Factoring Blog - For Small Businesses

I ran into this Q&A article outlining 7 points about factoring. One of the best parts of the article is this point outlining a common misconception:

“The biggest misconception is that people believe factors are a lender of last resort but that’s not true because clients seeking out factoring are often in the beginning stages of growth. At first glance, factoring appears to be expensive but does a lot more; in essence, factoring replaces the accounts receivable and credit department. For example, if a trucking company is doing $600,000 a year in sales, a factor may charge 5 percent (or $30,000) per year for financing. In addition to the financing, the factor will do credit checking, ledgering and all the collection work, thus saving the company the salary of an employee hired to handle the same tasks.”

When Tom Nort (CEO of Facteon) was interviewed on my radio program several months ago, one of his points had to do with the extra services that a factor can provide to a small business. The factor essentially can become your outsourced accounts receivable department. The factor brings added value to your business operations, making your business more efficient.

That’s something that a bank lender doesn’t offer.

And just think of the difference in attitude that presupposes. With a factoring company, they are on your side and working for you.  Banks, on the other hand, aren’t actively in a position to help you with collecting your accounts receivable.

Following up on my earlier post about bank credit tightening, there’s a report in the Washington Business Journal saying that asset-based lenders and factoring companies are seeing a surge in business right now. The article attributes it to the state of the economy and in particular, the state of the banking industry, with its tightening of credit.

Factoring and asset-based lending is thriving in this environment, it says. It also goes on to note these statistics:

“A survey published by the Commercial Finance Association July 8 found that the ABL industry in the U.S. grew 11 percent in 2007 to $545 billion in outstanding loans. The industry has grown 63 percent since 2003, when it boasted $334 billion in loans outstanding. Factoring volume grew 6.5 percent to $135 billion in 2007.”

Notice the statement at the end of that quote, about the growth in factoring.

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.