What Are Merchant Cash Advances and Working Capital Loans?

By Adam Uzialko

Could a merchant cash advance or working capital loan be the answer for your cash flow problems, or a potential pitfall?

  • Merchant cash advances offer an immediate lump-sum payment in exchange for future credit card sales.
  • Working capital loans offer a variety of financing options for short-term funding to cover operational costs.
  • There are risks associated with each type of financing that should be avoided.
  • Strategic planning for repayment can make each type of financing a viable option for many businesses.

Many small business owners have experienced a time when they need more cash on hand. Cash flow management is everything in business, but sometimes even the savviest small business owners find themselves with money tied up and unable to cover operational expenses. In these times, there are a variety of financing options available to small business owners that can help tide them over with liquid capital delivered directly to their bank accounts.

However, these financial products come with their own set of risks that must be properly managed to avert disaster.

When handled properly, these tools can keep a cash-hungry business running. When misused, they could lead to a vicious cycle of debt. This guide will introduce you to funding tools like merchant cash advances and working capital loans and provide advice from financial experts on how to use them to your benefit. Good planning and financial record-keeping is key to repaying loans successfully and keeping your business profitable.

What is a merchant cash advance?

A merchant cash advance is a form of financing that isn’t truly a loan. Instead, it is a financing option that provides immediate cash in exchange for a business’s future credit card sales receipts. In essence, when a business accepts a merchant cash advance, they are selling the revenue of future credit card sales for immediate payment.

Merchant cash advances are often used by seasonal businesses or those with cyclical sales to keep cash flow circulating during slow times of the year.

Business owners can pay operating expenses and wages when sales are slow; then, when sales volume picks up, the business can repay the merchant cash advance and generate a profit. Since merchant cash advances are backed by projected sales, businesses with a less-than-perfect credit score also often rely on them for an injection of short-term working capital.

Besides operating expenses and wages, businesses use merchant cash advances for things like equipment financing, marketing campaigns, hiring new employees, expanding inventory, buying needed materials and acquiring property.

How do merchant cash advances work?

A merchant cash advance traditionally offers an influx of capital based on a business’s expected credit card transactions over the course of a specified term. For example, if a business receives a $100,000 merchant cash advance with a 52-week term and a factor rate of 1.25, the business would have to pay back $125,000 in credit card sales over the course of the next year.

Merchant cash advance repayment is generally broken down into weekly payments, said Randall Richards, the director of business development at RFR Capital. According to Richards, cash advance companies will often draw the payment directly from a business’s bank account rather than its merchant account associated with credit card transactions.

“Weekly payments would be based on sales and a multitude of factors,” Richards said. “Someone who is only doing $20,000 per month in sales won’t qualify for a $100,000 [advance.] The sales have to support the payment or else the lender is at risk of losing money.”

Since merchant cash advances are based on sales, borrowers with poor credit can usually access them even when they can’t obtain a traditional loan. Of course, this flexibility means that merchant cash advances are more expensive than bank loans as well.

“[Merchant cash advances] are one of the alternatives today for people as they move down and become less and less creditworthy,” said James Cassel, co- founder and chairman of Cassel Salpeter and Co. “Merchant cash advances could [carry] the equivalent of 40% interest rates.”

Cassel clarified that merchant cash advances don’t carry an interest rate of their own, but the cost of a cash advance can be measured against the interest rates associated with a traditional loan. For example, in Richards’ hypothetical of a $100,000 merchant cash advance that costs a business a total of $125,000 over a 52-week term, the interest rate equivalent would be 25%. That is much higher than the interest rates on many bank loans, which might cost a business with great credit between 2% and 5% of the loan’s principal value, Cassel said. Understanding your factor rate and whether you can negotiate it is useful in reducing the cost of a merchant cash advance.

What are the pros and cons of a merchant cash advance?

Merchant cash advances can be useful tools for many businesses. Whether you are a seasonal business weathering the slow season or a business with cyclical sales, such as a manufacturer that makes most of its sales in Q4, merchant cash advances offer support. However, for struggling businesses, relying on a merchant cash advance to stay afloat could be the beginning of a death spiral.

“Sometimes it’s a business that’s so excited and thinks it can’t lose but does. Other times, it’s a business that’s in deep trouble and just trying to stay afloat, waiting for the one more sale … just trying to survive, because then they believe they will thrive,” Cassel said. “Sometimes you have to question the viability of the business.”

Like all forms of financing, merchant cash advances come with a unique set of pros and cons. If you plan accordingly, they could be an effective tool for maintaining healthy cash flow and operating your business profitably.

However, they can also expedite the demise of a failing business when used improperly. Managing a merchant cash advance to the benefit of your business means understanding the pros and cons and how to best navigate them.


  • Immediate lump-sum payment: Merchant cash advances are useful because they deliver a lump sum payment to a business immediately. That means when cash flow is low, a business can bolster it with a quick influx of capital.
  • Based on sales, not credit score: Merchant cash advances are based on sales instead of credit score, meaning even borrowers with poor credit or no credit can make use of them.
  • Easy to qualify: Qualifying for a merchant cash advance is relatively easy. It requires a few months of bank statements, a one-page application and some basic information about the business, such as its tax identification number, website and address.
  • Fast approval process: Merchant cash advances can generally be approved more quickly than bank loans, which often take several months for In some cases, merchant cash advances deliver funding within a few days of approval.


  • Expensive: Merchant cash advances are generally very expensive, ranging from a high 40% equivalent rate to an astronomical 350% equivalent rate in extreme The cost depends on several factors, including the lender a business partners with, but a merchant cash advance is always significantly more expensive than a traditional loan.
  • One-time influx of capital: Merchant cash advances offer a one-time injection of a modest amount of For many businesses, this isn’t a problem. For example, the seasonal business that needs to cover its operational costs in the lean months until business booms again will likely do well with a merchant cash advance. A struggling business using a merchant cash advance to hold itself over in hopes that sales eventually increase, however, could be backing itself into a corner.
  • Restrictive requirements: To accept a merchant cash advance, a business must sign an agreement with a In many cases, these agreements include provisions that require the business to abide by certain rules. For example, your business might be precluded from moving locations or taking out an additional business loan. Cassel said you can avoid this problem by having an attorney review any agreements before you sign and negotiating the details of the contract.

