Tag Archives: cash flow

Prepare loan package, secure loan

Small businesses get loans in record numbers

A common complaint since the financial crisis began was that some of the Wall Street banks that were being bailed out by the federal government weren’t doing enough to help the mom-and-pop shops on Main Street.

“In 2008 when the recession hit, the impact on small business lending was pretty catastrophic,” said Greg Lehmann, managing director of Biltmore Bank of Arizona. “Not only did you have small businesses struggling with lost revenue and weakening balance sheets, but all the banks were retrenching and looking inward.  The unique element about the Recession was that it hit every business sector; small business, large businesses, banks, etc. Nobody was immune to its impact.”

In 2013, small business owners and entrepreneurs have a little more reason for optimism. So far this year, big banks are approving small business loans at the highest rate in more than two years, according to Biz2Credit, which calculates its monthly Small Business Lending Index using 1,000 loan applications made over its online lending platform.

“With an improving economy, Wells Fargo is growing new lending commitments, providing more dollars to help small businesses stay competitive today and for the long term,” said Jennifer Anderson, business banking manager for Wells Fargo Arizona. “The business owners who see increased demand for their products and services are investing in their businesses now. As business owners become more confident and find more opportunities to grow and improve their businesses, we expect to do more business.”

Wells Fargo literally puts its money where its mouth is. According to SNL Financial, the bank was the nation’s largest lender to small business in 2012, lending $32.8 billion to small businesses.

But Wells Fargo isn’t alone. If you look at recent reports, small business lending is up across the board:

* Biz2Credit found that big banks — those with more than $10 billion in assets — approved 15.9 percent of the small business loan applications in February 2013, up from 11.7 percent in February 2012. Small bank approval rates have also ticked up — 50.3 percent in February, up from 47.6 percent in February 2012.
* Government-guaranteed loans have increased 6 percent year-over-year in fiscal 2013. That represents $9.2 billion, an 18 percent increase over the dollars approved during the same period a year ago. Approvals in the last two years have set Small Business Administration records.

Despite the positive reports, the general belief is that small businesses aren’t getting loans, which isn’t true, said Dee H. Burton, executive vice president of Alliance Bank of Arizona.

“Yes, small businesses can get loans now,” Burton said. “At Alliance Bank, we have always been actively engaged in lending to small business — and we never stopped lending even through the toughest times of the Recession.”

What about the perception that lending standards have changed or tightened? That’s another misperception, bankers said.

“General underwriting guidelines have not really changed over the years,” Burton said. “Unfortunately, the Recession has made it more challenging for businesses to qualify. For most businesses, a reduction in revenue may have resulted in a negative impact on cash flow or resulted in a more leveraged balance sheet. Further, the value of assets which banks often look to take as collateral — equipment, real estate, accounts receivable, etc. — are not at the levels they were pre-Recession. All-in-all, these factors have impacted small businesses’ ability to meet the typical standards under which banks underwrite business loans.”

While Lehmann said banks were more willing to bend on some of the fundamentals prior to the Recession, he said banks always look to cash flow, collateral, and capital levels to make a credit decision.

At Wells Fargo, Anderson said lending standards have remained consistent. Before the bank extends credit, it looks for a business to show:

* Steady cash flow. Cash flow is a key indicator of a business’ financial health and its future prospects. When it can show reliable cash flow, we can see it has the resources to repay new loans.
* Debt load is manageable. Banks want to make sure a business has the ability to take on additional debt and is in a strong financial position to manage its debt payments.
* Good payment history. Payment history provides an important record of its ability to responsibly pay down debt.

As for lines of credit for small businesses, Ward Hickey, business banking manager for National Bank of Arizona, said, “Small business lines of credit are based on  business cash flow and collateral values. As both of these improve for small businesses in Arizona, the underwriting standards will ease and more small business lines of credit will be available.”

As the economy in Arizona continues to strengthen, bankers see a better environment for small business.

“We can point to a number of positive signs in small business lending,” Anderson said. “There is more small business activity in our stores, more small businesses are applying for credit, and loan delinquencies continue to decline.”

As businesses shift from survival mode to growth mode, the outlook for lending to small and medium-sized businesses — which Lehmann called “the life blood of the Arizona economy” — continues to be positive, which will help small businesses grow and add workers.

“Arizona will continue to be a growth state and businesses that have survived this Recession will be able to grow as the state continues to grow,” Burton said. “We see businesses are now investing in items such as new equipment and new expansion, which had been put on hold during the Recession. Businesses are also taking advantage of the current interest rate environment to fund their expansion.”

Lehmann agreed.

“As the economy continues to heal and grow,” he said, “so will the small businesses of Arizona.”

Steps to Improve Cash Application Percentage

Steps To Improve Cash Application Percentage

Better Payment Application Improves Cash Flow: Simple steps can make significant difference.

When a payment is received by a customer or client, businesses often consider the transaction to be complete, overlooking the last step of the sales cycle — applying. The ability to apply payments to invoices correctly can be difficult for most companies for a variety of reasons.

Although it’s tough for most companies to reach 100 percent accuracy, there are some steps to take that can significantly improve your cash application percentage.

Dealing with multiple payment types and multiple payment channels

While it is extremely convenient to be able to receive payments via Automated Clearing House (ACH), wire transfers and credit and debit card payments, lockboxes, electronic bill presentment and payment (EBPP), mobile devices, Web portals and even by phone or in-person visits, these options create multiple ways for payments to get lost in the shuffle.

When dealing with the multiple channels and their individual requirements, customers can provide incomplete remittance information, payments that don’t match the invoice, or even take unapproved or unearned discounts. Accounts receivable employees can also get confused and inaccurately apply payments to the wrong invoice, have difficulty identifying the customer or company, and find they are unable to manage the volume of payments. Together, these two things lead to a growing amount of unapplied or misapplied cash for businesses.

How to prevent unapplied and misapplied payments

Unapplied and misapplied cash creates a myriad of problems that can negatively impact cash flow by taking a considerable amount of time and effort to resolve. It can also damage customer relationships when up-to-date customers begin receiving calls from collectors and invoices for accounts that have already been paid.

