As we come out of this recession, where are small businesses turning for financing.  I’d like to give you a couple of stories about recent transactions at The Interface Financial Group (IFG). 

The Interface Financial Group is one of the few factoring firms that will finance sub-contractors in the construction industry.  Until the recent economic turmoil, IFG targeted companies with $250,000 to $5,000,000 in sales.  In December 2008 IFG financed a window distributor and installer who had done about $6 million in sales for the first half of 2008.  Then, the contracts that he had on his books for the second half of the year didn’t mobilize.  Sound familiar?  His competitors went out of business. 

IFG Knows Construction!

A general contractor on a mixed-use commercial/residential project approached him to supply and install the windows.  He took on the business, who wouldn’t?  He ordered the windows from his usual supplier.  But when the time came to take delivery of the windows and install them, his supplier refused to ship the windows because the supplier was owed money on previous orders that had not been paid.  IFG was able to structure a transaction, including subordination from two banks, where IFG advanced money so that the window supplier was paid.  He shipped the windows, and our client installed them.  The client completed the progress billing to his general contractor, and IFG was paid about 53 days later.  Usually, IFG is able to complete a transaction in 48 hours; because of the bank subordinations, this transaction took longer – 8 business days. 

Our usual transaction size is $25,000 to $50,000.  The transaction just described was for a total of about $500,000.  The next transaction is on the other end of the spectrum.  In March I talked to a staffing company in the construction industry that had done about $8 million in revenue for 2008.  But, as we all know, business died in the latter part of 2008 and early 2009.  He was having trouble making payroll.  Sound familiar?  He liked the concept of our “use it as you need it” service, but he didn’t want to have his customers notified that he had sold the invoice to IFG.  On a Wednesday afternoon he changed his mind and called me.  I visited his office on Thursday morning and funded him by the 1 p.m. wire deadline on Friday for a total of about $16,000.  IFG was paid about 45 days later.

The survivors will need financing as we come out of this recession.  The Interface Financial Group is fast, flexible,  and cost-effective.

The program was attended by about 40 people, including bankers, CPA’s, business owners, and finance professionals.  The first part of the program was “Taking Your Financial Pulse.”  The take away from this section, is that, as a business owner, you need to know your company’s numbers.  Even if it is not your strongest suit, lenders will want you, as the owner, to present your company.  Are you monitoring you “days outstanding sales?”  When is the last time you looked at “sales per full-time equivalent employee?”  Have you been monitoring your margins, your receivables?  Have you been communicating with your suppliers?  with your banker?  Have you been doing your collections?  Your banker wants to see that you are on top of your business and that you are adjusting to the current climate.

The second section focused on “Are you prepared to go looking (for financing)?”   Have you updated your sales forecast?  Can you show where the increase is going to come from?  Is it new customers?  Is it deeper penetration into your current customer base?  What is your cash cycle?  There’s an old saying “Cash is King.”  It is always true, but it is even more true today.  Those that have watched their leverage, managed their business carefully, will be able to take advantage of opportunities that will arise.  You need to know how much cash you will need;  the rule of thumb is to ask for 18 months of cash needs — one year of cash plus an additional 6 months to line up the next financing source.

The third section focused on “Sources of Financing.”  Even though we all read the paper and watch TV as the politicians harangue the bank presidents about lending, there is money being lent.  You have to work harder to find it and you have to be prepared to show that you are credit-worthy and know how to the money that might be availabe.  Some banks are lending;  you will have to go to more than one bank.  I suggest that you go to the ones that have not been in the news;  they are the ones that have to cut their lines of credit in order to support commitments they have already made.  Try privately held banks, new banks; these banks are less likely to have as many bad loans that they are working out of.

Other types of financing — asset based lenders, factors, invoice discounters.  If you own equipment, see if you can sell it and lease it back.  SBIC’s are Small Business Investment Companies; they finance small companies with loans and equity.  If you are large enough to have $1 million in EBITDA, there is private equity capital available.

