Consider this:

Surviving in today’s economy is dependent upon one thing: getting paid.   Many small to mid-sized B2B companies are failing not because of a decline in sales, but because they do not have the cash-on-hand to survive if their customers fail to pay. In this economic climate, business owners have to plan for the worst in terms of their own finances, as well as take their customers’ financial situation into consideration.

It generally takes a small business 56 days to get paid by its customers. For a company selling $20,000/week, that’s eight weeks of sales outstanding, which equals $160,000 in untouchable assets. What would the difference be for a company of this size if, instead of risking that amount, it could have guaranteed access to 90% of that capital within 3-4 days rather than 7-8 weeks?

The economic crisis has affected almost every sector of the US economy but there are a few steps B2B companies can take to protect their businesses from losing money this year.  Business owners should take into consideration the credit worthiness of their customers before making sales and have a backup plan in place to prevent a loss in revenue from buyer bankruptcy. In today’s market, it’s important to understand the consequences of the business relationships keeping a company afloat and although it’s possible for companies to grow under these circumstances, having an added layer of protection certainly helps.

One increasingly popular way for SMBs to protect themselves from being subject to a customer’s failure to pay is by AR Outsourcing.   Here’s some background on how AR outsourcing works and the implications it could have on the health of a company:

 

Know Who Your Customers Are

Business that use AR outsourcing should implement an underwriting and credit verification process before verifying invoices so that businesses immediately have a transparent look into the creditworthiness of their customers. As a business owner, having this insight helps you avoid selling to someone who might not pay on time – or at all.

A business’ credit management provider should also maintain an ongoing credit monitoring system with its customers to help establish a credit policy that includes trade credit limits and payment terms. Having an understanding with customers about the extent to which you will lend helps ensure a healthy business relationship and protects against unpaid invoices.

 

Put the Burden on Someone Else

Similar to a B2C company accepting a credit card for payment, AR outstourcing puts the invoicing burden on the credit provider. By working with financial institutions, the credit management vendor borrows against your AR, takes on the debt and provides you with the capital upfront. In some instances, businesses get paid in as few as four business days, which eliminates the hassle of slow paying customers while also increasing a business’ cash-on-hand.

 

Businesses Have More “Insurance”

By outsourcing AR, businesses are often guaranteed a certain percentage of each sale, thus providing “insurance” for their invoices. In addition, in the event that a customer does go bankrupt, the business is protected and will still get paid. For certain credits, credit insurance backs each sale for up to 90-100% of the amount of the sale made.

 

By: As founder of FTRANS, John B. Hayes brings over 30 years of experience in developing technology-based companies that help businesses manage their finances.  John was also co-founder and president of the company that built Peachtree Software products, the first microcomputer accounting software.  He recently published a book entitled, “Use the Credit Crisis to Grow Your B2B Business: A Proven Strategy for Enduring Competitive Advantage and Business Growth, Especially in Times of Crisis or Recession.”

 Ftrans combines fast and affordable access to funding professional with receivables services – providing small and medium businesses the business line of credit they need to grow and take advantage of market opportunities.  Liberating you from funding challenges and receivables hassles.

I spent some time at the large payroll processor ADP.  A very successful company and a very successful public company.  They had a significant focus on ‘earnings quality.’   Wikipedia defines Earnings quality as an assessment criterion for how “repeatable, controllable and bankable”[2] a firm’s earnings are.

Since I’ve been involved in the Commercial Finance business, I think of Accounts Receivable in much the same way – how reapeatable, controllable, and bankable is your AR?  Every business owner or manager is justifyablely proud of his or her customers – they are the lifeblood of the business.  But others, with less pride of ownership, take a more jaundiced view of business practices and their impact.

I’ve quoted in other articles this combination of two Norm Brodskyism’s:  It’s only a sale if you get paid for it.  That is the essence of quality Accounts Receivable:  are you really going to get paid for the sale?

The current state of the state in best practices in Accounts Receivable says:  bill correctly and accurately, set the terms to the actual due date, then enforce it …

These practices are key to ensure 1) that credit risk is minimized, 2) that time to payment is as predicted and 3) that dilution is minimized.

