Factoring Blog - For Small Businesses

This report from Reuters says that bank loans are tightening up for small businesses in the United States. Quoting from the article:

“As losses mount at American banks and the pain of the credit crisis spreads from housing and finance to the broader economy, many small companies complain it is increasingly difficult to obtain loans. * * *

‘In recent weeks we’ve seen banks becoming more cautious and the pace of lending has slowed considerably,’ said Weldon Gibson, a consultant at the Lamar University Small Business Development Center in Texas. ‘They are demanding higher credit scores and want more collateral before lending.’”

With the banks having a rough time, some tightening of credit would seem inevitable. But as the article also points out, not everyone agrees. The National Federation of Independent Businesses (NFIB) says small business owners are not reporting any problems getting credit, in its most recent Small Business Economic Trends report:

“For the 10th straight month since the Federal Reserve declared the existence of a “credit crunch,” no evidence of credit problems has appeared on Main Street. It is a Wall Street issue. Regular borrowing activity was reported by 35 percent of the owners, unchanged from May and typical of readings for the past 15 years. The net percent of owners reporting loans harder to get in recent months fell one point to a net seven percent (eight percent said “harder,” one percent said “easier”).”

The NFIB’s statement is all the more interesting when you consider that the NFIB’s Small Business Optimism Index is at historical lows. Here is a look at the Optimism Index for June 2008:

While it’s not a pretty picture, the silver lining is at times like these, factoring can avoid having to apply for loans. With factoring, you’re not seeking credit, but rather are getting to use your own money faster. The money due you can come in more quickly. In effect you self-finance your business.

The news about the economy isn’t exactly positive these days. So are you ready for an inspiring uplifting shot of optimism? Then I suggest you watch a slideshow.

Forbes has been doing brief slideshows where they show a picture and a few sentences of information next to them. Much of the time you end up wanting more information because the slideshows are too brief (someone I know called them “lightweight news”).

Still — this one containing inspiring bios of self-made billionaires should make you feel positive. I mean, who couldn’t smile at the story of billionaires who started with nothing, saved their pennies, made the right moves, and worked their way up? The lack of capital didn’t hold them back.

Just consider the story of the grocery store titan, John Catsimatidis. In 1966 after graduating from high school he started working in a grocery store. He started by buying ownership in a local grocery store he worked in. By the age of 25 he owned 10 stores and was debt-free.

Here’s the slideshow.

You know gas prices are high when even the IRS reacts and does something special.

In a nod to the high gas rates we are paying at the pumps, the IRS announced a mid-year adjustment to the standard mileage rate.

Effective July 1, 2008 the rate increased from 50.5 cents (in effect for the first six months of 2008) to 58.5 cents per mile for business miles driven from July 1, 2008 through Dec. 31, 2008.

According to the IRS announcement:

“In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

“Rising gas prices are having a major impact on individual Americans. Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an automobile,” said IRS Commissioner Doug Shulman. “We want the reimbursement rate to be fair to taxpayers.”

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.”

Remember, also, to keep track of your mileage in a log or some other recordkeeping means. Many people use a small notebook as a mileage log, keeping it in the car and jotting down mileage with each business-related trip.

In my case I make notes on my computer. In addition to a mileage record, I enter the mileage information into my QuickBooks accounting records. I try to do it right away. If I don’t do it within a day, I usually forget about it and lose track of the mileage.

The Purchasing Managers’ Index is a good indicator how the economy is going and the long-term trend, month by month  on a regular and timely basis. Here is a quote from an old article (Why Greenspan Focuses on Business Buyers) from BusinessWeek that emphasizes the importance of following this indicator:

“The report that Greenspan loves to watch is called the Purchasing Managers’ Index (PMI). Based on data from 350 to 400 NAPM members working in manufacturing, it ”has a fairly robust track record of accurately predicting trends in the economy,” says economist Joseph Liro of consultants Stone & McCarthy Research Associates in Princeton, N.J. For instance, the PMI turned downward a year before the 1990-91 recession. It also signaled the factory slowdown in 1997 and 1998, when the Asian financial crisis cut into demand for U.S. exports.” (BusinessWeek, 06/05/00.)

If you learn how to analyze the figures you could be better prepared when the industry starts contracting. When buyers purchase less due to high inventory stock levels, it could be a signal of forthcoming problems with paying invoices by the supplier due to decreased sales.  The manufacturing sector is struggling with higher raw materials prices and a volatile commodity market. Please take note and read carefully the excerpt from ThomasNet Industrial Newsroom:

“While down, manufacturing has so far performed better during this slowdown than in previous contractions as demand from overseas continues to grow. In February 2001, a month before the last recession, the Institute’s index was 42.1.

