Small Business Funding Alternatives

In eighty-five (85%) percent of the cases when “small” businesses are sold, the seller must carry back the financing for a large part of the sales price or the full price itself.

Financing to buy a business is not like getting a loan from your banker to buy a home.  Real estate is usually not involved and, therefore, there is no “collateral” a bank can really attach a lien to thereby making the transaction more difficult.

Additionally, many times whenever a business is sold, the buyer does not have adequate funds for a complete purchase.

At that point, the buyer and seller agree on a down payment and sign a contract specifying how the remaining payments are to be made over time. The owner creates a note for the buyer. This is a business note. This business note can be sold for cash.

There is such a broad range of  business notes that can be purchased, it would be impossible to list them all.  However, some examples include the following:

1. Restaurants

2. Convenience Stores

3. Florists

4. Medical/Professional Practices

5. Laundromats

6. Dry cleaners

7. Printers and many others

Who is a business note buyer?

A business note buyer functions very much like a private mortgage buyer. Let’s say there’s a potential buyer of a business who cannot qualify for a commercial loan. In today’s world he’s not out of the running, because he can be financed through a business note buyer. The business note buyer represents a consortium of investors who specialize in this type of investment and liquidity is not a problem.

Fast Cash For Businesses

The seller of the business structures a private loan for the business which:

• 1.  A note is bought by a business note buyer at closing or

• 2. After a substantial downpayment and several months of seasoning (i.e. regular payments), the note will be purchased by a business note buyer.

The business has changed hands successfully for both parties, often in a very short period of time. Basically this means fast cash for the seller, and an easy loan for the buyer.

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Believe it or not, doctors are beginning to factor their receivables.

Of course, medical receivables are quite different from trucking or employment agency or most other receivables in general, with third party payors and all the procedure codes etc.

Although many experts speak of gloom and doom in the medical industry, the fact is that this industry keeps growing by leaps and bounds. Every year, the demand for medical services, medical testing (e.g. MRI Centers, Testing Centers, etc.) and medical supplies keeps getting stronger. This trend is expected to continue as the population ages.

However, even though the growth trend looks good, running a medically related business keeps getting more and more challenging. In the past, doctors and medical suppliers could expect to get large and quick reimbursements for their services. Cash flow was reasonably easy to manage. However, Medicare, Medicaid and 3^rd party insurance companies have put in place strict compensation guidelines. These guidelines can be summarized in two simple points: you can look to receive less money than before and you should be prepared to wait longer to get paid.

Let’s take a look at several options for the funding of medical receivables below.

Option 1

Cash is advanced by the funding source to a provider of healthcare services. The funding source then collects payment from third-party payors such as insurance companies and government insurers.

The funding source holds ownership position on the healthcare provider’s receivables that are advanced (i.e. factored), and a security interest on the provider’s remaining receivables. In a factoring relationship, the receivables are purchased, thereby passing ownership and the credit risk of non-payment on to the factor.

The Process

1. The healthcare provider completes the funder’s application.

2. A Letter of Intent is sent out by funder, specifying what it can do for the healthcare provider. Also included in the LOI will be a fee estimate for related audit.

3. The healthcare provider executes the Letter of Intent and returns to funder with a due diligence fee.

4. Funder then performs an audit of the healthcare provider’s third-party payors which includes:  (a) Analyzing of revenue cycle, billing and collection system; (b) Review of previous billing/collection history to build a matrix on each third-party payor; (c) Provides an on-going review of the billing procedures as long as the factoring relationship continues.

5. The healthcare provider signs a Purchase and Sales Agreement.

6. Funder funds the healthcare provider’s approved receivables upon satisfactory completion of final due diligence. 

Claims Processing

These funders know how critical claims processing is to a healthcare provider’s cash flow and, thus, business success and longevity. If claims are mishandled or incorrectly processed, your cash flow cycle can become sluggish. The efficient operation of claims processing is also vital to a receivables funding program as noted above in Option 1.

The primary goal of a billing or claims processing relationship is to ensure that the cash collection process is carried out with maximum efficiency, so the collection percentage is high and the time-to-collection is minimal. The claims processor’s primary responsibility involves taking over the billing function of a healthcare provider by acting as the liaison between the provider and the third-party payor.

Specific services include:

• Invoicing third-party payors (commercial insurance companies, HMOs, Blue Cross/Blue Shield, Medicare, and Medicaid), self-insured companies, and individuals who have no insurance or are required to co-pay a percentage of their bills.