Business owners can avoid this from happening by managing and improving the cash application processes by taking just a few or all of the following steps:

  • Create, monitor and staff an unapplied cash account
    Some companies manage unapplied cash by depositing the payments into an unapplied cash account. If an unapplied cash account is created, it is important to monitor the account and to clear the balance on a frequent basis.
  • Establish internal controls
    Develop and implement internal controls to ensure cash is applied on a daily basis and the amount of cash received matches the amount applied. Bank accounts should be reconciled on a daily basis to make sure payments are applied on the right day and to the right account.
  • Assign each customer a single account
    Sales and other departments within your organization may want to open several accounts for a single customer, but this creates problems when it comes to applying cash. Multiple accounts make it difficult to know where to apply a payment.
  • Establish a deduction write-off policy
    It can be costly and time consuming to resolve deduction disputes. In many cases, it is more efficient to establish a deduction write-off policy. The threshold limit should be determined based on historical information and can be based on a percentage or dollar amount of billed criteria.
  • Communicate with customers
    If you have questions about missing or unclear remittance information, again, it is best to call the customer. For example, if a customer sends a payment to cover several invoices, contact them and ask how to apply the payment.
  • Strive for accuracy
    Above all, strive for accuracy. Reward staff members who apply the cash correctly the first time.

Although cash application is far from a perfect science, even the slightest improvement will increase the cash flow and the organization of your business’ finances making it easier for both your employees and your customers. Change may not happen overnight, but each improvement will bring your organization closer to the elusive 100 percent accuracy.

For more information about FSW Funding, visit fswfunding.com.

Increase Cash Flow, Reduct Debt

Increasing Cash Flow, Becoming A Debt-Free Company

How much debt financing is right for a business? In today’s low-cost money environment, the “easy” answer might be “as much as you need” because it is inexpensive (depending on a company’s financial situation). However, the credit environment has tightened significantly during the past two years because of the stress that has been placed on the financial markets. Low-cost money really isn’t that easy to come by.

Possibly the more important question may be, what would it take to run the business without any debt? As the B2B CFO for a number of small- and mid-sized businesses, I can attest to the fact that operating a business on the cash flow generated from operations is easier and less stressful than being saddled with a lot of debt. It also increases control over the company.

With a good focus on cash flow and a deliberate plan to reduce debt, it is possible to achieve the objective of becoming a debt-free company. The elements of a robust cash flow plan will likely include a sound understanding of the classic elements of the sources and uses of cash. In simple terms, you want to increase the sources of cash and reduce the uses of cash to the extent possible.

Sources of cash:
·         Improve the efficiency of revenue generating processes
·         Collect customer receivables faster
·         Turn inventory faster and reduce the inventory balance
·         Lengthen supplier payment terms, request early pay discounts, or take full use of existing terms
·         Reduce operating expenses
·         Increase gross margin of products or services

Uses of cash:
·         Increase working capital in all its forms — A/R, inventory, etc.
·         Increase interest expense as a result of increasing debt or rates
·         Increase operating expenses – payroll, benefits, rent, travel and entertainment
·         Capital expenditures
·         Add employees or contractors
·         Decrease gross margin

Successfully implementing these actions so that the sources outweigh the uses will increase cash flow in the business. The CFO is then able to turn this into a comprehensive financial plan to determine when the business can be debt-free. Without debt in the business, owners are no longer reliant on other entities for success.

Debt isn’t always a detriment. In fact, by the end of the year, my firm will have helped clients obtain more than $200 million in debt financing. These clients have largely been growing businesses in which a loan can be very helpful to support capital expenditures and increased working capital to support additional revenue. When used properly, growth-supporting loans are paid off when revenue growth and increased profitability are achieved.

Unfortunately in a difficult economy, too much reliance on debt has become a way of life for many businesses versus a vehicle for growth. As we enter a year when the economy has at least stabilized, eliminating or reducing debt is one beneficial goal to achieve for companies.

For more information about increasing cash flow and becoming debt-free, visit B2BCFO.com.

New Technology Makes Financial, Inventory Management Easy, Affordable

New Technology Makes Financial, Inventory Management Easy, Affordable

The expansion of the Internet and the growth of online financial tools continue to change the way we do business. With the development of Web-based and online tools, it is easier than ever for small business owners to manage day-to-day operations, track financial transactions and measure performance. Unlike the more costly software packages many companies were using up until now, Web-based tools are available free of charge or for a very low cost.

If you are a still using old systems and thinking it’s time to update your business, here are a few key areas to consider that will curb costs and increase efficiencies:

Inventory management

When was the last time you examined your inventory? If you are unsure, it is safe to say apply the 80/20 rule ― 20 percent of that inventory is turning while 80 percent sits idle, taking up space and costing money to finance.

Effective inventory management can be the key to running a profitable business.

Before making a decision to update pricing or increase inventory, you must first know what you have in your current inventory. Online inventory management programs can do just that. An inventory management program can also be especially helpful for companies with multiple warehouses, or stores with multiple locations. Businesses can benefit from the up-to-the-minute software when multiple people are tracking merchandise orders, sales, returns and product availability. Inventory management programs also show which items are slow selling and should not be ordered or produced as frequently.

Finally, using an online inventory management system that interfaces with accounting software such as QuickBooks makes it easier to evaluate your financial situation.

Online payment options

Both business-to-business and business-to-consumer companies were previously more limited in the type of payments one could accept. Today, thanks to new technology, small business owners that typically accept only cash or checks can now easily add credit cards and online payments to the mix.

More amazing is that, traditionally cash-only small merchants are now able to accept credit card transactions by simply using a smartphone. Tools like the Square and Intuit GoPayment readers will scan a credit card payment from the phone. The cost is a flat percentage fee per transaction. If a customer is paying from another location, businesses of any size can accept credit card payments online with websites like PayPal and Google Checkout. Certain applications also allow customers to purchase products directly from Facebook brand pages now.

Payments by check can also be received online from remote locations with the development of eChecks. Customers can input their check information, including account number, routing number and check number, into an online form. The information is then evaluated by an online database that will tell businesses within seconds whether the check is valid or not. This tool can reduce the fear business owners may have about accepting checks by eliminating the potential for checks to bounce or for a purchase to be made from a closed account.

