Factoring Blog - For Small Businesses

If it’s a recession, it could be a short one. And we may avert a recession altogether.

Those are not my predictions. They are comments published in light of the most recent economic data from April, that is just now being reported.

For instance, this report published in the New York Times, quotes the chief economist of Eaton Vance:

United States retail sales weakened modestly in April, but outside the hard-pressed auto sector they were more resilient than many economists had forecast, a government report showed on Tuesday.

The report echoed recent data showing underlying economic durability, including fewer job losses in April than feared and a surprisingly strong pace of first-quarter productivity.

The Commerce Department said overall retail sales declined 0.2 percent, but if cars were excluded, sales rose 0.5 percent. Economists expected total sales to slip 0.1 percent, but had forecast a gain of just 0.2 percent excluding autos.

“I think it’s a report that tells you the economy is very weak, but if we are in a recession it’s going to be a real short one,” said Robert B. MacIntosh, chief economist at Eaton Vance in Boston.

And then there’s this report, from BusinessWeek, suggesting that recession may be avoided altogether:

Recession is still very much a matter of opinion, not a matter of fact. Some economists are even taking at least a half-step back from their previous beliefs that a downturn is all but inevitable. So far, most of the economic data outside of homebuilding and house prices have not met the recession forecasters’ downbeat expectations. Businesses are reining in their capital spending, but not dramatically. Employment losses have not matched the size of those in past recessions. And even consumer spending through April, at least outside of flagging auto sales, is holding up far better than expected.

So, are they right? I don’t know. But I do know that things don’t seem to feel as bad. I’m not sure how to describe it, other than the fact that what’s happening in the economy right now feels slow, but not dismal.

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.

As if you didn’t already have enough tax record-keeping to contend with, some proposals are afoot that could add extra work and expense for compliance.

According to the New York Times, the budget proposed by President Bush, if approved, would “require detailed reporting of credit card transactions to the Internal Revenue Service. Another would require most owners of small businesses to report any payments above $600 to corporations, like Federal Express, for services.”

The measure related to the credit card transactions is designed to provide a records trail that would enable more audits of small businesses.  From the small business perspective it also would add a huge paperwork burden.  You’d not only have to match the credit card receipts with other records, but deduct returns item by item.

How often have you heard the phrase, “the check’s in the mail?” It must be often enough that the market for factoring is growing. And now it looks like the factoring companies are turning into chains.

From the Financial Post in Canada comes a story about franchising of factors.:

“The cheque’s in the mail.” How many times have you heard that? For small business owners and contractors, it’s a phrase heard all too often and it evokes wry grins or agonizing groans, depending upon whom you ask.

Even when dealing with household corporate names, delayed payments are surprisingly common as head offices decide contractors or vendors can wait another 30, 60, or even 90 days for whatever reason. It turns out companies that provide interim financing to these struggling small business owners by purchasing their creditworthy, outstanding invoices — minus a fee — comprise a thriving, if little-known, global industry.

It’s called factoring and it’s worth an estimated $1-trillion a year worldwide, with $100-billion of that in the United States and about $4-billion in Canada ….

This must be a signal of a new trend in the factoring business. If entrepreneurs have come up with this kind of franchising idea, my guess is that you have strong potential for this industry and we will see a growing international scope later on.

But don’t underestimate the value of experience. Facteon, at around 8 years old, caught the curve of this industry early and has the track record to prove it. Plus, there’s personalized service that’s hard to match through a franchised approach.

The Federal income tax rebate checks have started going out. According to President Bush:

“These rebates will deliver up to $600 per person, $1,200 per couple, and $300 per child,” Bush said in his weekly radio address.

About 7.7 million Americans received their rebate checks last week. More are on the way.

Here’s the schedule:

May 2-15: Taxpayers who receive their tax refunds – or make payments – through direct deposit will receive stimulus payments in their bank accounts.

May 16-July 11: The rest of the 130 million stimulus payments will be sent through the mail as checks. Check your card: Stimulus checks will be sent out in the order of the last two digits of the Social Security number used on a tax return. For joint filers, the first Social Security number listed will determine the timing of the couple’s rebate check.

So the question becomes: will the rebate checks help?

The economic news in the United States lately can best be described as confused. Some financial pundits and economists swear we are in a recession. Others say no way, Jose.

