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.

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.

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

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.”

I am glad to see that students at Hunter College and Brooklyn College are encouraged to write and publish on the web, after their articles have been edited by the faculty. Here is an excerpt from Suzanne Macguire’s report, Boost Your Business With Effective Financial Management.

Receivable factoring or credit card factoring is another unique working capital management strategy, whereby the businesses sell their future receivables at a discount. However, it is not possible for all small businesses to document their receivables in order to qualify for this financing option. The documented sales volume and credit card sales activity of these small businesses serve as financial asset to attain a business cash advance or a merchant cash advance. (NyCityWatch.org)

I want to tell the students at the faculty that documenting receivables is usually not much of a problem for the small businesses who use the Facteon factoring services.  If you have an invoice that’s due you, you just send Facteon the invoice and provide some information including a contact at the customer that owes the invoice, and the factoring company takes it from there.  Please read our FAQ for more information.

I found a really interesting article by a U.K. businessman who goes by the nom de plume of the “Unknown Entrepreneur.”

The title of the article is a tad sensational, but the article is actually well-balanced despite sounding negative at first.

In it the Unknown Entrepreneur talks from personal experience about the positives and negatives of his experience with factoring in the U.K. He writes:

“The positives

1. Increase your cashflow - allowing you to focus on your daily business activities.

2. Insure your risk - it can cost you but remember if you have a net profit of 10%%, any loss your suffer you will have to write ten times the revenue to recover the loss.

3. Fees can be negotiated - as you grow and if you have a clean book you can negotiate your fee down.

4. Your own back end office - if you opt for for confidential factoring your client will not know that you factor and you then collect out your own ledger then pay your factor the money you collect out.

5. If you do not have a back office then non - confidential factoring can be a great bonus as the factors chase the money that you are owed and this can be an advantage as the factors will apply pressure when you need it.”

The author also includes some negatives relating to invoice factoring, including several points that were lessons learned from a particular instance where his company had made an operational mistake. But even though that situation was difficult for his company, he says he would use a factor again, noting in part:

“Keep your operations tight and you will benefit from using factoring services… I would absolutely use factors again but this time would ensure that we would not make a operational mistake like we did.…”