Managing deposits

Remote Deposit Capture (RDC) is the official name banking institutions use to describe the process of electronically depositing a digitally scanned check. With RDC, business owners and managers can make a deposit by using a computer, scanner and remote deposit capture software or employing a third party. When the bank receives the digital check, almost immediately they can send digital copies to another bank to verify the funds and make the appropriate withdrawals and deposits. This tool is not only convenient and a great time saver, but it also reduces cost and the risks connected to driving to the bank to make deposits. This is especially true for larger companies, which often hire a courier service or armored car to handle the task.

Banks have recently implemented applications that allow businesses and individuals to deposit checks from an iPhone or Android. Checks can be photographed and submitted through an app.

Adopting online tools to manage financial tasks and operations can be fairly simple and inexpensive, while the benefits to your business are abundant. These tools not only save time and money, but they also increase the ability to track day-to-day operations, enabling companies to make more informed financial decisions; and most importantly, they can help improve cash flow.

We’ve all heard the saying “cash is king.” That statement has never been truer than it is today.

For more information, visit fswfunding.com.

5 C's of Credit

The 5 C’s of Credit: 
What Do They Mean To Your Small Business Loan?

One of the most common questions among small business owners seeking financing is: “What will the bank look for from me and my business?” While every bank has its own unique criteria, many use some variation of the five C’s of credit when making credit decisions. Broadly speaking, they are:

  • Character
  • Cash flow
  • Collateral
  • Capitalization
  • Conditions

Let’s take a look at each of these ingredients and review how they may impact your funding request. Review each category, and see how you stack up.

Character ― Your willingness to pay back your loan

What is the character of the management of the company? What is your payment history and patterns in other loans you have taken? What is management’s reputation in the industry and the community?

Bankers want to lend their money to those who have impeccable credentials and references. The way you treat your employees and customers, the way you take responsibility, your timeliness in fulfilling your obligations are all parts of the character question.

This is really about you and your personal leadership. How you conduct both your business and personal life gives the lender a clue about how you are likely to handle leadership as a CEO. It’s a banker’s responsibility to look at the downside of making a loan. Your character immediately comes into play if there is a business crisis, for example. As small business owners, our personal stamp on everything that affects our companies is essential. Because the bank may not know you, your credit score tells the lender how you will pay your business loan. Many times, banks do not even differentiate between us and our businesses. A poor personal credit score is enough information for a lender to outright decline a business loan. In a commercial lender’s eyes, there is no differentiation between handling personal obligations and business obligations. They are one and the same.

Cash Flow ― Your capacity to pay back your loan

What is your company’s borrowing history and track record of repayment? How much debt can your company handle? Will you be able to honor the obligation and repay the debt? There are numerous financial benchmarks, such as debt and liquidity ratios, that investors evaluate before advancing funds. Become familiar with the expected pattern in your industry. Some industries can take a higher debt load; others may operate with less liquidity. As a conservative guideline, you should have $2 of income (business and personal) for every $1 of debt.

Collateral ― How lenders get paid if the business fails

While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call the secondary source of repayment. Collateral represents assets that the company pledges as an alternate repayment source for the loan. Most collateral is in the form of hard assets, such as real estate and office or manufacturing equipment. Alternatively, your accounts receivable and inventory can be pledged as collateral. Generally, lenders will want a 1:1 ratio, or $1 of collateral for every $1 you borrow. Bankers typically discount an asset and lend on that basis. So for every $1 of collateral, the bank will lend anywhere from 70 percent to 85 percent of the value depending on whether it is fair market value or liquidation value.

The collateral issue is a bigger challenge for service businesses, as they have fewer hard assets to pledge. Until your business is proven, you’re nearly always going to pledge collateral. If it doesn’t come from your business, the bank will look to your personal assets. This clearly has its risks; you don’t want to be in a situation in which you can lose your house because a business loan has turned sour. If you want to be borrowing from banks or other lenders, you need to think long and hard about how you’ll handle this collateral question.

Capitalization ― How much money have you put into the business?

How well-capitalized is your company? How much money have you invested in the business? Has your business grown? Have you reinvested the profits, or paid yourself a bigger salary? Investors often want to see that you have a financial commitment and that you have put yourself at risk in the company. Both your company’s financial statements and your personal credit are keys to the capital question. If the company is operating with a negative net worth, for example, will you be prepared to add more of your own money? How far will your personal resources support both you and the business as it is growing?

Conditions ― SWOT: What are the Strengths, Weaknesses, Opportunities and Threats that affect your business?

What are the current economic conditions and how is your company affected? If your business is sensitive to economic downturns, for example, the bank wants a comfort level that you’re managing productivity and expenses. What are the trends for your industry, and how does your company fit within them? Are there any economic or political hot potatoes that could negatively impact the growth of your business? (I wrote at length on SWOT analysis in my January blog.)

Keep in mind that in evaluating the five C’s of credit, investors don’t give equal weight to each area. Lenders are cautious. One weak area could offset all the other strengths you show. For example, if your industry is sensitive to economic swings, your company may have difficulty getting a loan during an economic downturn ― even if all other factors are strong. And if you’re not perceived as a person of character and integrity, there’s little likelihood you’ll receive a loan, no matter how good your financial statements may be. As you can see, lenders evaluate your company as a total package, which is often more than the sum of the parts. The biggest element, however, will always be you.

For more information about the five C’s of credit and/or B2B CFO, visit b2bcfo.com.

Cash flow

Common Issues That May Affect The Cash Flow Of The Business

Do you know where your cash is? Common issues that may affect the cash flow of the business.


Have you ever asked yourself the question, “I am making a profit, but I don’t know where the cash is?” Many business owners tend to manage their business strictly from the income statement.

An income statement is very important to a business as it provides a historical view of what transpired in the company over a period of time and gives the business owner, banks and other investors a better perspective of what contributed to the net profit or loss reported. However, the income statement does not necessarily translate into an increase or decrease in cash.

Understanding how the income statement results will impact the cash flow of the company is equally important, yet often ignored.

Anyone running a business needs a clear vision of how his/her business decisions affect the finances of the company to achieve the desired success desire. Cash is king. Every business owner should have a clear understanding of the financial implications of his/her business decisions to increase the chance of success.  If you don’t take control of your cash, it will most certainly take control of you.

Here are some common issues that may affect the cash flow of the business:

1. Invoices issued upon the shipment of product or the delivery of services are delayed because the supporting information has not been processed in the accounting system on a timely basis.

