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The following article appeared in the Capital
City Club (Raleigh,
NC) Business Alliance Grapevine
for February, 2007.
When the Bank Can’t or Won’t
Michael Schaul
Assistant Editor, Financial
View Bio
You don’t have to get financing from a bank. There
are non-bank sources, as reliable and safe to deal with as banks, but they
don’t have government regulations, loan committees, and a “the way we’ve always
done it” mentality. Non-bank funders frequently observe that banks will
only give you money when you can prove you don’t need it. Because these
funders specialize in target markets (but collectively offer more than banks
can dream of), they usually understand your business and your needs and can
be quicker and more nimble than a bank.
Improving cash flow
When you wait for an invoice to be paid, it is
essentially cash that’s unavailable for business growth. The most straightforward
way to improve a company’s cash flow is factoring. Factoring gets you
money when you need it, not when your customer happens to send it. The
basic idea is that you sell an invoice when you submit it. A
substantial portion of the invoice is wired into your account in a day or
two, and when the factor gets paid, you get the rest, minus the factoring
fee. You can factor four to six figures each month.
The factor only cares that the invoice will be
paid. That means that factors look at your customer’s creditworthiness,
not yours. Factors have even worked with companies in bankruptcy or
with tax liens to cure the situation. If you are acquiring a business
with substantial receivables, they can be funded at closing to provide part
(or all) of the down payment. Banks offer “accounts receivable
financing,” which is really a loan based on your creditworthiness and shows
up on your credit as debt.
Factoring has many benefits. Most people who have
never factored have a lot of misunderstandings about the benefits and how
they offset the costs.
Financing equipment
Another way to improve your cash position is to not spend
it and if you need equipment, lease it. You have three choices:
buy for cash, get a loan, or lease. Paying cash, if you can, may leave
you vulnerable when you need it. A loan shows up on the books as a debt
and affects your credit. With a lease, you negotiate with your supplier
and then the leasing company buys it at the agreed price. You can
structure the lease so that you simply deduct the payments and then buy the
equipment for a small amount or walk away, just like a car lease. You
can finance equipment of all kinds and for various amounts, and your down
payment can be as little as the first and last months rent.
If you’ve already paid for your equipment, and discover
that you now need cash, you may be able to arrange a sale-leaseback.
You sell your equipment to an equipment leaser, and then lease it back until
you buy it back for the residual value. In theory, this practice is
similar to leasing new equipment, but the funders will often value your
equipment for much less than you think it’s worth.
Consumer contracts
You can also improve your cash flow by making it possible
for more customers to buy your service. If you are typically involved
in consumer projects, such as home improvements that cost thousands of
dollars, your customer may not be able to write a check or use a credit
card. Specialty funders will tailor a program that puts your name on
the contract and minimizes the cost to you. You can then sell the
contract and get paid.
Litigation financing
Personal injury plaintiffs with time sensitivities can
get advances. Attorneys who want to grow their practices, or are
involved in large cases, such as intellectual property or class action, can
receive advances based on their portfolios. Recipients of payments
under structured settlements who need money sooner rather than later, can
then sell the payments.
Warning about liens
Be careful of liens. Just as your real estate can
be encumbered, your creditor can file a UCC (Uniform Commercial Code) against
your other assets. If you let them UCC your receivables when they haven’t
financed them, they won’t finance them, and they won’t let you factor, even
if it’s obvious they are strangling you. I’ve had calls from business
owners who were struggling for lack of a relatively modest amount of working
capital. The bank wouldn’t loan more and wouldn’t take second position,
making it more likely the business would fail and the bank would lose its
money.
Be careful of liens. Just as your real estate can
be encumbered, your creditor can file a UCC (Uniform Commercial Code) against
your other assets. When a factor UCCs your receivables, that makes
sense, but banks will file a blanket UCC on every asset you have if your
lawyer lets them. If they UCC all your assets, they won’t finance your
receivables later (no new money without new collateral), and they won’t let
you factor, even if it’s obvious they are strangling you. I’ve had
calls from business owners who were struggling for lack of a relatively
modest amount of working capital. The bank wouldn’t loan more and
wouldn’t take second position, making it more likely the business would fail
and the bank would lose its money.
Conclusion
There are many financing mechanisms that your bank can’t
do, or might not be able to do for you.
There are other options out there, take the time to explore them.
Bio
Mike Schaul is retired from IBM where
most of his career was focused on the software development process,
specification and design methods for reducing error insertion. He started KG
Funding in 1995 to buy and broker the sale of seller-financed mortgages and
business notes. The American Cash Flow Association inducted him into its Million
Dollar Club in 1999. Since then he has evolved his focus to commercial
mortgages, business cash flow solutions, and litigation funding. Recently,
the Gerson Lehman Group Councils named Mike a GLG Scholar for being ranked in
the top 20% of their consultants.
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