Factoring Blog - For Small Businesses

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)

Hear the lament of the small business owner about clients paying on time:

“That ethereal number you’re punching into the company accounting system is actual money to a real person, and no excuse at all — ‘our creditors department is really busy’, ‘the MD is out of town — is going to change the fact that without that payment you’re leaving some brave entrepreneur well up the creek. For that entrepreneur, being up the creek means phoning your bank manager and grovelling, emptying the last of your credit cards, or selling your new computer to pay your only staff member. I’m not kidding, I’ve seen it and it’s the real deal. At my small publishing company, we’ve found that the bigger the client, the longer they take to pay.”

The above quote comes from Arthur Attwell, a South African (that’s why some of the terminology sounds a little foreign — it is foreign to those of us here in the States).

This is such a common theme for small businesses everywhere. Some clients, especially big clients, just don’t pay quickly.

But there’s a better solution than selling your new computer in order to pay your staff. Factoring can help you accelerate your cash flow, and do it quickly. When cash is almost within your grasp, it makes little sense to sell a computer or do something you’ll regret five minutes after you do it.

Recently I’ve been thinking of implementing a business dashboard for my business. So I’ve started reading up to see what kind of financial indicators I should be tracking in my dashboard.

According to this article in the New York Enterprise Report, you should identify and track 5 to 10 key measurements and performance indicators. Some indicators will be the same for almost all businesses — indicators such as cash flow, revenue and sales.

However, for some businesses you will need to track the indicators that are unique to that type of business. Examples:

Restaurants: Whether a table holds two or three parties in one evening can have a big impact on the bottom line, so “table turns” is a unique and critical indicator in the restaurant business. A restaurant’s dashboard report should track table turns, along with food sales and other indicators.

Manufacturers: Margin is important for manufacturers, but utilization of the plant is also a crucial piece of information. This can be tracked through machine- or manhours, and it’s important to know the capacity of the facility.

Professional Services Firms: For law firms, accounting firms and consulting firms of all types, it’s all about billable hours. Tracking the staff and how time is recorded and billed is paramount. The key indicator here is realization — how much is actually billed out of the pool of available hours. A dashboard will alert you to whether you’re billing enough hours, and if you’re not, you have the opportunity to identify low performers and boost billing before it drags down your profits.

But I guess the main takeaway I got from reading up on dashboards is that they are early warning signals — if you use them right.

They have to be short enough to focus on a set of numbers that can appear on a single page at a glance.

MyBizHomepage.com is one dashboard designed for small businesses, that works with QuickBooks. It’s free and works seamlessly without added work or keystrokes.

Another option is an Excel spreadsheet.  Once you set up a template, the information can be loaded in and updated regularly.  The downside with a spreadsheet is that it may be a little too “manual.”