Small Business Funding Alternatives

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Here’s a great article, written by an associate in the cash flow industry, I’d like to share here along with some comments following it ….

Factors and Asset Based Lenders Fill Bank Financing Void
The results are in and the numbers show what many of us were already seeing, factoring and asset based lending are on the increase.  Amazingly, factoring has experienced continued growth for the past 33 years in every year except 2001.Just take a quick look at these highlights from the 2008 Asset-Based Lending and Factoring Surveys recently released by the Commercial Finance Association in June 2009 to see where opportunity is knocking in the United States.Factoring Highlights

• Factoring experienced an annual volume of $136 billion in 2008 compared to $20.2 billion volume in 1976, the first year reported for the survey results.
• While the growth was a nominal .5% compared to 2007, it still reflects stable volume during volatile economic times.
• The major regional market for factoring continues to be the Northeast (47%) followed by the West (24%) and the Southeast (20%).  The Midwest and Southwest comprised just 5% and 4% respectively of market share.
• The textile/apparel industry prevails as the primary client base for large scale factoring companies while transportation and business services contributed to much of the small factor volume.
• Non-recourse factoring makes up 77% of transactions with the remainder consisting of full or partial recourse factoring.
• Notification factoring comprised 78% of the volume with non-notification contributing the other 22%.

Asset Based Lending (ABL) Highlights

• The Asset-based lending industry reached $590 billion in 2008, an 8.3% increase over the prior year.
• The regional market allocation for ABL was more consistent across the United States but was still led by the Northeast (27%).  It was followed by the Southeast (25%), the Midwest (20%), the West (16%), and the Southwest (12%).
• Just 12 states represented almost 65% of ABL outstanding loans.  Read more…
   

And yet I still get comments from professionals about the cost of factoring being 50 cents on the dollar. Unfortunately, it is misinformation such as this as well as the “too good to be true” belief that is really frustrating to cash flow professionals such as me. As with any new product (i.e. factoring) that becomes readily available the price is higher in the beginning but, over time, it drops. Such is, as is natural, the case with factoring. But 50 cents on the dollar it has never been! The fees in the cash flow industry just like others will bear what the market will bear and no more!

And that’s if these same professionals are even aware of the tools we cash flow consultants bring to the table with factoring being only one of many tools.  Unfortunately, I have found there is a sad lack of education for these professionals of the tools we work with.  One MBA student I spoke with, in her final semester of studies, had about two weeks in one semester regarding our funding tools.

So, anyway, I’ll get off my bandwagon but, just suffice it to say, that most of the cash flow consultants and the funders we work with are small business enterprises just like those we market to.  Thus, we, of all people, understand the cash flow dilemmas that small businesses suffer with as we, ourselves, have experienced them at one time or another as well!

Till next time, be safe.  Debra

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Not sure how many business owners have been turned on to “Meetup.com” yet but it’s a great tool for business as well as personal networking and meeting of people with similar interests.

I attended my business meetup yesterday with the Baton Rouge Business Networking Meetup Group and really enjoyed it.  It’s a very inexpensive and effective method of networking for people on a shoe-string budget — and fun.  This group was recently featured in the Baton Rouge Business Report too since this is definitely an idea that has reached it’s time!

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Don’t know about any others reading this blog but I love semi-precious gems and minerals and am a member of my local Gem & Mineral Society - we’re called Rockhounds, by the way! Anyway, thought I would do a little promoting of the Earth Sciences some here since this happens to be the week to focus on them as they are doing in the classroom above.

 I wasn’t able to go to the last dig we had at our gem & mineral club, but 20 or so members went and had a great time at the Hogg Mine in Georgia.

 Any other rockhounds out there?  Got any stories to share?

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in general, and as a certified Woman-Owned business owner, I was

particularly proud to see this headline:  Ten Most Powerful Women in Washington as

well as the 50 Most Powerful Women. 

 I am proud to link to these articles about powerful, successful women who are every day doing as my t-shirt says, “Breaking through for Women” and I say, ‘”It’s about time.”

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I received an e-mail from Blog Catalog yesterday informing me of the upcoming International Literacy Day on September 8th and giving me the opportunity to unite with other bloggers to support this important day.

I wanted to pass this information along as I have personally worked with someone who was held back on his job and providing for his family due to his inability to read the necessary paperwork and forms required for a promotion. 

