Author Archives: Robyn Barrett

Robyn Barrett

About Robyn Barrett

Robyn Barrett is founder and managing member of FSW Funding, formerly Factors Southwest LLC, specializing in factoring financing for small to mid-size companies.

Factor Financing

Considering Factor Financing Helps Companies Protect And Grow

Considering Factor Financing Helps Companies Protect And Grow

Companies faced with a cash-flow squeeze and slow-paying customers can quickly find their own credit ratings at risk and face difficulty securing a credit line or loan.

When you don’t quite qualify for a traditional loan, receiving an advance against invoices or accounts receivable from asset-based lenders called factors can be an optimal solution for securing cash needed to grow.

Many business owners don’t realize that factor financing can be a good source of capital for high growth or start-up companies. The factor advances most of the invoice amount, usually 70-90 percent, after reviewing the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction – or factoring) – fee.

If you are going to consider factor financing, it is important to understand the different options. In non-recourse factoring, the factor accepts specified risks around the debtor’s failure to pay. In other words, the credit risk has shifted to the factor and if the debtor (your client) does not pay, you are not required to pay back the factor for the advance against the factored invoice. While this might sound like a great option, non-recourse factoring is very expensive and the factor becomes the aggressive collection company pursuing your clients. The factor takes over all rights to pursue the customer for payment. This includes the right to take legal action.

In recourse factoring, the factor does not take on the risk of bad debts and the credit risk remains with you. To put it another way, the factor will be able to reclaim their money from you if the customer does not pay. Whether you refund the advance or not, you will still have to pay the fee and interest. Recourse factoring is cheaper than non-recourse factoring and may have fewer requirements concerning your customers and your systems.

When choosing recourse factoring, it is important to protect your company against credit risk, since you retain the credit risk of non-payment. In the event your customer goes bust or just doesn’t pay, you are ultimately responsible for any funds advanced to you by the factoring company. If you sell on open credit to your customers, there will be times when you are concerned about repayment. If you don’t want to be on the hook for all the credit risk, trade credit insurance may be an option.

Trade credit insurance insures manufacturers, traders and providers of services against the risk that their buyer does not pay (after bankruptcy or insolvency) or pays very late. The trade credit insurance premium will be based primarily on the credit profile of the customers you are insuring against. The trade credit insurance policy will pay out a percentage of the outstanding debt. This percentage usually ranges from 75- 95 percent of the invoice amount, but may be higher or lower depending on the type of cover that was purchased.

Before deciding what the best option, is for your organization, including factor financing, do your homework, ask questions and get referrals.

Robyn Barrett is founder and managing member of Factors Southwest LLC, specializing in factoring financing for small to mid-size companies. For more information about factor financing, visit www.factors-southwest.com.

 

Managing Cash Flow, Increasing Cash

Managing Cash Flow And Increasing Cash Balance

The phrase “Cash is King” has never been more true in business than it is today. Unfortunately, while many companies are finding themselves short on cash, lending requirements have become extremely stringent. Moreover, increasing sales don’t always equal increased cash flow ― especially if the sales are credit sales. Managing cash flow effectively requires close attention, just like managing the rest of your business. The good news is that a little attention can go a long way toward increasing cash balance at the bank.

As with all good things, a little work is required so let’s look at how you can improve some of your operating processes and manage cash flow, which will increase cash.

Here are a few tips that can have an almost immediate impact on managing cash flow and cash position:

1.    Set a price and term policy, then stick to it

Make sure all employees understand the importance of discussing pricing and payment terms during the sales process. Often the emphasis is placed on “getting the sale,” not “getting paid.” When customers delay payments, they’re using your cash and costing you money. Basically, you are financing their business. Be diligent about setting payment expectations right from the beginning with your customers.

2.    Send out invoices in a timely manner and follow-up promptly

The quicker you send out the invoice, the sooner the clock starts ticking for a customer to pay. Send out invoices promptly and follow-up immediately with a courtesy call. A courtesy call isn’t a collection call but a call just to check in with the customer and make sure the invoice has been received.

