factoring

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Did you ever do something that everyone else thought was crazy that turned out to be smart?  I bet when Truett Cathy began selling his chicken sandwich, they were not thinking that he was the smartest small business owner around; maybe they even thought he was a little crazy.  Strangely though, thanks to Mr. Cathy, I seem to keep eating Mor Chikin.  Speaking of crazy ideas, can you imagine telling your investors that you’re a fast food restaurant that’s not going to be open on Sundays?  They would say you were crazy.  But Truett Cathy is not crazy; he’s crazy smart.

If you’re a small to medium sized business and let your customers pay you on terms, is that crazy?  No.  Although, don’t you wish they would pay you much more quickly?  Most business owners have a list of several pressing, growth-oriented ways to deploy cash, payroll included, and need it as soon as possible.    What if you gave your customers a 2% discount to pay you in 5 days and they did it every time?  Most small businesses would be all over that.  In fact, a small business can set up an accounts receivable line of credit that allows them to get their cash in a few days for a fee.  The conventional wisdom is that financing your business by setting up a line of credit based on your receivables, or factoring, is crazy.   It’s not; it’s crazy smart.  Every time a business accepts a credit card for payment, they are getting paid faster for a fee.  Risk bucking the conventional wisdom to something cash-wise.

It’s the businesses who take a risk and do something different from their competitors that give themselves the opportunity to stand out.   Have you done something crazy that turned out to be crazy smart?

You may have seen Ftrans and one of our client’s featured in the Wall Street Journal article, “Asset-Based Lending Grows in Popularity.”   We’re happy to be associated with such success stories as Seth Chapman and Weezabi and know that many other businesses are benefiting from these types of services as the stigma of asset lending wears off (and the traditional credit markets remain dry).  Asset based lending is no longer viewed as “lending of last resort.”   As a matter of fact, it is increasingly becoming a preferred form of financing.    As indicated in the article, asset based lending (excluding mortgages) grew by 8.3% in 2008

The data supports this trend.   According to the FDIC,  traditional, commercial lending is DOWN 14% Sept. 2009 over September 2008.   Thus, we have every expectation to believe that asset lending will have grown significantly in 2009.  When it comes to providing growth and working capital to small and medium businesses, asset based lending is carrying the day.      

The moral of the story is two fold (1) Consider tapping your assets such as receivables for access to capital and (2)….. If you need a whole buch of creatively designed t-shirts, call Seth — He’ll take care of you.

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Surprise!  The Wall Street Journal says, “Big Firms Are Quick to Collect, Slow to Pay.” 

If you sell goods and/or services to large corporations, you don’t need The Wall Street Journal to state the obvious that large companies are extending the time it takes to make payments.   Many large companies are increasingly utilizing their purchasing power to force extended terms on their suppliers.   According to the Journal, companies with greater than $5B in sales pay in an average of 56 days while smaller companies pay in an average of 40 days.   Many large companies are requiring payment terms of 60 days and greater. 

Is this a new phenomenon?   No.  Historically, accounts payable have been the largest source of capital for most businesses in America.   Generally, these businesses owe their suppliers more than they owe their banks.   Furthermore, this financing is free to the business buyer.   If a business buys on 30 day terms but pays in 45 days (a 50% extension), they are generally never charged interest.   Thus, with this precedent set, it only makes sense for buyers to demand even more favorable terms—particularly if they have the purchasing power of a large buyer.   This is further exacerbated by the fact that the credit markets have tightened for large companies that formerly issued commercial paper or utilized other financing vehicles.   More than ever, they are now relying on Main Street (i.e. their small business suppliers) to finance their businesses.  

How long will this last and what should small businesses do?  Get used to it.   The credit markets, while improving, may not provide ease of access to credit as in the past.   Additionally, large companies are likely to continue to leverage their newly “rediscovered” purchasing power.   As a result, small businesses should embrace professional credit management and accounts receivable management.   Firms such as FTRANS provide these services at scale economies giving small companies the ability to manage their credit and collections processes as professionally as large companies.   Additionally, when properly managed, receivables can be effectively used as collateral for payment advances which diminishes the burden of providing increased payment terms.

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The most common question we get at FTRANS is:  how is your solution different from factoring?  Before we get into that, let’s recap what types of factoring are out there: 

  1.  True factoring is the purchase of accounts by a third party and a transfer of risk from the SMB to the factor.  Not only is it very expensive, but it also puts your reputation at risk, as factoring invoices is done on a one-off basis and there is no incentive for a factor to maintain your solid client relationship.
  2. ‘Receivables Discounting,’ an alternative kind of factoring, that you are liable for and is now more common than True Factoring.  It’s expensive as well, and again, there is no incentive for a receivables discounter to carefully manager the relationship with your buyer. 

Now that doesn’t sound like the best way to run a business.  Let’s break it down more and look at the 5 key ways FTRANS is different from factoring: 

  1. FTRANS is significantly less expensive than factoring and accounts receivable discounting.  Traditional factoring costs as much as 20 % – 30% of an invoice.  FTRANS costs significantly less than that.
  2. FTRANS is a customer-friendly alternative to factoring.  With FTRANS, you have the discretion to maintain your customer relationships.  You still send the invoices, and your buyer sends payment to a lockbox, addressed to you.
  3.  Unlike factoring, where the SMB makes discrete decisions on factoring each invoice, our system facilitates the capture of 100% of your A/R.  You see a continuous view of your cash availability position with the bank, and you can drill down into the detail of your credit administration.
  4. Due to the credit background investigation completed by FTRANS, you have ongoing significantly enhanced insight into the credit quality of your buyers.
  5. Any disputes you face as a borrower, you now have the assistance of FTRANS as a professional third party.

On the other hand, FTRANS preserves a key advantage of factoring – its operational simplicity.  We provide you with virtually the same ease-of-use as accepting a credit card for payment.  FTRANS designed this new approach in B2B trade credit to be simple, safe, and based on familiar business processes.

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