AR Dilution is how much you don’t get of what you thought your sales were.  This AR dilution stuff includes short pays, discounts, returns, disputed deliveries, or damaged goods.  It doesn’t really matter who is at fault in any of this, it just matters that you have AR dilution and didn’t get as much in actual cash for the sale as you originally hoped.

Often this shortfall is based on the quality of the Receivable.

We lend on Receivables.  This requires us to develop an opinion of their quality and typically AR dilution.  So, let’s take a tour of the Account Receivables in various industries to give you an idea of what I’m talking about.

Chart describes Accounts Receivable dilution by industry

Hopefully, this view of your business will enable you to better forecast cash and ultimately better run your business.  Think about your business in terms of how you sell, contract,  and bill;  then, how you collect.  And think about this key measure:  be sure you know how much cash you really are going to get.

Dan Drechsel is CEO of Ftrans. Prior to joining Ftrans, Dan was General Manager of SAP’s Banking business in the Americas.  Dan has alos served as President of Global Energy Decisions and was President and COO of S1 Corporation (Nasdaq: SONE), a leading provider of technology solutions for financial institutions and one of the key leaders in distribution channel innovation surrounding the growth of internet banking.  Previous to that, Dan served in key executive roles with CheckFree, ADP and D&B.

Ftrans combines fast and affordable access to funding professional with receivables services – providing small and medium businesses the business line of credit they need to grow and take advantage of market opportunities.  Liberating you from funding challenges and receivables hassles.

For months we have been scratching our heads.  News story after news story would have us all believe that there is little demand for business lending.  We just had a hard time believing that was true.  Karen E. Klien’s interview with John Paglia in BusinessWeek had us nodding our heads instead.  Full article

Why Small Business Can’t Get Financing

Small companies are desperate for growth capital, but banks and investors remain cautious, says Pepperdine Private Capital Markets Project’s John Paglia.

Associate finance professor John Paglia is senior researcher for the Pepperdine Private Capital Markets Project, a twice-yearly survey of privately owned businesses and the lenders and investors who fund them. Its latest report shows that multiple efforts to shake loose capital over the past 18 months are not working, Paglia says, and Main Street continues to suffer. He spoke recently with Smart Answers columnist Karen E. Klein; edited excerpts of their conversation follow.

Excerpted…

Many bankers say they aren’t lending, at least in part, because demand for loans is down. But your survey seems to contradict that assertion.

Generally speaking, we found more demand for loans among business owners. And among the banks that responded to our survey, 72 percent indicated that the number of loan applications they received had increased during the last six months. So there’s demand for capital. Something’s not quite sitting right when we hear from the banks that there’s no demand.

What about loan approval rates?

The banks reported that they declined 72 percent of cash flow-based loans, 90 percent of real estate-based loans, and 46.7 percent of collateral-based loans. The quality of cash flow and earnings were cited as the top two reasons that loans were declined, followed by weakening industries and current debt loads.

But your survey shows that the creditworthiness of borrowers has been going up, despite the economy.

Yes. The majority—55 percent—of bankers said the credit quality of potential borrowers has increased in the past six months. That may reflect the fact that the banks are risk-averse, and companies know that they’re really ratcheting up their standards. Almost 39 percent said they had tightened up their loan agreements’ financial covenants.

What about your business?  Could you use growth capital?

Sandra Chesnutt is a Marketing Director with Ftrans.  Ftrans combines professional receivables services with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.  Liberating you from funding challenges and receivables hassles.

 

 

 

I’ve been following this week’s press on the proposed tax plans for small businesses.  Two prongs of the plan to provide $35B in tax cuts for small businesses and workers were under fire in this morning’s edition of The Wall Street Journal: 1) increasing, for 2010 and 2011, the write-off for qualifying equipment to 100%–a two-year cut, and 2) making the tax credit for business-research expenses permanent.

