"Profits are the reward of doing a better job" D. Blakely

If your business is short on cash, losing money, and you are struggling to keep the doors open, here are your options: a reduction in expenses, an ultra-conservative approach to your cash flow and a determination to boost sales, or close the doors. Your immediate goal must be survival. The first step in doing so is to reduce expenses. And it is difficult compared to the excitement of expanding. It is like the medieval practice of bloodletting – painful, but considered at that time to be vital to the patient's survival. No business survives on sales volume. Get profitable and your problems will go away.

If you are determined to save your business, spend a few minutes on- line at any of the major investment websites viewing a few high-tech company financial statements. You will get an eyeful about "staying in business," reading the income statements of countless questionable companies with rapidly growing sales volume – but losing money. And, it seems that the more they grow, the more they lose. For example, I think you will agree that a 100 percent increase in sales with a 150 percent increase in expenses is "poor" management. An astute businessperson would ask: " What benefit is more business if it increases your losses? " A paper route would have been more profitable. Had these firms prevented expenses from outpacing sales the profits would have rolled in.

Getting back to your situation, be realistic. If you look for the miraculous "big cut" you probably will not find it. Instead, think of every dollar you can reduce in expenses as a new dollar in cash flow and the profit on sales of ten times that amount. Look everywhere for savings. Question every type of expense. Do you need all the cellular telephones? Do you need the company season tickets to the local stadium? Do you need the 800 numbers? Are all the ads and giveaways necessary? Nothing should be off limits or thought to be unchangeable. Pension plans, health plans, credit cards, even magazine subscriptions, should be on the list – nothing must be sacred. And don't place limits on your efforts; ask everyone for help. Ask for a reduction in rent. Ask your employees to take a pay cut. Ask anyone you owe or pay money to – it is in his or her best interest that you survive. Do not spend a dollar you do not have to. Do not fall for the argument, it is just a few dollars and will not matter. To use a trite expression: "They all add up." How much do you have to cut back? Enough to get rid of your losses. Most likely, the toughest part of the paring process will be letting employees go. In your haste to expand, you may have hired too many people. Now you must consolidate positions, eliminating all marginal and unnecessary tasks.

Think about it this way, if you aim for a 10 percent net profit, it requires $300,000 in sales to support a $30,000 employee. Every expense you have must be put to the test of, "Do I need it to stay in business?" You start your trip to saving your life's dream by reviewing your past three months of expenses from pay roll to paperclips and squeezing the excess out of all. Look at your losses for the last three months and determine how much you would have had to cut expenses to break even without an increase in sales volume. Hopefully, you can find enough "fat" to do so. Your miserliness must be unrelenting. Success will require sacrifice and discipline, and if you are not prepared to do so – quit now.

I find it interesting that one of the touted business models of the dot.com era, Amazon.com, just announced its first dollar of profit. Unbelievable! The company lost $3 billion from day one and is now hailed by some as a success. I suggest you not follow Amazon as a role model if your business is going to finance your children's education and your vacation home. You need profits, not public relations justifying your losses. Remember, this is a three-step process to survival: cut expenses, hold on to your cash and increase sales.
________________________________

Article © Copyright 2002 Dr. Paul E. Adams. Syndicated by Paradigm News, Inc.

Banks and Factoring? What Can They Be Thinking?

In the past ten years, numerous banks have gotten in and out of the factoring industry in one form or another. With the advent of several companies that sold “their concept of factoring” to banks, the industry has changed dramatically. Rates have been driven down to half of what they were twenty years ago and yet, in many cases, the risk has risen.

Banks have primarily concentrated on balance sheets and cash flow. They look at the credit history of the client company to determine if they can reasonably expect the client to service the debt so that their money will return to them with an interest percentage that is connected to prime or LIBOR . As collateral goes, they are most comfortable with a hard asset such as real estate or machinery and equipment. This is their mindset; it is what they have been taught to do.