• Managing the collection of accounts receivable including the resolution of disputes over claims with both payors and utilization review companies, handling patient and payor inquiries regarding billings, and pursuing unpaid invoices.

• Financial reporting and analysis, including the production of summary reports relating to payor mix and collection performance.

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To be wronged to the point of having to resort to filing suit, waiting throughout long, drawn-out judicial proceedings, and sometimes advancing court costs, etc. is a nerve-wracking and forgettable experience for most.

But to have the Judgment you worked so hard to have awarded   go unpaid by the judgment debtor adds insult to injury! Unfortunately, nearly 80% of all judgments are never satisfied.

Your judgment may have been awarded by the court but the follow through is completely your responsibility! Bet you didn’t know that!

But…..a judgment is a piece of paper with a dollar value attached to it, right?

So, you’re in luck – It is a negotiable paper instrument in the cash flow industry.

So, there are funders in this industry who have the resources, expertise, and determination to assist judgment holders in the process of collecting what is rightfully due them.

Oftentimes, judgment debtors will try and hide assets but these funders have the expertise to uncover any assets or sources of income, and take whatever steps are necessary to legally seize them and satisfy the judgment.

Even better, there are no upfront fees to the judgment holder and the funders do not receive payment unless they are able to recover for you!

These funders do not do an outright purchase of the judgment due to the fact that it can oftentimes be a lengthy process to pursue and collect the money owed — if at all. It is too risky an investment for even the most daring of investors.

They will take it on a “contingency” basis, though, and put their valuable time and sweat equity into recovering the money as well as advance any costs involved. So, the judgment holder can rest assured they will give it their “best shot”. Some might liken them to a modern-day “bounty” hunter!

First and foremost important fact for the weary judgment holder to remember —

Once you make the decision to allow these funders to handle the enforcement of your judgment, you basically do not have to do anything but:

• 1. Give the funding company the right to collect the judgment,
• 2. Inform the funding company of the basic facts of the case and any information on the judgment debtor available, then
• 3. Sit back and let the funding company investigate, seek out, seize and collect the judgment, plus interest and allowable costs. The funding company will advance any costs and expenses incurred in collecting on the judgment.

But….it is Extremely Important to not delay. The longer a judgment holder delays in getting the process moving, the more time the judgment debtor has to dispose of or hide assets which they do oftentimes try to do.

So, —– there is nothing for the judgment holder to lose (and lots to easily gain) by trying this option!

Some FAQs:

Can judgment holder collect interest on my unpaid judgment?

Usually, yes. Most judgments include a provision for collecting interest, usually from the day it was rendered. The actual interest rate and calculation procedure (compound or simple interest) varies from state to state.

Why not use an attorney to collect the judgment?

You can use an attorney if you are willing to pay a retainer and pay a fee of between $125 and $175 per hour, plus costs upfront, whether anything is collected or not. With our option, the judgment funder pays you a percentage of everything recovered and puts up any up-front costs. Also, this is their one and only area of work; collecting judgments is 100% of their business.

How about using a collection service?

A collection service may contact the debtor and harass him, they may even place a black mark on his credit report, but they rarely collect! With the passage of the FDCPA (Fair Debt Collection Practices Act), the debtor has the right to simply tell the third-party debt collector to stop ALL contact. A judgment funder will investigate the debtor, find his assets, and then seize them to collect the judgment.

Is there any guarantee of collecting the judgment?

No. Sometimes there are simply no assets to seize. However, the judgment funder will employ all legal means of uncovering existing assets including access to databases that enable them to garnish wages and bank accounts, and seize the assets of debtors if necessary….. because they DO NOT GET PAID if they are unable to collect the judgment!

Must the judgment holder pay for the expenses incurred in collecting on the judgment?

No.  The judgment company advances the cost of all expenses incurred in the judgment collection. In most cases, the expenses incurred in collecting on the judgment are either added to the total judgment (upon petition to, and approval by, the court), or the costs incurred are deducted from the amount recovered from the debtor before payment to you.

How long before results are seen?

It all depends on the difficulty in locating your debtor, and the difficulty in uncovering his assets. Some debtors are very smart about concealing their assets. Although the judgment company normally tries to get results in the first few weeks, recovering funds could take a few months or longer - sometimes a year or two.

What about a judgment awarded in one state against a debtor who resides in another state?

