Factoring Blog - For Small Businesses

Whether yours is a technology business or you just use tech in your business, technology is crucial to running most businesses today.  If we were suddenly to have our technology disrupted or suspended, most businesses would come to a screeching standstill. 

PCWorld has an excellent rundown of how the U.S. Congress acted on key technology issues.  Among the highlights:

• Congress extended the moratorium on Internet taxes (a good thing). Of course, taxation is a tricky area. Your company may still be subject to taxes on certain transactions, so be sure to take your cue from your tax advisor.

• Patent reform did not happen (a bad thing). To date it’s mostly been large corporations that have gotten hit by claims from patent trolls, i.e., those who file broad patents purely for the purpose of suing. However, small businesses are starting to get ensnared and of course we all suffer when unnecessary litigation raises costs of doing business.

If you want to know more about how technology issues fared in Congress in 2007, read:  Congress Cools on Tech Issues in 2007. 

A recent Kansas City Star article points out several advantages to accounts receivable factoring.  It notes that factoring can be very helpful for businesses in these five situations:

• Business-to-business companies.

• Startups with strong accounts receivable.

• Accounts that take 30 or more days to pay.

• A special job or project where payment will be delayed.

• Cash-strapped businesses needing to meet a payroll or take advantage of a supplier’s cash discounts.

Another advantage the article points out is that factoring can help preserve a relationship with a client, because you don’t have to get unpleasant about collecting invoices that are more than 30 days due. One business owner quoted in the article says, “it keeps the relationship with clients pure.” Very interesting take on the value of invoice factoring.

Read: Setting Strategy: Factoring provides alternative to loans

It’s hard to turn on the television these days without being bombarded with ads for “structured settlement” payments or “legal settlement” payments.  You know the ones.  “It’s YOUR money.  Use it when YOU need it,” intones the distinguished white haired, deep-voiced executive. 

Seeing one of those commercials for about the 500th time today made me reflect on the differences between structured settlement payments and accounts receivables factoring. 

Both accelerate cash flow.  But that’s pretty much where any similarity ends.   Aside from cash flow acceleration, the two are very different animals.   

Structured settlement payments target consumers.  Let’s say a consumer has been awarded a settlement in a malpractice case, in the form of a structured payout over a period of years.  The consumer assigns the rights to the structured settlement to a funding source, in exchange for an immediate lump sum.  That lump sum is typically paid at a steep discount — meaning the consumer gets far less than the total amount — netting perhaps only 60% to 75%.   

By contrast, factoring accounts receivables is a well-established funding mechanism for businesses.   When you factor receivables, you will net far more for your receivables than the consumer does from selling a structured settlement.  So it’s a much less expensive source of funding in that respect.

Also, a business person making an informed decision to factor receivables, and a consumer under the lure of immediate cash, bring two entirely different sets of knowledge and motivations to the table.  Business owners make weighty financial decisions everyday and “run the numbers” routinely.  Consumers may or may not be as well informed or equipped by experience to evaluate the ramifications of their decision.

One additional difference that I recently discovered is that structured settlement transfers are subject to laws in most states requiring judicial oversight and approval.  This is an added protection for consumers.  And it’s a big difference with accounts receivables factoring, which in most circumstances is not subject to any kind of court proceeding.

Businesses have the ability to plan and cover some or all of the cost of factoring, i.e., businesses often can raise prices going forward to cover factoring fees.  Consumers receiving structured settlements do not have that ability.  Whatever settlement they received — that’s it.  Any costs of the structured settlement have to come out of their settlement amount.  Consumers have no possibility of recouping the funding costs.

While I’m not here to trash payments on structured settlements, I do think it’s important to understand the significant differences between them and accounts receivables factoring. 

Congress passed last minute legislation to help as many as 20 million taxpayers avoid getting hit with the Alternative Minimum Tax (AMT).  

If you’ve been hit with the AMT in the past, chances are you still will be.  The tax change will help primarily those who have not incurred the AMT before, but it could prevent them from incurring it.

If you have been saved from the AMT for 2007, you still have a few days left to max up on your deductions.  You may not have to worry about too many deductions throwing you over the limit into AMT-land.

So how do you know if you’ve been saved from incurring the AMT?  This article from the Chicago Tribune suggests running last year’s tax software (such as TurboTax) to see if you would have avoided the AMT.  You’ll probably be in the same boat for 2007.  Or you could call your accountant, too, and get his or her opinion.

I just found a wonderful spreadsheet template that you can use for advanced financial planning for your business. 

It’s called the FastTrac Financial Template and it’s by the Kauffman Foundation.

Among other things, it can help you calculate “days receivable” for your business, to see how long it is really taking you to get your money. 

Traditionally the week between Christmas and New Years is slow for many businesses. 

Some people use the days during this week for vacations or going out of town to visit family.  But if you’re like me you’ve stayed in town.  After a few family get togethers and some festivities, pretty soon you’re restless.  Work begins to beckon.  

That when I hit the books.  Not academic books, but rather my financial books.

During this last week of the year I have more time to think about my business, because I am not working on my business. 

I find it’s a great time to take stock of how the year went.  That puts you in a frame of mind to think about the big picture for the upcoming year.

 Here are some good activities to do during the last week of the year:

• Assemble and organize tax documentation that you will need for taxes in another month or so. No matter how organized you are, there are always some loose ends to organize or pull together — for personal taxes, business taxes or both. Not only will you be a step ahead when you start preparing your information for your tax preparer, but the act of organizing does something else: it gets you closer to your financial situation.

• Review (and I mean really review) your P&L and balance sheet. You will understand you business better the more familiar you are with them.