Then, you have the factoring company. This is an entirely different mindset. They want to know the history and character of the principals of the client they are factoring, but their primary focus is the quality of the commercial accounts receivable. Their credit criteria are the strength and concentration of the account debtors, the opportunity for dilution and several other considerations which are necessary to consider every day, on every piece of business. They understand that the reason they are being used is because a company’s balance sheet does not meet the criteria of a bank’s credit culture. They know and under-stand the risk involved and further understand that monitoring is the key to success fully getting their money returned to them.

So, how do these two cultures reconcile their different mindsets ? Banks have been sold a false concept (and many have paid a high price for the learning experience) by companies that promise them the high return on their money without fully explaining their risk, nor giving them the proper training and tools to properly carry out the daily duties and responsibilities of the factoring company. These companies have very derisively been called “factor in a box” by the factoring companies that know the truth and the high risk that is involved. Banks have been sold on this false concept of “Just use this software and you too can be getting 24%-36% AP R on your money, just like those factoring companies are getting.”. Just use our software and training program and we will generate business for you and then our software and systems will protect you. Then the banks happily put a teller, or an up and coming junior bank officer in charge of the portfolio. Three months , six months , or a year later a deal goes south and the bank wonders what happened. The high returns have evaporated in the loss and they have a bad taste for the factoring industry.

In order for a factoring entity to survive and be successful, it must have three elements ; #1 is capital, #2 is a method of sourcing companies for their product and most importantly, #3 is a proven method of getting their money back along with a reasonable fee for their efforts. Fail in the firs t area and you will prevent growth as having money available is the product, fail in the second area and your product (your money) sits on the shelf and you realize no gain, but fail in the third area and your company is doomed.

For a bank to be successful in the factoring industry, they have to change their mindset and understand these basic principals . They already have the first element, capital and they have it at a much cheaper rate than most factoring companies . They usually have leverage on assets of 12. 5 to 1 and their cost of funds is much cheaper. The second element is, in most cases, right in their bank. They have a built in referral system which allows them to draw on their customer base to loan money when the commercial lending arm is just not able to justify the lending of money based on balance sheets . The third element is what gets them in trouble. Portfolio monitoring is critical and it is not an easy task. So much of the daily decision making process of advance rates , when or should you loan on an invoice is based on experience in the industry. Collateral must be monitored on a daily basis . The very reason that the balance sheet does not justify loaning money is why the monitoring is so critical. It requires a conscious effort on the part of the back room operation on a daily bas is to ensure that the invoices are correct and valid; the debtors are properly notified and are of sufficient credit strength to justify an advance. Someone who does not have experience in the industry is going to lose money. There are just too many snares and traps which can and will trip you up, take your money and take it fast. Factoring is not rocket science but it does take experience and the education process can cost more than 8 years at Harvard Business School. Even the most experienced people will occasionally take a hit in their portfolio but the entire concept is to lessen the risk. The banks that understand this vital third element of success in the factoring industry have flourished, while the ones that have bought into the false theory of a software monitoring package and little or no controls have taken massive hits.

Another point that banks should take into consideration is the rate on return. The very fact of having bank rate funds is a very lucrative position to hold in commercial finance. The inherent costs of the backroom must be taken into account, but also the concept of “Risk versus Return”. So often, with the strong competition that the industry is experiencing, rates are lowered and lowered significantly. Sometimes in the heat of competition for a deal, rates are dropped even further until it is way past the concept of “risk vs return”. This industry sells a product and if you do not realize the return on the product, the industry as a whole suffers . Banks in the industry or entering the industry would do well to keep in mind that comparing the normal rate of return on a commercial loan to a factoring proposal is not the proper way to set your rates . Take all of the other costs in consideration of properly monitoring the loan and the risk of the proposal. Take advantage of the competitive edge that having the high leverage and the low cost of funds allows but cutting rates to the point of not being able to hold the proper amount in loan loss reserves is damaging to the industry as a whole and certainly will come back to haunt the institution that practices wholesale rate cutting.