What is a working capital loan?

The term “working capital loan” refers to a small business loan or alternative financing option designed to cover near-term costs with a short repayment date. Working capital loans are often used by businesses to cover a wide range of operational costs. There are many different types of financing that could be considered a working capital loan, including:

  • Lines of credit: A line of credit isn’t a loan but rather a predetermined amount of money a business could borrow from at any Much like a credit card, lines of credit only incur interest on the balance borrowed, not the total value of the credit limit. Lines of credit are primarily extended by banks or credit unions, though sometimes businesses with enough leverage can negotiate a line of credit directly with their supplier. The amount of a line of credit is generally based on a business’s credit score.
  • Short-term loan: A short-term loan is generally a small dollar loan to be repaid in one Short-term loans range up to $100,000, providing borrowers with an injection of capital to cover operational expenses immediately. Interest rates on short-term loans can vary but tend to be higher than longer-term conventional loans due to their quick maturity period.
  • Invoice factoring: Invoice factoring, also known as accounts receivable financing, is similar to a merchant cash advance as it is not related to credit but instead a business’s sales. A business sells a lender (or “factor”) their uncollected accounts receivable for a significant portion of the total value upfront. The factor then works to collect the outstanding payments and keeps the remaining percentage of the total value not paid to the Invoice factoring is generally considered less risky than a merchant cash advance for one simple reason: Invoice factoring is based on existing accounts receivable that have not yet been collected, while merchant cash advances are based on projected future sales rather than an existing asset.
  • Equipment loan: Equipment loans are specifically intended for the acquisition or lease of equipment needed for a business to operate. Generally, these loans are backed by the equipment itself as collateral rather than a business’s credit; if the business fails to repay the loan, the equipment can be repossessed.

Borrowers that require a working capital loan might need them for the same reasons a company seeks out a merchant cash advance, including covering wages, financing the purchase of equipment, acquiring new properties and expanding inventory. They are also commonly used by seasonal businesses or those with cyclical sales.

What are the pros and cons of a working capital loan?

Working capital loans tend to be less risky than merchant cash advances but often serve similar purposes. However, it’s not uncommon for the qualifying requirements to be stricter, since working capital loans are often based on creditworthiness or some other form of collateral more tangible than projected future sales. Here’s a closer look at some of the pros and cons associated with working capital loans.


  • Short repayment period: Working capital loans, by nature, have fast repayment periods, which are useful to businesses that want to quickly clear the debt from their Repaying a loan within one year means businesses aren’t forced to pay interest on the loan for years to come.
  • Flexible: Depending on the type of working capital loan, funding is relatively Certain loans, like equipment financing, are more restricted; however, lines of credit, short-term loans and invoice factoring can all be used to cover a wide range of costs.
  • Fast approval process: Short-term loans generally have a faster approval process than conventional loans because they are designed to fill an immediate need for a


  • Expensive: A short-term loan matures more quickly than traditional loans, so borrowers should expect to pay higher interest rates. The interest rate on most working capital loans varies depending on the precise type of loan, but they are generally more expensive than a longer-term loan.
  • Short repayment period: While the short repayment period is a blessing to companies that want to clear debt from their books, it can be a challenge for businesses that struggle to repay their Since working capital loans have a much narrower window than longer-term conventional loans, businesses have to pay back the principal much more quickly.

If you need cash fast, consider a merchant cash advance or working capital loan

Many businesses need help to support their cash flow. After all, cash flow is oxygen to a business, and without oxygen, it won’t be long before the business chokes and operations stall. Merchant cash advances, lines of credit and working capital loans are methods that can help buoy businesses while they await future sales. However, without a clear plan in place, these forms of financing can spell disaster for a business.

To make the most of any type of financing, have a clear road map to repayment and the ability to execute that plan successfully. Good record- keeping and a strong understanding of your business are critical.

Accepting a loan in hopes that you might generate future sales to cover it is a major risk. When in doubt, consult with an accounting professional before accepting any money from a lender of any kind. With a bit of planning, though, merchant cash advances and working capital loans could be precisely the support you need to get through the lean times until you’re back on track to profitability.

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Climate change is already starting to affect small businesses in flood zones. Here’s what the experts say about preparing your business for natural disasters.

Last year, a neighborhood in Key Largo, Florida, felt the full effects of rising sea levels. For more than 80 days, the low elevated streets of Stillwright Point were flooded with saltwater, leaving residents trapped in their homes, unable to work.

Mike Turner works as a window tinter who frequently goes to the neighborhood. He said because of the corrosive saltwater, he had to limit jobs in the neighborhood, fearing damages to his car.

“People didn’t want to go out, some of their cars can’t drive through the water,” Turner said. “The water was up to the knees.”

Flooding wasn’t new for the neighborhood, but local news source Keys News reported that the longest previous flooding lasted 22 days. It had been over 80 days. Local meteorologists said in the report that the flooding was caused by rising sea levels due to warmer ocean water temperatures.

Though the flooding cleared by November, Turner said it served as a stark reminder of how extreme weather affects businesses.

The climate crisis will be devastating for the planet over the next century, but it is already impacting small businesses now. Areas prone to wildfires, rising sea levels, or hurricanes pose great personal and financial risk.

Research published in September of last year by Willis Towers Watson, a global insurance and advisory company, categorizes events that will have a high impact on global economic growth. The paper highlights climate change as the No. 1 concern. Climate change first appeared in their rankings in 2013 and has moved its way up ever since.

Higher insurance costs, loss of business, and adopting greener initiatives have been the main threats of climate change, according to the study.

We talked with an investment banker who works with small businesses and Miami’s first chief resilience officer. They said there are several precautions you can take to withstand natural disasters.

Weather-proof your retail location

In Islamorada, Florida, also in the Keys, a famous restaurant located next to the sea, Islamorada Fish Company, has felt the effects of flooding for a few years. One section that houses more than 20 tables overlooking the sea is closed off on days water floods the area.

