Factoring Blog - For Small Businesses

Robert S. Bernstein has written a book called, Get P.A.I.D. — A Guide to Getting Paid Faster. He explains the four pillars of “getting paid” (Preparation - Assessment - Implementation - Defense) in his article, Credit to cash. Businesses desiring payment must give credit wisely.

Two of the key points he makes are:

(1) that most small businesses extend credit to their customers whether they realize it or not, by performing services and providing goods before getting payment, and

(2)  that there are hidden costs to operating your business by extending credit, whether you realize it or not.

He writes:

Small businesses and entrepreneurs need help deciding when to extend credit to customers and how to make sure they get paid. In case it isn’t clear, when a business extends credit to a customer (selling goods or services on credit), it is risking a loss in order to make a profit. If the customer doesn’t pay, all the materials, labor and know-how to produce that order have gone for naught.In addition, there are many hidden costs to extending credit for a business.

The cost of capital (that could be used elsewhere), the cost of staff to monitor credit, the cost of collecting delinquencies and the cost in damage to the relationship with delinquent customers.

These costs escalate the longer-past due a customer gets. Thus, it is very important to have the correct business processes to know how to extend credit, how to manage the credit you extend and how to collect from your customers.

I would suggest that those hidden costs are ones to consider in weighing factoring as an option.

Yes, with factoring you pay a fee to a factor.  In exchange for that fee, you receive a large chunk of the money owed you right away, within a few days, sometimes within one day.  And the remainder of the money (less the factoring fee) is paid when the invoice is collected.
However, as you decide on a course of action and consider whether factoring is right for you, you might want to balance those “hidden expenses” against the factoring fee.  You may not necessarily be saving any money if you have to wait  months to get paid.

By now, the so-called subprime mortgage mess is probably old news to you. Some lenders who made higher risk loans got caught with their pants down.

Inevitably, that has caused some lenders to ratchet back on new loans, as they work to resolve delinquencies and credit issues.

Now there are a few signs that the small business loan market may not be immune from issues. Some lenders say they are experiencing higher levels of delinquency among small business loans. Lenders such as Bank America, which offered “express” loans that could be secured in as little as 24 hours, up to $100,000 with little or no collateral, are now dealing with delinquencies, they say. As a result, they have discontinued the express loan program.

What’s hard to tell is how widespread this issue is for small businesses. It looks to me like Bank America was very aggressive in trying to grow its small business loan portfolio. It overly relaxed its underwriting standards to achieve that goal. That’s been a recurring refrain among lenders over the years and decades, and not just with small business loans. Aggressive growth always brings extra risk.

But, to the extent that credit is tightening, just remember that factoring may be an alternative. Factoring is not credit. Factoring is about accelerating cash flow (invoices receivables) already due you. The primary issue is going to be your customer’s likelihood of paying their invoice they owe you. Your borrowing ability and debt level is not the main issue with factoring, as it is when you go to get a loan.

The official figures suggest we are not in a recession. However, commentators, economists and your brother and his next door neighbor are talking about a recession.

OK, so we can debate all day whether it’s a recession — or not. But whether we’re “teetering on the brink of recession” or in a recession, how about being proactive?

The CPA Trendlines blog polled some CPA pros for strategies to beat a recession, in the article “Recession Tips from the Pros.” One of those strategies hit home particularly well, from CPA Brian Brown, who said,

“CASH FLOW, CASH FLOW, CASH FLOW!!! Track it, analyze it and project it. Without it, your business will come to a screeching halt very fast. The best laid business plans and products are worthless if you can’t pay employees and vendors in order to carryout the basic operations of the company.”

Keeping the cash flowing is always important, but becomes doubly so during tight economic times. Why? Because that’s when payables tend to get even slower. Everyone starts watching their own house, and stretching out how long it takes to pay.

All the more reason to pay close attention to your cash situation. If you have done a yearly or quarterly cash budget, make sure you are comparing it to your actual cash situation each month, or maybe twice a month. That budget isn’t any good unless you use it. If you don’t do a cash budget at all, maybe it’s time to start.

For resources on setting up a cash budget, visit:

Prepare a Cash Budget
How to Prepare a Cash Budget

And remember that if your cash situation falls short, contact Facteon for solutions to accelerate payment of your invoices and quickly increase your cash flow.

One of the joys of building a buisness is knowing that you have created something of value.  Perhaps you want to leave to your children to inherit.  Or maybe you want to sell the business and exit with a nice chunk of money.