So, as in most industries, the key to success in factoring is experience and following good solid industry practices . If banks can change their paradigm of thought, they can be successful, however if they buy the concept that has been sold by these “factor in a box” companies, they will continue to suffer losses and do damage to the factoring industry.

Dave Rains is one of the nation’s foremost recruiting professionals . With
over 27 years of sales /recruiting experience and an honors graduate of S HS U, he
has earned a reputation as an expert in the placement of Business Development
and Operations professionals in Commercial Finance. Throughout his career,
Dave has been recognized as a top performer within the MRI family of over 1, 000
offices . He has been awarded 16 national and regional awards including
“Southwest Account Executive of the Year – 2001”.

There was a time in the old days when going to the bank was the only way to get outside capital for your business. These days with the explosion of raising equity investment, many of the guidelines for running a company have been revolutionized. Unfortunately this new phenomenon is only true for companies with super "star power", because these companies have potential to create sky-rocket return earnings.

For everyone else, sticking to fundamentals is where it's at. Building your company incrementally, following a pre-prepared business plan, watching expenses, and increasing sales. When your company moves beyond its launch, it begins to operate much like a bank. On the financial side you will be making credit decisions
involving your customers. Some will have to pay C.O.D., some you will extend net 30 day terms. In this sense you are now becoming a banker for your customers.

Without getting into how inexpensive debt financing ultimately is compared to equity (try 20% annualized interest versus 20% ownership lock stock and barrel), in certain situations the time honored tradition of borrowing money can be the best solution for increasing growth or starting a company.

By knowing what commercial finance companies look for, you will become a much more attractive prospect.

1. Concentration – This means putting all your eggs in one basket. Avoid going out and making a large sale to a customer and then not continuing your sales effort to find more customers. The risk of a problem developing with your main customer, or for whatever reason they are no longer buying from you can obviously be detrimental to your success. Finance companies look for incoming revenue to be spread evenly over a number of customers.
2. Creditworthiness - Who are you lending your hard earned assets to? What kind of due diligence do you perform on new customers? The challenge here is whether to accept a lucrative sale with a company that could never get credit from any type of finance company. You are essentially telling yourself that you know better than the banker about loaning money. Finance companies will respect a business owner that has a thorough credit checking process and a number of stable credit worthy customers.
3. Book keeping – While some businesses send out all their accounting to outside agencies, it is helpful to have a qualified book keeper on staff. When it comes time to seek financing, being able to produce an instant fiscal snapshot of your company will show the sophistication of your operation. Finance companies appreciate businesses that keep a close eye on their books.
4. Taxes – Pay them. Using the Internal Revenue Service as your funder becomes expensive. Whenever you work with a finance company, you will be pledging assets as collateral, thus the nature of debt financing. When you fail to make tax payments, the government steps in and places a lien against those same assets essentially stepping into first position. This leaves the finance company with money outstanding to your business and no collateral to back it up. This places your entire relationship in default. When going to closing on financing expect to sign a form that allows the finance company to receive duplicate correspondence from the IRS. This is standard procedure to track tax problems. Owing taxes does not mean you cannot get financing. It is entirely possible to receive a subordinated debt agreement from the IRS which allows the finance company to work with you unencumbered.
5. Bankruptcy – If you have ever entered into a bankruptcy proceeding whether personal or business, own up to it right away. It will come out, and being up front about the circumstances will enhance the necessity to overlook the past difficulties.
6. Applications – Finance companies ask for a variety of information when performing their due diligence. Do not be alarmed, they are not trying to steal your secrets. They need to feel comfortable with you and your company. Each company has its own threshold for fact checking. Invariably the finance companies that do the most thorough job are the most reliable and safest to do business with. Finance companies like working with a business that takes the time to put a loan package together in advance of asking for financing. Typically you can start with; Interim Balance & Income Statement, Interim Profit & Loss Statement, Last Year End Statements, Accounts Payables Aging Report, Accounts Receivables Aging Report, and of course Tax Returns.
7. Contracts – Be prepared for onerous language. Finance companies cannot sugar coat the reality that if something goes wrong they need to exercise their rights. They have to go into the relationship always thinking that the absolute worst case scenario will unfold. Once a finance company finds itself being defrauded, stolen from or payments not made without explanation, it's too late to insert stronger language for protection. By and large the language is standardized and walking from a deal to start shopping for less demanding legalisms won't produce much. Remember this, a contract is just paper in a file cabinet until you default on your agreement. Stay within what you agreed upon and all the tough language won't matter. Even if you start having financial difficulties, get in touch with your finance company immediately. You can greatly reduce the chance of default by showing that you are pro-active with your situation.
8. Using the money for the right reasons – This sounds obvious but in certain cases it can be highly relevant. You hear a lot about going to the right Venture Capital Firm that would handle your type of investment. In some ways that holds true for debt finance companies. They tend to work within industries that they feel comfortable. Additionally the type of financing company will depend on your plans for the money. If you are trying to set up a new business infrastructure, then a working capital line of credit is not your best option. You will probably do better with a term style loan that will allow you to amortize the expense over a period of years.
9. Management Integrity – Also like equity investment, get a good team together and hold onto them. Finance companies raise red flags when a long time Financial Officer who has been the contact person at the company since the inception of the relationship all of a sudden leaves without explanation. Again, always fearing the worst, the finance company could unjustly feel that something untoward was afoot and begin to scrutinize your account more closely. Even though finance companies are not part owners of your business, they are partners in your success just like your good customers. Keep them abreast of breaking news.
10. Be Professional - Answer calls and messages expeditiously, be prepared with information, show up on time. When its crunch time and you need an extra fifty thousand dollars for a week to get a better deal from a vendor, you would be surprised how much mileage you can get by being a courteous and thoughtful customer to your finance company.