Cindy Trisha, a frequent customer of the seafood restaurant, said that the unpredictable sea levels will rise and flood the entire section. While there are other sections to host more guests, she said that on busy nights, she estimates a big chunk of business is lost since customers have to be turned away.

“No one can really tell when the levels will rise,” Trisha said. “When it does, they lose a lot of customers. It’s a problem that they haven’t fixed yet.”

Representatives from Islamorada Fish Company did not respond to Business Insider’s request for comment.

Jane Gilbert, the City of Miami’s first chief resilience officer, has worked on resilience projects and initiatives to mitigate flood risks. Her initial findings report that the construction industry and retail sectors are more vulnerable to floods. To help flood-proof, Gilbert said small businesses can get flood panels, elevate critical equipment, or, if possible, elevate their buildings.

“Small businesses don’t think 40 years out, but if you are located in a storm surge zone, whether its climate change or hurricane, those businesses are more vulnerable,” Gilbert said. She added that the city is looking into giving businesses resources to help fortify themselves.

Consider climate risks in business decisions

Apart from shoring up their physical property, Gilbert encourages businesses to work with their insurance company and their local government, who can help businesses get back up and running as soon as possible in the event of a natural disaster.

James Cassel, 64, an investment banker who works with small businesses to navigate through climate crisis, said that weatherproofing stores and getting flood insurance policies are a good investment in the long term, though he understands why businesses are hesitant since it can be costly.

“We are starting to see commercial insurance rates rising with flood policies,” Cassel, the CEO and founder of Cassel Salpeter & Co, said. “It may cost more money, but you [have] got to have a longer-term view than the next 20 minutes.”

Cassel said that when making new investments, have climate risks in the decision-making process, whether it is an adaptation or understanding the risks with insurance.

Greener initiatives can lead to new (and more) customers

According to the Carbon Majors Report, more than half of industrial emissions can be traced to 25 companies. While the listed companies are not small businesses, it illustrates how businesses play a part in the climate crisis.

Cassel said adopting green initiatives will not only help reduce the carbon footprint but will help get new customers.

With more green and climate awareness, consumers, especially the younger generation, have become more socially conscious on what businesses they support. Banning plastic straws has especially increased the chances of businesses getting younger customers.

Cassel said a sustainability mindset starts with the little things. “Young people will patronize businesses because they are adopting green measures, or they will penalize businesses by not going there because they are not doing it,” he said.

In this area, small businesses have an advantage over large companies, since they typically can implement new methods more quickly. Cassel suggested businesses install new lighting, such as motion sensor detectors or lightbulbs that use less electricity, toilets that use less water, and energy-efficient appliances.

“There are so many ways to have a positive impact [on] the environment,” Cassel said. “Every small business has an obligation to do their part. You can’t argue over the fact that the water is rising.”

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As veteran workers wait longer to retire, here’s how you can also keep younger talent

By James S. Cassel

No matter what industry you are in, you will find that older/senior-level workers are waiting longer to retire. These diehards have varying motivations for extending their careers. Their names may continue to offer brand value that attract customers, clients and potential partners; they may feel they still have much to offer; they may have little else that interests them; or they simply may have to keep earning because people are living longer and are rightfully concerned that they may outlive their savings or won’t have enough money for the life they’re accustomed to.

This presents challenges to middle-market businesses that want to keep younger talent who are sometimes impatient to be promoted. But losing younger staff can mean losing the future. So, here is what you can do to keep those mid-level managers on your team and not on the competition’s.

You must show them a path to the top, albeit a slower one. Talk to your ambitious mid-level employees about how they can advance, or at least how they can grow laterally. If they don’t know there’s a path, or can’t see one, the best are more likely to look elsewhere, and once they leave, they are tough to replace given today’s low unemployment and high demand for talent. So, be as specific as you can about growth opportunities.

You may also need to work with senior-level people to alter their positions to allow younger staff more opportunities. For example, a law partner might go from partner to senior status.

Second, be careful with your hiring practices. For example, contracting a search firm to replace top-tier employees while overlooking those just one rung down the ladder sends the message that there is no path upward, leading good employees out the door.

Third, nurture a corporate culture that is challenging but respectful. The #MeToo movement has shown that we are less tolerant of abusive company leadership than ever before. This means keeping a close eye on your employees at the top who often come from a different era and corporate culture. Make sure they are treating subordinates respectfully.

Fourth, create long-lasting incentives as opposed to merely giving one- off bonuses for accomplishments. You can get this done in a variety of ways like providing educational opportunities for employees and linking such professional development to your business goals. If you cannot offer in-house training opportunities, reach out to outside providers. There are many executive programs now available that help employees hone skills and brush up on weak areas.

Also, consider including exceptional mid-tier employees in key decision- making processes. Helping steer a company toward a brighter future strengthens the bond between employees and the company.

Another possibility is offering some type of stock ownership, but not just for the senior people. With proper vesting, and other terms, this helps encourage people to stay long-term and may even give them a path to potentially buying out the founders.

Sometimes you will have to make a difficult choice, selecting who is more important to the future of the business. Remember, when you lose from the middle, rebuilding from the bottom can afford you some additional runway. Sports teams make these tough choices yearly. During rebuilding years, they sometimes have to decide between the rising star and the older veteran. (Let’s see what happens with Tom Brady.) Ultimately, it’s better that you make the decision instead of having it made for you.

There is no escaping the trend of folks working longer and inhibiting advancement opportunities for others, but if you want to have a successful middle-market business, you are going to need mid-tier workers to execute your vision. With too much employee churn, you have instability and lose institutional knowledge as well as your investment into those employees. Take the necessary steps to confront the challenge and prosper, but be prepared to address the loss of talented staff. Patience might be a virtue, but not every employee will be virtuous.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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The Toughest Job in America? Boeing’s New CEO Faces an Epic To-Do List as He Takes the Helm Today

By Erik Sherman

Beginning today, David Calhoun steps into the cockpit as CEO of Boeing, the company’s fourth chief executive in just under five years.