So, if you wish to unite with me and other bloggers on September 8th to support this cause, see the following:

Unite for Literacy                                                                                       

On International Literacy Day each year, UNESCO reminds the international community of the status of literacy and adult learning globally. Celebrations take place around the world.

Learn More

Thanks!
Debra

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Ok, I’ve started this post twice…hopefully I can get it done this time. Last time the word press gremlins just made my draft disappear and I had not saved a backup. I learned my lesson!             

In any event, on to the post…….I think.

The phrase, it’s just “Too good to be True!” and the early days of factoring are two of the most difficult obstacles that we, as cash flow consultants, have to overcome in educating and informing small business owners of the funding options we bring to the table.

And, I had no idea of the wealth of information out in “internetland” on the phrase, “too good to be true” until I started researching it for this post. So, in this post, I’ll just deal with this first obstacle (too good to be true) and we’ll deal with the second one (factoring’s reputation) in another post.

OK, I’m an optimist to the inth degree; I (usually) see the glass 2/3 full. Sometimes, however, when I make mistakes in judgment, I really doubt that philosophy and wonder if I was mistaken to have it in the first place. But, then, usually something, such as some of the info I found in my research for this article comes around and makes me glad that I am the way I am. Not trying to pat myself on the back here, but I feel it is unfortunate that more people Don’t have this outlook. I found some validation for mine in my research. And, how cynical and uncreative would this world be if we just wrote off all innovative, creative and “new”, advanced ideas as too good to be true!

Check out this article by Erik Brady, USA Today:

“It’s official. We don’t believe anything anymore.

Dale Earnhardt Jr. wins a race at the track where his father died and the skeptics cry fix. Cal Ripken Jr. hits a home run in his last All-Star Game and the world wonders if he got a fat pitch. The Philadelphia 76ers reach the NBA Finals and some Milwaukee Bucks suggest that referees favor the team with more TV households.

We are becoming a nation of Oliver Stones, joylessly searching out conspiracy theories every time a story seems too good to be true. Nothing wonderful just happens in sport anymore, at least not without some fanciful notion of a great and powerful Oz scripting reality from behind the curtain.

History tells us our sports events are fixed sometimes — read more here

There’s a book, movie, song and blog named Too Good to be True!   To mention only a few! 

If ever I felt validated about taking that chance to believe that something “might” be as good as it claims to be, it was a passage I found about Einstein…..

Albert Einstein once said, “I never discovered anything with my rational mind.” In our context, the comment, “too good to be true,” might have just been the prod Einstein needed for his next great invention because Einstein didn’t think like that. I can see Einstein asking you “Why?”, if you were to tell him something like it’s too good to be true (and then figuring out how to disprove you)!

As has been said before, too much of anything is never good. And so it is, I contend, with the blatant thought of “it’s too good to be true.” When a person automatically thinks this Stinky Thought (as far as I am concerned) about a new, innovative and/or revolutionary idea how many of the well springs of our creative juices shut down? If, in fact, this “too good to be true” saying were completely true we would not have any of the inventions or advances we have now because those innovators would not have dared to believe it could be “true”.

“Noooo way, you can’t do that”; “that’s impossible to do” soon turn to “that’s too good to be true”………. when the successful innovator figures out “how” it IS possible to do it.

First, this innovator receives no encouragement to “try” to overcome the obstacle and then no congratulations but disbelief when it is overcome!

It’s not surprising, then, to know that the innovators and entrepreneurs among us are only a small percentage with these objections and obstacles to overcome. What more could our great country have accomplished had we not turned into a country of Stinky Thinkers?

And, I admit there “are” a lot of things that are, in fact, to good to be true but should that stop us from looking for the next great invention, song, thought, movie or business funding opportunity?

Are we so negative and pessimistic today that we just automatically say, nah, that’s too good to be true and pass up a chance to be creative and look for alternatives to fixing our cash flow problems.

Yes, skepticism is indeed needed.

Here’s an interesting quote I found on Scientific Skepticism,

“Skepticism is a primary tool of science. We’d be hypocrites if we never directed a skeptical eye towards Scientific Skepticism itself. Denied imperfections and errors are free to grow without limit, and Skepticism is not immune to this problem. Unbridled gullibility can destroy science, but unbridled disbelief is no less a threat because it brings both a tolerance for bias and ridicule as well as the supression of untested new ideas. Better to take a middle road between total closed-mindedness and total gullibility. Practice pragmatism, pursue humility, and maintain a clear, honest, and continuing view of ourselves and the less noble of our own behaviors.”