-from a speech given at SmartStart 2000 Albany Law School Science & Technology Center

By Sean Harris

What is "Accounts Receivables Factoring"? Factoring involves the purchase of the face value of your accounts receivables or invoices by a factoring company at a small discount in exchange for an immediate cash advance, usually in the form of a wire transfer. Factoring accounts receivables, or "accounts receivables financing" as it is also known, provides billions of dollars in operational cash flow for companies each year. Once only used by a small group of industries, accounts receivable factoring is increasingly used by entrepreneurial-sized business who may have trouble securing loans from banks in today's fast paced economy. As banks step back, accounts receivable factoring is filling the financial void.

Why is "Accounts Receivables Factoring" important? Essentially, the use of a commercial finance company to factor your invoices is an off balance sheet transaction. This means that when you get beyond the need for financing you have no net term liability to be paid off. Each purchase of an invoice by the factoring company, when paid by the customer, is a completed business deal.

How is it done? The practice of factoring has been around for thousands of years. Whenever someone is owed money, there has always been someone else willing to take a cut of future income in exchange for providing "instant relief" to the owed party.
    The most common example of a modern receivable finance vehicle is the credit card. A merchant gets paid by the host bank before its customer gets around to paying the bill, and the bank takes a percentage of the customer's payment.
    The factor works in similar fashion, providing capital either by purchasing the asset value of a receivable (non-recourse) or by making a loan with the invoice as collateral (full-recourse). Some factors are private individuals with huge cash bankrolls, while others are public companies accountable to shareholders.
    When the factor purchases the value of the receivable, it takes the credit risk that the invoice will be paid, while the client retains the performance warranty on the work done for the customer. The factor usually performs a credit check on the customer before deciding to purchase the receivable. When a factor makes a loan against an invoice – which typically occurs when customer credit is not favorable – its client continues to assume the credit risk, and will be liable for non-payment.