Yet the price problem creates the greatest challenge. The ISM Prices Index registered 84.5 percent in April, showing manufacturers are paying higher prices on average when compared with March. This is the highest reading for the index since it registered 86 percent in May 2004, says the ISM.

Though last week, prices for commodities dropped slightly, the outlook calls for more increases. “Chile’s worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world’s biggest mines,” according to a Bloomberg News report.

Therefore, goods producers are caught between suppliers requiring more money and consumers who have less confidence in many businesses who continue to shed jobs as a catalyst for cost cutting. Depending on how much cash they have, there’s only a limited time before producers will stop subsidizing consumers who will only buy at the lowest price.

The manufacturing contraction results partially from events that started last year. “(ThomasNet.com, 05/06/08.)

So where are things today with the Purchasing Managers Index?  According to Forbes, the latest news shows another drop in June 2008, which is a contraction for the fifth straight month.

I keep reading with great curiosity about peer-to-peer lending programs and wondering when this, too, shall pass.

Call me skeptical.   But I think it’s just not very practical nor destined to last over the long term, except as a charitable endeavor involving small sums of money going to third world countries.

What is Peer to Peer Lending? 

Peer to peer lending is when one individual or business makes a loan to another business or individual.   A variety of websites have cropped up to serve as matchmaking vehicles, to bring together the individual lender and individual borrower.

It’s part of the “social entrepreneurship” trend going on right now, where entrepreneurs combine making money with social goals.

The sites that facilitate peer to peer lending include Prosper.com,  which focuses on loans to individuals and entrepreneurs here in the U.S., and Kiva.com, which focuses on loans to entrepreneurs in third world countries.

From the Borower’s Perspective

From a borrower’s perspective, peer to peer lending can be a godsend.  If you’re an entrepreneur in Africa who needs $500 to buy some goats to start a goat milk farm, a peer to peer lending outfit like Kiva may be your only choice.  And that $500 could mean the difference between your family starving or being self sufficient.

From the perspective of someone here in the U.S., the needs and impact are going to be different.  This Dallas Morning News article writes about a small sporting goods business that got a $25,000 loan through Prosper.com.  Apparently Prosper.com is seeing more interest from small business owners now that credit is getting tighter.

However, I don’t see peer to peer lending taking the place of credit cards, receivables factoring or traditional business loans anytime soon.

While a one-time loan through something like Prosper.com may be good, as a long-term source of funding your business operations such as factoring can become, I just don’t see it.  Because it’s still a loan, whereas factoring is your money and you’re just getting the use of it much sooner.

From the Lender’s Perspective 

From the perspective of the individuals who lend money to others peer-to-peer, here is where another challenge comes in.  If you want to lend a small amount such as $300 to an entrepreneur in a developing country, most people will think of that as kind of charitable contribution.  You probably won’t even worry too much about getting repaid.  Your intention is to help out and the amount is small enough  that the risk is minimal.

Contrast that with the “lenders” at something like Prosper.com, who from the Dallas Morning News story cited above are in it for investment purposes.  Now, all looks rosy as long as borrowers are repaying their loans.  But what if they stop paying?

The way Prosper works, a bank actually makes the loan and the “lender” buys a participating lender interest.  The website suggests creating a portfolio of multiple loans in which you have a small ownership interest in each, to spread out your risk.  But banking is a funny business, and high default rates can hit even the best of banks.  And let’s not even talk about the fraudsters who fraudulently apply for and receive loans — even the best of banks can be the victim of fraud, too.  Things can get ugly quick if you start experiencing defaults.

Loan participations are for banks that understand the risks, not individuals who may not.  From my banking days when I was involved in many loan participation/loan sale transactions, I know that even banks can end up suing over a participation in a portfolio that goes bad, on the basis of insufficient underwriting, fraud, etc.  I wonder how many of those individual “lenders” really are prepared for the risks, or if they will start filing lawsuits should they start losing money?

Time will tell.

If you still haven’t received your U.S. Federal Income Tax Stimulus check, and are wondering how much it will be, I noticed a handy dandy little online calculator just for that purpose.

Go over to the IRS website to the Economic Stimulus Payment Calculator. You’ll need about 5 to 10 minutes to complete the calculator, along with your 2007 Federal tax return in front of you.

It’s pretty fast to complete. And it will tell you exactly how much you can expect to receive.

There’s also an entire Stimulus Payments Information Center — a section of the IRS website with information about how the payments are calculated, FAQs and so on.