Today’s articles highlighted some of the issues small businesses struggle with as they contemplate how these proposed cuts could help them lower the 9.6% unemployment rate the country is facing.  Assessing the net impact of any tax cut or increase is difficult at best, and consumer and business confidence is much of what helps to boost the economy.  Knowing that you won’t have to spend additional money on taxes, or that you might even spend less, can give you the confidence to project your revenues and expenses, and thus to assess growth opportunities and the hiring of additional employees.

As far as the proposed cuts go, businesses spending less than $800K on certain equipment can already write-off up to $250K, which means many small businesses are already taking advantage of this write-off.  It appears to be a two-year tax cut targeted at a very small number of businesses: those making over $800K in either manufacturing or an industry that must constantly re-invest in new equipment. While manufacturing as a whole comprises almost 12% of employment, it represents only 5% of all establishments, most of whom are large companies. 

If this write-off is an attempt to encourage spending through the purchase of new equipment (which could have a net positive, short-term impact), what is the reality of a small business having the funds to make such a purchase?  Investing in capital equipment requires a cash investment no matter how quickly it can be written off.  Most small businesses simply don’t have access to the cash required for these purchases, and, even if they do, most are already with the qualifying $250K limit.  Is a tax credit with a two-year limit really just a quick shot of adrenaline versus a boost that will provide a long-lasting impact to the majority of small businesses, the fabric of our economy?

Making the credit for research expenses permanent is a longer-term fix, but it requires the ability to see ahead and invest in the future in a time when many small businesses are struggling to make it from one day to the next. 

What would you propose?  What tax relief would help you expand your business and help reduce the unemployment rate?

WSJ: Obama Tax Plan Holds Less for Small Business http://online.wsj.com/article/SB10001424052748704358904575478053722103156.html

Parties Spar Over Small-Business Proposal http://online.wsj.com/article/SB10001424052748703417104575473653330146646.html

Kelli Spencer is a product marketing professional.  Ftrans combines professional receivables services with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.  Liberating you from funding challenges and receivables hassles.

In the first two installments, Dave Price, of Bennett Design and Landscape, walked us through both his failure and his success securing an SBA loan.  Four months after beginning the application process for an SBA Disaster Assistance loan, his binder was five inches thick and he was weary from the effort.  As we conclude our talk, Price candidly shares the surprises he encountered and has a few suggestions for us.

So the detail required in your application was a big surprise.  Were there any other surprises?
We had a HELOC on our home and used part of the SBA loan to pay it off – that was difficult to explain to the SBA!  Roll forward a year or so later, I was holding a contract to sell my house.  Surprise, the house was part of what secured the SBA loan.  We had to go back and work with the SBA to renegotiate the loan.  I also think at first we had a false sense of security since we didn’t have to pay loan back for 30 years.  The reality is you have to pay it all plus interest, so you better be doing a good job running your business now.   By the way, the hardscape division sucked money out of the company.  Within a year we had to close that division.                                             

Did you have to sign a personal guarantee on the loan?
We did have to sign personal guarantees.  The business gets so intertwined with your personal finances.  If the business goes under, I lose everything.    But the personal guarantee was not a surprise.  We have to sign personal guarantees all the time.  Look, we have to sign personal guarantees with John Deere Nursery to get a $30,000 line of credit to buy plants for our clients.

I have to ask you, In the end, was it worth all the work?
We successfully borrowed $100,000, consolidated all our lines of credit into a 30 year fixed rate a little over 3%.  That’s better than you could get anywhere else by far.  The drought lifted just as the economy fell apart.  Thank God we got the loan.  We can budget better and we can better manage cash flow because we have just one payment and the interest rate is fixed. We were able to survive.  

Who, based on your experience, is the ideal candidate for an SBA loan?
Someone who has something in their business that is going to give them an edge with the SBA, like being a woman-owned business.  Or for example, if you wanted to start a tax preparation business that served the Hispanic community, that was the kind of thing that seemed to appeal to the SBA.   Your industry association may be able to let you know if there are special SBA loans that you can qualify for.  One thing we learned, just because you have a great new innovative business idea doesn’t mean the SBA will be interested in loaning you money.  Their job isn’t to fund innovation. 

What advice would you give someone who is considering an SBA loan?
Run! Run, run, run!  No, seriously, no doubt about it we got a good interest rate. 

