retirees that are either retired today or will retire in the next 10 years that are searching for a new financial plan. Economist are now saying that we should prepare ourselves for 10 years of relatively low yields, say 1.5% – 3%.

The problem is that the 4% draw down model does not work with 1.5% – 3% yields and 1-2% inflation. You run out of retirement income way too early. Even if you follow a more aggressive investment model of 60% bonds 40% stocks and bonds stay in the 2-3% range you need huge returns on stocks to hit your 4% goal.

Here is the problem for the next 10 years. Notice the downward trend in 10 year yields and a new base being established in the 1.8 – 3% range.

What can you do?

1. Assume you need to maintain a 4% draw down rate in retirement, you probably need a consistent 6-7% yield/growth on your investments to accommodate for inflation.
2. Always remember bond yields move directly opposite from bond prices.
3. The key is to substitute “bond like” equities that offer higher yields for traditional bonds.
4. Plan on maintaining a higher equity (stocks) proportion of your portfolio well into retirement. Today you could easily be in you 80’s and still have a 50/50% bond/stock portfolio. In past years at 80 you would own 100% bonds and CD’s.
5. Continue to fine tune your financial retirement plan, you will live longer than you think, you need to be debt free in retirement and you need to manage expenses.
6. If you develop a good plan and pay attention to it, you can retire comfortably and sleep at night knowing you can meet your goals.
7. Your plan might be to spend all your money before you die, or leave a legacy (money) to your loved ones for them to enjoy.

In a future article I’ll provide some suggestions on how to build a 6-7% yield/growth portfolio.