3.    Offer payment options

Do you only accept checks? Offer other options such as electronic transfer, wire payment or credit card. Make it easier for customers to pay you.

4.    Clean up  inventory

When was the last time you took a look at your inventory? Are you still selling Sony Walkmans? The 80/20 rule applies to inventory ― 20 percent of that inventory is turning while 80 percent sits idle, taking up space and costing money to finance. Consider running a clearance sale or re-merchandising product to free up this cash.

5.    Ask vendors and suppliers for a discount

When you purchase goods or services, always ask if there is a discount offered for paying early or with cash. A five percent discount for paying now, versus in 30 days, is like getting a 60 percent discount on an annual basis. Don’t be afraid to ask; the worst they can say is “no.”

6.    Customer deposits

If you’re offering aggressive pricing or giving concessions, don’t be afraid to ask for something in return. This is a great time to ask your customer to pay a deposit at the time of order, or prior to starting a job. This helps cover your up-front costs, and the risk associated with non-payment is decreased when your customer has some investment in the transaction.

7.    Require a minimum order for credit sales

Invoicing, collecting, receiving and depositing checks is a time-consuming and expensive process. Establishing a minimum credit purchase requirement eliminates having to chase small amounts, promotes larger orders and collects payment for smaller ones at time of sales.

Cash flow is the lifeblood of your business. You can sell a million widgets, but if you only get paid for 50 percent of them, your business is destined to fail. Making changes to your operating processes and managing cash flow is a way to keep your business healthy, vibrant and able to meet its obligations.

[stextbox id="grey"]Robyn Barrett is founder and managing member of Factors Southwest LLC, specializing in factoring financing for small to mid-size companies. For more information about managing cash flow and increasing cash balance, visit www.factors-southwest.com.[/stextbox]

Prepare loan package, secure loan

Show Me The Money: How To Prepare A Loan Package

The current state of the economy has left companies of all types and sizes in need of cash to keep their doors open, to maintain and to grow. Unfortunately, securing a loan can be tough; and while there are other options, in all cases, you need to be prepared.

If cash flow is tight, you are having difficulty making payroll and/or purchasing necessary materials or equipment to expand production and increase sales, there are three sources you may want to consider: a traditional bank loan, an asset-based loan or factoring. All can provide necessary cash; the difference is in how you qualify and how the repayment is structured. The key is determining what will work best for your business and then how to prepare to qualify for the optimal solution.

The traditional route

Bank loans are a good source of capital for mature businesses with a proven positive cash flow. The credit decision is based on historical cash flow of the business and the personal credit of the owner, since the bank is repaid with cash flow from the company.

To secure a bank loan, the lender will want to know the reason for the loan, the specific amount of money needed, the age of the business, the business’s assets, the number of employees and the legal structure. In addition, they will ask for the following:

  • Financial statements: Income statements and balance sheets for the current year and the past three years, as well as tax returns for the company and its owner.
  • Management profile: Prepare a short statement that is focused on each principal in the business, as well as the owner’s personal financial statements and those of the principal business owners.
  • Market information: State clearly the products of the company as well as its markets. Name the competition, and explain the company’s plan to compete in the market and satisfy the needs of its customers.

 

When cash is low, assets high

Asset-based loans are a good source of capital for companies with little cash flow but a large amount of assets, both accounts receivable and inventory. Because this type of loan is tied to assets — if the company is unable to repay the loan — they risk losing their assets.

For asset-rich companies, the benefit of an asset-based loan is more funds may be available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers.

To successfully qualify for an asset-based loan, the company will need to provide a potential lender:

  • Financial statements and tax returns for the past three years
  • Detailed reports of the accounts receivable, accounts payable and inventory
  • Purpose of the loan and a business plan that documents the owner’s dedication, training and experience necessary to operate asuccessful business
  • Investment of 25-50 percent of savings or personal equity into the business

 

Factoring in the equation

Companies faced with a cash-flow squeeze and slow-paying customers, selling invoices or accounts receivable to specialized companies called factors can be an optimal solution for securing cash needed to grow.