Hopefully the small business owner I am talking to here has a sound judgment, adequate education and the ability to look at a creative, new, out-of-the-box funding alternative and assess it for its true worth – be that too good to be true or, in fact, a newfound funding option just in the last 15 years or so becoming readily available to the small business owner as it has been to big business for many, many years.

You judge, too good to be true or not?

Until next time….Debra

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Examples abound of the cash flow industry hard at work but the majority of those the everyday public is aware of and have heard of are the ”big” ones (examples).  Because….these funding tools have always been around for big business but now thanks to the development of the cash flow industry and brokers, we are bringing these same tools down to the level of the small guy and soon they will seem as commonplace as some of the “big” ones.  We are leveling the playing field!

For example, we’re starting to see more ads for the purchase of timeshares, lawsuit funding ads and for life insurance which have not been there previously.  These are the smaller instances of this industry at work (i.e. the fundings are not in the Millions).  But, as the SBA says, the total of small business is bigger than big business and that is exactly why the cash flow industry has grown so much - this vast resource for investors has gone untapped for a long time and, similar to China, the sleeping giant is waking up.

So for a first example of a large transaction:

“Louisiana receives slice of $55M tobacco settlement” New Orleans City Business.

State receives slice of $55M tobacco settlement
Louisiana will receive $1.2 million from a $55.4-million settlement reached with House of Prince A/S and Scandinavian tobacco connected to the 1998 Master Settle Agreement.

The MSA requires tobacco manufacturers that signed the agreement to make annual payments to states, in part, to compensate them for billions of dollars in health care costs associated with tobacco-related illnesses.

The House of Prince settlement resolves a three-year court dispute over whether cigarettes made by its subsidiary Scandinavian and sold in the United States from 1999 to 2003 were subject to MSA payment requirements. Cigarettes made by Scandinavian haven’t been sold in the United States since 2003.

— CityBusiness staff report

Will add more as I come across them.  Now that I want to find some examples I can’t seem to locate but will update this when I do.

As Always, Be Safe.  Debra

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to make the deal happen!

Talk about contrasts to the banking scenario — check out this case study of an actual deal done by one of our funders.  But, first, let me just state, I am NOT, in any respect, trying to belittle banks — all small business should strive to become ”bankable” as quickly as possible. 

What I am saying, though, is that there are stark contrasts in the banking scenarios as opposed to the cash flow industry’s and I am trying to adequately document just how we work and how we fill a niche and very significant need of many small businesses with cash flow problems.

That being said, please check out this real-life example of a factoring deal:
 

The funding source received an e-mail from an effective and efficient consultant, Alice, on August 12, 2005. Alice was referring a prospect, Henry.

Henry’s company is in the business of asbestos abatement. Henry had been referred to Alice by his banker, Amanda.

In her initial correspondence, Alice informed the funder that Henry’s contracts, mostly with governments, are bonded. Henry has several loans with Amanda’s bank, and thus Amanda has a blanket lien on everything. However, Henry is current on all his loans, and his bank is willing to release (subordinate) Henry’s receivables so that he can factor and improve his cash flow.

Henry has never heard of factoring, but with Alice’s quick educational session and with Amanda’s prompting and blessing, Henry reluctantly agreed to explore the factoring possibility.

By examining all the information and documents that Alice sent for the deal, the funder found out the following (about Henry’s company):

• annual revenues are about $9 million.

• is considered a construction company (progress payments, retention, bonding, etc.).

• Henry’s loans to Amanda’s bank amount to about $500,000.

• Henry owes the Internal Revenue Service about $56,000.

• Henry’s contracts are generally bonded.

• The accounts receivable and the accounts payable are mixed together in one report that requires some decoding.

A conference call with Henry and Alice was scheduled for August 17. The objectives of the conference call for the funder were:

1. Get a feel for the prospect

2. Establish that he has a cash need

3. Get some relevant information and clarify certain issues

4. Analyze his cash flow needs

5. Propose a financing solution

6. Get a mutual agreement on the proposed solution

During the conference call, it was mutually agreed that factoring would solve Henry’s immediate cash flow problems. After the value of the funding company’s factoring service was established, Henry’s reluctance to factor disappeared, and he asked about the next step and how to expedite the process.

