Factoring Blog - For Small Businesses

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 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.…”

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.

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.

You probably already have a business if you’re here reading this blog.

But just in case you’re thinking of starting a business (or another one), CNN Money lists the 100 Best Places to Live and Launch 2008.

It’s a list of the places in America with the best mix of great lifestyle and business advantages. The top five places on the list are:

1 Bellevue, Washington
2 Georgetown, Texas
3 Buford, Georgia
4 Marina del Rey, California
5 Bethesda, Maryland

What kind of business advantages are considered sufficient to make the list? The article looks at a host of factors including whether corporate taxes are low; availability of a qualified workforce; accessibility to airports; availability of economic development resources in the area; thriving entrepreneurial scene; access to venture capital.

It’s a good list, although any list like this has limitations. Many of the cities are small. Also, the focus is very much on having the right conditions for tech businesses and high growth businesses — and not for mainstream small businesses such as hair salons, CPAs, restaurants and so on. Still, it’s a worthwhile list.

Go here to see if your city is on the list.

Lots of sites are making New Year’s Resolutions, lists of trends for 2008, and Top Whatever lists.  Matt McGee at Small Business SEM rounds up a huge list of them for us. 

While they tend to be heavy on the Web issues, you’re bound to get clued in to some very useful information. 

Want to know where the money will be in 2008?  Want to know how to get more customers from search engines in 2008?  If you are looking for the next trends for keeping ahead of the competition or for forecasting customer demands in your business, this is one list you need to check out. 

Read:  Big List of 2008 Prediction & Resolution Posts.

As an entrepreneurs and business owners we can get so focused on the day-to-day aspects of running a business (or sometimes just surviving!) that we forget the long term picture.  It pays to raise your head up from time to time.

For instance, do you have an exit strategy?

OK, don’t laugh.  I know for some of you the exit strategy you’re thinking of may be nothing more sophisticated than a gurney on the way to the funeral home. 

But if you have plans to retire before that day occurs, or if you want to ensure you leave a legacy for your kids or involve employees in ownership, then you’ll want to find time to think about that exit strategy.  Here’s why:

” … [I]f you wish to share equity with your employees or with your heirs, it is important that you start early, when the company valuation (and share price) is low. U.S. tax laws severely limit gifts to heirs; hence, it will take many years to pass the business on to children. Assuming the company experiences consistent growth, sharing equity with employees can be rewarding at any stage in the business cycle. However, transferring total ownership to the employees, including the sale of your shares, is more easily accomplished by starting early, when the company valuation is low. * * *

The proceeds from the sale of a private company are usually for cash, for shares of a public company, for shares of a private company, or for a combination of the above. This is generally a move toward greater liquidity in your personal estate. You are selling illiquid shares of your private company for cash and/or shares of a public company that will eventually become liquid.
This allows the successful entrepreneur, who often has nearly 100 percent of his or her assets tied up in the business, the option of diversifying his or her portfolio of investments. Some entrepreneurs sell to other private companies and achieve asset diversification by becoming
part of the larger, merged business. While immediate liquidation may not be their primary driver, entrepreneurs who take this course usually move closer to a liquidation opportunity.”

The above quote gets at the major downside of small businesses: they eat cash. Some lucky percentage of small businesses throw off good cash flow, but I’d say the majority do just the opposite and scarf up cash like the Cookie Monster gobbling cookies. And of course we’re always scratching around for money, because it’s all tied up in the business.

Mind you, I’m not complaining about owning a small business and neither should you (never complain, just do something about it). But if you can plan to eventually draw out the cash that you’ve put in, wouldn’t that be a wonderful end goal?

For more about exit strategies, read: Choosing Your Exit Strategy at the Biz Info Library.

There are essentially nine basic sources of growth for your business. All are potential opportunities for creating new growth trajectories.

1) Natural growth, where the market for what you make is strong and expanding

2) Gaining market share through low cost — high productivity growth, rapid cycle times, high asset turnover.

3) Proprietary or patented technology.

4) Highly-developed distribution channels that you have built over time.

5) Opening new markets for your existing products — for example, globalization.

6) Gaining power in the marketplace via acquisitions, alliances, vertical integration.

7) Expanding your pond.

Resegmenting your markets.

9) Moving into adjacent segments.

The first six are very familiar: If you haven’t tried them, you can read about them in many books and countless articles.

The last three are not part of the standard repertory. In fact they are more ways of thinking than anything else. They represent outside-in thinking and you should give them some thought.

A good resource for 9 Ways to a Growth Business

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Motorola Inc. is getting into the e-commerce business: The 79-year old, $35 billion company has launched an online store, Store.Motorola.com.

It offers Motorola products as well as wireless service plans for various telecommunications companies to go with its numerous mobile phones.

The site also includes a section for digital content–ringtones, wallpapers and games designed for use on mobile devices. Additionally the web store is promoting offers exclusive to the online sales channel.

The website is part of a strategic plan Motorola hopes will change the way consumers purchase mobile phones and wireless services.

I wonder how their other sales and channel partners feel about this new strategy?

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Guess what company this is speaking?

There are three pillars to my plan:

1. Focus the vision.

a) We need to boldly and definitively declare what we are and what we are not.

b) We need to exit (sell?) non core businesses and eliminate duplicative projects and businesses.

2. Restore accountability and clarity of ownership.

a) Existing business owners must be held accountable for where we find ourselves today — heads must roll,

b) We must thoughtfully create senior roles that have holistic accountability for a particular line of business (a variant of a GM structure that will work with Yahoo!’s new focus)

c) We must redesign our performance and incentive systems.

3. Execute a radical reorganization.

a) The current business unit structure must go away.

b) We must dramatically decentralize and eliminate as much of the matrix as possible.

c) We must reduce our headcount by 15-20%.

See who the company is: Fresh New Direction - Sound Familiar, Guess Who?

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