How common is accounts receivable factoring? Since the factor often helps provide financial discipline for its clients, it isn't uncommon for a bank to recommend a factor to a client seeking a loan without the adequate credit record. Banks see factoring as an interim solution to inadequate credit. A few institutional banks offer accounts receivable financing directly.
     "Sometimes a company can't pursue conventional financing," says Michelle Douglas of Southern Financial Bank. "Factoring allows companies the opportunity to secure short-term working capital to get them in a better position to secure a banking relationship."
     An honest – and smart — factor wants its client to eventually graduate to conventional banking relationships. A company which cannot establish an exemplary credit history can eventually become a bad risk for any financial partner. The factor's ideal partnership is with a new or reorganized company with a bright future – one which probably won't include depending on a factor for more than limited time.

How does the perception of factoring affect a business that uses factoring? Until recently the use of a factor was thought to indicate that a company had fallen to the bottom of the financial pecking order. The perception of the factor as the last line in a shaky financial defense has persisted largely because of the unregulated status of the factoring industry.
     "The general misconception is that the only time to use a factor is when your company is going out of business" says Gary Honig, President of Creative Capital Associates. "Exactly opposite is the truth: Factors want to work with companies in a growth mode. They are as unlikely as any financial institution to invest in a failing company."

What has changed? The factoring industry is growing and has shaken out shady players through a combination of competition and the establishment of sound operating procedures. Factors watch each other closely and now provide assistance to one another much like banks do.
     Some factors specialize narrowly, dealing with just medical or construction receivables, for example. These factoring companies comprehensively learn their clients' business and industry. And while they often deal with companies unable to make a deal with conventional banks, the typical factoring company doesn't take on all comers. Far from it. Since it will operate as a de facto partner or investor by assuming the risk of a company's receivables, it's in the interest of the factoring company to take on clients who are growing, solvent, and ambitious.
     "It's critical to work with a factoring company who understands you and your business plan," says Gary Honig. "Most factors aren't willing to take on just anybody, and you should be wary of any factor who gives the impression that they're willing to do business with everybody. Normally, you shouldn't use a factor beyond the growth spurt that initiated the need for one. You should use a factor to get to better terms."

And terms, of course, vary greatly. The factor generally discounts the full face value of an invoice by a certain percentage. Rates are generally determined by risk and volume. High risk is more expensive; low risk less expensive. Low volume, measured in dollars per month financed, is more expensive; high volume less expensive. If a client can guarantee it will need factoring for a specific amount of either time or money, the rate is lowered. Some factors provide annual APR rates which are tied to the amount of financing outstanding, while others simply discount invoiced amounts between two to six percent.
     It's rare to find two factoring companies which operate entirely alike, partly because of the absence of regulation. Each factor has its own method to sort out credit issues, notify a client's customers, and verify that invoices are real and collectable. Some factors will also operate as a collection agency.

So what's the good news? Even skeptics admit that there factoring offers some unique benefits. First and foremost is retention of equity, which remains unchanged on the company balance sheet when a factoring arrangement is established. A conventional bank loan or credit line shows as an on-going liability on company books. Also, entering into a relationship with a factor – and getting capital – takes only a few days. For companies wrestling with a cash flow crunch, the immediacy of funding available through factoring is often the deal-maker.
     "We've been operational for over twelve years, and recently we got into a pinch due to some new and large accounts," notes Doug Beaver, owner of Gaithersburg-based Amguard Security Services. "Rather than going through a total re-application of our bank line, we used a factor for short-term working money until the new accounts became self-payable. Having never used a factor before, I was surprised how quick and painless the process was."
     But no aspect of the factoring business is as highly regarded as its flexibility. Compared with the usually rigid practices of both your neighborhood and downtown bank, a factor can be just the fresh opportunity a business needs to blossom.
    "Our business grew ten-fold in less than two years," says Anthony Wright of Virginia-based P&W Surplus Office Movers, "And factoring allowed us to sustain that kind of growth. It gave us flexibility."

by Sean Harris
[Mr. Harris has been widely published in newspapers worldwide (Washington Post, Baltimore Sun, Seattle Times, Montreal Gazette, Toronto Globe & Mail, London Times, Houston Post, etc.), and has written about information technology and DVD for a variety of national trade magazines (Information World, the SIGCAT Discourse. Etc.). He is the Creative Director for the PR and marketing company Pink Piglets Ltd., based in Washington D.C.]