Here’s a story of a small business that needed funding.  They make sport bags.  They manufacture here in the western U.S.  They have created a niche, not by being the cheapest, but by being creative, by being able to do small runs, and by have very short delivery times.  They just got a big order from one of the national sports leagues.  But they don’t have the money to purchase the raw materials to manufacture the bags.  They have been in business for many years, but they don’t qualify for bank financing because their earnings history is uneven.   But they do have receivables from other credit worthy customers, like major sports equipment manufacturers.  They can’t wait to be paid on the outstanding invoices before they need to purchase material to fill the new order.  This is a perfect case for invoice discounting/spot factoring.  They can sell the invoices that they are waiting to be paid on and use that money to start filling the new order.  The set up takes about 48 hours; they don’t have a commitment to sell any more invoices unless they want to. 

In tough times, my mother-in-law used to say “This, too, shall pass.” I’m not sure that it ever made me feel better at the time, but it certainly is a true saying. Here are some excerpts from today’s editorial in Investor’s Business Daily: “This Too Shall Pass.”

Wall Street: Old timers will recall F.I. DuPont or Goodbody & Co. Not-so-old timers remember E.F. Hutton and Kidder Peabody. Now we can add Bear Stearns and Lehman Bros. to the storied names that have fallen.

We drop these names (and we could have mentioned a hundred more) for two reasons: (1) to remind readers that this isn’t the first time an investment bank or brokerage has gone under, and (2) to point out that the country has always survived and grown.

In fact, what’s happening now is quite normal in a financial system characterized by booms that lead to excesses that then require financial corrections before any renewal takes place. We’d be hard-pressed to remember a bear market when one or more financial firms didn’t go out of business.

In the oil crisis of the 1970s, for example, major financial companies such as Penn Central and Franklin National went bust. The booming ’80s saw hundreds of banks go belly up due to bad loans made to the farm sector and the Third World, and, later, S&L loans to U.S. homeowners.

The ’90s? Remember the Long-Term Capital Management debacle in ‘98, following the Asia Crisis in ‘95, and coinciding with Russia’s ruble meltdown? Then, too, we heard predictions that the world as we knew it was ending. It wasn’t.

Yes, the problems to be worked out this time seem scarier than most. And watching institutions like Bear and Lehman fail, and Merrill Lynch taken over just like that, doesn’t inspire , .

But they’re no different from other investment firms of the past that have paid the price for making too many bad decisions or taking too many risks in what is already a high-risk business.

How long all this will last is anyone’s guess. But this a big country, with a highly liquid market and a still-strong economy. We’ll get through it.

For financing small business, follow this link.

To quote their website,7(a) loans are the most basic and most used type loan of SBA’s business loan programs.  All 7(a) loans are provided by lenders who are called participants because they participate with SBA in the 7(a) program. 7(a) loans are only available on a guaranty basis. This means they are provided by lenders who choose to structure their own loans by SBA’s requirements and who apply and receive a guaranty from SBA on a portion of this loan. The SBA does not fully guaranty 7(a) loans. 

Actually the SBA does not fully guaranty any loans; the maximum is 90% in certain programs.

A key concept of the 7(a) guaranty loan program is that the loan actually comes from a commercial lender, not the Government. If the lender is not willing to provide the loan, even if they may be able to get an SBA guaranty, the Agency cannot force the lender to change their mind. Neither can SBA make the loan by itself because the Agency does not have any money to lend. Therefore it is paramount that all applicants positively approach the lender for a loan, and that they know the lenders criteria and requirements as well as those of the SBA.   In order to obtain positive consideration for an SBA supported loan, the applicant must be both eligible and creditworthy.

And to repeat, this is a key concept.  Small businesses would like the SBA to be able to provide more money when banks are not able to provide credit, as in the current environment.  But the SBA does not actually have any money to lend.  And even though they provide a guaranty for half or most of the loan, depending on the program, they can’t force the bank to loan any money.  The SBA will guaranty the loan that the commercial bank makes, assuming that it is meeting the criteria.  But now the banks’ lending criteria are more strict than what the SBA requires.  So the SBA has been guaranteeing fewer loans.