Calhoun is highly seasoned. His path to Boeing follows a long and distinguished career at high-profile companies in multiple industries. He’s held top positions at Blackstone Group, Caterpillar and Nielsen Holdings, to name a few.

From those who know him well, Calhoun gets high marks as both a smooth operator, adept at making the numbers work, and as a kind of Mr. Fix-It.

Calhoun will have to rely on both skills if he’s to right America’s most troubled company.

Just yesterday, Treasury Secretary Steve Mnuchin dropped a timely reminder of just how much is riding on Boeing’s turnaround. “There’s no question that the Boeing situation is going to slow down the GDP numbers,” Mnuchin said in a Fox News interview. “Boeing is one of the largest exporters, and with the 737 Max, I think that could impact GDP as much as 50 basis points this year.”

Calhoun is heir to one of the biggest messes, not only in the company’s history, but in modern business. Just before Christmas, the Boeing board asked him to step in and achieve a seemingly impossible metric: pilot the aviation and defense giant beyond the twin tragedies of the Lion Air and Ethiopian Airlines crashes that killed 346 people, and into less turbulent times.

To do so, he must regain the trust of investors, suppliers, consumers and employees. He has to repair relationships with regulators, fix the dysfunctional, we-know-best culture that’s created a toxic rift between management and the workforce that was best summarized by a recently released internal employee message that referred to the 737 MAX designers as “clowns” and the company’s supervisors as “monkeys.” Oh, and he’s got to do what his predecessor, Dennis A. Muilenburg, couldn’t—get the 737 MAX back into the air.

He’s under a huge time constraint, too.

Calhoun needs quick progress because of a major cash burn—the company had a cash burn of $4.1 billion in the third quarter—and growing impatience with the company on all sides. He is about to become one of the most scrutinized figures in business, and one who will likely feature in many a b- school case study for a long time to come—whether he likes it or not.

Insider for an outsider’s job

Some suggest that Calhoun isn’t the best choice because of his 10 years on the Boeing board, which oversaw the MAX fiasco. There’s also criticism that he hasn’t run an aerospace company before, and lacks that most Boeing of pedigrees—an engineering background.

Jeffrey Sonnenfeld, senior associate dean for leadership studies and Lester Crown professor in the practice of management at Yale, disagrees. “He is universally admired within and outside the company in every critical constituency,” Sonnenfeld says. “He has a huge amount of good will in Wall Street and in the engineering world. He still comes at it with all the authority of his GE aerospace days.”

Calhoun also has deep experience in managing corporate crises, such as during his time as chairman of Caterpillar when multiple federal agencies raided the company over claims of tax fraud in 2017.

Although not an engineer, during a 26-year tenure at GE, Calhoun ran the company’s aircraft engines and transportation (aircraft and rail) divisions. Jay Apt, a professor of engineering and public policy at Carnegie Mellon University, says that an engineering background isn’t necessarily key to success at Boeing.

“Engineers throughout the organization were in charge during the 737 MAX software issues,” Apt says. “What one really needs is a safety culture. That safety culture can be led by someone who is seriously committed by safety, whether they are an engineer or not. It requires complete commitment from the board, the CEO, and the chief risk officers to say, ‘Schedules are important but [a lack of] safety can kill the company.'”

Another advantage of Calhoun is that a full outsider would lack knowledge of the operations and culture of a sprawling company that employs over   130,000. “The learning curve is 18 months for an outsider to master the [CEO] job, and that’s if you pick the right person,” Sonnenfeld says. Calhoun is a known quantity and has support from Boeing chairman Lawrence Kellner—a former head of Continental Airlines—and CFO Greg Smith (Smith served as interim CEO over the past three weeks). That backing is vital, Sonnenfeld says, calling Calhoun “a culture carrier of the best of the old Boeing.”

Time is of the essence for the company, which is burning through cash. In the first nine months of 2019, Boeing had a negative operating cash flow of (negative) -$226 million, compared to $12.4 billion in the same period of 2018. Boeing is reportedly looking to raise as much as $5 billion in debt to cover costs.

The “sudden drop in the firm’s operating cash flows [is] causing the firm to take on significantly more leverage and potentially disrupt its relationships with suppliers,” according to a client note from Management CV, which analyzes senior management performance at public companies.

The financial problems are in the commercial aircraft division, source of more than 60% of the company’s overall revenues. Until the MAX begins flying again, the financial shortcoming will be impossible to fix without drastic steps like layoffs, which so far have been avoided.

Cash flow isn’t the only issue. Ivan Feinseth, chief investor officer and director of research at Tigress Financial Partners, which advises large investors and also holds some Boeing stock for clients, thinks that by next month the company needs to show a plan to get the MAX back in the air by early summer at the latest.

Bridging the trust gap

Getting the MAX airborne and restoring a sense of trust with others will be difficult. Relations with the Federal Aviation Administration and other regulator bodies around the world have been fractured. “The number one priority Boeing had was to repair its relationship with its regulator,” says Mark Dombroff, partner and co-chair of the aviation law practice at Fox Rothschild.

He noted the recent damning batch of internal Boeing emails that indicate Boeing was above regulatory scrutiny. “Some of these emails, to the extent one interprets them that way, are commenting on the FAA oversight.”

It wouldn’t be a first time that Boeing was truculent with a regulatory body. “We had a very tough relationship with them,” says Peter Goelz, currently a senior vice president of government and public relations firm O’Neill and Associates and a former managing director of the National Transportation Safety Board from 1996 to 2000. The NTSB dealt with two crashes of Boeing 737s in the 1990s that involved a malfunctioning rudder power control unit that, under certain circumstances, would force the rudder in the direction opposite to what the pilots wanted, a situation in many ways similar to the current one. “They battled us right up until the end,” Goelz says.

The FAA now controls whether and when the MAX returns to the air. Repairing that relationship is critical. So is regaining trust with everyone else involved with the plane’s performance. Airline customers the world over have been burned by having to ground MAX planes or hold off on delivery of new planes that they badly needed, messing with business operations. American Airlines Group, for one, fought Boeing in the courts for damages (the airline says the MAX grounding shaved $540 million from its 2019 pretax profits), before reaching a partial settlement.