Unemployment actually fell in April a little bit. But inflation is up, with food and gas prices high.

My best estimate: the rebate checks won’t do much for individual situations. Of course, I won’t be turning mine down, however.

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.

In some ways, we’ve had it pretty good in the economy for a long while in the U.S. Costs of some things, such as technology (computers especially) and telecommunications, actually came down in recent years. The cost of some consumer goods, including food, stayed steady for a long time.

But in 2008 so much has changed. As the economy has slowed down, we’ve been hit with rising food costs. Restaurant and hospitality businesses are being hit — especially the lower end outlets such as pizza parlors, where the profit margins were not huge to begin with. A 500% increase in the cost of flour really bites.

One recent article says the causes of the problems are many:

“Experts attribute food inflation, the highest in two decades, to a perfect storm of ugly circumstances: A sluggish economy. Record crude oil and gas prices. A robust demand for biofuels and a subsequent decline in corn inventories. Drought-reduced harvests. Commodities speculators. And the rising demand for food supplies in developing countries such as China and India.”

When food goes up, it hits us all in the pocketbook. Even if you are not in a restaurant business, in your personal life you and your employees can’t help but be affected.  We all have to eat.

So, is any relief in sight?  This CNN article suggests the worst may be behind us.  It suggests that the Federal Reserve may soon stop lowering rates (which actually tends to cause inflation due to a weak dollar — long story).  In other words, if the Fed stops lowering interest rates, it may stop inflation.  Lower inflation could be one of the best developments for consumers AND small businesses.

Go to Entrepreneur.com and read Yun Lee’s article, Factor Your Receivables for More Cash. It’s an overview of the factoring topic and points out questions you should ask of a factor.

Here’s one thoughtful note the article makes:

Finally, put yourself in your customers’ shoes and inquire about what the invoice handling process will be like from their perspective. Look for a company that is as focused on customer care as you are. You should know that many factoring companies adhere to “notification factoring” where it is clearly indicated on the invoice that payment should go to the factor.

Another point mentioned in the article is that pricing is crucial. You need to know what the factor charges.

Facteon believes pricing is crucial, too. And you should not have to guess what a factor’s fees are, or be confused by them. One of the ways Facteon is different in making its factoring fee schedule available on the Web. And, the fees are based on a straight percentage and volume of invoices, and are easy to calculate — no complex formulas.

Related: 10 Things to Ask Your Factoring Company.

With National Small Business Week here, let’s take a look at the Small Business Tax Index from the Small Business & Entrepreneurship Council. The SBE Council ranks the States according to how tax friendly they are to small businesses and entrepreneurs. It looks at 16 different tax measures, including: income, property, death/inheritance, unemployment, and consumption-based taxes such as state taxes on gas at the pumps.

SBE Council President & CEO Karen Kerrigan said: “Entrepreneurs and small businesses have to struggle every day with the costs of taxation, which affect a wide array of decisions, including hiring, investment, expansion and location. While the federal tax burden and the complexity of that system is quite heavy, state and local taxes can add significantly to that load. The ‘Business Tax Index‘ captures these tax costs, and provides businesses, investors and political leaders with a measurement of how the states stack up against each other in this regard.”

The 15 best state tax systems are:

1. South Dakota
2. Nevada
3. Wyoming
4. Washington
5. Florida
6. Alaska
7. Texas
8. Colorado
9. Alabama
10. Mississippi
11. South Carolina
12. Tennessee
13. Missouri
14. Ohio
15. Virginia

The 15 worst state tax systems are:

• North Carolina
• Nebraska
• West Virginia
• Hawaii
• Idaho
• Vermont
• Massachusetts
• New York
• Rhode Island
• Maine
• Iowa
• California
• Minnesota
• New Jersey
• District of Columbia

Go to the interactive map to check out the status in your home state.

On a related note, according to the Tax Foundation, “Tax Freedom Day” occurs today, April 23 in 2008. Here is an excerpt from the report:

Tax Freedom Day had arrived later for the four previous years, but due to an expected slowdown in the nation’s economy and a massive one-time fiscal stimulus tax cut passed earlier this year, Tax Freedom Day is projected to arrive three days earlier this year compared to last year.

Do you see a relation between the business tax index and the tax freedom day?

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.