Factoring as an Option

It doesn't seem all that long ago that factoring was considered a horrible, last ditch option for funding and that the impression customers got of it was that your company was six feet from six feet under.

With the credit markets still artificially tight due to the Fed paying on reserves and Washington DC too captured to prosecute or hold accountable the greedy who caused the mess we are in, alternative sources of business funding are coming to the fore and are being accepted and promoted as valuable methods of financing in a very challenging environment.

It is often a concern of business owners: What will my customers think if they were to find out I factor my receivables?

While this is something that should be considered (and discussed with a potential factoring partner - how is the customer interaction really handled?) it is essentially a reflection of the business owner's own worry about perceptions relating to their business and their abilities, not so much an issue for the customer base.  Psychologically, we as humans do not want to show weakness.  This is particularly true of those of us who are incapable of bearing children due to...shall we say, the lack of necessary equipment for doing so.

Factoring is not necessarily a sign of weakness - granted, there are situations where a company might be in such a predicament that factoring may be considered, but if the company's going concern status is questionable, most factors will pass on funding the deal (DIP funding is an altogether different topic, but can be done also).  Actually, factoring your receivables can and should be viewed as a strength.  You are using other people's money to provide terms to customers, take advantage of early pay discounts with vendors, smooth out cashflow, cover payroll and expenses, grow your company, capitalize on new opportunities for growth, utilizing the credit decision support and invoice collection expertise of a specialized firm, and on and on.

Most companies that I work with have customers that range from small mom and pop stores to huge multi-nationals.  What we are finding lately is that many of the larger customers are well aware of factoring and how it fits into SME financing, and that the smaller mom and pop companies are finding out about it as well.  Interestingly, as of a few years ago there was a report that about 75% of small to medium sized business owners did not know about factoring and how it could be used to fund their business. More importantly, the idea of a vendor using factoring as a means to fund their business is becoming more widely accepted as "normal".

Take for instance the June 2011 issue of The Costco Connection.  A little background:  The Costco Connection is a magazine sent out to all Costco Members. It is the fourth largest magazine by readership in the US (8.3 million monthly subscribers as of December 2010, they print about 96 million copies of the magazine annually) and the second largest among households earning $250k or more per year (it lost out to People Magazine, why readers are interested in the comings and goings of overpaid celebrities is still beyond me...surprisingly it beat out National Geographic who was third on the list). 18% of The Costco Connection readers are millionaires, and 55% own their own businesses.  Not bad for a magazine printed by a retailer/wholesaler.

In the June issue, there is an article on page 21 that discusses the cashflow crunch and how to deal with slow paying customers.  Factoring is referenced as a means to solve the issue. 

In the August 23rd edition of Business Week's Today's Tip, factoring is listed second (behind asset based financing, which can be almost as challenging to obtain as traditional bank financing in some instances) as a good option for financing a business.

As we head towards a still uncertain future with the economy and the markets weakened and staggering, factoring is a valuable alternative to fund your business.  Whether your bank is restricting availability, politely asking you to find other sources of funding, not funding on your export sales or purchase orders, or you might have a new business unable to secure traditional facilities, I would encourage you to look into factoring (and PO funding) as a means to achieve your goals.

Please feel free to contact me if you have any questions or if you would like a quote.

Should I Expand My Business?

Here, as promised, is the guest post from Domenic Rinaldi of www.bizbrokerjournal.com. Please see the last post on this blog for his contact information.

Despite today’s market, countless business owners are finding ways to weather the economic storm and keep their businesses profitable. The gut instinct for many is to look for ways to cut costs internally by trimming headcount, salary, employee hours, or seeking ways to reduce production costs or improve efficiency. Some business owners, though, could benefit from considering business expansion.

There are plenty of ways to expand a business. The most basic form of expansion is to focus on your current customer base and adapt your business’s offerings to fit their changing needs. This may involve purchasing new equipment or enhancing the inventory selection to provide more products or services applicable to a variety of demographics. Excellent customer service is also essential when today’s consumers have many options available to them. Providing additional support hours at the request of customers, for example, is a surefire way to maintain a more loyal following and possibly generate word-of-mouth recommendations.

You can also look to expand your business to new customers by introducing a new location, acquiring a competitor or moving into a related industry. Not only will these expansion opportunities help position your company for continued growth, they will also enhance your business’s selling power once it comes time to exit the business.

Here are some questions every business owner should ask themselves, however, before considering any type of expansion.

What Type of Expansion is Right for Me?

Not all types of expansion will work for every business or for every industry. Business owners need to be particularly diligent in researching what will work for them and what resources they have at their disposal. Before considering expansion, rule out the options you know are not plausible, or that you simply don’t have the time, money or desire to pursue.

You can make this decision by doing some initial research. If considering expansion that goes beyond internal activity or purchase, talk to local business brokers and ask for their input into what trends they are seeing in your industry.

You can also look at competitors that may be expanding to see what they did and where they had success or failure.

Will I Really Benefit From Expansion?

There are several benefits that could come with business expansion, but also a lot of assumed risk.

Some things to consider include:

Economies of scale -- Expansion may expose you to economies of scale, with cost advantages that result from having expanded. Consider if this might be the case for you.

Customer base -- Not only should you ask yourself if expansion will expose you to new customers, but also if your existing customers will remain loyal while you work out all the growing pains.

Yourself -- Will expansion bring unavoidable stress into your life that could potentially deter your ability to successfully operate the business under the new expansion?

Can I Afford Expanding the Business?

In today’s market, business loans are not easy to come by. With big lenders struggling to survive the market, receiving a loan for your business may be a bit more difficult than anticipated.

People who are getting loans are being forced to leverage large pieces of collateral, such as their homes. This adds a lot of risk to any type of business expansion because failure could mean the loss of not only your livelihood, but your home as well.

For buyers considering the purchase of another business – whether it’s a competitor or a business in a related industry – seller financing is proving to be one of the only ways to get a deal done. Seller financing is a loan provided by the seller of a business to cover an agreed percentage of the sale price.

Consider how you will fund your expansion before taking any drastic steps.

[Editor's note: Please see my interview with Domenic on using receivables finance as a component of your acquisition funding plan.]

Getting Started with Expansion

Once you have decided to take the initial steps toward expansion, consider how exactly you will make it happen. If it is only internal growth, put together a plan for how you will allocate resources and what you will do to make your current business bigger and better.

If your plan includes acquiring a new business, judge how well you feel you can take on that process yourself. There are several tools already in place, such as buyer acquisition programs that utilize the expertise of business brokers and intermediaries to set your goals, identify target businesses, screen the businesses, advise on offers and assist with negotiations and closing.. Business-for-sale online marketplaces like BizBuySell.com offer an alternative resource for those seeking to buy a business on their own.

While there are countless considerations to make before deciding to expand your business, these three standard questions can help facilitate your decision-making process. Taking advantage of the downturn -- with its lower business-for-sale asking prices -- by buying up your competition can put you in a great position for when the economy bounces back.