Small Business Funding Alternatives

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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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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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HOW DID YOU LEARN ABOUT ALL THE DIFFERENT FUNDING OPTIONS AVAILABLE TO PEOPLE EVEN AFTER BANKS TURN THEM DOWN FOR A LOAN?
 
Through hours of study and a training course with the American Cash Flow Association as well as working with a Mentor for the first two years. 

And, it’s been interesting for me to learn that MBA graduates and students and others in the financial services realm you would think would be very knowledgeable about the options available in the cash flow industry for the funding needs of small businesses are not aware of these tools at all (or very little).  Or, they do not give enough import to these options (if they are aware of them) which are so desperately needed by small businesses.  The tools of the cash flow industry seem to be glossed over and not really acknowledged as the option they are. 

For instance, I met with an MBA student (Electrical engineer) who was in her last semester before getting her MBA and she happened to have a class on our funding options that semester and a homework assignment on them the same weekend we met and talked.  So, she told me, “thank you very much!” and took my literature and flyers I brought to our meeting and used to complete her homework assignment!
 
WHO ARE YOUR CLIENTS?

Almost any business that has a piece of paper to leverage.  Construction is sometimes difficult because of retainage fees but it can be done too – by companies that specialize in construction. 

Some examples, though, are:

Medical facilities of all sorts
Manufacturing
Service industries of all types – staffing agencies, trucking, fabricating, engineering, printing, import, export and the list goes on and on…
  
IN YOUR YEARS OF EXPERIENCE, WHAT OBSERVATIONS CAN YOU MAKE ABOUT SMALL BUSINESSES ON THE THRESHOLD OF GROWTH?

I would say that I have observed that oftentimes they are afraid to go for the larger clients and faster growth because of fear of the resultant cash flow issues.  But – that need not be the case! 

Now, the small business owner can do just that and know that the tools offered in the cash flow industry can assist them in accomplishing faster, more rapid growth!  It all goes back to educating and making people “aware” of the options available to them. 

But this, too, is one of the many reasons I love this business I have found!  I like being able to help people and when I can do that and myself in the process, I call that a win/win situation!

WHAT IS THE CASH FLOW INDUSTRY ALL ABOUT AND HOW CAN IT HELP?
 
In a nutshell, it’s about leveraging a businesses “liquid” assets to  self-finance it’s own growth and expansion without incurring debt or giving up equity in the business.  It looks good on the balance sheet  because it is not a “loan” per se but a “sale” of a liquid asset of the business.

The asset-based lending industry is what I call a close cousin to the cash flow industry in that it is more often an actual loan with liquid assets as collateral.
 
WHAT IS THE MOST IMPORTANT PIECE OF ADVICE YOU WOULD LIKE TO GIVE OUR LISTENERS? 
 
Well, at the risk of sounding like I’m promoting myself –  but I think if your listeners agree about cash flow being such an important issue for small business owners – my most important piece of advice would be…..
 
If you have cash flow issues and your traditional funding sources haven’t  been able to help, check with a cash flow consultant — whether that be me or some other cash flow consultant. 

And, I don’t say a funding company that does the actual funding (for example, factoring of accounts receivable), but a “cash flow consultant”, in particular, because there are soooooo many different funding niches/sources in the cash flow industry that a business owner can get lost in it  as easily as in the traditional funding arena.  The cash flow industry  is very, very niche  oriented and that is where a cash flow consultant’s expertise comes into  play — to assess the business owners needs and direct them to the  appropriate funder and save them time and effort and let them do what they  do best…..run their business without worrying about cash flow issues!

So, whether it be me or some other cash flow professional, be sure to check out the funding tools in our industry to supplement the fulfillment of your funding and cash flow needs!
 

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Hi, All -

I was recently interviewed byLinda Coughlin, the owner of Paralelles.com, and host of the radio show, One Big Life, about the alternative small business funding options I work with and I would like to share that interview with you here

There are two other interviews besides mine on the  show but I am about mid way if you wish to fast forward to it.  Let me hear back from you once you’ve listened with any questions or suggestions for future interviews!

We did not have the time to cover all the questions I had been sent as possibilities for discussion, so I thought I would take my preparatory notes for the interview and share those with you here.  I figured if Linda had these questions, you might too!

HOW DID YOU GET YOUR START?

We did cover this on the show but I will recap here too.

I got the entrepeneurial “bug” about 12 years ago when I had my first business and have been looking for something I could really enjoy for this period of time. 

I found the cash flow industry in early 2003 and started out with the plan to deal with the leveraging of owner-financed real estate notes. 