2. Past due receivables are increasing because customers are experiencing cash flow issues themselves.

3. Customers are paying their invoices short because of product quality issues or invoicing errors.

4. Inventory is increasing faster than sales because of over-purchasing inventory components in comparison to current production needs.

5. Staffing is increased to meet short-term demand without any confidence that the demand will continue to support the additional cost.

Monitoring these issues is not a difficult thing to do. A simple report incorporating income statement and balance sheet information every month will focus management in the right areas and help to improve the cash flow of your business. This report should identify the customers who management must contact to resolve quality and past-due collection issues. It should also identify excessive inventory issues and other cost drivers that may impact the financial results of the business.

Next, management must become disciplined to obtain its cash balance from the accounting system and not the bank. Your bank statements will not show checks that have been written and not presented to the bank for payment, nor will they show receipts that have not been deposited at the bank. These unreported bank transactions should represent the difference between the bank balance and the cash balance reported in the accounting system. Relying on your accounting system cash balance, which is periodically reconciled to the bank balance, will allow you to avoid serious and expensive mistakes.

Finally, management must establish a process to create cash flow forecasts to understand where the cash will be during the next 13 to 26 weeks. Establishing cash flow projections is simply using a few basic principles with your intuition and knowledge of the business.  Adjust for any significant changes you expect to happen that are different from the past, and never project revenues that you cannot be fairly certain will occur as this will create a false sense of security.

Finally, review the projected cash balance weekly to determine any unexpected shortfalls.  Further analysis will identify priorities that management must focus on to resolve the issue identified in the forecast and avoid real problems in the future.

Understanding your cash flow will give you peace of mind and help you start to take control of the financial side of your business. In addition, it will provide the management team with a course of action to grow the business profitably while knowing where the cash is.

For more information about understanding your cash flow, visit b2bcfo.com.

Create a Budget

Cash Flow Management: Creating A Budget To Reach Financial Success

Tracking of cash flow dates back more than 3,000 years. Before currency existed, people would use cattle, grains, silver or other items of value as trade. These transactions, tracked on tablets or sometimes counting tokens, were used as a tool to track financial dealings. This tells us that managing trade or cash flow has been around for decades and is a critical factor when it comes to managing finances. Some important elements are creating a budget, emergency fund planning, debt management and savings strategies.

When it comes to planning for future goals, a budget can be a very useful guide to help reach financial success. A budget helps project future cash flow needs and can be a great tool to assist with preventing financial problems and increasing net worth.

Before putting a budget together, one will need to gather data on past spending and income. The budgeting process should include: estimating income, estimate of spending, and planning for savings. Begin by putting a preliminary budget in place which will include goals and priorities for each goal. Track these goals on a regular basis and make necessary changes when needed.

One of the top priorities of a budget is having an emergency fund. This is critical and is often overlooked. Many planners recommend having at least three to six months of expenses, but with the increased cost of goods and services today, many feel that six to nine months is best. Expenses should include fixed cost and variable cost. Emergency funds should be in a high liquid type of account, such as a savings or money market account.

Debt management has become a very challenging issue today. Hopefully, with the degree of issues we’ve seen in the last few years, people will see the importance of managing their debt closely.

Three common rules of debt management are: total monthly debt should not exceed 36 percent of gross income, mortgage payments should not exceed 28 percent of gross income, and consumer debt should not exceed 20 percent of gross income.

In our fast-paced society and with the current availability of credit, it can be difficult to stay within these parameters. However, using these rules as a guide and implementing them can help us get back to managing our debt within a reasonable level. Financial debt will eventually catch up to us, but before it does, we can take responsibility now to control it before it controls us.

Many people who begin to think about saving usually consider it only when they have excess or residual income. Saving should be planned as part of a budget sooner than later, not just when it’s convenient. Delaying saving usually ends up never happening or may be too late to be beneficial. At a minimum, it is recommended to save five to 10 percent of income annually. I also suggest to increasing the saving percentage every year; this will help keep up with inflation and allow investors to get a head of the saving game.

These are important factors and planning tools that can help with implementing or adjusting a financial plan and managing cash flow. The earlier an individual, household or business can start, the more likely for success.

 

Securities and investment advisory services offered through ING Financial Partners, Inc. Member SIPC. Jacob Gold & Associates, Inc. is not a subsidiary of nor controlled by ING Financial Partners, Inc.

This information was prepared by Michael Cochell of Jacob Gold & Associates, Inc. and is for educational information only. The opinions/views expressed within are that of Michael Cochell of Jacob Gold & Associates Inc. and do not necessarily reflect those of ING Financial Partners or its representatives. In addition, they are not intended to provide specific advice or recommendations for any individual. Neither ING Financial Partners nor its representatives provide tax or legal advice. You should consult with your financial professional, attorney, accountant or tax advisor regarding your individual situation prior to making any investment decisions.

Financial Statements

Using Financial Statements, Tools To Plan Your Future

Know what you have before planning the future using specific financial tools and financial statements.


There are many famous quotes about the importance of enjoying the present and not focusing too much on the past or the future. We do this in our personal lives and with many of our responsibilities, such as work, education and our finances. As a financial planner, I meet with many people seeking assistance with meeting specific financial goals and find that many times they have ideas of what they want and what they have already done. This is great, but before planning the future, it is important to know what you have now, a snapshot of your current situation. This is a critical piece, not only for individuals, but businesses, too.

Before focusing on investment news, what stocks are hot, politics and what might be a new trend in the investment world, investors should focus on understanding their current position. It is nearly impossible to determine the right mix of investments and what strategies may be appropriate without knowing this. Investors can use specific financial tools, including different financial statements, to help them identify what they have. These tools can apply to both individuals and businesses.

The first step is a data-gathering process. The second is imputing the information from various financial statements. For individuals, we would include a statement of financial position and a statement of cash flow. For business owners, we would include a balance sheet, income statement, statement of cash flow, and a pro forma statement. These are great tools that can help identify one’s financial position.

When creating a statement of financial position, one will clearly list his or hers assets and liabilities. Assets, such as real estate or other valuable items, should be considered at current market value (the price that one is willing to pay today for it). Assets should be categorized as cash and cash-equivalents, such as checking, savings, money market accounts, stocks, bonds, mutual funds and life insurance. Liabilities include credit cards, auto loans, unsecured loans, real estate mortgages, education loans and personal debts. This will provide individuals a balance sheet of assets at a particular point in time.