The shutdown is impacting consumers, too. Some airlines have had to stop flying to certain destinations that would have been serviced by the MAX. Others are having to cut costs and/or boost ticket prices. And, the flying public is leery of ever boarding a MAX again.

Then there are Boeing’s thousands of vendors.

“Boeing typically is super-duper tough with their suppliers,” says Joseph Smith, aviation director at investment banking firm Cassel Salpeter & Co. As the MAX grounding has stopped production, a host of vendors are feeling the pain. Boeing’s biggest supplier, Spirit AeroSystems Holdings, just laid off 2,800 workers, or 20% of the workforce.

Calhoun has to address all these problems at the same time and under a tight deadline. Sonnenfeld calls the task facing Calhoun a “heroic quest.”

Welcome to your first day on the job.

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Looking back at 2019 and at the business year ahead: What’s ahead?

By James S. Cassel

2019 was full of surprises with interest rates unexpectedly reduced, the trade war with China, and other eye-openers — but can reviewing these developments help forecast what 2020 will bring, or will nothing short of a crystal ball help? Are greater curveballs in store as we throw into the mix a highly contentious presidential election and impeachment proceedings? And what are the implications and potential safeguards for your middle-market business?

In 2018, interest rates were raised several times; the Fed predicted two hikes for 2019, but rates were actually lowered three times that year. Meanwhile, the trade war with China resulted in onerous tariffs and serious long- and short-term repercussions for America. According to Fortune, while Beijing enforced a strategy that protected its economy and took intellectual property, the U.S. approach is “forcing our manufacturers and consumers to pay tens of billions of dollars more for imported products and parts.”

American farmers lost close to two-thirds of their exports to China, while China was busy developing relationships with other global markets for its agricultural imports. Countries like Brazil have filled the void, offering China low-cost pork and soybeans that before the imposition of tariffs, were being exported from the U.S. to China at higher prices. Some believe the chances of those contracts returning to the U.S. are questionable.

In manufacturing, the ISM Purchasing Managers Index (PMI) showed that September had the “lowest levels of activity… since the great recession.”

M&A activity didn’t escape unscathed either, as “U.S. M&A sank 40% year-on- year to $246 billion, the lowest such quarterly (the third) level since 2014.” Likewise, the trade war impacted global M&A, which hit a three-year low. But things seem to be going better in the fourth quarter, and the first quarter of 2020 also looks more positive.

We also witnessed a continued squeeze on migrants that is draining the labor pool, causing escalating problems for many U.S. businesses, particularly in tourism and retail, which will result in lower GDP growth.

Additionally, President Trump’s “$1.5 trillion tax cut package appeared to have little impact on businesses’ capital investment or hiring plans.” Despite much fanfare, the fiscal facelift did little to improve the long-term economy, and what it did do, is in the rear-view mirror.

Looking at the year ahead: The Fed has indicated that interest rates are unlikely to be adjusted. Although 2020 is fraught with uncertainty, phase 1 of an agreement with China has been announced, which will purportedly lower tariffs and see China resume buying U.S. agricultural products, but the exact amounts are in dispute. Arguably, phase 1 merely puts us back where we were before the trade war started.

For small and middle-market companies who can’t push back on their suppliers to absorb the tariffs, the truce will spare them from what might have been the kiss of death. Also, our national employee base is not expected to materially grow in 2020, and retaining existing staff — perhaps by delaying retirement or drawing people back to the workforce — will be essential.

The upcoming elections will have the parties championing different views relating to healthcare, environmental issues, regulatory policy and taxes, with varying implications for middle-market businesses. You can safeguard your interests by continuing to monitor economic and political trends.

Even if trade wars fade into the past, you still want to weigh the benefits of staying with your business or going to market to sell. But remember, the sales process takes about six to nine months. Don’t wait to have full clarity on the political and economic future, or it may be too late. If you intend to raise capital, strengthen your position by raising money now, and then see what the next two years bring.

Erring on the side of caution is sound practice, and never more so than in times of marked uncertainty. Build your coffers now: As the saying goes, an ounce of prevention is worth a pound of cure.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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Plane Advantage: Pilot Problems

By Dale Buss
December 26, 2019

What the looming pilot shortage means for private aviation.

Business aviation is playing a game of musical chairs these days, as an unprecedented shortage of pilots raises the specter of a CEO showing up on a tarmac somewhere only to find an empty cockpit in the company plane.

“We haven’t gotten to the point that an aircraft is just sitting somewhere— yet,” says David Lamb, COO of Clay Lacy Aviation, an aircraft-management company. “But it’s getting tough.”

Sean Lancaster says pilot scarcity is “fortunately and by design somewhat invisible” to his clients, who are Fortune 500 CEOs, company owners and other high-net-worth individuals, “because they just get on the plane and get up and go. But operationally, for the people who work for them, it’s a real problem,” says the vice president of plane broker Bristol Associates.

Indeed, a historic pilot shortage has become a huge drag on the corporate- aviation industry, as company flight departments, charter services and fractional outfits absorb the significantly higher costs of competing for scarce pilot talent—and pass them on to their clients.

Pilots flying an upper-market Gulfstream G650, for example, now can command nearly $300,000 in compensation, about double the pay of five years ago, some experts say. Flexjet, a fractional-jet leader, boosted its compensation for second-in-command pilots by 25 percent, to about $100,000, this year.

“You can get what you want, but you’re going to pay for what you get,” says Roger Pierce, a veteran pilot and corporate-aviation director. “People with really solid experience and good reputations in the business are just being able to demand more.”

The severe pilot shortage stems from several factors that have snowballed over time. Persistent pilot deficits within the U.S. Air Force and Navy have meant many fewer pilots exiting the American armed forces, traditionally a huge source for commercial and corporate aviation; and the boom in pilot training now is in military drones, not manned aircraft. The Federal Aviation Administration stiffened pilot-licensing requirements after a 2009 commuter jet crash in Buffalo that killed 50 people.