I asked Jim Pipper, Marketing & Outreach Specialist here in the Phoenix office of the SBA, to comment on the information in the press about the SBA’s lower loan volume in 2007.  He confirmed that lenders are not willing to take on as much small business lending as the SBA is willing to guaranty.  In fact the SBA is projecting lower loan guaranty volume for their next year as well.

If you are looking for an SBA lender, going to your bank is probably the first step.  But this link will take you to the Arizona SBA’s list of banks that are currently doing SBA loans.  

Please read the caveats at the top.  Some of those banks in the yellow/beige group may be new lenders, or just haven’t replied to the survey.  So they might be worth a call.

Next post, I’ll share with you some of the other services that the SBA provides.  The SBA is not just about money.

Not keeping a close eye on cash flow can cause ripple effects that could lead to business failure.  Very real problems can arise when cash going out overwhelms cash that is coming in (you may have presented invoices to your customers, but that doesn’t pay the bills).  

Here are some of the things that can happen:

Your expenses go up when you can’t pay bills on time, because you are assessed late fees.

Planning is hindered — Plans you may have for a product launch, the addition of business equipment, advertising and promotion or for anything else that may promote growth can be derailed.

Problems in your workforce — Cash flow issues can cause panic among employees. You don’t want them to worry about getting paid.

Customer turnover — What if you have trouble paying suppliers and they begin to slow the pace of delivery of goods and services to you, which, in turn, causes difficulty in getting goods and services to customers? If lead times on product delivery get longer on a sustained basis, loyal customers won’t stay loyal that long.

So what can you do to streamline cash flow, both before problems occur and once they do? There are a number of tactics you can use.

• Track your cash flow — This is the first and foremost step to take. When you make a sale, if it is to a business customer, you may not receive cash for 30 days or more. Most businesses track booking and revenue, but you really should be tracking the cash. Invoice your customer as soon as the goods or services are delivered. Find out the answers to questions like these:  What triggers customer payments? What are the processing times for credit cards, debit cards, checks, etc? Work with your banker to get answers to these questions. He may have suggestions to speed up the processing. If you work with a bookkeeper or bookkeeping service, an accountant, or a software package, be sure you are tracking when receivables are paid and turned into cash.

• Offer good terms, get good terms — If you offer a small percentage discount or payment within 30 days, you’ll find that you’ll likely have cash in hand more quickly. However, be aware that you have essentially repriced your product into two components: actual product price and financing price. On the other hand, if you need to stretch payments, ask your suppliers for their absolute best terms– you may be surprised at the flexibility available to you. If you suppliers offer you discounts for paying within 10 days, be sure to compute the cost of not taking the discount.

• Offer customers multiple ways to make payments — Accepting more than just cash and checks — credit cards, debit cards, PayPalor services available through QuickBooks, for example, makes you more attractive to customers. Depending on the type of business, consider setting up your customer accounts so that they can access them on line and allow them to pay using a credit card or PayPal. These other forms of payment may speed up cash flow and they provide records that can aid bookkeeping.

• Make customer terms crystal clear — For customers that don’t pay at point of sale, invoice quickly and follow up. Putting a specific due date, such as July 25, rather than “30 days net” is the single thing that prompts people to pay. Prominently display your terms and conditions on all invoices.

If you do run into cash flow problems, the one thing you must do is communicate. Talk with your suppliers. Don’t avoid them.

Most important, knowledge is power. Work with your bookkeeper or accountant to develop a cash flow forcast if you don’t have one. If you are a rapidly growing business, you will have a cash shortfall. If you have predicted a cash shortfall, you can make funding arrangements. Line up funding before it becomes a crisis so that you will be able to take advantage of the business opportunity. If your bank cannot fund you, be aware that there are alternate business funding sources.

