Factoring Blog - For Small Businesses

There is an introduction to factoring over at the OPEN Forum blog. Check it out: Factoring Receivables: When it Makes Sense, When Not.

It is surprisingly hard to generalize on the topic. There are so many different permutations of factoring — by industry, by size of business, by type of factoring.

The biggest point made was the need to view factoring as a matter of your financing strategy. It’s all too easy to treat it as a matter of fast necessity (and it can definitely solve short-term cash needs). But for the right type of business it can be a long-term cash-flow strategy that obviates the need for bank loans or works in addition to bank financing.

As the U.S. Presidential elections loom, and the economy seems to be weakening, the economy is becoming the center of attention.  And likely will stay that way for some time.

The New York Times The Board blog shows that paychecks (real wages) have been declining in real terms since last fall.  This chart tells the tale:

One of the culprits appears to be inflation.  As Felix Salmon of Portfolio notes:

“The chart doesn’t mention the main reason for the fall: unusually high inflation. Since inflation is running at a 4% clip right now, you’d need wages to be rising at the same rate in nominal terms just to stay at zero on this chart. If food and energy prices stop rising at some point, real wages will start looking much healthier.”

The candidates will be out in force to convince us how terrible the economy is and, therefore, what they can do to make things better. Some of that is typical electioneering — and lucky for us that it’s usually never as bad as the candidates paint it.

But that doesn’t change the fact that inflation has crept into our lives and into our businesses. Things are costing more. Not only are wages affected, but business profit margins too. As the costs of raw materials rise, and businesses have to raise the rates they charge others, everything gets “inflated.” Hmmm, I suppose that’s why they call it inflation.

I was doing some digging around over at Work.com. I discovered that the Facteon blog made the list of resources in the Guide to Small Business Factoring. It’s nice to be recognized!

The article suggests that factoring is right for businesses in these circumstances:

• Seasonal businesses
• Start-ups
• Undercapitalized businesses
• Businesses experiencing rapid growth
• Businesses that can’t secure traditional bank loans

You can find some other interesting articles on factoring in the Business Financing section at Work.com.

CNN Money lists the unemployment rates for each state.  The stats are little outdated (as of the end of December), but not too much so.  And still interesting.

Idaho had the lowest unemployment rate at 2.7%, while Michigan had the highest at 7.4%.  That’s quite a variance.   

Do unemployment rates in your state impact conditions for your business?  For so long reports have been that small businesses have had trouble finding qualified help. 

If you operate like an increasing number of U.S. small businesses today, chances are your business does some activities over state lines — thanks to the Internet and cheap communications and shipping.   

A long line of cases and law has protected interstate commerce and prohibits states from taking action to place an undue burden on companies trying to do business across state lines.  However, in recent years, some states have gotten more aggressive in trying to find ways to impose taxes on small businesses. 

The U.S. House Committee on Small Business under Chairwoman Nydia Velazquez (NY) has been considering the effect of  business activity taxes across state lines and their effect on small businesses.  For instance, this testimony given by small business representatives is eye-opening. 

The Committee’s press release notes:

U.S. small businesses regularly sell their products and services around the globe, but can they reach out as freely to consumers within our own nation? According to witnesses at a hearing of the House Committee on Small Business, the answer is “no.” Many entrepreneurs are finding that Business Activity Taxes (BAT), which vary considerably from one state to the next, significantly inhibit their ability to engage in commerce. The congressional panel, chaired by Congresswoman Nydia M. Velazquez, today explored the issue with an eye towards balancing the needs of entrepreneurs with the fiscal interests of states.

“We are seeing cases where entrepreneurs are charged a $400 BAT for less than $100 of total sales in a state. Not only does that have a chilling effect on small firms, it hurts the national economy,” said Chairwoman Velazquez.

This state taxation issue is definitely one to be aware of.  And you might want to double check with your own tax people.

Docstoc.com is a site where people can upload their business forms and templates for documents.  Then people like you come along and can download and use them.  In other words, it’s a community sharing site for business, legal, tech and financial documents.

• Pros: There is a wide variety of documents. I saw anti-spam policy documents; startup expense worksheets; website design consultation agreements; employment agreements; non-disclosure agreements; disaster recovery plans. You’ll find them in many popular formats, including Excel spreadsheets; Word documents; PDFs; PowerPoints.

• Cons: The quality is all over the place — it’s only as good as the person or company uploading it. And it’s always dangerous to take someone else’s legal documents and act like your own attorney. You know what they say: someone who represents himself or herself has a fool for a client.

Still, it’s worth checking out to see if you have any documents to upload and share.  If your document is marked with your company brand and has links to your website, it could be a way to spread the word.   

Just be careful about relying on the documents for anything where a lot of money is potentially at stake or there is a chance of getting sued if something goes wrong.

When the “Do Not Call” registry list was initially founded in 2003, consumers could list their personal phone numbers for a 5-year period.  After that, they would have to re-register in order to stay on the “Do Not Call” list.

