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It does not have to end this way

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Many small business owners and start-up entrepreneurs get overwhelmed with what they have to do. One of the leading indicators for a failing business is the inability to pay their bills on time. Being overwhelmed, it’s easy to let small things slip and understandable. After all, it’s hard to do everything right when you are just starting out. But some slips can be very costly; taxes and other important payments cannot be neglected, there are severe consequences if you do. Failure to meet payroll is not uncommon for a startup, but those loyal hardworking employees will eventually leave if not paid on time.

The most common reason that a business cannot pay their bills is because their customers don’t pay them quickly. Waiting a long time for a payment from customers is commonplace, but it’s hard to meet payroll and pay for expenses when you are not getting paid for your services and/or goods.

Factoring, or selling accounts receivable to a third-party at a discount, can dramatically raise your capital. It’s not a new practice either; many businesses have used factoring processes to help manage their cash.

It might seem like an expensive endeavor, but when it’s hard for you to manage your money and time, factoring companies can help you to stay on top of your business. Factors will give you 75 to 80 percent of your invoices immediately, and forward the rest of the payment (minus what you’re paying for the service) back to you when your customer pays you.

Think of factoring companies more like extending your credit line (not a loan or liability). Factoring is an asset that allows you to be more concerned with your clients and your service, rather than worrying about your customer’s ability to pay and timeliness of payments. The factors fees are usually pretty nominal (between 2 and 3 percent), but the services they provide are worth much more than that. Additionally, there’s a lot of misconceptions that factoring is a last ditch effort, but it’s not. Usually, factoring is for businesses that have a lot on their plate. Factoring provides these businesses the on-hand cash that they need to grow.

There are 5 big reasons that factoring services aren’t expensive for businesses (they’re actually hugely beneficial):

  1. Factoring can raise money for your business, fast

Factoring deals often happen in less than 24 hours, and this quick turnaround can give your business critical capital that expands operations immediately. The other alternatives are to apply for loans or wait to hear back from your customers- and neither usually happens very quickly. Small businesses don’t have weeks to wait or months to wait for income, businesses need immediate action.

  1. Businesses that factor can bring in money without filing for loans

Debts can be useful to build businesses, but it can be extremely risky. This is because businesses badly need capital in many phases of development. If you don’t take action for your business now, you’re going to have to have a loan. The more immediate the loan, the more expensive it will be. Factor costs are fixed, and take care of a very important aspect of your company- the cash flow that makes your company grow.

  1. If your business can’t get a loan, factoring could be a great alternative

It’s never been easy to get business loans, but now it’s even more difficult because so many businesses fail. Banks ask for higher and higher rates and refuse to give money to businesses that do not have an extensive credit history. If your business hasn’t been around long, has had problems making payments, or doesn’t have a lot of spare capital it’s unlikely that your business can get the loan that you need. In these circumstances, factoring services are some of the only options for businesses.

  1. Often, businesses have collection departments that are non-existent or understaffed, but a factoring company’s isn’t.

Does your business have several employees dedicated to paying the bills, filing invoices, and contacting clients? If you do, you don’t need them anymore because factoring provides one of the cheapest, most efficient services out there. Not only do factors provide your business with money in 24 hours; they also keep track of your invoices and tardy customers, because they’re getting paid for it (it’s built into their fee). So not taking advantage of it is poor business practice. Paying a factor is cheaper than keeping your credit and collection employees. The factors have a professional staff trained in collecting invoices; you don’t have to worry about that anymore.

  1. Factoring is inexpensive!

The «high costs of factoring services» are grossly misunderstood. In reality, most factor services are inexpensive when you compare what it costs to not have that money right away and to have employees dedicated to collecting payment. Plus, factoring services usually get money from clients within 30 days. This means that when businesses factor, the cost of the service is usually about 2 or 3 percent for nearly a month of financing for amounts up to 75-80 percent (and the money is received right away).

Whenever you assume that factoring services are too expensive, you should also yourself a few questions:

– Could you get needed capital (such as a bank loan?) the next day?

– How much would it cost, even for a small loan?

– Is your understanding of the costs of financing accurate? Have you considered the benefits of factoring?

More often than not, you’ll be pleasantly surprised with the results that you find when you consider the benefits of factoring. Factors free your business from worrying about having the money to grow your business.