The next important piece is a statement of cash flow. Some of us may know this as an income statement. This statement will show inflow of income and outflow of income at a particular point in time. The inflow may include salaries, sale of assets, investment dividends, rent and bonuses. Outflows may include mortgage payments, auto payments, credit card payments, insurance, general living expenses and taxes. The statement of financial position and statement of cash flow are valuable tools to have before implementing an investment plan.

A pro forma statement is the last tool to use and includes future projections of the balance sheet and cash flow statement. This is important because as our economy and life situations change, we may need to adjustment our plan as needed. The same process also applies to business owners. However, the business entity will need to consider many more details regarding assets and liabilities, as well as inventory and staff.

Once the financial statement process has been completed, one will have a greater understanding of his or her position when beginning an investment plan. In addition, this process can improve the odds of success and allow more control in an investor’s decisions.

For more information about financial statements and financial planning, visit jacobgold.com.

Securities and investment advisory services offered through ING Financial Partners, Inc. Member SIPC. Jacob Gold & Associates, Inc. is not a subsidiary of nor controlled by ING Financial Partners, Inc.

This information was prepared by Michael Cochell of Jacob Gold & Associates Inc. and is for educational information only. The opinions/views expressed within are that of Michael Cochell of Jacob Gold & Associates Inc. and do not necessarily reflect those of ING Financial Partners or its representatives. In addition, they are not intended to provide specific advice or recommendations for any individual. Neither ING Financial Partners nor its representatives provide tax or legal advice. You should consult with your financial professional, attorney, accountant or tax advisor regarding your individual situation prior to making any investment decisions.

Investors Need Transparency AZ Business Magazine Sept/Oct 2010

Investors Need Improved Transparency When Dealing With Illiquid Assets

Now more than ever, investors and regulators are demanding greater transparency when it comes to hedge funds that invest in illiquid financial instruments. This should come as no surprise given that so many recent defining business failures were related to illiquid assets.

For example, AIG’s downfall was caused by investments in structured credit derivatives that were difficult to value. Bear Stearns’ and Lehman Brothers’ descents were due in part to the illiquid non-agency mortgage assets they held. Many hedge fund investors suffered significant losses in the recent financial downturn, and consequently want a closer view of portfolio assets and valuation processes.

What are illiquid investments?

Illiquid assets are investments that can be difficult to sell and value due to limited market participants, infrequent transactions, complex structures or highly uncertain future performance. In some cases, it can take years to realize a return on the investment. Illiquid investments are frequently held in portfolios managed by hedge funds, private equity groups or investment banks. Examples may include investments in private equity or venture capital companies, distressed credit, bankruptcy claims, over-the-counter (OTC) derivatives, whole loan pools, convertible bonds, auction rate securities and collateralized debt obligations (CDOs). Because of the lack of observable transaction prices, illiquid investments often are valued using models that may include significant management judgment.

Upfront due diligence

In order to mitigate the risk posed by illiquid investments, institutional investors need to perform increased due diligence relating to a fund’s investment strategy. They need to be able to answer questions such as:

What experience has management had with liquidity shocks?

What informational advantages or specialization do they have in the marketplace?

What else is required in order to implement the fund’s strategy, such as sufficient ability to sell/hedge positions in a dealer market or continued financing terms?

It’s also important to ensure that the fund structure is appropriate to meet the cash flow needs of investors and the investment strategy, as well as the financing requirements of asset managers. Is the fund’s structure appropriate given the liquidity profile of its investments? Consider issues of leverage, redemptions and side-pocket accounts that have been used to separate illiquid assets from other, more liquid investments. Is the financing or leverage of the fund appropriate given the composition of its assets? For example, a highly leveraged capital structure with short-term financing is not advisable when combined with illiquid investments.

Lock-up periods, which may restrict an investor’s ability to exit a fund investment, are another area of growing attention due to the recent liquidity crisis. While many funds that specialized in illiquid assets were able to negotiate long lock-up periods for redemptions, other firms were forced to sell in order to satisfy investors’ requests for cash. Funds with long lock-up periods were well-positioned to buy assets at favorable valuations when their competitors had insufficient capital available to make investments. For funds with large concentrations of less liquid investments, a long lock-up period is an appropriate structure.

Hedge funds with long lock-ups need to be able to instill investor trust in their managers’ investment approaches and their funds’ interim values. If investors are restricted in redeeming their fund investments, they should have sufficient information to assess the value and report to internal constituents.

Valuation policies and procedures with an independent third-party review

Hedge funds need to establish and follow clear policies and procedures for the valuation of all assets, but this is particularly true with regard to illiquid investments. During due diligence, investors should review the fund’s written valuation methodologies to ensure management is adhering to industry best practices.

Hedge fund management can ease investor uncertainty by engaging an independent third party to review the fund’s valuation policy, process and the resulting asset prices used for investor reporting. The third party may be hired to review the valuation process and inputs for reasonableness, or alternatively, to provide an independent value of the defined assets.

Additional disclosures to investors

In response to market dislocation, many hedge funds have made disclosures above and beyond what may be required by generally accepted accounting principles (GAAP) in their financial statements to investors. Currently, these disclosures are not part of the regular financial statements, but are provided in an investor letter or as part of a supplemental investor reporting package. However, we may also see additional disclosures required related to fair value measurement, as well as structural or contractual risks.

Such disclosures can help clarify the risks to investors, such as an estimate of transaction and search costs required to liquidate assets, a discussion of market participants and exit strategy, or an estimate of the time necessary to sell or unwind a position — especially a large position. Hedge fund disclosures may also include the liquidation or quick-sale value, i.e., the price if the manager is compelled to sell.

Types of illiquid assets

  • Private equity or venture capital companies
  • Distressed credit
  • Bankruptcy claims
  • Over-the-counter derivatives
  • Whole loan pools
  • Convertible bonds
  • Auction rate securities
  • Collateralized debt obligations

Arizona Business Magazine Sept/Oct 2010

Now’s The Time For Business To Streamline And Maximize Cash

Now’s The Time For Business To Streamline And Maximize Cash

How do strategic growth-oriented organizations find and exploit the opportunities inherent in any downturn? Recently, Ernst & Young surveyed 3,100 entrepreneurs around the world to discover the actions entrepreneur-led companies are taking to remain on course during the current economic times. Contrary to what you may think, the survey found that today’s economic environment has opened up space in local and global markets.

