Monthly Archives: December 2016
When it comes to benefits packages, both employees and employers know that one size does not fit all. What is right for a younger, entry-level worker might not make sense for an empty nester with seniority. A flexible benefits package based on employees’ unique situations and income levels is essential to retaining top talent.
As open enrollment approaches, employees will be hitting the exchanges once more to select their health care packages and other benefits for the coming year. Here’s a look at how some employers are using private exchanges to give employees more options, as well as to better manage benefits-related expenses.
What is a private benefits exchange?
Private exchanges are essentially marketplaces where employees can shop online for health insurance and other benefits, including dental, vision and life insurance. Employers first access the private exchange and choose from a variety of carriers the benefits they want to offer, as well as set their specified contribution levels for each offered product. Employees then access the exchange to peruse the products offered by their employer and select the ones that suit their lifestyles and financial needs.
“Think of these exchanges as a store, and each of the types of benefits are aisles,” Steven A. Nyce, director of the Willis Towers Watson Research and Innovation Center, told Business News Daily. “As an employer, you ‘own’ the store and have the ability to decide what products you want to include. So, say, one aisle is medical, [an employee] would have a number of products to choose from in that aisle.”
Depending on what products the employer has selected to offer, employees have their pick of the entire “store.” Those employees who need pet insurance can select it, while those who desire supplemental medical coverage, such as hospital indemnity, are able to as well. The aim is to give customizable control to the individual who is selecting the plan while also stabilizing costs to the employer.
“By facilitating a shift to a defined contribution … private exchanges offer the potential for cost stability to employers, while giving greater choice to employees, albeit with greater financial risk as well,” a 2014 report issued by The Kaiser Foundation reads. “Because the employer defines up front the amount paid to the employee, employers have greater control over how much they spend on health benefits.”
Health benefit costs are a huge consideration for employers. According to a 2015 report by the Centers for Medicare and Medicaid Services, health care spending grew by $102 billion between 2012 and 2013. The rapidly increasing costs of health care in the U.S., coupled with employer obligations under the Affordable Care Act (ACA), means keeping health benefits expenses stable is a growing challenge.
How are employees using private benefits exchanges?
To better understand the emerging private exchange marketplace, the Private Exchange Research Council (PERC) partnered with private exchange Liazon to see how consumers were operating within that exchange, and found that employers are offering more products over time and employees are purchasing more as well.
The PERC report found that, on average, employers offer 14 products on their customized exchanges. Medical, dental and vision plans are the most commonly offered by employers: The average company’s benefits package on Liazon includes six medical plans, three dental products and four vision packages from which to choose. Many companies also offer life insurance, legal plans, identity protection, disability benefits and pet insurance.
From 2013 through 2015, employees on average increased the number of products they purchased for their individualized plan from 3.6 to 4.4. A number of factors could be responsible, Nyce said, from the growth of the exchanges to more comfortability among those who have participated in the exchanges for several years.
“We’re seeing an expansion of benefits and a blurring of the lines traditionally seen between retirement and health care, life insurance and disability,” Nyce said. “Those were traditionally in their own silos, but we’re seeing them come together now in a more holistic approach. It provides employees with a unique experience, and they can use [these benefits options] as a platform to grow to a broader set of benefits in the future.”
If your business had a slow month, would you be able to survive?
New research from the JP Morgan Chase Institute finds that many small businesses are living month to month, and the median small business has only enough cash in the bank to last 27 days without additional funds.
“It is well known that small businesses are a critical driver of economic growth, but the consistency of their growth is in question if they’re living month to month,” Diana Farrell, president and CEO of the JPMorgan Chase Institute, said in a statement.
The number of days businesses can survive without bringing in any money varied widely among industries:
Restaurants: 16 days
Repair and maintenance: 18 days
Retail: 19 days
Construction: 20 days
Personal services: 21 days
Wholesalers: 23 days
Metal and machinery: 28 days
Health care services: 30 days
High-tech manufacturing: 32 days
Other professional services: 33 days
High-tech services: 33 days
Real estate: 47 days
Cash reserves are critical in order for small businesses to meet liquidity needs, the study’s authors said.
“Cash reserves provide a readily available means to pay employees and suppliers in normal times and are an important buffer to draw upon during adverse times,” the study’s authors wrote. “In other words, cash reserves are a key measure of the vitality and security of a small business.”
The research found that the median small business holds an average daily cash balance of $12,100. At the high end of the spectrum, small businesses in the high-tech industry have $34,200 in reserves, on average, compared with just $5,300 for small businesses in the personal services industry. [See Related Story: Best Alternative Small Business Loans 2016]
When small businesses don’t bring in much more money than they spend each day, it contributes to low cash reserves, the research showed. Overall, the median small business spends an average of $374 each day and brings in an average of only $381 daily.
The study’s authors said this small profit margin leaves small businesses with very little wiggle room.
“Without strong and continuous cash-flow management, even small changes in cash inflows or outflows — especially if unexpected — can have large impacts on the financial health of these businesses,” the study’s authors wrote.