Factor loans can be a good source of capital for high growth or start-up companies. The factor advances most of the invoice amount, usually 70-90 percent, after reviewing the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction (or factoring) fee.

Factoring can provide the most cash flow of the three options because the factor is looking at the credit worthiness of the company’s customers, not the company’s current and past financial performance.

To secure a factor loan, a company will need to provide:

  • A detailed list of accounts receivable and accounts payable with samples of invoices
  • Current and historical financial statements and tax returns for the previous year
  • Business organization documents

 

Each of these loan sources bases the credit decision on different criteria. Understanding what information the lender looks at to base the decision will allow your company to prepare what the lender is looking for and, in turn, the lender will be able to make a faster credit decision.

Buyers, Choose Your Lender Wisely in Phoenix, Arizona

Buyer Beware: Pick Your Lenders Wisely

A struggling economy and changes in lending practices during recent years made it difficult for many business owners and companies to qualify for traditional bank loans or equity lines of credit. The good news is times are changing. While, the days of securing money easily may never return, banks are beginning to ease up as the economy recovers.  In other words, if you are in need of an infusion of cash, all may not be lost. In fact, you are not necessarily at the mercy of the banks. You have more power than you may think when it comes to finding and selecting a lender.

A strong relationship with the banks or lenders you work with is invaluable to the long term success of your business. But just like any other relationship, you need to make sure it is a good match before agreeing to play or work together. Do your homework. Conduct interviews. Check references. Listen to your gut.Then, choose wisely and structure things carefully.

Remember that this is your business and livelihood, and while it may not always feel like it, you are in the driver’s seat. As the driver, keep in mind a few rules and guidelines to live by:

  1. Communication is key

    Know your lender better than your spouse. Just like a marriage, the lines of communication are key. You lender can, and will, help you out of a tough situation if you communicate. Once you stop communicating, a lender is likely to become defensive and you lose any chance of working out of a bad cash flow situation.

  2. Understand the type of loan you need

    Keep in mind that needs are different than wants. You may want a $1 million dollar line of credit, but it may not be what you need. Don’t take on more debt than your business can handle.

    Match long-term debt with long-term assets. This means don’t buy a piece of equipment or real estate with a line of credit. These are long term assets and should be funded with a long term loan. If you use your line of credit (i.e., short term working capital) inefficiently you won’t have available funds to meet payroll or vendor commitments.

  3. Don’t put all your loans in one place

    If you have more than one loan with a lender, chances are the loan docs have cross default language. Cross default means a lender will tie your loans together. Cross default is a provision in a loan agreement or other debt obligation stating that the borrower defaults if he/she goes into default on any other obligation. For example, a cross-default provision may state that a person defaults on his car lease if he defaults on his mortgage. This provision exists to protect the lender.

    Your job is to protect yourself. Do this by planning smartly. If you have a line of credit at one lender, then make sure to secure a real estate loan at another.

Getting cash to grow your business is like driving down the road. You control the car but you have to make wise decisions to make it to your destination. There will be lots of bumps in the road and you don’t always know what is lying ahead but if you navigate correctly then you arrive safely. Pick your finance partners wisely and navigate the road with your lender as carefully as you would a winding road down the California coast line. Enjoy the ride!

[stextbox id="grey"]Robyn Barrett is founder and managing member of Factors Southwest LLC, specializing in factoring financing for small to mid-size companies. For more information, visit www.factors-southwest.com.[/stextbox]

piggy bank

Cash Strapped Companies Seek Solutions

The economic downturn and volatility of the financial markets has left a large number of established businesses with difficulty managing cash flow. Cash-strapped businesses, big and small, are paying their bills more slowly than ever. It’s a cash flow river — or trickle in this case — that flows downhill, impacting the businesses below that require healthy cash flow to operate effectively.

As larger companies and small business owners have trouble paying their bills, they are quickly discovering fewer and fewer options. Banks are not lending and credit lines are stressed. What many businesses owners and managers don’t know or have not previously considered is the possibility of factoring.

For small to mid-size companies doing business-to-business or business-to-government transactions, factoring may offer a financial solution that will keep the doors open and even help them grow.