When the vice president of a Reston high-tech firm arrived at his home office after a Las Vegas trade show, he was exuberant. The three-day show had been a smashing success, and he was looking forward to developing a solid roster of new clients from the product orders he'd received. But fulfilling these new orders meant more supplies needed to be purchased, employees would be working overtime, and shipping and handling costs were about to skyrocket.

The vice president actually had a dilemma on his hands despite his Vegas success. Instead of launching into a new level of sales, he would need to spend the next few weeks looking for capitalization while holding off expectant customers. The vice president turned to a little-known capitalization vehicle for help. Unable to borrow from a bank, he went to an entrepreneurial factor for the capital he needed. Using the completed Vegas orders as collateral, he quickly secured the cash needed to fulfill customer expectations. And as it turned out, fulfilling the Vegas orders led to the high-tech company being able to establish itself with a banking institution to avoid ever being short of capitalization again.

How is it done?

But what was the "entrepreneurial factor," and how common – and safe – is it to do business with this kind of finance provider?

The practice of factoring has literally been around for thousands of years. Whenever someone is owed money, there has always been someone else willing to take a cut of future income in exchange for providing "instant relief" to the owed party. The most common example of a modern receivable finance vehicle is the credit card. A merchant gets paid by the host bank before its customer gets around to paying the bill, and the bank takes a percentage of the customer's payment.

The factor works in similar fashion, providing capital either by purchasing the asset value of a receivable (non-recourse) or by making a loan with the invoice as collateral (full-recourse). When the factor purchases the value of the receivable, it takes the credit risk that the invoice will be paid, while the client retains the performance warranty on the work done for the customer. The factor usually performs a credit check on the customer before deciding to purchase the receivable. When a factor makes a loan against an invoice – which typically occurs when customer credit is not favorable – its client continues to assume the credit risk, and will be liable for non-payment.

How common a practice is this?

Since the factor often helps provide financial discipline and for its clients, it isn't uncommon for a bank to recommend a factor to a client seeking a loan without the adequate credit record. Banks see factoring as an interim solution to inadequate credit. And even institutional banks have begun to offer the kind of lending services normally associated with factors — accounts receivable financing.

"Sometimes a company can't pursue conventional financing," says Michelle Douglas of Southern Financial Bank. "Factoring allows companies the opportunity to secure short-term working capital to get them in a better position to secure a banking relationship."

An honest – and smart — factor wants its client to eventually graduate to conventional banking relationships. A company which cannot establish an exemplary credit history can eventually become a bad risk for any financial partner. The factor's ideal partnership would be with a new or reorganized company with a bright future – one which probably won't include depending on a factor for more than limited period.

How does the perception affect a business?

"The general misconception is that the only time to use a factor is when your company is going out of business" says Gary Honig, President of Creative Capital Associates, a Maryland-based factor. "Exactly opposite is the truth: Factors want to work with companies in a growth mode. They are as unlikely as any financial institution to invest in a failing company".

The perception of the factor as the last line in a shaky financial defense has persisted largely because of the unregulated status of the factoring industry. Some factors are private individuals with huge cash bankrolls, while others are public companies accountable to shareholders. Until recently the use of a factor was thought to indicate that a company had fallen to the bottom of the financial pecking order.

What has changed?

But the factoring industry itself is in a growth mode, and the marketplace is shaking out the shady players through a combination of competition and sound operating procedures. The factors watch each other closely – they interact constantly, providing assistance to one another as banks do – and they aren't shy about comprehensively learning their clients' business and industry. Some factors often specialize narrowly, dealing with just medical or construction receivables, for example. And while they often deal with companies unable to make a deal with conventional bankers, the typical factoring company doesn't take on all comers. Far from it. Since it will operate as a de facto partner or investor by assuming the risk of a company's receivables, it's in the interest of the factor to take on clients who are growing, solvent, and ambitious.