There were major issues that had to be resolved, though, before any funding could occur, namely:

• The IRS issue had to be resolved in a way that was acceptable to funding source.

• CB had to subordinate its position to the funding source on the invoices to be funded.

• The bonding company had to agree to factoring by the funding source.

Henry concurred. The application form was sent to him; he completed the same day and returned to funding source with all the requested documents. The funding source faxed him that same day their factoring proposal. He accepted their proposal and sent it back the next day.

On August 18, the same day the Funding Source received the signed proposal, they sent him their full factoring agreement package by overnight mail. On August 19, Henry executed the factoring agreement and sent it back. The whole process of conversion, including executing the final documents, took less than three days.

On August 19, the funding company’s due diligence was immediately begun, in addition to working on resolving the above-mentioned three major issues. At the same time, to expedite the process further, they asked Henry to start sending them any invoices he needed to factor so that they could work at the same time on the verification process.

They encountered quite a few challenges along the way before being able to fund the first invoice:

Challenge 1: The bonding company refused to cooperate.

Solution: The Factoring Company agreed to factor the invoices for the contracts that are not bonded.

Challenge 2: CB did not accept their first draft of the subordination agreement.

Solution: The Factoring Company negotiated a compromise with Amanda and Henry by which CB subordinates only the invoices related to nonbonded contracts. A subordination agreement was finally executed on September 16, 2005.

Challenge 3: Amanda of CB was on leave from her job for more than two weeks.

Solution: The only solution was to wait for her to come back.

Challenge 4: CB requested some returns from the factored invoices to reduce Henry’s debt to CB.

Solution: The Factoring Company negotiated again with Henry and Amanda to have 10 percent of every factored invoice go to CB. The Factoring Company drafted an Intercreditor Agreement that was finally executed on September 26.

Challenge 5: Resolving the IRS issue

Solution: A written settlement was signed by the IRS on September 29, 2005.

Challenge 6: Henry’s customer’s creditworthiness and concentration were issues.

Solution: Since initially The Factoring Company had to work with only one customer with average credit, The Factoring Company requested and received proof of payment of previous invoices by that customer.

Despite all the challenges, The Factoring Company managed to fund the first three invoices, totaling more than $200,000, on Sept. 20, 27 and 29, respectively.

I think, by now, it should be very clear to all the extent to which a quality funding source will go to achieve its main goal of helping small business!

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Objections are a part of life and certainly business - especially when there is a new idea, thought, process or product.

So, learning to address them right off the bat - especially in the business sense — is critical to success in business.

Some of the most common objections heard in the cash flow industry about our non-traditional funding options:

Objection:  We don’t need it!

Response: 

What kind of terms do you give your customers?  How long does it take them to pay? Could you manage your business better as well as finance its growth if you had that money sooner rather than later? 

Objection:  It sounds too good to be true!

Just because you haven’t been exposed to this financial service doesn’t mean
that it doesn’t exist.  Its been available to big business for a while and is just now becoming available to the small business owner – as is the norm unfortunately!

A for instance, the cash flow industry is about trading paper, right?  So, are you a homeowner by chance?  And, if so, have you ever had to change the name of the mortgage company you make your payment to?  “This” is an example of paper being bought and sold (traded) in the cash flow industry and it has been going on for a long time — with BIG business and usually in “portfolios”.  Now, however, this tool has been made available to small business.  As I’ve said over and over again, the total of small business is bigger than big and the smart investors we work with have realized this and made the same financial tools available to the little guy now.

Objection:  We do that ourselves!

It may sound like our funders act like a collection agency but believe me they are not.  They advance money to your business based upon your invoices to your business customers and wait for them to pay.  Meanwhile, you have the use of the money to better manage your business and to finance it’s growth.

Objection:  I’ve heard of factoring, but I’m too small!

Businesses with cash flow issues – small or large – benefit from factoring
to keep the cash flowing in their business.

Instead of waiting for your customers to pay your invoices, would your business benefit from having most of that money right away – regardless of the size of the invoice?

Would you be more comfortable with a factoring program that doesn’t require a minimum monthly volume and doesn’t require an annual contract – no problem – we have factoring programs to fit the various sizes of small business owner (we can factor $50 limousine charges or invoice volumes of $1M and above a month).