Retiring Wings

Meanwhile, about 42 percent of all active airline pilots, or approximately 22,000, will retire over the next decade, one industry survey says, with a new mandatory retirement age of 65, imposed by the federal government several years ago, looming as a main culprit. But growth in aviation will require 20,000 extra pilots a year for the next decade, Boeing estimates.

So airlines are getting more aggressive about recruiting, which puts a particular squeeze on business aviation. “It’s hard for pilots to justify not going for more time off, a schedule and more money, with an airline, and it’s a hard thing for a corporate operator to compete with,” says Sheryl Barden, CEO of Aviation Personnel International.

To make sure they and their clients aren’t losers in this game of high-flying musical chairs, business-aviation players are fighting back in these ways:

Treating them better: Increasing compensation is a huge part of that. Pilot salaries in corporate aviation have increased by 20 percent to more than 100 percent, Barden says. Charter company Clay Lacy, for example, just launched a three-pronged program that includes higher salaries, an explicit career ladder and enhanced benefits that include what Lamb calls “zero-deductible, almost no-cost medical” insurance, and likely will add a deferred-compensation option as a sort of retirement benefit.

Wanting to coddle pilots was one big reason Flexjet encouraged its ranks to decertify the Teamsters union in 2018. “Now we have a direct relationship with our pilots,” says Flexjet COO Megan Wolf. “So if they want different materials for their uniform shirts or invite us to consider a new hotel in a destination city, we can make those changes quickly.”

Flipping the script: To the right audience, business aviation can make its own strong case for the lifestyle of its pilots, highlighting the clear benefits of being a business pilot over the more strait-jacketed, routinized life of a union-represented airline pilot.

“You’re more in control of things as a crew member and control your schedule to a certain degree,” says Janine Iannarelli, president of plane broker Par Avion Ltd. “And if you’re flying to California from the East Coast, once you get there, your time is yours. Business aviation is more flexible for the pilot.”

Flexjet keeps adding new second- and third-tier airports as home bases, such as Savannah, Georgia, and Tulsa, Oklahoma, “so that our pilots don’t have to live near a hub airport as they would with a commercial carrier,” explains Wolf.

Expanding the pool: The National Business Aviation Association and other corporate-aviation groups are getting more proactive about promoting their careers in schools. More aviation companies are testing ways to help would-be pilots afford aviation school, where they can run into big debt burdens such as those experienced by college students. “It’s difficult to go and get student loans and come out a pilot,” says Craig Picken, managing partner of NorthStar Group, an aviation-recruitment outfit.

Business aviation needs to recruit more women to become pilots as well, says Joseph Smith, director of the aviation-services division of investment bank Cassel Salpeter. “Right now, they make up only three to five percent of the pilot population,” he says.

Some in the industry are also pushing to raise the mandatory federal airline pilot retirement age to 68. “People can fly safely at that age if they’ve taken care of themselves, especially if you’ve got a more senior and a junior pilot in the cockpit together,” Barden says. “If we could stave off or slow down forced retirements by just a couple of years it would take some of the pressure off.”

Reducing the need: The aviation industry and regulators are discussing the greater possibility of single-pilot certification only for cargo flights, which would reduce pilot demand. And, of course, the high degree of automation already employed in flying aircraft suggests a future in which artificial intelligence and robotics enable airplanes that operate entirely autonomously.

“Planes could fly themselves already; it’s probably more feasibly now than with automobiles,” Lancaster says. “But will people ride in the back? That’s the question.”

Enhancing the role: More companies are highlighting the importance of the pilot’s role in business aviation, especially that of the chief pilot who administers a single aircraft or a handful. “They’re the pilot of a special purpose-built small jet that helps world leaders move around, giving them a sense of ownership and pride, versus ‘driving the bus’ for an airline,” Ianarelli says. “And crew members generally develop close relationships with the people and companies they work for. You have to like who’s flying you, and who’s flying has to like you.”

Some pilots are being brought strategically into areas such as business-travel planning, maintenance, security and other aspects of ensuring that their precious human cargo travels safely.

“They’re like an executive chef; chief pilots aren’t people who just cook anymore,” says Pawel Chudzicki, aviation lead for the Miller Canfield law firm.

A Business Asset

Partly because of this evolving role, more companies are “looking at the flight department as a major HR piece and want to attract pilots who mesh well with executives,” Picken says. “They’re not looked at as just a commodity but as a highly-skilled and highly trained asset to the company.” Pilots can be promoted to positions such as director of aviation to oversee an entire department.

More companies are taking advantage of the certified aviation manager designation course offered by the NBAA, whose enrollment is growing every year and which has trained more than 500 people since its launch in 2014, according to the Washington, D.C.-based group. The curriculum credits pilot candidates for experience and prepares them for jobs as flight-department directors and managers.

“When you think about ultra-high-net-worth individuals who now have dedicated their lives to improving the world, they depend on their pilots,” Barden says. “That’s a great job compared with following the American Airlines flight plan every day from Chicago to Newark. You’re making a lot of decisions about travel and problem-solving, and you’re in charge of a $70 million aircraft.”

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Creditors recover $112 million from South Florida cash advance scheme that defrauded over 3,700 investors

By David Lyons

Checks totaling $112 million have been delivered to 3,750 investors in Florida and across the U.S. after they lost their savings in a securities fraud scheme involving two South Florida companies that provided cash advances to small businesses.

Miami investment banker James Cassel, of Cassel Salpeter & Co., liquidating trustee of 1 Global Capital and 1 West Capital of Hallandale Beach, announced the recovery after 16 months of legal actions and financial analysis that took investigators to multiple cities and towns around the U.S.

“We have returned 40 cents on the dollar,” he said in an interview Monday. “It took us 14 or 16 months to collect that.”

Cassel said the investors, a large number of whom live in Florida, were mainly retirees who turned over anywhere from $20,000 to $100,000 to 1 Global and its affiliates. He said more recovery efforts are underway.