If you’re thinking about selling your business — maybe sometime in the future — it’s helpful to know a few statistics about what you can expect.

• 9 months – Nine months is how long it is taking on average to sell a business. That’s from a February 2008 survey

• 10% commission – You’ll likely pay a 10% commission to a businesb broker if you hire one. If a business sells for more than $1 Million, ask for a stepped However, Don’t be tempted to eliminate a broker to save money — it smarter and it could be more cost effective to use a broker.

• 6% — The commission you can expect to be charged on any real estate associated with your business is typically 6%, in keeping with a standard realtor’s commission.

• 10-8-6-4 – This is the Double Lehman scale of charging commissions for businesses that go for more than $1 Million in selling price. The commission scale is 10% on the first million, 8% on the second million, 6% on the third million and 4% on the remainder. As per Ney Grant, a business broker, in his column at AllBusiness.com.

• $250,000 – A quarter million is the median asking price for small busineses in the United States, according to BizBuySell.com as of Q1 2008. (Median means half are above that amount, and half below.) BizBuySell handles about 90% of the broker listings in the U.S.

• $400,000 – This is the median annual revenue of small businesses in the United States listed for sale at BizBuySell.com, as of Q1 2008.

I was actually surprised by the median prices and annual revenues, above.  Somehow I had the idea that businesses being sold would be much bigger.

Anyway, good stats to consider if you plan to sell your business sooner or later.  Be sure to bookmark this post for later reference.

A lot of Americans are feeling the pinch at the gas pumps, in the grocery stores and in other retail outlets.

Fact is, we’ve been spoiled with cheap goods. But it looks the ride we’ve had with goods produced inexpensively in China is beginning to come to an end. The Voice of America reports that prices are going up in China, too:

“The world’s factory is giving notice: it can no longer provide the planet with cheap goods. Chinese manufacturers say higher production costs, tighter credit and a strengthening yuan are squeezing margins. Some industry experts and economists predict thousands of small factories could shut down this year and leave thousands of workers jobless - creating new problems for China.”

A recent article in Forbes by Michael Marks points out how we can look forward to ricing costs — and we should be careful what we wish for. For years now politicians have been decrying the ‘articifically low” pricing in China that led to the loss of manufacturing jobs.

“Many of these articles and speeches were aimed at getting our politicians and policymakers to force China and other developing countries to bring their costs into line with those in the U.S. so that we can create jobs at home. While the employment initiative is an admirable undertaking, the debate completely ignores the impact on the pricing of goods in American stores, and the impact that will have on inflation rates and standard of living in this country. (The debate also ignores the substantially positive impact on the economies of developing countries, but that’s for another day.)

Now we are about to find out why we should be careful what we wish for. Brace yourselves for a myriad of articles and speeches complaining about rising costs of products like steel, consumer electronics, and kitchenware, due to rising inflation and appreciating currencies in the developing countries.”

So look out for higher prices, in your personal life and also for raw materials and business supplies.

If you want to check out a place for comparisons of CD rates, credit card offers, bank rates, etc., go to Bankaholic.com (”Bringing you the best in banking”).

As a business owner, you may find the reviews of business credit cards interesting. The design and layout is user-friendly and I think it is a good idea to use the blog platform as a main function of the site.

I like the outspoken attitude in the blog posts. Maybe John Wu has been trained by Jim Cramer of TheStreet.com. The site is “powered by TheStreet.com”.

As an example, read the post, Is Your Bank Safe from Collapse? and watch the embedded YouTube video. Here are some quotes by John Wu in an article (End of Cheap Credit Hits Homes, Businesses) by Steven Mufson of The Washington Post.

For a country of consumers addicted to debt, a possible sign of a change can be seen in places like the Web site Bankaholic.com.

Founded a year and a half ago by John Wu, who turned a project from his student days at the University of California at Berkeley into a rapidly growing business, the site offers a first stop for consumers shopping for credit cards and mortgages. About 750,000 people visit the site every month, Wu says.

But these days, Bankaholic finds that consumers are shopping more for savings accounts and certificates of deposit than credit cards — and, to lure them in, banks have boosted their ad spending on the site. “Banks really need depositors to put money in them,” Wu said. “They’re desperate to get more money.”

That could frustrate the Federal Reserve, which has been cutting interest rates to boost economic activity. But many banks aren’t passing the lower money costs made possible by the Fed along to consumers or businesses. The interest rates on credit cards have dropped modestly at best, and 30-year mortgage rates have not declined substantially, Wu said.