Objection:  We already have a credit line!

Great; but how big is it?  Does it automatically increase as your receivables increase or do you have to apply for a larger line?

Would you like to have access to larger amounts of funding without having to go through the application process?

Factoring is a receivables “Only”-based line of credit that grows as your
receivables grow with no application or specific request for increased funding needed!

Factoring ALSO works in conjunction “with” your existing credit line to, in affect, allow you a “second” line of credit based solely on your receivables.

Objection:  We see the benefits of factoring, but we’re afraid our customers will think we’re in financial trouble and will look for alternative sources for our product or service.

In no uncertain terms, you can let them know that the fact that your company
“does” qualify for factoring makes a powerful and positive statement about the strength of your finances and the factor’s level of confidence in your business!

If another business owner received a multi-million dollar credit line from his bank, what would you think of him? 

Our funders provide a virtually unlimited line of credit to you based only upon your receivables as collateral.  You should remind (or inform) them that you (as the savvy business owner that you are) wish to take advantage of a funding tool of which you were previously unaware that can ease the ebb and flow of cash flow so that you can concentrate on what you do best – providing them with the quality service or product for which they have come to you and it keeps you from having to worry about cash flow issues.  As with most things, when we use the “tools” available, whatever the “process” or chore is, it is accomplished with more ease and speed when available “tools” are used.
Now that we have a hammer, will we go back to pounding nails with a stone?
You are using the tools available to you to help your business grow and
deliver the best service or product.

Objection:  We wouldn’t do that to our customers!  We’re afraid it will offend or alienate our customers!

You are dong it FOR your customers! 

Would they like it if you went out of business because of cash flow issues OR had to change your terms to COD?

You should let them know that factoring will enable you to continue to provide the high quality product or service they have come to expect without having to change payment terms so that they can continue to enjoy the generous trade terms you provide, i.e. 30 days or more, that factoring will enable you to continue to provide “for their benefit”.

Objection:  Must the customer be contacted?  If so, what do you tell them?

Yes, they must be contacted.

Generally, in the process of verifying an invoice, your customer is told that you have been provided an unlimited credit line based on your accounts receivable and we are providing receivables management in conjunction with that credit line.  Now how impressive is that?  If they are having cash flow issues themselves, they might just want to check it out themselves!

But, basically, in our communications with your customers it is referred to this way with the additional information that you have received it to accommodate the growth that you are experiencing.

Its largely, too, a part of you being confident in your choice to use this tool and the posture with which you relay this to your customers.

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Hi, All - I know it’s been a while but lots has been going on and it has kept me from blogging.

 But….I’m bbbaaaccck!

Have you ever heard the saying, “A contract (with the government) is like Money in the Bank?”

Have you ever tried going to the Bank with that contract to get an advance against it to help fulfill the huge contract you just landed but need to hire additional personnel and purchase additional inventory, raw material or the such?  Not quite as easy as you thought, right?

 Have you ever heard the saying something to the affect that, “the only time you can get money from the bank is when you HAVE money in the bank?”

Well, in the cash flow industry….it IS money in YOUR bank account!  Please check out this real life example I personally came across and I’ve previously posted but think it very much illustrates this and bears reviewing here:

Right after Katrina, a purchase order funder in the asset-based lending industry was able to help a NY power company fulfill a $2.2M order from the USACE. The power company’s bank was not able to process their funding request fast enough and they were about to lose the order. The purchase order funder (in Dallas) took the application on Wednesday and the order was being shipped by Friday of the same week. The power company was able to fill that order and other future ones due to the speed with which they were able to get the funding they needed.

Now if that contract shouldn’t have been a “Money in the Bank” situation I don’t know what would qualify!

I’m not bashing banks or bankers at all.  I get a lot of referrals from bankers.  What I’m saying is that this saying just isn’t necessarily true and I, for one, would like to say so here. 

The cash flow industry offers the flexibility and speed oftentimes required for special situations which just does not fit the banking business model and it defintely fills a gap in funding alternatives for small businesses – i.e. prior to the business having the financials required by banks and in conjunction with a banking relationship when flexibility and speed are called for and at other times as well.

Anyone else have any stories you can relate about this misconception?

Night…..Debra

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