"It's critical to work with a factor who understands you and your business plan," says Honig. "Most factors aren't willing to take on just anybody, and you should be wary of any factor who gives the impression that they're willing to business with everybody. Normally, you shouldn't use a factor beyond the growth spurt that initiated the need for one. You use a factor to get to better terms."

And terms, of course, vary greatly.

The factor generally discounts the full face value of an invoice by a certain percentage. Rates are generally determined by risk and volume. High risk is more expensive, low risk less expensive. Low volume, measured in dollars per month financed, is more expensive, high volume less expensive. If a client can guarantee it will need factoring for a specific amount of either time or money, the rate can also be lowered. Some factors provide annual APR rates which are tied to the amount of financing outstanding, while others simply discount invoiced amounts between two to six percent.

Partly because of its unregulated nature, it is rare to find two factoring companies which operate entirely alike. Each factor has its own method to sort out credit issues, notify a client's customers, and verify that invoices are real and collectable. Some factors will also operate as a collection agency.

So what's the good news

Even hardcore skeptics of factoring admit there are some unique benefits to the practice. First and foremost is equity, which remains unchanged on the company balance sheet even when deals with a factor are struck. A conventional bank loan or credit line shows as an on-going liability on company books. Also, entering into a relationship with a factor – and getting capital — takes only a few days. For companies wrestling cash flow crunch, the immediacy of potential capital is often the deal-maker.

"We've been operational for over twelve years, and recently we got into a pinch due to some new and large accounts," notes Doug Beaver, owner of Gaithersburg-based Amguard Security Services. "Rather than going through a total re-application of our bank line, we used a factor for short-term working money until the new accounts became self-payable. Having never used a factor before, I was surprised how quick and painless the process was."

But no aspect of the factoring business is as highly regarded as its flexibility. Compared with the usually rigid practices of both your neighborhood and downtown bank, a factor can be just the fresh opportunity a business needs to blossom.

"Our business grew ten-fold in less than two years," says Anthony Wright of Virginia-based P&W Surplus Office Movers, "And factoring allowed us to sustain that kind of growth. It gave us flexibility."

By Sean Harris

Mr. Harris has been widely published in newspapers worldwide (Washington Post, Baltimore Sun, Seattle Times, Montreal Gazette, Toronto Globe & Mail, London Times, Houston Post, etc.), and has written about information technology and DVD for a variety of national trade magazines (Information World, the SIGCAT Discourse. Etc.). He is the Creative Director for the PR and marketing company Pink Piglets Ltd., based in Washington D.C.

Would financing be right for your business?
To find out click here!

At various times in the life of a company there are going to be requirements for outside assistance in order to grow the business. One requirement will be the need for additional capital. Choosing which financing vehicle is best for your company is very important. It's choosing the right tool to fix the problem.

Deciding whether to seek equity capital or debt financing is the first step. Usually companies trying to get equity capital are very early stage with little or no real assets. While companies on their way to a steady growth curve use debt financing.

The equity route

As the owner of a business idea, plan, or company – you hold ownership to a subjective value called equity. The equity of any type of property whether intellectual or physical is the value someone is willing to pay for it minus any liability attached to it. In business that could mean the value of an entity today measured in time and money invested versus the value in the future measured by comparable growth.

Once the owner and investor determine the "valuation" of the equity, the owner can then sell parts of the equity in order to raise capital. There are a variety of methods you can raise equity capital (Seed, Angel, Venture) and you should learn the pluses and minuses for each. An equity capitalist is interested in picking a company that shows great potential. They are expecting that there will be significant growth due to their involvement. That could mean that the company will grow tenfold within five years.