I told an associate about the “cash flow” industry though, and he gave me a hot lead for a pipe fabricating company here in Louisiana with a large contract with Bechtel Corporation and we ended up doing $3million in accounts receivable factoring for it on my very first deal in this industry! 

So, I considered the fact that real estate and I were not really getting along with a lot of number crunching and this new area seemed so much more to my tastes that I would focus instead on accounts receivable factoring, purchase order funding and contract funding.

And for those still not sure what exactly the ”cash flow industry” is about - it is about helping a business to leverage its liquid assets to self-finance its own growth, expansion and daily working capital needs, without acquiring debt or giving up equity in its company.

Factoring of accounts receivable is the most commonly used tool in the cash flow industry.

WHAT IS THE NUMBER ONE REASON FOR BUSINESS FAILURE IN THE U.S. AND WHY?

Lack of working capital!  Cash Flow!  You’ve heard the saying, “Cash is King”, right?  Well, there’s a reason it is out there!  When you’re not able to  focus on your “business” and have to worry with cf issues everything suffers.  That’s true for us in our personal lives too, I think.  What is one of the number one reasons for discord in a marriage or personal
relationship?  Money matters.

Plus, even if you have a great product or service, to be able to produce or get it out there for your customer, you have to have cash flow!

These two, plus the first question below were covered on the show.  I will break this post here and continue on into a second one for the rest of the questions and answers I had prepared for this interview.

Until next post.  Debra

(Here’s the rest of the questions to follow.)

• How did you learn about all the different funding options available to people even after banks turn them down for a loan?
• Who are your clients?
• In your years of experience, what observations can you make about small  businesses on the threshold of growth?
• What is asset-based lending all about and how can it help?
• What is the most important piece of advice you would like to give our listeners?

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to help fund your small business!  And the list continues to grow as new ones are discovered as needs arise and creative entrepeneurs and investors figure out a win-win situation for both sides!

But, what “are” the 60 Cash Flow Income Streams Which Can be Sold in the Secondary/Cash Flow Market?

Well, the most commonly known are - private mortgage notes and business invoices. 

But, there are many more.

Business-Based Income Streams are comprised of cash flow streams paid to a business by another business, individual, or government and some examples are: 

Accounts Receivable

Aerospace leases
Bankruptcy Chapter 11 reorganization plans
Bankruptcy receivables
Commercial contracts
Commercial deficiency portfolios
Commercial leases
Construction receivables
Equipment leases
Equipment timeshares (or “fractional ownership interests”)
International receivables
Letters of credit
Medical receivables
Partnership agreements
Purchase orders
Sports contracts
Trade acceptance drafts
Warehouse inventory lines

Collateral-Based Cash Flow Income Streams

Aerospace notes
Automobile notes
Business notes
Collectibles notes
Equipment notes
Homeowner/condominium assessments
Marine notes
Mobile home notes
Private mortgage notes
RV, Motor home and business vehicle notes
Tax lien certificates and tax deeds

Contingency-Based Cash Flow Income Streams

Commercial judgments
Commissions
Consumer judgments
Corporate charitable contributions
Franchise fees
License fees
Royalty payments (including mineral rights fees)
Sales Revenue

Government-Based Cash Flow Income Streams

Farm contracts and conservation reserve payments
Lottery winnings
Tax refunds/credits
 

Insurance-Based Cash Flow Income Streams

Annuities
Casino winnings
Corporate retirement plans
Funeral purchase assignments
Prizes and awards
Structured settlements and class action awards
Viatical settlementsCemetery pre-need contracts
Consumer-Based Cash Flow Income Streams

Cemetery pre-need contracts
Certificates of deposit
Consumer Contracts
Credit Card charge-offs
Delinquent debt
Health and country club memberships
Inheritances
Trust advances
License impounds
Retail installment agreements
Student loans
Timeshare and vacation club memberhips

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Oftentimes people compare factoring fees to automobile or mortgage lending rates and factoring initially appears expensive.  They tend to annualize the points charged by the factor - equating 3 points per month to an interest rate of 3% or 36% annually. This is both an incomplete and incorrect comparison.  

First, factors purchase accounts receivable at a discount. They do not lend money.  (Similar to a sale of a personal vehicle between two individuals.) 

Second, the “paper” (accounts receivable invoices) is short-term in nature and management intensive versus a bank loan, which is secured against some stable asset and usually advanced once.  Conversely, factors are continuously advancing and collecting accounts receivable, providing clients with ongoing reports, credit, due diligence, and personalized account management services.   

So, let’s look at some examples: ·       

Think of a business which typically offers a 2% discount for early payment of its invoice – say within 10 days of issue.      