In most cases this is possible. Especially if your debtor answered your complaint or made an appearance at the trial or hearing. However, if your defendant didn’t answer or appear, the judgment is called a ‘Default Judgment’. This is considered a weak judgment. Each of us has the right to confront our accusers and to defend ourselves against any legal claims. Therefore, if the debtor is able to show the court that he was not properly served, or served in the wrong capacity, he can file a motion with the court asking it to set aside the judgment. This is the most common ‘hurdle’ that must be cleared in any judgment collection efforts, especially when done across state lines.

Is there a statute of limitations on executing on a judgment?

Yes. Your state law sets a limit on how long a judgment is valid, usually a period of 10 years from the date the judgment was rendered. Some states provide ways to renew the judgment for additional periods of time, usually another 10 years. However, in most cases, the sooner you collect on the judgment, the better.

How does all this work?

First,  an agreement is drawn up detailing the specifics of the judgment company’s purchase of the judgment. If acceptable, you then assign the judgment to the judgment company making them the judgment owner of record. Once this ‘assignment’ has been filed with the court, the judgment funder has the legal right to investigate the debtor and to proceed with the legal process of collecting on the judgment. On receipt of the signed documents, they will immediately initiate collection of the judgment.

And remember, it is to the judgment company’s advantage to move as expeditiously as possible, too, which will help you to be confident that all is being done as quickly as it can be done!

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With Purchase Order funding, there is a need for additional funding “before” you get to the invoice phase. I think of Factoring as the alternative financial tool of choice ONCE you have a completed service or product for which you are to the invoicing stage and Purchase Order funding as the tool of choice to help you get TO the invoicing stage.For instance, have you seen the Citi Bank commercials on TV lately?The one where the manager goes to the operations supervisor nervous and upset because they have just received a huge order for which they will need significantly more employees and materials to deliver?  The manager is upset because he doesn’t have a clue how they will have the needed resources to fill the order! Purchase Order funding would be happy to step in here as an off-balance sheet way of filling this order as opposed to more traditional debt models.Should a business hold back its sales efforts for fear of actually getting a larger order?Absolutely not!  Unfortunately, though, many business owners are unaware of the tools in this industry to help them leverage “Other People’s Money” to help self-finance their business growth and expansion.  The Citi commercial is a prime example.Fred Schmedt of The Samuel Noble Foundation says, “The use of other people’s money, called ‘leverage,’ is a tool that agricultural producers can and should use to harvest increased profits.”  The cash flow industry says not just agricultural producers should take advantage of this time-tested concept.Purchase Order funding is short-term funding used to finance the purchase or manufacture of specific goods that have been pre-sold by you to a creditworthy end customer. The cash advanced under PO funding is used to pay for the upfront materials and labor necessary to fulfill the order from a quality customer.  Once you produce, ship, and send an invoice for the goods - the funder will have a Factoring company buyout it’s interest.  The transaction then continues as a normal A/R factoring program. 
 
Contract funding is pretty much the same as PO funding but it is for a service as opposed to goods and there are many funders who specialize in this type funding as well.

Basically, though, they each (PO and/or contract funding) allow clients to accomplish the following:

Modern-Day Factoring – How it Works

The Vendor submits a particular customer for pre-approval of the factoring of their invoices. 

 Once pre-approved: 

• The Vendor performs a service or delivers a product and has issued the invoice to its client (account debtor) which has signed off on the invoice.

•  A copy of the invoice is faxed to factoring company and the original is overnighted so that the factoring company can begin working right away.

• Upon receipt of the signed original, the factoring company will wire transfer 70 to 80% of the face amount of the invoice into the Vendor’s bank account — generally within 24 to 48 hours.  (70% for construction and 80% for most others.)

•  The factoring company will send the original invoice and an Authorization Letter to the Vendor’s customer advising them that the invoice payment should simply be redirected to the address given.

•  When payment is received by the factoring company, the Vendor is sent the remaining 20 or 30% balance less the factoring fee which is based on the amount of time the invoice takes to pay and was previously agreed upon and acknowledged by the factoring company and Vendor.

 What Modern-Day Factoring does NOT do: 

• It does NOT change the payment terms of the Vendor with its customer.  The Vendor’s Customer does not need to pay any faster and the name on the check stays the same.  The address to which the payment is mailed is all that changes.
• It does NOT change the day-to-day contact between the Vendor and its customer

• It does NOT work as a collection agent.  Even though the Vendor’s customer will be sending payment to the factoring company, the factoring company will not be calling it to collect payment.  If payment is not remitted for some reason, the factoring company will work with the Vendor to reclaim the funds.