“People have been expecting that credit card rates would come down. But because there’s greater risk now in lending, credit card companies have been raising their rates a little bit as the Fed has been cutting,” Wu said. (Washington Post, 03/18/08.)

Please give us your tips on other interesting sites in the comment section.

P.S., remember, factoring is not debt. You can factor your invoices without taking on any more debt.

In Grant Thornton’s International Business Report you could find payment periods in different countries (page 36). The global average is 46 days for payment of sales invoices. In the United States of America you get paid after 41 days. Could you guess where you get paid after 23 days? In one country in Europe, you have to wait for 83 days. Click here for the list (PDF).

Here is a part of the list, from position 11 - 20:

• Australia - 39 days
• Argentina - 40 days
• Sweden - 40 days
• Canada - 40 days
• Brazil - 41 days
• USA - 41 days
• Thailand - 44 days
• Great Britain - 47 days
• Botswana - 49 days
• Luxembourg - 50 days

So, in the United States it is an average of 41 days to receive payment on invoices. But much better than Spain and Italy, at 73 and 78 days respectively. How does your business compare?

Hat tip to Martin Lindeskog for the links. The PDF article is in Swedish, but it’s pretty easy to figure out the countries.

In the latest newsletter from Forbes.com, one article points out that the debt situation is shifting from home equity to Those Credit Cards. Here are some excerpts from Brian Shniderman’s article that should interest small business owners:

Small-business owners who frequently leverage personal assets to secure credit may find it increasingly difficult to tap into those lines as lenders freeze, reduce or altogether revoke home equity and other personal lines of credit. Before tapping into savings and then into their investments, we can expect this group to increasingly use existing personal and small business credit cards to address short-term cash flow needs. …

Small businesses, truly a major engine in our economy, are at risk in a scenario that features stagflation and a prolonged recovery. Sadly, many could shrink or go under entirely if it plays out that money remains tight. In some cases, even the business owners’ personal assets may have been tapped out. That could certainly cost our country jobs and innovation.

Have you as a small business owner, used your credit card in tough economic times?

In the same newsletter, David Malpass, chief economist for Bear Stearns, paints a more positive picture on a macro level, in his article, Credit Crisis Hits Home.

Funded by millions of U.S. taxpayers, the government will mail checks to millions of households hoping they’ll spend their rebates to lift the economy. Growth is ultimately driven by hard work, innovation and profit. But the first estimate of GDP comes from how much is spent; by that gauge Washington’s gesture is unusually timely.

Will you spend your tax rebate check on personal consumption or will you save it for the future? Or invest it in your business?

Courtesy of the blog at Paymo, a time-tracking software application, I came across the Better Projects blog, which lists important reasons to do track time on projects and deliverables. One recent post, Good reasons to do time tracking, you’ll find this point

There are many reasons that time tracking is important. In order to make strategic decisions, you need data. The only place to get data that can be aggregated is to have the detail that rolls up. The types of decisions that have been made based on the time tracking data I’ve collected over the years include:

* Staffing - Several people avoided layoffs because I could show exactly what they were working on and how long they spent doing it. We also could show that we needed more people in order to do additional projects in the time frame management required it.

* Project delivery dates - Because we had good historical data on actual times vs. estimates, our estimates were given more credibility by management. Instead of management insisting on an unreasonable delivery date, they accepted ours.

* Planning when new projects could be started - When management saw that staff was fully loaded for the next few months, they reprioritized their projects to fit the staffing schedule.

I would add one point to the above: without tracking time, in a service-based business you may not have accurate financial projections and budgets.

Service-based businesses that essentially sell time (law firms, consultants, engineers, marketing, software development, Web design firms, etc.) need to be aware of time spent on offerings on a unit basis. Otherwise, you’ll never understand your true cost structure. What’s more, you won’t have a real handle on the upper limit of your revenue growth or what it will take to grow.

We will make additions to the blogroll in the near future. Please come with your suggestions. Here are a few blogs that we will be adding to the blogroll:

Don’t Mess With Taxes

Don’t Mess With Taxes aims to keep Uncle Sam cranky by providing tax and personal finance tips and advice that will put more money in your bank account, not the government treasury.

Footnoted.org

Takes a closer look at the things that companies try to bury in their routine SEC filings. Some posts are little factoids while others are more serious, like aggressive accounting or the type of questionable self dealing that can often be indicative of serious problems at a company.

Resource: Business blog directory at Blogged.com.