Small Business Funding Alternatives

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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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OK - so who, besides me - in my “blogworld” - is going to be watching the 41st Annual CMA Awards tonight?

This will, in fact, be my first one to watch!  I have come to realize in the last several years just how much I do like Country music and how much “country” is really in this girl…a lot more than I realized previously.  On a recent visit by my brother I made him laugh when I told him I had a lot more yeehaw’s in me than I realized before.  But then, I love our cajun music, zydeco, dancing, etc. etc……but I digress…on to examples.

Specific Examples

These are some examples I am aware of first-hand, post-Katrina.

The asset-based lenders I work with also work in conjunction with an already established banking relationship. However, they are able to be much more responsive to the urgency of a business’ cash needs to take advantage of profit opportunities when they present themselves.

 

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.

 

Another Katrina-related example..

 

Right after Katrina, I had a display in the “Resource” section of a contracting conference in Baton Rouge since my business (as is the cash flow industry) is a “Resource” for small business. Lots of my referrals come from bankers (also a Resource and positioned next to me at conferences) unable to help a struggling new business but realize that it is a viable business that just needs some help with cash flow issues for a while. The Cash Flow Industry is definitely a “niche” industry that fills a need. We help businesses before they have the financials required by banks but also in conjunction with a banking relationship as shown in the previous Example.

 

In any event, after this contracting conference, I received a call from a plumbing company who had received lots of government work but was having cash flow problems. To make a long store shorter, we ended up factoring $1,000,000 in FEMA receivables for them so that they got $800,000 almost immediately and were able to put it immediately to work for them to expand and grow their primary business and take advantage of other opportunities which presented themselves (as a result of Katrina) (i.e. added port-o-potties business and trash dumpster rental for construction/reconstruction). If they had not factored their receivables, they would definitely not have been able to do this because FEMA ended up taking 9 months to pay. Can you imagine what would have happened had they not been able to factor??

 

If you can’t imagine it, don’t worry!  I have another example of a similar situation with a security company I also worked with which clearly demonstrates what “could” have happened.

 

In this case, the security company was doing about $1.5M a month in receivables as a second tier under a prime contractor for FEMA. They, however, did not attend the seminar (where the plumbing company got my information) or otherwise find out about factoring and came to me from a banker referral 6 months after starting the FEMA work. At that time, they already had tax liens and shortly thereafter had to go into Bankruptcy for reorganization. We worked with them all this time and still could have helped them to pull out of their dilemma had all the parties been willing to work together but this was not the case and they ended up going out of business after delivering worthless payroll checks to their employees.

 

This example really shows why I am passionate about this industry which can (at times) literally make the difference in whether a business stays open or not!

 

 

 

 

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Tags: country, factoring, Funding examples, purchase order

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