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Factoring 101

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Usually the first question I get when I say my company does factoring is «What’s factoring?».

What is factoring? Factoring involves the sale of invoices to a factoring company. A factor will provide advances against these purchased invoices and will also take care of the collection of these invoices.

Why do companies sell invoices? Companies that are growing often can’t wait for payment from their slow paying customers. Through factoring, companies can quickly convert their invoices to cash in order to meet their immediate financial demands like paying employees, paying suppliers or paying rent.

What is an advance? When a factor purchases invoices from a client, the client can borrow up to a certain percentage of the invoice amount from the factor. This is called an advance and enable the client to borrow up to 80% to 90% or more.

How can I afford to use a factor when my profit margin is very low?An increase in sales realized through factoring can result in higher net income. Companies should weigh whether they can increase their net income/profit by working with a factor. Overhead costs do not necessarily increase in proportion to sales.

Who can factor? Factoring is not limited to a specific industry. Any company that sells products or provides services on terms is a candidate for factoring.

Why should I not go to the bank? Banks’ credit requirements are often much stricter than a factor. Banks also require financial statements that reflect several years of profitable operations and positive cash flow.

What is a factor guarantee? The easiest way to understand factoring is to think of it as a credit card for the business. When a customer makes a purchase and presents his credit card, the merchant transmits the information and requests a credit approval. If the amount is within the purchaser’s credit limit, the credit card company approves the transaction and agrees to accept the risk in case the purchaser is financially unable to pay. When a factor approves a customer and issues a payment guarantee, the related invoices are called approved or non-recourse accounts.

Looking up in a forest

Are you lost in the woods?

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An interesting article in the Harvard Business Review called the «The Five Stages of Small Business Growth» talks about the most important aspects of building a small business.The authors point out that after you start finding clients and making income it all comes down to management.

Management, they continue, is the most prominent determination of success or failure. After doing some research, they found out that most businesses have the same eight problems:

  1. Finding financial resources
  2. Finding the right personnel
  3. Understanding how your business operates
  4. Business resources, customer relations, supplier and distributor relations.
  5. The owner’s goals for the business
  6. An owner’s ability to market, invent, and produce
  7. An owner’s ability to delegate responsibility to others and manage productivity
  8. A strategy that determines what your business is especially good at, and what you could do better.

The reality of the situation is that businesses need money. Without money or capital, a business can’t grow or expand. Clients end up finding new alternatives for their needs that are either cheaper or more readily available.

Highlighting the top seven ways that successful businesses find working capital:

#1: Factoring your Accounts Receivable

Factoring is probably one of the oldest and best options for small businesses to use to get money. Factors will give you 75 to 80 percent of your invoices immediately, and forward the rest of the payment (minus what you’re paying for the service) back to you when your customer pays you.

Factoring offers the fastest means of getting cash by giving businesses immediate access to funds that could have taken days to receive.

#2: Using Hedge-Funds

Hedge funds are not a resource for smaller businesses and best for bigger businesses and have the same concept as your run of the mill loan- except with a lot more risk. Hedge funds usually allow access to funds much slower than other methods and the loans can be risky.

#3: Peer-to-Peer Lending

These kinds of lenders can be family, friends, or interested strangers. These kinds of transactions are easier than possible through crowdfunding ventures like kickstarter.com or indiegogo.com. With these kinds of programs, the only fees that your business would have to pay would be the fees associated with running your campaign and pay taxes on what you earn. The benefits of these programs are obvious, but not a lot of money is made that way, contrary to what you might believe (only about $300 million annually) per year, according to these crowd-funding venues.

#4: Loans from your Customers

Generally for these types of loans to be effective, businesses should possess solid customer lists and establish customer trust- which can be very time-consuming. Farmers have used this technique to have customers prepay for a share of the harvest and also share in the risk.

#5: Using Credit Cards

Credit cards can be a great option if you’ve got good credit. You get easy access to cash, and usually enough to make a few moves, but there are a wide variety of drawbacks of using credit cards. Usually, credit cards have the highest amounts of interest, huge penalties, and the terms are subject to your credit score. Miss an important payment your credit line could fall.

