Where Is The Business?

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Recent reports indicate that small business revenues are still below the levels prior to the economic meltdown. Although businesses are growing it is a very slow pace and it appears that it will take more time before revenues recover. In addition to the lack of revenues, many small businesses are expressing deep concern over pending government regulations. All of this is holding back hiring which is needed to help the overall employment picture.

Even with these issues businesses will continue to grow and when growth finally accelerates many businesses will need cash to support the growth. With banks only doing minimal lending for small businesses, business owners will have to look at alternative financing. Invoice factoring, or sometimes called receivables financing can provide cash when it is needed as the business grows. This form of financing is common and has helped thousands of small businesses over the years.

Jan J. Cunningham
The Interface Financial Group

Up and Down

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The Fed states than small business lending is up but banks say that small business lending is down. So which is it?

Regardless of the Ups and Downs, the simple fact is that banks are not lending to most small businesses especially those in the construction industry. You may get a loan if you have been in business for at least three years, have assets and two years of profitability. Most will not meet this criteria and will not be able to obtain funding. There are alternative funding options beyond the banks that can help small businesses in need to capital.

Invoice factoring services will purchase outstanding invoices providing immediate cash. Qualifications are minimal and are not based on the same criteria as bank lending. Using receivables, money can be obtained quickly and easily when it is needed by the company to meet current obligations.

New Businesses Sprouting

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There are many new businesses starting everyday in the US and Canada, with the largest group related to the construction industry. These new startups will bring new jobs over time as the economy improves and businesses begin growing.

There will be challenges while the economy staggers along with some ups and downs but generally speaking growth will occur. With growth comes the challenge of working capital. Cash needed to pay suppliers, payrolls and other expenses.

Banks are not keen on lending money to new businesses so obtaining needed capital requires some planning. One viable alternative for short term working capital is invoice factoring, selling invoices (receivables) for immediate cash. The process is fast and efficient and allows a new company to obtain capital when it is needed.

Jan J. Cunningham
The Interface Financial Group

Fed’s Say Small Business Lending Is Up

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The Federal government reports that small business lending is up as a result of the Small Business Jobs Act of 2010. This government program encouraged smaller community banks to begin lending to small businesses to help in the economic recovery. The report indicates that California banks have increased lending by $295 million dollars. If this amount is divided by the 1.2 million small businesses with annual revenues of less than $10 million, then each business would have received $236.49. It is difficult to hire someone and grow the business based on that amount.

Small businesses are beginning to grow again although growth is slow and there is still concern about the overall economy. Many businesses are reluctant to hire due to a lack of confidence and cautiousness.

Those businesses that are growing and need working capital beyond the $236.49 can obtain funds through invoice factoring, a form of receivables factoring. The business can sell a portion of receivable and obtain cash quickly and conveniently when it is needed without having to be concerned about a long term contract.

Commercial Factoring Due Diligence – Financial Statements

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Most commercial factors will ask prospects to provide financial statements as part of their application package and due diligence process. Some will make an exception for smaller companies or will ask for bank statements in lieu of financial statements. But all in all, asking for financial statements is fairly common in the commercial factoring industry. What is also fairly common is that many prospects usually object to providing this information. This creates an interesting tug of war between the commercial factor that wants to take on new customers while being careful and prospects that want to maximize their chances of financing by disclosing the least possible amount of information.

The most common explanations from prospects are:

“We don’t have financials” This explanation will lead most commercial factors to run because first question that come to mind is: how do they know that they have a financial problem if they don’t have financial reports? How do they know that their problem stems from slow paying invoices? Nowadays you can buy very inexpensive software that is easy to use and will generate all needed financial statements so not having them is no longer an option.

“They’re buying invoices, why do they need to see financials?” Commercial factors need to see financials to make sure that the company is not at risk of going into bankruptcy or into any other event that could prevent the factor from collecting on the invoice. Yes, this happens! You see, even though commercial factors buy your invoice, an invoice is really just a piece of paper (or an e-mail nowadays). The purchase happens actually when they advance funds to your company and secure the collateral by filing a UCC lien. However there are many things that could trump this, which is why commercial factors care about the financial health of your company, and need to see your financials.

“Our financials are not up-to-date they are 6, 9, or 12months behind”. This is just a variant of the good old we don’t have financials excuse. And the question remains the same, if your financials are not up-to-date party how do you know that you have financial problems and how do you know the factoring will help you?

“I refuse to provide my financial statements”. Whenever a due diligence officer hears this explanation, it produces a red flag for them. Many take this statement to mean that the prospect has something to hide. While this is probably not always the case since many potential clients may just want privacy, they have a point to think like this. From their perspective, here’s a company that wants factoring but is refusing to provide critical information about itself. Ask yourself this: “would you provide funding to a company that did not disclose information about itself?”

One last point, when a commercial factoring company asks you for financial statements they are evaluating more than just the statements. They are evaluating whether you run a business that is well managed and keeps careful track of their finances. This is very important, and in some cases it may be more important than the numbers in financial statements themselves.

Sabeen Ahmed
Chief Operating Officer & Chief Credit Officer
The Interface Financial Group

Why Do Banks Decline B2B Financing Prospects?