If this 2% discount for payment within 10 days is annualized (similar to the thought processes mentioned above) using the thirty-six,10-day periods in a year, 72% interest has been lost.       

But — are you really losing 72% for early payment? Of course not. 

Another example: 

• You get a factoring advance that costs 3 points per month but that consistent cash flow from factoring helps you to generate more business at your 20% profit margin.

• So, would it not have cost you 17% by not factoring?

 QUESTION:        What amount of return is generated when a company has an order but no way to fill it?   

QUESTION:          How much return does a $30 to $35 overdraft fee generate? 

QUESTION:           How much money is a business owner and/or his employees earning when they are running after payments from customers? 

All this being said, a company can mitigate any factoring fees incurred by being creative.  

For instance, with ready cash, some companies have been able to negotiate a larger discount (than their factoring fees) with their suppliers by paying those suppliers faster with their ready cash – thus, more than offsetting the factoring fees!  And, I’m sure there are many more creative ways that a smart business owner can figure out so that growth and sales opportunities are not left at their door! 

I submit that when a business owner truly focuses on ALL the positive aspects and benefits which will occur as a result of factoring and maintaining a consistent cash flow, the choice of whether or not to factor will be clear.

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As well as being a niche industry, the funding companies in the cash flow industry could be referred to as “boutique funders”…Another difference between them and the banks.

With traditional sources you usually get a “Commercial” or “Business Banking Department” for business or commercial banking. In the cash flow industry, the funders are much more specialized than this.

For instance, with factoring, for example, there are funders that specialize in construction as opposed to medical receivables factoring. Two seperate industries, right, with their own particular differences in terminology, daily activities, transactions and ebb and flow of work? So, the cash flow industry has funders who are experts in each of the industries they are involved with. This industry does not operate under the philosophy that one size fits all, as we all know that, in fact, one size definitely does NOT fit all.

From my experience, I have seen banks attempting factoring but, generally, shying away from it because they realize that their one commercial or business banking scenario does not work well for this specialized type of funding.   They do realize however, that there is a need for the funding offered in the cash flow industry and Wells Fargo Bank has, in fact, recently purchased one of our larger factoring companies!  I have also seen banks branching out and opening a whole new section just to specialize in factoring of accounts receivable. 

 And, I say “larger” because not only do we have funders who specialize in particular industries (i.e. construction, medical, transportation, etc.), they break it down even further sometime into small, medium or larger transactions.  For instance, with factoring there are usually small ($50 on up to $100,000/per month), medium ($100,000 to $1M per month) and larger ($1M and above/per month) factoring companies.  Different from the banking industry, huh?

Don’t get me wrong, it is always a business’ objective to use banks BUT there are definitely times when the cash flow industry fills a need and quite often gives businesses the life’s blood they need to survive.

I use the analogy that the cash flow industry is sort of like the convenience stores, you can pull in and get what you need right away, without hassle and you may pay a little more for it.  But, you have what you need when you need it. 

We may all want to shop at the large discount stores like Wal-Mart, Target etc. to get the best value for our dollar but oftentimes the crowd or other things just make it easier and more advantageous for us to use the convenience store.  We have to make the decision of which best suits our needs at that time. 

Same thing with the cash flow industry and bank.

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So they can go fishing and catch an 844 pound shark!

No, seriously, they sell them for 3 reasons:

• 1. Access to their cash!
  • Sometimes there is a serious need (i.e. pay off credit cards, medical bills, or for a divorce settlement or retirement). 
  • Other times, there is simply a desire to .. purchase a dream home, take a vacation, buy a new car, start a business or put money into someone else’s venture.
  • And, then, in other instances people just want access to their cash for peace of mind. They don’t want to worry about liquidity issues, collection worries, or the finances of the person who owes them the debt.
• 2. Yield/Interest
  • People also sell because they know that with cash in hand today, they can start earning interest or yield. They will oftentimes even sell their income stream for less than face value so that they can begin earning a yield.
• 3. Inflation
  • Lastly, people realize that over time, the payments they receive today will drop in real value.

So, on the other hand, Why do people BUY income streams?

Buying future payments is a very profitable form of investing.

When investors buy future income streams, they do not pay face value and this equates to a high yield on their investment. Also, a nice perk with this type of investment is that they (usually) know in advance EXACTLY what that yield will be (provided the payments come in on time or are not contingency-based).  If they are contingency-based, as in the Cubs example below, this would be factored into the offer by the investor.

Buying income streams is very attractive to investors because it gives them the opportunity to invest their money profitably and relatively securely.