“We continue to pursue collections where we can and legal actions where we can, and we’re working to see what else we can garner for the estate,” he said. Cassel credited the law firms of Greenberg Traurig and Genovese Joblove & Battista, the restructuring and recovery firm of Development Specialists Inc., and the U.S. Securities and Exchange Commission for teaming to help maximize the recovery.

Last year, the SEC sued 1 Global Capital, 1 West Capital and ex-CEO Carl Ruderman for allegedly defrauding the investors out of $287 million.

Headquartered in Hallandale Beach, 1 Global Capital operated from early 2014 until July 27, 2018, when it filed for bankruptcy. As of that time, Global had raised more than $330 million. Internal documents showed a $50 million cash deficit, the SEC alleged. A federal judge granted an SEC request for an asset freeze against Ruderman, 1 Global Capital and several affiliated companies.

Federal prosecutors based in South Florida also investigated the company, which advertised itself as a lending firm that provided cash for small businesses in need, promising investors a profit from loans it made to small and midsize companies.

In its complaint filed in U.S. District Court in Miami, the commission alleged that the cash advance company and Ruderman fraudulently raised millions by selling unregistered securities to investors through a network of agents that included brokers barred from the industry.

Ruderman allegedly moved money to several other companies he controlled, and allegedly misappropriated $35 million for his own use, the complaint said. At a hearing in September, U.S. Bankruptcy Judge Raymond B. Ray in Fort Lauderdale approved a plan calling for the return of a sizable portion of the millions raised by 1 Global Capital.

Attorney Paul Keenan of Greenberg Traurig said a vote backing the plan drew approvals from 2,425 of the investors.

In addition, the commission announced in September that Ruderman consented to a final court judgment in which he was permanently barred from violating federal securities laws, and held liable for turning over nearly $32 million in “ill-gotten gains” and paying a $15 million civil penalty. Ruderman also agreed to turn over $750,000 in cash and 50 percent equity in a multi-million dollar condominium.

Authorities also pursued several other individuals in the case. They included:

  • Jan Atlas, a securities lawyer from Fort Lauderdale, pleaded guilty to one count of securities fraud, according to the U.S. Attorney’s Office. He also agreed to be Prosecutors said he wrote two opinion letters in 2016 that allegedly contained false information describing how 1 Global Capital investment actually worked and the duration of the investment, which omitted information about its automatic renewal.
  • Alan Heide, 1 Global Capital’s chief financial officer, pleaded guilty to one count of conspiracy to commit securities fraud.
  • Henry J. “Trae” Wieniewitz III, an external sales agent, was accused of unlawful sales of 1 Global securities. The commission said it settled with Wieniewitz in July, where he agreed to a final court judgment holding him and his former company jointly liable for turning over $3.5 million and paying a $150,000 civil penalty.

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Middle-market businesses seeking buyers from other countries face challenges — but might reap big rewards

By James S. Cassel

For middle-market companies looking to be acquired, a foreign buyer can sometimes prove to be the best fit, but finding that buyer and closing such a deal can make for a complicated process with unique challenges.

Opening your business to being acquired by a foreign buyer, thereby adding to your list of suitors, can be a good way to increase competition and therefore the ultimate sale price. Oftentimes, foreign buyers are willing to pay more than domestic acquirers when they see a strategic advantage or can add value by getting access to a U.S. platform and the U.S. market. It may also give them instant credibility if they are buying a trusted brand.

More than just money, you may also find that a foreign buyer can sometimes be a good strategic fit as well. Based on the calculus of what your company and the foreign buyer are looking for, the advantages that come with access to a new market, good supply chains and distribution, useful proprietary technology, and other possible synergies can make for an attractive deal for both parties.

But how do you find the right foreign buyer? The first step is to consult with an investment banker with experience and relationships with buyers outside of the U.S. and who knows the best ways to access and vet these potential buyers. You must share with that investment banker exactly what you want out of the sale: Do you simply want to sell, or are you are interested in leaving behind a legacy? Are you looking for a quick exit, or do you want to remain in a leadership role, and if so, for how long? These factors may have significant implications for the final deal, one that could mean selling 100% of the business, or just a minority or majority position.

You may also find that the ideal foreign buyer is someone you are already doing business with, or even partnering with. It might be one of your competitors. Whomever the best choice is, it will be up to your investment banker to vet and approach that potential buyer.

Still, finding the best foreign buyer is only half the task. You also have to address the cultural, regulatory, legal and financial challenges of closing the deal.

To begin with, in many cases, a company looking to sell to a foreign buyer may need to notify the Committee on Foreign Investment in the United States

(CFIUS) and then get past that interagency committee’s regulatory review. A good, experienced legal team is a must. With increasing trade secret thefts, mounting concern over technology transfers, national security entering into the equation, and scrutiny moving beyond Chinese and Russian buyers, you may be surprised at what issues may arise.

Even with a qualified, prospective foreign buyer who can clear regulatory complications, you must still assess the buyer’s grasp of our cultural, legal, and financial hurdles, which may extend the time it takes to close. You and your investment banker may need to educate the buyer and guide them through the deal. Does the buyer, for example, understand how to interpret

U.S. financial statements and documentation? Does the buyer have sufficient knowledge of our environmental and labor laws? Will they be able to secure access to lenders who will loan to a foreign buyer for an acquisition? Will they be able to move money into the U.S. to close the deal in a timely manner? Not all can.

Expanding the universe of potential buyers for your company beyond the U.S. can help you secure the best deal, ideally resulting in a great strategic fit for both parties. But closing that deal will be a much greater challenge and will take longer than selling domestically. Though the issues you will face will be more complex, addressing them early on may result not only in the best price for your company, but an exit that has meaning for you beyond your bottom line.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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Why Alphabet’s Acquisition of Fitbit Is a Master Move

By Tom Taulli

Earlier in the week, there was lots of buzz that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) would acquire Fitbit (NYSE:FIT), whose shares spiked more than 15% today on the news (the main report came from Reuters). While such rumors often fizzle, this one certainly did not. Today the announcement hit the wires: Google has agreed to shell out $2.1 billion for the company. All in all, I think the deal is a spot on — and should be a catalyst for Google stock.