As of September 2008, 150 million “Do Not Call” registrations by consumers were set to expire, leaving them open to telemarketer calls.

Humph!  Bad news for consumers, good news for telemarketers, that was.

Well, hold the phones.  Congress just passed legislation that stops the removal of consumer phone numbers from the list.  Essentially the legislation just continues the Do Not Call list and retains the numbers that were put on there.  In other words, telemarketers still won’t be able to call the numbers on the list.

So, if in your personal life you don’t want to be bothered by telemarketer calls during dinner, then you’re protected.

If you run a telemarketing firm, well you already know about the Do Not Call List.  You don’t need me to tell you anything about it.

Note: the List does not apply to B-to-B telemarketing calls, political and charity calls, and some other exceptions.

Go here for the Do Not Call Registry to register a phone number.

If you are wondering about all the details of the U.S. tax stimulus package, the IRS has a helpful Web page describing the stimulus payments.

Starting in May, the Treasury will begin sending economic stimulus payments to more than 130 million individuals. The stimulus payments will go out through the late spring and summer.

The vast majority of Americans who qualify for an economic stimulus payment will not have to do anything other than file their 2007 individual income tax return to receive their payment this year. They will not have to complete applications, file any extra forms or call the Internal Revenue Service to request the payment, which is automatic. The IRS will determine eligibility, figure the amount and issue the payment.

Stimulus payments will be direct deposited for taxpayers selecting that option when filing their 2007 tax returns. Taxpayers who have already filed with direct deposit won’t need to do anything else to receive the stimulus payment. For taxpayers who haven’t filed their 2007 returns yet, the IRS reminds them that direct deposit is the fastest way to get both regular refunds and stimulus payments.

The publication goes on to note that the payments will range between $300 - $600 for individuals, and $600 - $1200 for those who filed joint returns.

While this is not strictly a business tax issue, I thought you might be interested to know about it.

This article from the U.K. suggests factoring can be used by startups to avoid giving away equity to angels or VCs:

In the last few years more people than ever are leaving the safety of their careers for the excitement and challenge of being their own boss.

However many start-up businesses are keen to get an investor on board in order to get the capital they need to grow, when in fact they may easily be able to secure another form of finance that is less costly, in terms of both cash-flow and equity.

Before deciding to give away any amount of equity in your fledgling business, it is wise to explore all the other financial routes thoroughly. Whatever type of finance you go for should be considered against how you intend to use the money.

If your problems stem from being unable to pay for such things as suppliers, overheads or staff, then there are a few finance options that will solve cash flow issues. These types of finance are also used by many businesses for facilitating growth; management buy-outs; management buy-ins; and other activities that require a fast and large cash injection.

While I would agree with the benefits of factoring as outlined, I think the use of the terms “fledgling” and “startup” need to be defined or they could be misleading.

The question is, does the word “startup” mean a brand spanking new company, birthed last month?  Or does it mean a young company but one with some traction.

A lot of raw startups — one year and under — simply don’t have enough revenue coming in to make factoring viable. If you’re just 3 months in business, struggling to make sales (as many newborn businesses are), and have limited invoices, then factoring may be premature for you. 

On the other hand, if you use the startup term in a broad sense to mean a young business but one with some time under its belt, established customers, good billings but a need for cash flow, then I can see factoring making sense.

Some factoring companies are general and handle invoices in a wide range of industries.

Others specialize only in certain industries or certain types of invoices.  Some specialize in the garment industry; some in service industries such as staffing agencies; and so on.  Along with specialization, you may find that some factoring companies exclude certain types of transactions or industries. 

So why the specialities and exclusions?  Sometimes it’s because of special legal requirements in those industries that may involve greater due diligence.  Some factors simply are not prepared to handle certain industries if it means specialized due diligence or procedures — they leave it to the specialists.

Take, for instance, the following two examples of specialized invoices:

Construction Industry –  In the construction industry suppliers and subcontractors to a project often have special lien rights until they get paid for their work (e.g., mechanics liens).  Unless a factoring company is familiar with lien laws in your state, it may not be prepared to get involved.

Federal Government Contracts – When it comes to Federal contracts, a special law applies to assignment of those contracts:  The Federal Assignment of Claims Act  (31 U.S.C. §3727 and 41 U.S.C. 15).  This Federal law imposes specific requirements on factoring of receivables, including special notifications and sign-offs by government officials.  A factor that doesn’t see many government invoices may not be equipped to deal with the special requirements.

Many factors, such as Facteon, are general rather than specialized. They cover a wide variety of industries.

The best thing is to just ask. A phone call takes just a few minutes. The factoring representative will tell you immediately when you call if they can handle your type of transaction.  Look, they don’t want to waste your time or theirs.

Facteon handles most types of transactions, with just a few exceptions.  Pick up the phone and call 888.673.3863 (or have them call you) and you’ll learn immediately whether your type of transaction is eligible.