Factoring Blog - For Small Businesses

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.…”

It is important to have an eye on the risk of inflation, if you want to be safe when it comes to getting paid. If the prices for raw materials and basic stuff are going up and up, the producers have to adjust their prices accordingly.

Some providers are protecting their risks against rising commodity prices, by adding commodity surcharges.  Or they are reserving the right to increase prices with short notice in the event their costs have increased.

The Economist states that the “double-digit price rises are about to afflict two-thirds of the world’s population.” Here is an excerpt from the article, Inflation’s back.

Taken as a whole (and using official figures), the average world inflation rate has risen to 5.5%, its highest since 1999. The main cause has been the surge in the prices of food and oil, which briefly soared above $135 a barrel this week. But Mr Trichet’s concern is that higher headline rates could push up inflation expectations, leading to bigger pay demands, and so trigger a wage-price spiral, as in the 1970s. Central bankers’ mistake then was to hold monetary policy too loose, so that higher oil prices quickly fed into other prices. So it is worrying that global monetary policy is now at its loosest since the 1970s: the average world real interest rate is negative. (Economist, May 22, 2008.)

Does this apply to you?  Have you added commodity surcharges to your invoices? If that is the case, how are reactions from your customers?

It is always interesting to trace something back to is origin and look at the roots of a certain economic phenomena. Tom McCarthy, senior financial consultant in Texas, has written a post with the title, History Of Invoice Factoring - From Past To Present!

I don’t know where the information came from originally or even how accurate it is, but it certainly makes for an interesting story. To the extent that it is accurate, it shows the interwoven nature of factoring and day to day business. Factoring has an ancient history and is a well established form of funding for a business.

He writes, in part:

Elements of factoring can be traced back to the Mesopotamians, who are credited with being the cradle of civilization and the first to generate business code structures and government regulations for commerce. Experts have evidence that proves 4,000 years ago, the Mesopotamians also created the concept of factoring. Following Mesopotamia, there is evidence that the Romans sold promissory notes at discounted prices. Roman merchants also enlisted the services of collectors to settle trade debts. But factoring as we know it today got its start in the Middle Ages. * * *

By the time English colonists settled in the new world, America, this type of financing had become common. Both English settlers in the new world and English merchants were in prime situations to make lots of money. Due to the time distance in getting their goods, by boat, from the colonies back to England and vice versa, these merchants could have gone bankrupt waiting on their money. Cotton, timber, fur and tobacco industries all spurned their own factoring segments. Merchant bankers in London advanced funds to colonists for goods and materials before they made the journey across the ocean. They would ship their goods to the colonists or back to England where one of these factors would pay a discounted rate to the seller before the voyage and afterwards take a percentage for selling and collecting the money owed.

Factoring became a common business practice. Until the 1700s, England and the US shared a common law framework. Originally, English law forbade the selling of invoices unless the debtor was notified in advance. Of course, the United States developed its own government. In the late 1940s United States almost wholly adopted non-notification factoring arrangements and witnessed a boom in factoring in textile industries and transportation industries.

When did you first hear about factoring?

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.

It is interesting to see how alternative ways of getting financing are popping up on the market.

An article on the SFGate site explains that there are fewer SBA loans backed by the government available at the moment as well as pressure on regular banks — all giving fuel and opportunity for alternative financing.

It is a positive sign (even in the midst of a slow economy) that small businesses still find a way — they find ways of receiving money to finance the startup and expansion of their businesses. Here is an excerpt from the article:

These days, small business owners like Metzger have to be creative about getting the money to start and expand their companies. Many are turning to non-traditional sources, such as credit unions. Increasing numbers are going to online lending Web sites that cut out the traditional bank middleman and to factoring companies, which buy companies’ future revenues.

Factoring is enjoying a cyclical upturn that it often sees during economic downturns, while credit unions and online social lenders hope the uptick in their small-business lending volume survives even after banks’ lending returns to normal. …

The article makes some sweeping assumptions about factoring and assumes that all factors operate the same. However, even so, the basic point of the article is a good one: small business owners like you have more sources for getting funding for your business than the traditional SBA loan or bank loan.

Just because the Small Business Administration is giving fewer loans under their main loan program doesn’t mean funding is drying up across the board. (According to the online lending auction site Prosper.com, Small Business Administration gave out 17.6% fewer loans compared with the same period last year.)