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The following article appeared in the Capital City Club (Raleigh, NC) Business Alliance Grapevine for February, 2007.

When the Bank Canít or Wonít

 

Mike Schaul

Michael Schaul
Assistant Editor, Financial

View Bio

You donít have to get financing from a bank.  There are non-bank sources, as reliable and safe to deal with as banks, but they donít have government regulations, loan committees, and a ďthe way weíve always done itĒ mentality.  Non-bank funders frequently observe that banks will only give you money when you can prove you donít 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 thatís unavailable for business growth.  The most straightforward way to improve a companyís 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 customerís 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 ďaccounts receivable financing,Ē 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 youíve 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 itís 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 havenít financed them, they wonít finance them, and they wonít let you factor, even if itís obvious they are strangling you.  Iíve had calls from business owners who were struggling for lack of a relatively modest amount of working capital.  The bank wouldnít loan more and wouldnít 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 wonít finance your receivables later (no new money without new collateral), and they wonít let you factor, even if itís obvious they are strangling you.  Iíve had calls from business owners who were struggling for lack of a relatively modest amount of working capital.  The bank wouldnít loan more and wouldnít 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 canít 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.