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It’s not uncommon for us to get calls from companies that need business financing but have been declined by banks. Many of these prospects consider their experience of trying to get bank financing to be a sour experience. “They don’t understand me. They have no idea how quickly my business can grow!” they complain. I am going to play devils advocate for a second and say that actually, many people don’t know how banks lend. And if they understood how banks operated, most of these prospects wouldn’t have even bothered approaching a bank for business financing. Maybe it’s the bank’s fault for not making it clear…. perhaps.

Let’s start by looking at the typical b2b factoring prospect. Many prospects have less than three years of operations, though some have more. A number of them have no hard assets such real estate or equipment either for the company or personally the owners. And finally, a number of them are in turn around mode – meaning they are turning around a troubled business.

Now, let’s look at the other side of things. Banks lend either against assets you own, exceptional performance or a combination of both. Period. To meet their criteria you must have assets, performance or both. They want to see companies and owners that have solid balance sheets with assets that can be used as collateral. Remember: no assets = no collateral. Sometimes they can make limited exceptions to the asset rule, but in that case, they want to see outstanding performance showing a long track record of success. And of course, they will usually lend on a combination of assets and performance.

Now, if you look at the typical b2b factoring prospect described above you will see that most will not meet the criteria to get funded by a bank – regardless of how hard they try. For these companies, the better option is to consider an alternate source of funding such as b2b factoring.

Sabeen Ahmed
Chief Operating Officer & Chief Credit Officer
The Interface Financial Group

Construction Fastest Growing for Entrepreneurs

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An interesting report was released last week indication that for new entrepreneurs the fastest growing industry segment is Construction. This is a significant change from the past four or five years. Beginning with the housing collapse that marched across the country devastating the construction industry, like areas in the path of a tornado, it now appears that construction has bottomed out and individuals are beginning to start new construction related businesses.

There is a major problem with this advance into the construction marketplace, financing. There are very few banks and other financial institutions that will provide financing for construction. Where will these new entrepreneurs get access to needed funds as these companies begin to grow?

One service that is available is invoice factoring. A service that will purchase invoices and/or progress payments providing immediate cash for expenses such as payroll or to purchase materials. Receivables financing (invoice or receivables factoring) continues to grow and provide cash to small businesses. Cash can be obtained in as little as 24 hours. It is a “use it as you need it” service with no long term contract and no additional fees, only the discount.

Financing For A New Or Existing Business

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This is of course the single most important issue when starting a new business. How do I finance the business to start and then provide on-going working capital as the business grows?

Many new businesses start on a “shoe string”. A business plan may be created but the financial plan is missing or is overly optimistic regarding sales and low on the expense side. Having sufficient capital is important not in just starting the business but also having capital as the business grows. Most new businesses fail within five years, a well known fact. The primary reason is mismanagement, financial mismanagement.

There are many sources of capital for a new business but it must be planned for, it will not magically appear when needed. Some forms of capital include:

Personal assets
Savings
Family and friends
Grants
Partnership (see prior blog post regarding partners)
Private stock
Banks

There are pros and cons to each and each should be considered carefully. Using your own money leaves you in control. When any of the other sources for capital are used there may be control issues in the future. Not necessarily direct control but others may try to influence how the business is operated.

The point is, you must have a financial plan as a part of your overall business plan in order to be successful. As you consider sources of capital, seriously evaluate the pros and cons of each and have a backup plan should a source of capital become unavailable. One good source for working capital for existing businesses is invoice or receivables factoring. This service can provide funds quickly once an account is established. If you think you may be needing funds in the near future, set up the account today, don’t wait till the last minute.

What Plan B?

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Every small business should have a plan and be updating the plan periodically. Everyone that works with small businesses will tell you this. This is your roadmap for the business and helps toward your business success.

More importantly, is having a Backup Plan, often referred to as Plan B. Unfortunately, those that talk about planning many times neglect to instruct others on the need for a backup plan. Business does not always go as planned and when the wheels come off and there is a serious derailment you need a secondary plan that you can invoke quickly to move forward. If you had started a business in June of 2008, three months prior to the beginning of the financial meltdown, and had a backup plan, you may have survived. I doubt that most did as there most likely was no backup plan.

What is your backup plan for those periods when you have a cash flow crunch? Smart small business owners know that they can rely on invoice factoring when working capital becomes a problem. The smartest of the smart will also have already established an account so when cash is needed it can be obtained quickly. This is a “use it as you need it” service that is available to any B2B small business.

Jan J. Cunningham
The Interface Financial Group

Key Metrics for Every Small Business

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It is the end of the year and you are trying to figure out the status of your business! Unfortunately, trying to drive your business based on only having year end information can take it right into the ditch.

Every small business should have a dashboard with key metrics that are being evaluated continuously so that small (or large) corrective actions can be taken as necessary. It is too late to try and do it at the end of the year.

Each business should be analyzing five to seven metrics each month including:

o Total monthly revenues
o Total monthly expenses
o Number of new customers/clients
o Number of repeat customers/client
o Cash Flow

Each of these, along with two additional chosen metrics, should be compared against the targets projected for each month. This will allow a business owner to take the steps necessary on a monthly basis to guide the business in the right direction. These measurements are critical when in a down economy and having to navigate through narrow streets.

Cash flow is very important to every business. If you determine that cash flow is limited, invoice factoring may provide a short term solution. It is a “use it as you need it” service that is fast and does not require long term contracts or fees. Getting cash when you need it can smooth out the rough spots.

Jan J. Cunningham
The Interface Financial Group