Yes factoring is not a new concept but it is arguably the fastest way to get working capital for your business, sometimes as quickly as 5 days. Yes there are some requirements to is but is is quite simple because it is based on your invoice receivables. If you have contracts to back up the outstanding invoices, you can get cash for your business.

If you are looking for a small business loan based on sound business principles, the bank has turned you down and you need the money fast, get in touch with the business funding expert.

But now is not normal.  Tightened lending standards are making it harder for small businesses to borrow money. So more are turning to plastic to make ends meet.
A recent survey by the National Small Business Association in Washington, D.C., finds that 44% of small businesses used a credit card to finance capital needs over the past 12 months and 55% had trouble securing credit. Credit cards were the only source of small-business financing that didn’t decrease between 2007 and 2008. And more than half the respondents say their credit-card terms have worsened in the past year.

 
Unsurprisingly, some credit-card issuers are positioning their cards as a way cash-strapped small businesses can get some relief.

 
American Express’s new Plum card, for instance, lets businesses wait two months to pay off their full balance without incurring interest and finance charges, as long as they pay 10% of the bill by the due date. Amex’s SimplyCash card doles out 1% to 5% cash back each month on purchases.

 
Discover Card and Capital One also offer cash-back rewards cards for businesses.

 
One of the hazards, however, is if they carry a balance they can be at the mercy of the bank.  An annual percentage rate can be raised or a credit limit chopped at a moment’s notice.

Some small business owners are taking advantage of some other newer, alternative funding sources.  Peer-to-peer lending sites are an outgrowth of the micro loans industry started for poor borrowers in developing countries.  Business owners with good credit can find money on these sites:  prosper.com and myrichuncle.com.

These are two new sources of alternative financing for small business.  Other kinds of financing include factoring (using your accounts receivable to finance your cash flow), equipment leasing (for both new and used equipment), and purchase order financing.  What kind of financing are you using to get through the credit crunch?

When Jeff Walsh wanted to refinance the small-business loan on his coin laundry, he didn’t want to take a chance that his bank would reject his application. “I just bought a house in 2007 and was a little nervous about what the bank would say about my debt-to-income ratio.”

Instead, the 31-year-old from Schaumburg, Ill., recently borrowed $22,500 on Prosper.com, an online lending network that matches individual borrowers and lenders. The interest rate on Mr. Walsh’s loan: 10.25% — several percentage points below what he says he would have had to pay at a bank.

As the credit crisis spurs traditional lenders to tighten credit standards and raise fees, more small-business owners and entrepreneurs are turning to so-called person-to-person lending networks — with names like Prosper, LendingClub.com and Zopa.com — to help keep their businesses going. The unsecured loans are tiny, usually no more than $25,000. But borrowers say they are able to get loans more quickly and with less paperwork than at a bank. And people with good credit are able to lock in lower rates — often 8% to 12% — than they would otherwise have to pay on credit cards or unsecured bank loans.

Person-to-person lending is a small but fast-growing corner of the Web economy. New sites are jumping in, including Virgin Money USA, majority-owned by Sir Richard Branson’s Virgin Group PLC. Roughly $100 million in new P-to-P loans was issued in the U.S. last year, a number that is expected to jump tenfold by 2010, according to Online Banking Report. Recently, some larger financial institutions have begun to take notice of P-to-P lending, saying that offering loans through the sites is a way to bring in more deposits and reach more consumers.

And, I would be remiss if I didn’t remind you that Arizona Business Funding is an alternative source of funds, if your bank can’t make the loan.

Here’s how it works:

• Client talks to IFG
• Completes paperwork
• Client notifies his customer to pay IFG
• IFG purchases invoice
• 4-5 days to fund first invoice
• 24 hours to fund second invoice
• Cost depends on time invoice is outstanding

Customer comes back to your bank for traditional lending when he has “outgrown” IFG because he has never left your bank.