True, it’s still relatively small, as Alphabet’s market cap is a whopping $870 billion. Yet, Fit is likely going to provide quite a bit of leverage. Let’s face it, Google has tried to get a piece of the wearables market with its Wear OS. However, there has been little progress so far.

How Fitbit Benefits Google Stock

So with Fit, Google will have about 6% of the global market (this is based on data from IDC). This will definitely be a good launching pad. According to Fitbit CEO and co-founder James Park: “Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone. I could not be more excited for what lies ahead.”

But perhaps the biggest benefit — in terms of the impact on Google stock — would be the healthcare opportunity. During the past few years, Fitbit has gotten traction with striking deals with health plans. The company has also been working hard to get FDA approvals.

Oh, and yes, there is the treasure trove of data, which extends 10-plus years. Note that Google is a global leader in AI and this technology will likely prove extremely useful in transforming the healthcare industry. As CEO Sundar Pichai noted on the latest earnings call, the company continues to push the boundaries of innovation, such as with the creation of a new kind of neural network that improves web services as well as breakthroughs in quantum computing.

But the fast-growing cloud business should also be a driver for Google stock when it comes to healthcare. In September, the company announced a partnership with the Mayo Clinic to help with clinical experiences, diagnosis and research.

“Since Google has numerous health initiatives at present, those should complement what Fitbit brings to the table,” said James Cassel, who is the chairman and co-founder of investment banking firm Cassel Salpeter & Co. (in an email interview). “Access to the installed base could be very helpful to Google’s healthcare initiative Project Baseline – a partnership with Duke University School of Medicine, Stanford Medicine and the American Heart Association – as well as other health-centric projects they are working on. Access to big data is crucial for the future of healthcare and Fitbit has access to a lot of information.”

Bottom Line on the Alphabet Stock Price

The wearables market is simply too large for Google to ignore. For example, as seen with Apple’s (NASDAQ:AAPL) latest earnings report, the category is quite lucrative and a source of strong growth.

The company’s assortment of products — like the Watch, HomePod smart speaker and AirPods — generated revenues of $6.5 billion in the latest quarter, up 54% on a year-over-year basis (this is nearly as much as the Mac business!) In fact, AAPL has gotten traction with its Watch in deals with United Health (NYSE:UNH) and CVS (NYSE:CVS).

True, Fitbit has its issues. Growth has been lagging and the competition has remained intense. But again, Google should be an ideal partner — which should allow for a classic win-win partnership.

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Alphabet’s Acquisition of Fitbit is a Case of Perfect Timing

By Chris Markoch

On Friday, the markets waited in anticipation as trading on Fitbit (NYSE:FIT) stock was paused. Shortly after the markets opened, the news broke that Alphabet will buy Fitbit for $2.1 billion. Shares of FIT soared 15% after the announcement. Alphabet stock is up about 3.5% in mid-day trading. Although this news was being telegraphed for several days, the timing of the announcement was perfectly timed as investors are looking to capitalize on new trends in the tech sector.

The wearables market is taking off

There are many reasons why this acquisition makes sense for Alphabet. One of the primary issues is related to the growth in the wearables category. Once thought an ill-fated fashion trend, Apple (NASDAQ:AAPL) showed in its earnings report on October 30 that demand for wearables is growing. Apple reported an eye-popping 54.4% year-over-year increase in revenue from wearables. This means that Apple’s wearables market, which has only been around since 2015, has a bigger share of Apple’s bottom line than the iPad.

It was not immediately clear how much of the $6.5 billion number was tied to the Apple Watch. However, Apple’s wearables market is made up of two product lines: the Apple Watch and its AirPods line. So it’s reasonable to assume that the Apple Watch was a significant part of this growth. Apple did say that three out of four Apple Watch purchases were made by new consumers.

It won’t be known for several years if this kind of growth is sustainable. But for now, Apple looks to be successfully making in-roads within its iOS ecosystem. Instead of users choosing either an iPhone or an Apple Watch, they’re starting to say “why not both”?

Can Alphabet take a bite out of Apple’s momentum?

Alphabet has been trying to get into the wearables category with its Wear OS. But the company has struggled to get traction. The acquisition of Fitbit immediately gives Alphabet access to approximately 6% of the global market. While that number may not make Apple quiver anytime soon, it’s enough to get attention.

After the announcement, Fitbit CEO James Park said, “Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster and make health even more accessible to everyone.”

That last part, making health accessible, is one of the keys to this announcement. When devices like the Fitbit and Apple Watch were introduced, the ultimate question that had to be asked was the why. It was simple enough to see what the device did, but why was that important.

But wearables, like Amazon’s (NASDAQ:AMZN) Alexa and the Google Assistant are ideas that were ahead of their time. By this I mean they had to be created  as a vessel to open up the possibilities. Among those possibilities is the ability of these devices to collect data. And there is almost no other industry that offers greater possibilities for the use of big data than healthcare. That’s   where Alphabet comes in. As the global leader in artificial intelligence (AI), they are an ideal partner to make use of the vast amounts of data Fitbit has gathered over 10 years.

Fitbit has been making deals with health care plans and working to get FDA approvals. All of which complements work that Alphabet has already been doing, says James Cassel, chairman and co-founder of investment banking firm Cassel Salpeter & Co. In an email interview, Cassel said of the partnership, “Since Google has numerous health initiatives at present, those should complement what Fitbit brings to the table. Access to the installed base could be very helpful to Google’s healthcare initiative Project Baseline … as well as other health-centric projects they are working on.”

Is this deal a slam dunk for investors?

Investors will be cautiously optimistic about the opportunities this deal presents. With a market cap of $870 billion, the $2.1 billion acquisition wouldn’t seem like a huge expense for Alphabet. But FIT will still be leverage on Alphabet’s balance sheet. And there will certainly be more costs as the companies integrate.

However, like the wearables category in general, this is probably a case where the partnership has to come before the profit. Separately, Fitbit has struggled with increasing competition in the wearables category. And Alphabet has struggled to get its own line of wearables off the ground. Together, this looks like a marriage of two strengths.

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