 General Advantages: 

• No long-term contracts
• No financials required
• Flexible
• Access to prompt funding
• Fuel for the fast-growing Company 

Now let’s look at an example:

From Bibby Financial:

“Staffing Firm Employs The Right Solution

Founded in 1993, Prime Staff is a fast growing staffing consultancy that provides temporary staff for the construction, industrial, engineering and commercial sectors.

Prime Staff found that the inherent challenges experienced by the staffing industry are often exaggerated by the banks’ inflexibility to provide the higher levels of funding required by firms operating in the high value temporary market.

Prime Staff’s Managing Director, Danny McIntyre explains, “Cash flow is always a major strategic challenge for staffing companies. We pay our temporary workers weekly and also invoice our customers weekly. However, we often have to wait 30 days for payment, so cash flow problems are inevitable.

“We looked at a number of finance options before our accountants recommended receivables funding. Bibby Financial Services impressed us with their commercial awareness and understanding of our industry and we opted for a receivables funding facility. This facility releases up to 85 per cent of the value of our invoices as they are raised, giving us an ongoing supply of cash linked to our sales. They then chase up the outstanding amounts from our customers, paying us the balance of the invoice less their service fee.” 

The benefits of receivables funding within the staffing industry are profound. It has allowed Prime Staff to take on a greater number of contracts with more staff placed because it enables them to pay their temporary staff. The collection service allows the company to focus on its core skill of placing people in jobs while Bibby ensures that payment is received.

Danny adds, “Receivables funding is now incorporated into Prime Staff’s long-term business strategy. Our relationship with Bibby Financial Services has allowed us to develop plans for the future which include the launch of three new offices, and to double turnover in the next three years. Bibby Financial Services are fully supportive of our plans to expand and we are on target to meet our goals.” 

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funding option - Factoring?

What about —– A Receivables-Based Credit Line!

You already know that if you can get a line of credit at the bank, they will usually lien your businesses assets (furniture, etc.) as well as your accounts receivable.

In the cash flow industry, we offer a line of credit based solely on your accounts receivable!  If you happen to have a line of credit with your bank, too, but still need cash flow assistance, usually banks will work with us and release your receivables from their lienhold so that you can then leverage them further in the cash flow industry.

But basically — factoring is the conversion of a company’s commercial accounts receivable into immediate cash by selling those accounts at a discount. Factoring is not a loan. With factoring there is no interest to pay, nor principal to repay. No liability will appear on a company’s balance sheet due to its factoring. A Company simply sells one of its assets (accounts receivable) to obtain a more liquid asset (cash).

Since factoring is not a loan, funding is not based on the company which is factoring and its ability to repay the amount advanced. Rather, funding is based on the ability of the company’s customers (account debtor) to pay what is owed the company for the purchase of the company’s goods or services.

Factoring is, in essence, a Receivables-Based Credit Line, which needs no other collateral which is available to be drawn on when needed.   Contrary to bank lines of credit, facotring lines of credit grow as your receivables do!

 ADVANTAGES TO FACTORING:

Ø      Your Credit Line grows as your business grows

Ø      No restriction or control by the factoring company on the use of funds

Ø      No new debt is created

Ø      You are always in control of your CASH FLOW! 

In addition, factoring provides a company services other than just improved cash flow. By factoring, a company is in essence outsourcing all or a portion of its credit, collection, accounting, and monthly reporting. Factoring companies perform these services for hundreds of companies, and are experts at it. By supplying these services for their Clients, and giving their Clients the cash flow needed to grow, factoring Clients are free to do what they do best – run their business and increase sales. 

With over $60 billion of receivables being factored in the United States annually (and that figure is increasing rapidly), factoring is a quick and viable way for companies to finance their growth. 

 Fortune 500 companies such as IBM, Georgia-Pacific, and Shell Oil use this financial tool.  And now, it is available to small businesses (under $100 million/year) nationwide so that they, too, can take advantage of this proven, debt-free, and flexible method to effectively multiply working capital.