Without a doubt, first and foremost on any equity capitalist's due diligence list will be the management team. Even before the idea itself, it is commonly stated, great idea's with a bad team will get nowhere, whereas, bad idea's with a good team still have a chance to make it big. You should also realize, that once invested, the equity capitalist will be having an active role in the decision making of the company. Because they have "bought in" to your company they are now your partners, how active they become needs to be sorted out up front.

On the debt side

Conversely, raising capital through debt financing does not entail "selling" your equity, but instead works by "borrowing" against it. Debt financing is only available to business owners who have something of value that the lender can instantly liquidate. The debt finance company is not interested in becoming a partner in your endeavor, instead they are in business to make money from their money, letting you use it for periods of time.

Like equity financing there are a variety of methods available to raise debt financing. Traditional banking will always be the least costly source for your financing, but remember bankers are not in business to take on risk. When they ask for three years of company tax returns its because they want to see a steady reliable set of profitable growth numbers. Borrowing from the bank relies on two variables, the collateral that secures the loan, and your ability to repay the loan. You might have enough collateral, but if your business is losing money, the bank can't expect you to handle the added expense of loan payments.

Many early stage companies turn to private commercial financing which is better suited to deal with riskier issues. Factoring companies use the loans you make to customers (invoices for finished work) as the collateral for their funding. Here the emphasis will be the creditworthiness of your customers rather than the credit of your company. Equipment leasing companies will allow you to purchase new equipment and pay for it over time, usually three to five years.

Finally,

When seeking outside capital, whether equity or debt, remember that certain sources are familiar and like to work with particular industries. Take the time to look around and be sure that the source you are considering is well-aquatinted with your type of business.

- article appeared in the Business to Business Newspaper of Howard County & Columbia MD, May 1999.

This is a collection of web pages designed to help you better understand accounts receivable factoring and cash flow management.

Glossary of Accounts Receivable Factoring Terms
Popular terms explained

Reducing the Cash Gap by Factoring
Growing firms often find themselves strapped for money. A gap in cash is created when bills are paid weeks before cash comes in from customers. The cash gap can be shortened by concentrating efforts on fast moving inventory, implementing a just-in-time inventory model, negotiating extended credit terms to suppliers, and getting cash out of customers through discount programs and credit card transactions.

Debt vs. Equity
What is the difference between these two types of financing and which would be better suited for your particular business needs?

Factoring
Guest article on the basic's of the factoring industry. Kind of an overview of the who, what, why, & where's.

Factoring Solution
Accounts receivable factoring explained

Positioning Your Company
What qualifies you for collateral based loans? How can you strategically set your company up for competitive business financing?

Banks and Factoring
In the past ten years, numerous banks have gotten in and out of the factoring industry in one form or another. This articles looks at both sides of the bank factoring issue.

BusinessSurvival 101: Cut Expenses
Cutting expenses to increase profits.

Eight Ways To Improve Your Company's Cash-Flow – TODAY!
Cash is the lifeblood of any business. As humans need air to breath and food to eat, your business requires customers that provides the primary substance that keeps a business in business: cash.

How to Finance Your Start-Up
The process of obtaining money to fund a new idea or start-up company, can be frustrating and sometimes fatal for the new enterprise.

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Money, Money Everywhere – and not a Business Plan in Sight

A strong business plan is the single most important item in your financial planning portfolio.

Business Survival: The Proper Price Is Truly A Magic Number

So, how do we charge for that new product or service?

7 Cash Flow Secrets Your Accountant Never Told You

Looking for ways to boost your cash flow?

Small Business Financing: VC's and Banks

Looking for money to start or support your small business?

Transaction Financing – Instant Cash Flow From Invoices Or Contracts

This financing provides your firm with the money in order for you to perform an invoice or contract requirement

What do lenders & investors look for?
What is it that a lender or investor is looking for in your business plan?

The UCC-1
What is it? Why is it so important? Learn about the In's and Out's of the Financing Statement.