The results show that small business policymakers, advocates and private-sector partners need to do more to help small business owners improve their financial resilience, the researchers said. They proposed two main courses of action for small businesses.
“First, increasing access to credit can provide a lifeline to small businesses in the face of economic and/or idiosyncratic shocks,” the study’s authors wrote. “Second, [stakeholders need to be] helping small business owners better manage their cash flows and build up their cash buffer days to weather challenging times without relying on (often expensive) sources of credit.”
The study’s authors think there has to be a better set of available credit offerings to match the needs of the smallest and most financially fragile small businesses and more educational programs that illustrate to small business owners the consequences of poor cash-flow management.
“By helping small business owners understand typical levels of cash buffer days for their industry and region, providing information about typical causes of unexpected cash shortfalls, and providing concrete information about the timing and cost of credit options, these programs could help small business owners make better-informed decisions about the levels of cash balances they should seek to hold,” the researchers wrote.
The study was based on data from more than 470 million anonymized and aggregated transactions conducted by 597,000 U.S. small businesses between February and October 2015.
Securing financing for your startup or growth-stage business isn’t always easy. Sometimes, banks can be hesitant to lend or will demand a personal guarantee for any loans. Venture capitalists (VCs) or angel investors, when you can even find them, are always looking for big returns and a hefty slice of equity. For the entrepreneur, this creates a difficult situation. How can you continue to invest in your business without finding sufficient capital?
For businesses searching for a happy-medium between the world of conventional bank loans and the high stakes game of private equity investments, revenue-based financing might fill the void. But what is revenue-based financing? In short, it’s a loan that a business agrees to pay back over time by promising a chunk of their future revenues to the financier until a fixed dollar amount is reached.
What is revenue-based financing?
A loan with a fixed repayment target that is reached over a period of several years.
Generally comes with a repayment amount of 1.5 to 2.5 times the principal loan.
Repayment periods are flexible; pay back the agreed-upon amount sooner if you can, or later if you must.
Business owners do not sell equity or relinquish control when using revenue-based financing.
Revenue-based financing firms work more closely with you than bank lenders, but take a more hands-off approach than private equity investors.
“Everyone does it a little bit differently, but the way we use revenue-based financing is to provide a sum of money … which the company agrees to pay a percentage of their revenue until they’ve paid a set sum,” BJ Lackland, CEO of Lighter Capital, told Business News Daily. “The key to the whole thing is if a company grows faster than expected, they pay us in a shorter period of time, which means our ROI goes up. Or it may take longer than we expect, meaning ROI goes down.”
Generally, revenue-based financing comes with a repayment amount of about 1.5 times to 2.5 times the principal loan. The fixed dollar target can be helpful when a small business is planning out operations, but it’s important to recognize the payments will be coming out of your business’s revenue stream and to plan accordingly. That means maintaining best practices (which you should be following anyway) like keeping adequate financial reserves on hand and budgeting conservatively.
When do companies usually seek revenue-based financing options?
Growth stage companies looking to hire additional salespeople
When a company is in the midst of launching a new product
Companies on the cusp of a large-scale marketing campaign
A company with an established market, but not one large enough for VCs
Owners who don’t want to personally guarantee a loan OR sell equity
While debt financing allows owners to keep complete control, sometimes they must put up their personal assets as collateral, and even then it’s usually for a comparatively paltry sum. When it comes to private equity, on the other hand, founders often balk at the loss of total control of their company, but in exchange obtain the resources, network and experience of their financing partner. Revenue-based financing, again, is the middle ground; while companies like Lighter Capital are unlikely to sit on the board or really intervene in operations, they do maintain a stake in the success and growth of the company in a way banks do not.
“Banks are mostly concerned about getting their money back and making a small return,” Lackland said. “VCs and angels are just looking for huge upsides. They make their money on 10x returns; they’re constantly hunting for a home run hit. We’re in the middle; we like to call ourselves VC lite. We’re there to help and talk, but we don’t look over your shoulder.”
Is revenue-based financing right for you?
Revenue-based financing isn’t the best choice for every company. Before you pursue it, consider the following:
Your company should have an established revenue stream from which to draw debt service payments.
Your company should have an established market that is relatively stable.
Your financials should be in order. Make sure you have a summary of your debt, revenues, operating expenses, and future projections, and be sure it’s all generally accurate.
Before committing your business to any form of financing, it’s important to consider the long-term obligations you’ll be signing up for. A loan is a loan, and that means repayment is a must. When it comes to revenue-based financing, it might seem like there are fewer strings attached to the money, but treating it flippantly is a recipe for disaster.
“It’s incredibly flexible, but it’s still a loan,” Lackland said. “You need to be ready to handle those obligations. We try to make it really light on entrepreneurs, but we’re a capital provider and we have an obligation to our investors.”
Still, revenue-based financing is another tool in the entrepreneur’s toolbox and it can help growth stage companies hit their stride and reach the next level; all without risking personal assets or selling off part of the business.