#6: Convertible Debt Instruments

Convertible debt sounds like you’re riding off into the sunset- but you’d be wrong. These kinds of debt instruments require owners to give up a little bit of equity to qualify for a loan. This gives a lender equity into a business, making the loan a little less risky for the bank. Usually, lenders want to be paid back with a return, not an actual part of your company. The percentage is just to ensure payment if your bottom line fails to grow. Owners may have to pay back the debt that doesn’t convert into payments if the business is under-performing.

#7: Loans from Venture-Capital Companies

These days, some of the richest people in the world couldn’t be happier to give some of it away to you (for the right price of course). If you’ve got a killer idea and a plan to execute on that idea, then there are some big companies that would be interested.  Buyer beware- these options usually come with high-interest rates and stock warrant coverage requirements, both of which can be very expensive for small businesses.

Realistically, your financial means determine your ultimate utilization of resources

Your business’s choices on different loans and lenders might have to meet specific variables, including:

-Consideration of the timing of your loans

-Your credit history (the business or the individual)

-Your assets to back up the loan

-Your business’s geographic location

-The risks that your business has, as well as the realistic chance of success for your goods or service

In most situations, the best option is factoring. It releases your natural assets in a way that gives you more money instantly. Because your money is available instantly, A/R type factoring arrangements give your business abilities to operate with fewer complications and only a small fee. In many cases, these types of financing schemes are more reliable in situations when the bank says «no» but you still need your money.

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Merchant Cash Advance Loans – When and How to Use This Financing Tool

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I live in the world of business finance and speak to Business Owners every day regarding their business and cash flow requirements; there are many products and solutions available – each has its place. Many Business Owners are experts in their craft, but not finance experts and often select the wrong financing solution for their business.

Merchant Cash Advance loans “MCA” have exploded onto the marketplace and are gaining in popularity daily. The structure of this “Loan” is essentially selling the future revenues of the business to get money upfront. The price of this financing tool is at a significant premium; typically, the payback is 1.2 to 1.4 of the funds received over a short period (3-12 months). The “Lender”, or more appropriately defined as the Buyer of Future Revenues or “Buyer”, requires direct access to credit card receipts and/or the business bank account. The Buyer has first right to the businesses receipts and collects daily or weekly which leaves the business owner with a lack of control over their cash flow.

The underwriting, approval, and funding typically takes 2-5 business days. That’s the appeal to the Business Owner; its fast money and easily accessible. There is no robust underwriting process; the Buyer, is charging a high enough rate to absorb losses in the case of bad loans.

So what is the rate? Well let’s walk through an example:

A Business Owner sells $12,000 of future revenues for $10,000 today, and is paying back the entire $12,000 over a 3-month period. This is a 1.2x payback or 20% premium. Simple annualized interest would make this an 80% interest rate. The cost of funding is $2,000 on $10,000 or 20% multiplied by 4 (to annualize the rate – because it’s paid back in 3months).

Are there no usury laws that protect the consumers? This is intentionally not structured as a loan, it is a purchase of future revenues; therefore, usury laws are not applicable. Furthermore, this is a business transaction and not protected by consumer law. This transaction is only beneficial to the Business Owner when the risk of loss exceeds the cost of funding, and the business owner is 110% sure that they will have the money for repayment.

Well you may ask, when is paying an 80% interest rate ever appropriate? Let’s look at an example:

  • The freezer in a Steak House Restaurant breaks down,
  • The Health Inspector is due for an inspection anytime this month,
  • The inventory in the freezer costs $30,000,
  • The restaurant is heading into a busy season (Graduation or Valentine’s Day) and last year’s profits for the next 2-3 months is sufficient to pay-off the loan.

In this case, paying $2,000 to save $30,000 makes sense. The interest rate is irrelevant because the Business Owner would be in a much worse situation if they hadn’t used a MCA loan.

What Business Owners should not do is use this funding solution on the prospect of future expansion, to retire other debt, or to purchase an expensive piece of equipment. There are other financing tools that are more appropriate for those scenarios. I’ve seen too many businesses take out 2-3 MCA loans, and get in over their head. Please share this advice with other business owners so they can make informed financial decisions.

At Liquid Capital Business Funding, we help businesses in North Carolina find the best financing solution to meet their needs. If you need financial advice, please contact me and we’ll discuss the options available to you.