• Run sales projections for 2008. If you’ve already go those and a strategic plan — good for you. Just don’t go “naked” into the new year, without having a good handle on where your money is coming from next year.

I’m sure you can think of some other items to review and evaluate. Just do it!

One of the biggest questions business owners have about factoring is:  what do I tell my clients? 

In other words, “how do I notify my clients that a factor is involved?” The unspoken concern here is whether clients will get confused or misunderstand.

The fine folks at Facteon have come up with a set of 5 tips for what to say to your clients to make them comfortable with your decision to factor your accounts receivable invoices. 

Perhaps the most important thing is how to position your decision properly right from the get go.  This tip is especially important:

Tip #1: 

Working with Facteon helps me fuel my Company’s growth.

Selling invoices (receivables) to a third party like Facteon has been a standard business practice for hundreds of years. Our business is not in trouble. In fact, it’s just the opposite: it is growing fast and Facteon accelerates my cash flow to fuel that growth.

It’s like anything else in business: you set the expectations with your clients. How you choose to present the decision to clients will shape how they perceive the news. And to your clients it really is just business as usual, except for where they send their payment.

Read all five tips: What to tell your clients about accounts receivable invoice factoring.

As an entrepreneurs and business owners we can get so focused on the day-to-day aspects of running a business (or sometimes just surviving!) that we forget the long term picture.  It pays to raise your head up from time to time.

For instance, do you have an exit strategy?

OK, don’t laugh.  I know for some of you the exit strategy you’re thinking of may be nothing more sophisticated than a gurney on the way to the funeral home. 

But if you have plans to retire before that day occurs, or if you want to ensure you leave a legacy for your kids or involve employees in ownership, then you’ll want to find time to think about that exit strategy.  Here’s why:

” … [I]f you wish to share equity with your employees or with your heirs, it is important that you start early, when the company valuation (and share price) is low. U.S. tax laws severely limit gifts to heirs; hence, it will take many years to pass the business on to children. Assuming the company experiences consistent growth, sharing equity with employees can be rewarding at any stage in the business cycle. However, transferring total ownership to the employees, including the sale of your shares, is more easily accomplished by starting early, when the company valuation is low. * * *

The proceeds from the sale of a private company are usually for cash, for shares of a public company, for shares of a private company, or for a combination of the above. This is generally a move toward greater liquidity in your personal estate. You are selling illiquid shares of your private company for cash and/or shares of a public company that will eventually become liquid.
This allows the successful entrepreneur, who often has nearly 100 percent of his or her assets tied up in the business, the option of diversifying his or her portfolio of investments. Some entrepreneurs sell to other private companies and achieve asset diversification by becoming
part of the larger, merged business. While immediate liquidation may not be their primary driver, entrepreneurs who take this course usually move closer to a liquidation opportunity.”

The above quote gets at the major downside of small businesses: they eat cash. Some lucky percentage of small businesses throw off good cash flow, but I’d say the majority do just the opposite and scarf up cash like the Cookie Monster gobbling cookies. And of course we’re always scratching around for money, because it’s all tied up in the business.

Mind you, I’m not complaining about owning a small business and neither should you (never complain, just do something about it). But if you can plan to eventually draw out the cash that you’ve put in, wouldn’t that be a wonderful end goal?

For more about exit strategies, read: Choosing Your Exit Strategy at the Biz Info Library.

One of the best tools to stay on top of your finances and also manage cash flow and profit and loss, are dashboards.  Let me give a rundown of a few of these dashboards:

MyBizHomepage — MyBizHomepage is a free Web-based service that gives you financial analytics to run your business more profitably.  It works along with QuickBooks.  So if you use QuickBooks, it will extract data from your QuickBooks account and display it in a dashboard.  It’s password-protected, so only you see your data — it’s your private dashboard. 

ExcelWithMonarch — Organizations of all sizes can easily and quickly implement their own custom dashboard systems with software most every business already has: Microsoft Office Excel.

Using Datawatch’s Monarch software you can feed current data into Excel. Think of Monarch as a universal data translator. According to a Web comment by the owner of the ExcelwithMonarch site, by using Monarch and Excel, you “can extract data from report files, databases, PDFs and many other sources, and output to a number of formats, including Excel files. This really is a knockout combination as an organization can define exactly what content they need to see in their dashboard, how they want to visualize it (charts, tables, etc.), and (this is the best part) they can make the most of the software tools (accounting, ERP, etc.) they already use.”

Salesforce.com — If you are a user of Salesforce.com and you want to measure more than just your finances, the dashboards available with Salesforce.com are useful. You can have a dashboard to show critical metrics for sales and marketing, for instance.

Roll Your Own — This article at TechSoup outlines how you can create a customized dashboard using a portal software such as Microsoft’s Sharepoint.

The Wall Street Journal’s Real Time Economics blog has a roundup of economists’ reactions to the jobs numbers reported by the U.S. government this week.   Overall the message can be summarized as:  “don’t panic.  It’s not a recession, although things have slowed.”

The housing market and subprime mortgage lenders are still having troubles, but according to the report:

“… [I]ncreases in services employment appeared to limit the risk of a severe economic downturn Nonfarm payrolls rose 94,000 in November, the Labor Department said Friday, down from October’s 170,000 gain. The unemployment rate was unchanged at 4.7%. Average hourly earnings increased $0.08, or 0.5%, to $17.63. However, that was up just 3.8% from a year earlier, suggesting that relatively tight labor markets are not putting much pressure on labor costs.”

The article goes on to give four economists’ reactions, all of which I’d summarize as cautiously and tepidly optimistic in the sense that they do not predict recession.  Funny how our expectations get set, and we think it’s positive if people just say there’s not going to be a recession.