Strong business leaders are adapting to the difficulties in sourcing finance and maintaining liquidity, and understanding the pressures on their people, customers and suppliers. Change for everyone seems inevitable, and already some businesses are emerging as leaders in accelerating that change. What do market leaders need to do to be successful?

Despite the changes in the economic environment, net cash flow determines management’s focus. The dominant trend in the past six months has been an acceleration of management’s efforts to improve business performance. They are right to do so regardless of economic scenarios:

  • If the recession continues — or even worsens — then cash and access to credit will continue to be constrained and conditions will remain extremely difficult. The focus on relative performance will intensify.
  • If the rebound is already in sight — if there really are signs of “green shoots” — management needs to be prepared to act quickly. Typically, a rebound arrives with speed, giving management little time to respond.

Three elements are critical to an organization’s ability to react to future opportunities: an efficient operating model that maximizes your company’s strategic advantages, cost reductions that do not damage the organization’s strategy or customer’s experience, and a focus on cash forecasting.

A robust cash-forecasting process can create a “cash culture.” Improving cash awareness through internal procedures and policies drives an increase in accountability and responsibility. In addition, successful companies acknowledge financial concerns before they become a burden and make swift decisions when they need to be made.

Expand your customer base
A majority of entrepreneurs surveyed — 67 percent — are pursuing new market opportunities. But growth is only possible when companies have the required resources, and for now, this means cash. A strong liquidity position provides the basis for a wider array of financial choices to have available when business conditions improve, whether that means broadening a customer base, attracting and retaining people, acquiring strategic businesses or assets, or driving operational performance.

At the same time, entrepreneurs understand that some customers will probably fall away during tough times, and they reinforce procedures to manage these reductions or failures. When expanding your customer base, keep these three things in mind:

  • Understand whether your products or services are necessities or luxuries. Position yourself to help your clients through leaner times.
  • Focus on neglected or overlooked markets while building customer loyalty.
  • Manage your customers’ perceptions of your business.

Review tax position to uncover cash
Tax is between the third and the fifth largest expense for most companies, but only 23 percent of entrepreneurs surveyed review their tax strategies to reduce expenses and uncover cash. Government deficits and revenue needs are affecting global tax policy around the world. The recent fiscal stimulus package includes significant tax measures — in fact, tax measures comprise a larger share of the overall packages compared to spending measures, including:

  • Accelerated depreciation programs.
  • Carryforward and carryback provisions for net operating losses.
  • Adjustments to corporate income tax rates.
  • Enhancements to research and development tax credits.
  • Indirect tax changes.

While some opportunities are likely to arise from this, there are also many potential threats and a general tightening of enforcement and compliance efforts by tax authorities.

Focus on core skills
In being forced to reflect on the health of their businesses, entrepreneurs may initiate a transformation of their business model so it becomes significantly better adapted to tomorrow’s environment. They do this by identifying their core competencies and focusing on what they do best. Ancillary functions not aligned with key strategic goals can be considered as potential outsourcing targets, while divestment may be appropriate for service lines that are not aligned with the core business.

The survey of entrepreneurs suggests that, generally, there has been a pulling back of plans to outsource or to use shared service centers. Internal audit, tax and legal services and knowledge management are key exceptions where lack of in-house skills may force the decision. Companies may be reluctant to transfer responsibilities to a third party in today’s environment, preferring to retain control in-house. However, outsourcing may well provide the increased flexibility and cost reductions that business leaders are looking for. A credible case can be made for outsourcing non-core roles in order to safeguard the core, laying the foundations for a durable, flexible business model that will position an organization more strongly in a post-crisis environment of increased competition and tighter cost control.

Reshape your business
To broaden their customer base or enter new markets, many entrepreneurs see a marked increase in potential mergers and acquisitions at reduced prices. Their recipe: cautious raising of capital mixed with a renewed focus on having the right balance sheet and business model to capture acquisition opportunities. Their advice: Divest unprofitable units while seeking and investing in opportunities from the crisis.

These are times when new market leaders rise to the top. The economy is not a zero-sum game where one side must always lose to let the other win. Only if the majority of businesses improve will the economy turn around.

The views of the entrepreneurs surveyed reaffirm these messages and make one major addition — the need to act more quickly. Regardless of whether recovery is just around the corner or the clutches of recession risk are getting tighter, there is no time to delay improving your business. Accelerating the change is the only option.

money pile

Raising Capital In A Financial Drought Is Tough, But Not Impossible

In today’s turbulent economic environment, many companies are finding their cash flows temporarily reduced due to difficult business conditions. Less cash flow generated from operations can cause a working capital squeeze or make existing lenders uncomfortable and/or uncooperative, particularly if the company has violated a loan covenant or agreement. In the past year, we have witnessed a dramatic pullback on the part of all lenders, especially banks. If a bank has the power in its relationship with a borrower due to a broken agreement or covenant, a company could find itself in real trouble unless it is able to raise capital from another source.

What types of capital are currently available?
The answers vary based on the company’s size (revenue, profits, assets, etc.), history of financial results, strength of its management team, and industry.

In general, there is debt and equity (i.e., stock), but capital should be considered on a spectrum from senior to junior. The most senior capital is typically a bank loan secured by a first lien on all the assets of a company, followed by second lien debt and then unsecured debt. As a general rule, the more junior the capital, the riskier and more expensive it is.

No matter the interest rate, senior debt will be cheaper than other capital. In the current market, cash flow-based senior lending has all but dried up. It seems that cash flow senior loans are available only to those companies with strong cash flows — in other words, those that don’t really need the money. On the other hand, if a company has significant assets and is not already leveraged, the owners should check with their bankers; interest rates may be higher and advance rates lower, but senior debt may be available.

Let’s assume bank debt is not available — that leaves equity (common and preferred stock) and subordinated debt (sometimes called mezzanine debt because it comes between senior debt and equity in the capital structure). It will be least expensive if owners are able to access friends and family as investors. That said, many entrepreneurs prefer to keep business and family separate, so that leaves high net worth individuals (angel investors) and institutional investors.

How can business owners prepare to raise capital?
Regardless of the type and source of capital a company chooses to pursue, there are several steps to take to ensure the capital-raising process runs smoothly and, more importantly, maximizes the chances for success.