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Silani Cheese

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The “cheese” may “stand alone,” but sometimes the company needs help

Great cheese does stand alone. Its character speaks for itself. However, mid-sized companies like Ontario’s Silani cheese can run into financial barriers that are hard to surmount without assistance, even when product quality and demand are high.

Silani Cheese, a family-owned company manufacturing a wide variety of specialty cheeses for over 60 years, had run into financial issues due to an unusual combination of circumstances. After some unanticipated cost overruns and infrastructure issues, as well as several contracts that failed to come through as expected (and for which it had purchased machinery), it naturally turned for help to the banking facility it had in place. Unfortunately, certain margin criteria in the banking arrangement unexpectedly changed resulting in a reduced credit facility, forcing it to negotiate an insolvency/restructuring proposal with its creditors.

During the restructuring process, the company had repaid its bank debt using personal funds as well as financing from Farm Credit Canada, but in order to fully exit the proposal, it needed a broader financing solution—one that factoring could readily deliver.

”The need was critical and two-fold. Coming out of a company restructuring process, we of course had to pay the creditors. But to get the business rolling and back on its feet, we needed a steady, reliable source of working capital.”

Joe Lanzino, CEO, Silani Sweet Cheese Ltd.

Getting the right solution—from the right people

Factoring was the right solution for Silani’s issues, it just needed the right provider. After several months of working with another factoring company during the restructuring process, going so far as to complete due diligence and advancing to the point of signing legal documents, Silani expected a cash advance to take the deal forward. At the eleventh hour, however, the provider backed out. After a second factoring provider also failed to deliver timely, effective service, Silani finally came to Liquid Capital.

Despite arriving rather late in the process, Liquid Capital impressed immediately with their face-to-face approach, deadline-driven commitment and upfront clarification of what was possible in terms of timing. In the end, Liquid Capital negotiated the deal, completed due diligence and funded Silani on the timeline it needed—all in less than three weeks—enabling Silani to exit the insolvency proposal and repay part of the Farm Credit loan as well.

“The other companies we dealt with just weren’t cutting it. Their financing approach made us nervous, and they made promises they couldn’t keep. When Liquid Capital came in and took over the deal, everything changed. We were three weeks into problematic negotiations with the other company—with an irreversible deadline looming—and Liquid Capital jumped in, put everything together and closed the deal two days ahead of schedule.”

Joe Lanzino, CEO, Silani Sweet Cheese Ltd.

Making the most of the factoring solution

As a cheese producer, Silani receives milk deliveries three to four times a week, and those deliveries have to be prepaid. The upfront cash demands of the business are significant and unavoidable, making a reliable credit facility a business essential. With Liquid Capital, Silani now receives multiple fundings every week, as needed, so it has all the working capital it needs—plus enough to plan for growth.

Liquid Capital’s ability to understand and effectively manage the legal and timing aspects of the insolvency process was also a huge advantage for Silani. There’s a finite time limit to execute on the terms of these deals, and if they expire, the deal is done—and so, potentially, could be the business.

“It was pretty clear that Liquid Capital had a good deal of expertise with insolvency matters. They were very knowledgeable about what the ‘real’ deadlines were and what had to be done. I’m not sure what would have happened without them.”

Joe Lanzino, CEO, Silani Sweet Cheese Ltd.

Paving the way for success and growth

With insolvency and restructuring behind it, Silani is full steam ahead. It has a new operating facility with added capacity and room to grow, and it’s counting on Liquid Capital to provide the financial resources it needs to find and service new business.

Having returned to profitability, Silani is taking time to focus on the business by improving training, increasing efficiency and adding capabilities—for example by putting in automatic labelers—all without having to worry about funding.

“Liquid Capital did everything they said they would do. They made a proposal and that’s what they delivered, without deviating in any manner. It was just so different from the other companies we dealt with. Put your terms together and deliver—what more can you ask? A fantastic experience.”

Joe Lanzino, CEO, Silani Sweet Cheese Ltd.

 

Recent funding diagram

Recent Fundings – February 2017

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How to make your company bankable when credit is hard to get

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Compared with the United States and the United Kingdom, factoring is underdeveloped in Canada, at about US$4-billion worth, versus US$300-billion and US$600-billion, respectively. That’s a need Jonathan Brindley, founder of Toronto-based Liquid Capital Advance Corp., intends to satisfy.

Click on the below Entrepreneur article to find out how.