 Signs that a business could benefit from factoring include:

• LATE PAYROLL DEPOSITS
• IN BUSINESS FOR 3 YEARS OR LESS
• EXPERIENCING HEAVY GROWTH
• ALWAYS CHASING CUSTOMERS FOR PAYMENTS
• HEAVY SEASONAL SALES
• POOR RECORD OF INSURANCE PAYMENTS
• TAX PROBLEMS
• CONSISTENT HIGH BACK-LOG OF ORDERS
• LOSS OF SIGNIFICANT CUSTOMER

 WHAT ARE THE OVERALL ADVANTAGES TO  FACTORING? 

With factoring, you can have cash on demand to fund business growth internally, meet seasonal demands, and accommodate new and larger clients who may demand longer terms. 

IMMEDIATE ADVANTAGES:

• FAST & EASY!  Once a client has been set up, moeny can be wire-transferred to their bank account within 24-48 hours!
• NO FINANCIAL STATEMENTS needed in most instances.
• NO LONG-TERM CONTRACTS are required and you choose and pick which invoices to sell.
• Once an invoice is purchased, the factor assumes full responsibility for its collection (unless another option is chosen by you.).
• NO ADDITIONAL “DEBT” IS BEING ACQUIRED - AN ASSET IS BEING SOLD! 
• IMPROVES CASH FLOW to help grow your business which, in turn, makes your business more attractive to conventional financing - it helps establish your business!

DAILY ADVANTAGES: 

•  Custom-tailored program to fit your needs.
• Get cash for operating expenses - when needed - and when you can’t get it anywhere else!ØInterested in your Customers’ credit history - not yours
• Continuous source of Operating Cash
• Provides Credit Services (Screening & Monitoring, Early Detection of Customer Service Problems)
• Get instant credit reports on prospective customers and continuous monitoring of the credit status of all present customers
• Provides detailed Management Reports
• Faster Payments!
• No debt creation - no monthly payments or balloon
• No personal guarantees
• No geographical limitations
• Reduces internal administration so you can focus on growing your business - greater operating efficiency
• Reduces bad debt
• Avoids repayment of debt at inopportune time
• Avoids giving up equity or control, as in “traditional financing”
• Able to meet increasing sales demands
• Off-balance sheet financing
• Protects and improves credit rating
• Professional collections
• Greater Operating efficiency
• “Time Value of Money”
• Able to take advantage of volume, trade and other spur-of-the moment discounts by having cash available   

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in the Cash Flow Industry is an option of which many people, unfortunately, are not aware.  The funding tools of the Cash Flow Industry have been available to “big” business for years but are only recently becoming available and known to the small business owner and I am excited to be able to be a part of that!

But what exactly is the Cash Flow Industry?

We can break it down and start by defining cash flow — which is the flow of cash through a business or household (i.e. depositing a paycheck and/or payment into your/the business account and paying the bills). 

In business, cash flow coming in is usually referred to as revenue and going out is referred to as expenses.  For an individual or household, cash flow is income coming in the front door in time to pay bills out the back door. 

But, it all boils down to money coming in and then going out equals cash flow.  And, every household and business manages cash flow on a daily basis.

So that, the Cash Flow Industry is a marketplace which helps businesses and individuals manage their daily cash flow needs.  Its primary goal is to get cash into the hands of those who want or need it by leveraging liquid assets they may have through the buying and selling of future “income streams” they may own.

An income stream is a “future” paymnent or series of payments (i.e. a financial obligation or debt that one party owes to another).  The financial obligation is reduced to writing in a legal document.  It is the “payment(s)” that make up the income stream being bought and sold but it is also commonly referred to as the debt instrument or cash flow instrument. 

I like to say it is any piece of paper which has a dollar value attached to it and some of the ones which are most easily recognizable to many are lottery winnings, contracts, invoices, leases and mortgages.

There are many more, however — at least 60 cash flow “income streams” (debt instruments) being bought and sold today in the cash flow industry – most of which are privately held (i.e. owed to a private individual or business rather than to a bank or other financial institution). 

For example, if you sold your home to your daughter and financed it for her, your daughter would then make her monthly mortgage payment to you rather than to a bank.  And, in this example, the income stream created by your daughter to you is “privately” held, because you are a private individual, not a bank or mortgage company.

We’ll discuss the 60 different income streams in much more detail later on but for the time being to perhaps help you remember some of them you might realize that they are basically business-based, collateral-based, insurance-based, contingency-based, government-based or consumer-based income streams.

I always welcome comments!

Thanks for stopping by; Debra, YCFC

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