Prepare an executive summary of the business. Describe the company and how it makes money, be sure to discuss products and services and talk about the company’s challenges and opportunities. Also provide biographies of key members of the management team. Use charts and graphs to make strong points about financial performance and industry dynamics.

Assemble a historical financial information package. Include at least three full years of historical financial statements. Audited financial statements are best, but statements reviewed or compiled by a recognized accounting firm likely will suffice. Also, include monthly financial statements for the last fiscal year and the year-to-date period. It is helpful to include information such as sales and gross margin by customer and/or product to help investors consider concentration risk. In addition, provide a detailed breakdown of costs and expenses, including information regarding capital expenditures. Try to break down capex by expenses required to maintain the business and those that contributed to growth.

Assemble a financial planning package. Include the current-year budget and a forecast for the coming year. A detailed bottom-up analysis is essential to creating credibility with investors. Future growth will be the decisive factor for equity investors. Include projections for the next five years if possible, even if they are just a best guess driven by top-line growth rates and margin assumptions; they will be helpful for investors who want to understand the potential of the business.

Select an online data room provider and begin uploading documents for investors to review. Be sure to include all key contracts, credit agreements, charter documents, board minutes, tax returns, etc. An online data room will streamline the due diligence process significantly, requiring less of the management team’s time and shortening the overall time to close.

Prepare a PowerPoint presentation that walks investors through the business, its historical results, challenges, opportunities and projections. Include details regarding the use of proceeds. Invite the most interested investors to visit the company and use this presentation as a basis for discussion.


Where do business owners go to find capital?

The best advice for owners and management teams is: Do not underestimate the time required and the complexities involved with undertaking a capital raise. Never be afraid to admit that you are in over your head and need the help of professional advisers. Investors, particularly institutional investors, are currently at an advantage. In today’s business environment, capital is scarce and at a premium. To get the best deal for your company you need to bring your A-Game and your A-Team. A variety of corporate and/or business advisers such as attorneys and accountants may be able to help business owners determine the best sources of capital and recommend an investment bank to assist with a more comprehensive review of capital-raising alternatives, as well as sources of potential capital. It could be the difference between using a watering can versus an industrial sprinkler when combating your company’s capital drought.

Social Media

How To Get The Most Out Of Social Media

“Are you taking advantage of Web 2.0?” This question has been circulating throughout the business world regarding the online world of mass collaboration and consumer-generated content. Web 2.0 is redefining public relations, marketing, communications and branding for businesses worldwide.

Nielsen’s 2009 Global Faces and Networked Places report states that two-thirds of the world’s Internet population visits a social network or blogging site, and the sector accounts for 10 percent of all Internet time. “Consequently, the global media and advertising industries are faced with new challenges around the opportunities and risks this new consumer medium creates,” the report states.

Ken Reaser, a partner at Spin Six Strategic Marketing Design in Scottsdale, agrees. “People’s opinion is going to be out there,” he says. “You can attempt to influence it, but you can’t control it.”

Gabriel Shaoolian, founder of New York-based Blue Fountain Media, says social media can be tough to navigate at first, but once a company starts talking to its customers, “that dialogue is priceless. The persistent nature of online interaction means that (social media) has the long-lasting effects of traditional advertising, but the immediate interaction means it also has the revenue-driving power of traditional sales.” However, Shaoolian cautions that social media marketing is not for every business or marketer — but its impact is hard to ignore.

Businesses are all at some level of using social media networks, says Anthony Helmstetter, a partner at Spin Six. “Some are using it for reputation management, where social media is used as a function of customer service,” he explains. “However, 90 percent of the businesses out there will not stop using other marketing outlets.”

Forrester Research released its five-year forecast in July 2009, which states that spending on interactive marketing in the United States will reach almost $55 billion and represent 21 percent of all marketing spending by 2014. The report shows that social media spending alone will increase to $3.1 billion in 2014 from $716 million in 2009, representing a compound annual growth rate of 34 percent — the highest percentage gain in the marketing mix. This spending activity ranks social media as the third most prominent program behind search marketing and display advertising.

“Social media has its place, and we do find it to be a helpful tool, but only when it’s used correctly. … Be cautious with it.”

— Ken Reaser, partner at Spin Six Strategic Marketing Design in Scottsdale


The following is a look at the top social networking sites on the Web:

Link it Up: Optimizing LinkedIn for the Business Owner

LinkedIn helps people manage and make connections with other industry professionals, and expand beyond boundaries companies have been unable to reach. The site is relatively easy to use and provides a helpful breadth of information, as well as multiple ways to expand small businesses.

Mashable, an online social media guide, posted “How to Build Your Company’s Profile on LinkedIn” in August 2009. Adam Ostrow, a regular Mashable commentator, writes that LinkedIn separates itself from other social media networks with its company profiles. Company profiles allow a business owner to provide potential candidates with a lot more information about the company and the people who work there.

Here are Ostrow’s tips on how to set up a company profile:

  • Go to the “Companies” menu on LinkedIn. Select “Add Company.”
  • Enter the company’s basic information, such as a description, number of employees and industry in which it operates.
  • Follow LinkedIn’s wizard for creating your company profile, which allows you to add a logo, locations and feed for your company blog/newsletter.

LinkedIn will pull data about your company from around the Web site to further enhance the company profile that already has been established. For example, all of the company’s job listings will show up automatically on the profile, along with links to profiles for current, former, new hires and recent promotions regarding company employees.

Inovedia Marketing provides several tips for small business owners when utilizing LinkedIn, such as:

  • Connect with customers and vendors.
  • Improve a company’s image by requesting LinkedIn recommendations from happy customers.
  • Answer LinkedIn questions to build the company’s brand and promote it within the LinkedIn community.
  • Keep track of all contacts. You never know when you’ll need them.
  • Test a company’s ideas by joining marketing groups and utilize the “Start a Discussion” feature to act as a focus group.
  • Connect with fellow small business owners and find multiple small business resources.

All of this aggregate data about the company provides potential candidates information to determine if the company is a good fit for them. If a company is concerned about the information available online, LinkedIn does allow edits to the company’s basic profile information.