Check out the story on the sale of the Boston Cubs and the income stream their owner is selling.  Here’s a short excerpt:

“Whether Wrigley Field will be sold with the Cubs or separately is unknown. The neighborhood park with its ivy-covered walls is as much part of Cubs tradition as any player in the team’s history.

Donald Levin, the owner of the successful Chicago Wolves minor league hockey team, ticked off the questions surrounding the ballpark.

‘Do you own the field? Do you have to be out in case they renovate? Where are you going to play? What happens to all the income?’ said Levin, who is expected to make a bid for the Cubs. ‘These are more important evaluation questions than the contracts.’

Howard, the Oregon business professor, said an owner typically wants to control the venue where their team plays.

‘If you are paying that kind of money you want to be able to claim and control all income streams it will throw off,’ he said.” (Emphasis added.)

Perhaps the Cubs owner is tired of all the hassles that goes with running a major league club and, as noted above, would prefer to take a vacation and relax.  Sure, he will make a lot of money on the sale, but I imagine it will be far less than what he could make from the various income streams, tax credits and other benefits he would receive as the owner.

Suffice it to say, there will always be income streams available for purchase and investors will always be ready and willing to purchase them and hopefully I have been able to fill in some of the picture as to why that is so.

Until next post….Be Safe.. Debra

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The first method of finance that led to the emergence of the cash flow industry was owner financing.

In an owner-financed sale, a real estate seller accepts a promissory note as a portion of the purchase price. The note is then secured by placing a mortgage on the real estate being sold.  Homeowners and commercial real estate investors in this country have used owner financing as a method of buying property since the early 1900’s.  However, it wasn’t until much later that it became popular.

During the high interest rate periods of the Seventies and Eighties, home buyers found it difficult to obtain affordable financing from banks. Interest rates and inflation had skyrocketed to double digits, making it almost impossible for people to sell their real estate. If a real estate seller was willing to take a down payment from the buyer and hold a mortgage note for the remaining balance, the transaction was much more feasible for the buyer–and certainly more convenient.

By the time inflation drifted back down, thousands of individuals were holding private mortgage notes. Individual investors and investment companies recognized a tremendous profit opportunity in those notes, and they began to buy them directly from sellers.

These privately held mortgage notes have turned into a commonplace investment nationwide. Today, privately held mortgage notes are even securitized and traded on Wall Street.

The second method of finance that impacted the development of the industry is factoring, also called the sale of a business’ accounts receivables.

Factoring has a long, rich tradition dating back some 4,000 years to Mesopotamia (which some think of as the cradle of civilization).  In addition to many other things, the Mesopotamians first developed writing, put structure into business code and government regulation, and came up with the idea of factoring.  Mesopotamia and its citizens eventually became extinct but the concept of factoring definitely did not.  Indeed, almost every civilization which valued commerce has practiced some form of factoring, including the Romans.

The first documented use of factoring occurred in the American colonies before the revolution. With the advent of the Industrial Revolution, factoring became more focused on the issue of credit, although the basic premise remained the same. By assisting clients in determining the creditworthiness of their customers and setting credit limits, factors could actually guarantee payment for approved customers.

Prior to the 1930’s, factoring in this country occurred primarily in the textile and garment industries, as the industries were direct descendants of the colonial economy that used factoring so specifically. After the war years, factors saw the potential to bring factoring to other forms of invoice-based businesses and the expansion began.

Today, factors exist in all shapes and sizes: as divisions of large financial institutions or, in larger numbers, as individually owned and operated entreprenurial endeavors.

Many of these private factors sprung up in record numbers as interest rates rose to new heights in the 60’s and 70’s. This trend intensified in the 80’s, primarily due to the increasing impact of interest rates and changes in the banking industry. With banks becoming too expensive and too inflexible due to heavy regulation, the small businessperson was forced to find other sources of financing for expansion and growth. As more and more banks stopped being a funding source for the small businessperson, factoring has increasingly become an option used by the small business owner.

This year alone thousands of businesses will sell billions of dollars in accounts receivable, and they are doing it for profit, growth, and survival.

Prior to the 1980’s, factoring was used primarily in the garment, textile and furniture industries and was only otherwise available to “big business”. So, with the banking industry upheaval of the 80’s and the rise of the independent broker network in the 90’s factoring of accounts receivable has taken its place as an acknowledged financial tool that can assist many businesses - both large and small.

Clearly, the concept of selling an income stream has been a part of the financial services industry for “many” years. However, until the last decade, cash flow transactions were essentially limited to private mortgages and invoices.

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