Factoring is a form of financing based on a company’s accounts receivables or billing invoices. A company with slow-paying customers who pay between 30 and 90 days will approach a factoring company to provide cash. The factoring firm will make an advance of 80 percent to 85 percent against the company’s billing invoices for a percentage less than they are worth. The factoring firm charges a fee for the advance, which is based on how long the advance is outstanding, then provides the company with cash as if the bill had already been paid, and the factoring firm collects on the invoice itself.

The result is the factoring firm can help close the cash gap by advancing funds on earned, unpaid invoices so the company can use the funds to pay daily operating expenses such as payroll and vendors. Factoring will usually give business owners more availability of funds than a bank. In addition, factoring funding can be available within a day or two after the application process is complete. The best factoring firms make factoring fast, easy and flexible.

Factoring differs from a bank because factors make funding decisions based on the credit worthiness of a business’ customers. Banks, on the other hand, make credit decisions based on a company’s financial history, cash flow and collateral. Most importantly, a factor makes funding decisions in days or hours, while banks generally take weeks or even months.

This was precisely the case for Phoenix-based American Printhouse, which provides design and screen-printed apparel and accessories to local and national accounts. Its clients include Chaps Ralph Lauren, Calvin Klein, Disney, Liz Claiborne, the U.S. National Parks Service, Sony Signatures, the Arizona Diamondbacks, the Phoenix Zoo and Discount Tire, to name a few. Garments created and screened at American Printhouse are then sold to 1,500 independent specialty retailers and larger clothing retailers such as Hot Topic, Urban Outfitters, Buckle, Dillard’s, Kohl’s and Target. The company offers 12 different types of printing options for its garments.

Despite employing a staff of 15 and securing an impressive book of accounts on a local and national scale, the company still found itself experiencing the effects of the tightened financial markets.

“We really started feeling the slowdown and clients began asking for net 60 (day) terms beginning in September,” explained Sam Akkad, president and CEO of American Printhouse. “Then we hit the slow season and I was looking at the possibility of layoffs and difficulties paying the rent.”

After multiple banks refused to give the company a loan, and they received notice that their credit card lines were significantly reduced, the building owner suggested factoring. After learning more about factoring in late 2008, the company received $75,000 against their receivables in January 2009, within days of submitting an application for funding. This got them through a rough spot and allowed Akkad to turn things around.

“We didn’t have to do layoffs and today our business is booming,” Akkad said. “We have experienced 125 percent increase in revenue, we are adding new lines of business and looking at hiring.”

Johnny Benson, president of USMX, likes the flexibility factoring allows. Benson joined the company in the 1990s and served as the general manager for a number of years. In early 2008, he purchased the company despite its large debt load due to slow-paying customers. Benson was familiar with factoring and knew the banks would not be favorable to providing a loan or line of credit given the nature of the business.

The company is an environmentally friendly tire recycling facility in Phoenix that fabricates raw product and sells it to be used in playgrounds, artificial turf, molded rubber piping and landscaping. The company picks up tires at retail outlets and other locations throughout Arizona. USMX also cleans up areas where tires have been dumped, both for the state and for private land owners.

The business is growing due to more stringent regulations in recent years pertaining to the disposal of tires. But in order to continue growing, better cash flow is required.

“Working with a factor that allows you to select which customers and which invoices you want to factor is the ideal situation,” Benson explained. “We use factoring as a tool to bring cash flow in order to run our day-to-day operations.”

Regardless of size, factoring can work for companies seeking to fill the gap between invoice payment and payroll, purchasing and other business expenses. If businesses work with a flexible factoring firm, they also have the option of making factoring a big or a small part of their working business plan. Also, while long-term factoring relationships do contribute to a healthy, prosperous business, it would be best to seek out firms that consider factoring a shorter-term relationship. They will be the firms to help get your cash flowing again.

Factoring 101

Questions to ask when considering factoring:

  • Do I have to factor all my invoices?
  • Do I have to factor a minimum amount each month?
  • How much can I factor?
  • Where do my customers send their payments?
  • What fees will I pay?