The U.S. Small Business Administration was the subject of a critical piece recently in the New York Times.

The article criticizes the SBA on a number of fronts including claims that it places greater focus on disaster recovery assistance than on small business concerns;  is making fewer SBA loans; and is  not enforcing small-business and minority goals for Federal contracting

The SBA went to the extraordinary step of responding with a Letter to the Editor, and including several backup materials, including this detailed myth vs fact document.

The response refutes numerous points in the NYTimes article, basically saying the SBA was more efficient, even if fewer loans were being made.  For instance, the time to process loans and honor loan guarantees has dropped dramatically, from months to weeks.

What amazes me are the claims that the SBA is not spending enough.   Whenever you talk about a Federal agency not spending enough, it assumes that government programs are always a good thing.

Don’t get me wrong — I happen to think the SBA is a fabulous agency and does much good.

But often people gloss over what an SBA loan is, making it sound like it’s almost automatic to get one.  And that if the SBA is not spending and making loans, they’re doing something terrible.  In reality, SBA loans are not right for every business.  Sure, lenders love them and push them, because the SBA guarantee lessens their risk.  But there are easier and more targeted ways to finance a business

Some of the lucky few have already received a Federal Income Tax stimulus check.  The rest of us are still waiting … and waiting.

If you’re still waiting to receive your stimulus check and thinking about how to use it, why not see what other people are doing?

Over at the Bankaholic site, they’re running a poll to see how people are using their stimulus checks.  Choices range from putting it into a savings account, to donating to charity, to donating to your local lottery outlet, to paying for college tuition, and more.

Amazingly, 3% said they are going to spend it on lottery tickets.

Go take the survey!

I happened to be perusing over at the Allbusiness.com bloggers’ sites, and found this surprising statement:

“Unfortunately, some of the worst fraud cases I’ve seen have been perpetrated by family members.”

The author, Tracy Coenen, is a forensic CPA and fraud expert. I don’t question the statement or her article. She sounds like she has considerable experience and knows what she’s talking about.

I just found the notion of family members stealing from other family members in a family business to be counterintuitive.

My natural inclination would be to trust family members more than someone without blood ties.

But therein lies the point of the article — it’s precisely the family relationship that gives rise to the temptation to embezzle and steal from the company:

“When a family member is put into a management position, there is often the risk that the new executive is not fully qualified for the job. This can increase the potential for fraud, as an underperformer may feel the need to enhance the financial performance of their department or division in order to meet expectations. Many times there is also a feeling of entitlement by a family member in an executive position. This can lead to an abuse of expense reporting, payroll irregularities, or other theft of assets.”

So, what’s the bottom line? The author suggests fraud prevention is the best protection: Better controls over the money and financial reporting.

That squares with something a colleague of mine swears by: my colleague says NEVER let any employee handle the bank records in a small business.  She suggests having the bank records sent to your home address, not the office. And that as the business owner, you personally reconcile the bank account and review all deposits and withdrawals at the end of each month, to make sure they square with what SHOULD be in the account.

You see, years ago her business had been the subject of a trusted friend and long-time employee embezzling, to the tune of mid 6-figures. It nearly bankrupted the business.

My colleague says she simply put too much trust in one individual, who was a bookkeeper who handled invoicing, accounts receivables and the banking. Bad combination, to have one person handle all 3.

And as she points out, the mere fact that an employee knows you will be reviewing the bank account and deposits/withdrawals each month, may be enough to prevent that employee from giving in to temptation and going over to the dark side.

I’m sure there are other ways to put financial controls in place without having the bank records sent to your home. But she swears by it.

SCORE, which stands for Service Corps of Retired Executives, is a great resource for small business owners. Here from the About page:

SCORE “Counselors to America’s Small Business” is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA). (www.score.org)

I want to highlight two features under the “Summer Finance Fix-Up” section that you may find of interest. First, register with SCORE and the participate in a workshop on how to create a cash reserve.

Why you should do it
You can’t be competitive if you are unable to survive. No matter how good your business or how much expertise you have, once you run out of money the business is in danger of collapsing. Many businesses (and not just the small ones) have gone out of business even when they have been very busy. (www.tsbc.com)

Then do a quick guide in how to manage your cash flow.

60-Second Guide to Managing Cash Flow
A common problem for small business owners is the struggle to maintain adequate cash flow levels. Without cash, a business must eventually close its doors. Understanding and managing your company’s cash flow will help you measure the amount of cash on hand and prepare for cash flow shortfalls in the future. (www.score.org)