According to Ostrow’s post, LinkedIn recently added a premium product, Custom Company Profiles, that allows a business owner to add more features such as videos about the company, positions, interactive polls and several customized options for recruiting. Ostrow adds: “These are worth considering for larger companies (they come at a price), but for small businesses, a basic LinkedIn company profile should be enough to add lots of efficiency to the recruiting process — both for candidates and for you.”

www.linkedin.com

Face Off: Putting a Face to Your Business through Facebook

Facebook has become the largest player on the global social networking stage. In September, the company announced it had 300 million active users.

“Based on a simple design, broad demographic appeal and a focus on connecting, Facebook has become the most popular social network measured by Nielsen Online.” — Nielsen’s 2009 Global Faces and Networked Places report

Facebook started out as a service for university students, but now one-third of its global audience is aged 35-49 years, and one-quarter is over 50. In July 2009 alone, Facebook attracted 87.7 million unique visitors in the U.S., which was 14 percent higher than the previous month, according to comScore. In absolute terms, Facebook added about 10 million new visitors in July 2009 versus roughly 1 million new visitors for Twitter.

In August 2009, Facebook purchased FriendFeed for just under $50 million, which cost one-tenth as much as Twitter would have, had Facebook gone through with its plans to purchase the site.

So how can businesses capitalize on this growing social network empire? HubSpot, an inbound marketing system specifically for the Internet, published a report called “How to Use Facebook for Business.” The report outlines the difference between Facebook Profiles and Pages — the latter being specifically for business use.

  • Facebook Pages allow a company to designate multiple administrators to help manage the account.
  • Pages are by default made public and will start ranking in Facebook and public search results, and engines such as Google.
  • Pages are split into different categories to help the company get listed in more relevant search results.

For companies worried about privacy, Facebook is flexible in letting administrators control a business’ exposure. The creation of a Page is very similar to a user profile, except that you choose a category (i.e. brand or product) and a name for your Page (usually the company’s name). Once the creator is done setting up the Page, be sure to hit “Publish” to make it public.

Ken Reaser, a partner with Spin Six, strongly warns Facebook users to keep their personal profiles separate from their company pages. “You are now becoming a participant in a community where you no longer have control — be cautious,” he says.

There are various ways to promote company Facebook Pages, such as leveraging the viral nature of Facebook via the news feed, drawing on the administrator’s personal existing network, making the Page publicly searchable, and using Facebook Ads for an extra push, according to HubSpot.

Other areas Facebook excels at include:

  • Facebook Groups: Similar to Pages, but meant to be built around a group of people rather than an individual business or a brand.
  • Applications: Developers may write software to help promote a business on Facebook.
  • Polls: Marketers can use them to get quick answers about a particular feature, or find out information and opinions from specific demographics.
  • Facebook Connect: Helps integrate a company Web site with Facebook.
  • Facebook Ads: You can choose a specific demographic target, see how many people that demographic will hit and advertise to that demographic.

This point spotlights the biggest challenge for Facebook — turning its network into a revenue-producing mechanism. In 2008, Facebook earned around $300 million in ad revenue compared to MySpace’s estimated $1 billion. MySpace has primarily become an entertainment site. In September 2009, Facebook said it achieved positive cash flow for the first time since its founding six years ago.

Still, the fact that content supplied by the social network’s members is of a highly personal nature creates a Catch-22. The personal data is potentially one of the network’s most valuable assets, yet it provides a major obstacle in generating revenue as members see highly targeted ads as an invasion of privacy.

“If Facebook were a country, it would be the 8th most-populated in the world, just ahead of Japan.”

— Mark Zuckerberg, Facebook founder, January 2009

www.facebook.com

A Birdie Told Me: Utilizing Twitter’s Real-Time Potential

The first reaction many people have to Twitter is bewilderment, which matches the reason for the name of the micro-blogging site.

“Twittering is the sound birds make when they communicate with each other — an apt description of the conversations held on Twitter,” says site co-founder Biz Stone on the Twitter 101 site. “Every day, millions of people use Twitter to create, discover and share ideas with others. Businesses can use the outlet to quickly share information with people interested in the company, gather real-time market intelligence and feedback, and build relationships with customers, partners and other people who care about the company.”

Evan Williams, Twitter’s CEO and co-founder, says that in the best cases, Twitter makes the public smarter, faster and more efficient. However, not everyone believes in the Twitter-hype.

Anthony Helmstetter, a partner at Spin Six Strategic Marketing Design, says Twitter, despite being hot right now, sees a less than 40 percent retention rate after someone has had an account for 30 days.

“What this shows is that this exuberant hype is short-lived,” Helmstetter explains. “What Twitter lacks is a ‘sticky’ component. There’s nothing to make people keep using it.”

He clarifies that Twitter is better for real-time information, but not to build legacy content. But that’s not stopping major brands across the nation from tuning into the world’s mind. Mashable’s commentator Ostrow reported in August 2009 that big brands are embracing social media, with Fortune 100 companies selecting Twitter as their choice of venue. According to recent study by the global public relations firm Burson-Marsteller:

  • Among Fortune 100 companies, 54 percent have a Twitter presence, 32 percent have a blog, and 29 percent have an active Facebook Page.
  • Of companies using only one of these tools, at least 76 percent of them choose Twitter.
  • Of the Fortune 100 companies on Twitter, 94 percent use it for news/announcements, 67 percent for customer service, and 57 percent for deals/promotions.
  • The average Fortune 100 Twitter account has 5,234 followers. The median is 674 followers.
  • Many companies are simply avoiding blogs and going directly to Twitter instead.

One of the most well-known brands on Twitter is Starbucks. According to the Twitter 101 Web site, Brad Nelson tweets on behalf of Starbucks Coffee, and says he “loves” the 140 character limits for tweets. He manages it through a third-party application called TweetDeck that allows him to group his followers and see everything at once, from DMs (direct messages) and replies to searches and trending topics.

What a company chooses to post about depends on its goals for using Twitter.

“Listen regularly for comments about your company, brand and products — and be prepared to address concerns, offer customer service and thank people for praise,” Twitter’s co-founders say. But most importantly, don’t spam people.

“There’s the idea that social media is free, but it’s not free,” Spin Six Partner Ken Reaser says.

He adds that businesses looking to go into social media, especially sites such as Twitter, need to be consulted as to why they want to get involved, what their goals and expectations are, what they want to get out of it, how much money they have budgeted for it and the cost to manage it.

www.twitter.com

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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?