Dave Price started his landscaping design and architecture firm in Atlanta with a $100 investment.  Fourteen years and several local and national awards later, Bennett Design & Landscape’s designs have been featured in Southern Living and Atlanta Homes & Lifestyles. 

Sandra Chesnutt is a Marketing Director with Ftrans.  Ftrans combines professional receivables services with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.  Liberating you from funding challenges and receivables hassles.

I catch back up with Dave Price of Bennett Design & Landscape to get even more scoop on his first-hand experience landing an SBA loan. 

That’s not the end of the story though.  You tried again!  What was happening in your business that prompted you to again seek an SBA loan? 
Georgia was in the midst of a major, four-year drought and had been declared a state of emergency.  In our business, we were laying people off; all around us, other landscape businesses were shutting their doors.  It’s hard to sell landscaping when people are not allowed to water their lawns.  But we had cash and we had the line of credit and we decided a good strategy for staying in business would be to bring our hardscape business, or stone work, in house instead of subbing it out.  We could keep the business going and we would also be able to control the quality over that part of our projects.  To get started, we knew we would need a large investment in massive trucks and saws and blade sharpeners to haul and cut stone.   Through our industry association we heard about an SBA disaster assistance loan program.  We knew of eight landscape businesses who had applied and seven had been approved.  It was worth a shot.

So this was a different type of SBA loan, an SBA Disaster Assistance loan, and you applied directly to the SBA not through a bank. 
Correct.  We were assigned two SBA staff who helped us apply, one of them took us from zero to completion of the application and the second was more of an underwriter.  Believe me, both of them were dry and serious.  Again, the questions the SBA wanted answered were very specific:  How was the loan going to change our business?  Why did we have one bad year in the middle of seven great years?  What specifically did we do to turn it around? How will not getting the loan hurt our business?  How will you maintain your business if you don’t get the loan?  All these questions had to be answered in detail.  I had to document how I was going to use every dollar.  As in, “I’m going to use $5,000 for this specific piece of equipment.” Our SBA guide suggested we include $15,000 to be maintained in a separate account to use for cash flow and I included that in my explanation of how I was going to use the money.  I had to prepare projections for the next five years, both with and without the loan.  At the end, our application binder was five inches thick.

What do you think was the true cost for this loan including hidden costs?  What did it cost you in time and money in addition to the interest you paid? 
We had to pay for a home appraisal and about $2,000 for a commercial appraisal.  The application fee was around $1,000.  The overwhelming expense was my time.  I would say I was involved for maybe an hour, maybe five hours a day, three days a week for more than four months.  I was constantly answering questions that required digging in the detail behind my P&Ls.  I had to take myself away from other duties to explain anything out of the ordinary, like why was Shop Supply Expense different this year compared to that year.  Once we started preparing the application, he would go over and over each response.  To gain approval, every response in the application had to be worded just right.

Compare that with how long it took us to get our $60,000 line of credit:  one week.

To come – Part 3: In the end, was it worth all the work?

Dave Price started his landscaping design and architecture firm in Atlanta with a $100 investment.  Fourteen years and several local and national awards later, Bennett Design & Landscape’s designs have been featured in Southern Living and Atlanta Homes & Lifestyles. 

Sandra Chesnutt is Marketing Director with Ftrans.  Ftrans helps small and medium sized businesses looking to accelerate and improve their cash flow by providing an AR line of credit combined with AR management tools for a cost effective way of liberating you from funding challenges and receivables hassles.

As part of our ongoing series on small business funding, I sat down with Dave Price, whose firm, Bennett Design and Landscape, is a nationally recognized landscape architecture firm and a fixture in the Atlanta landscape design scene.  He shared with me his personal observations and described his experience applying for an SBA loan.

Your story is a classic start-from-scratch American small business story.  Can you share a little bit about how you went from not having a business to a $5 million business with 13 employees a few years later?

My partner and I both had full time jobs.  He was a landscape architect and we thought why not make some money on the side designing and installing small landscape projects for homeowners?  We soon realized that once we earned our customer’s trust on the small jobs it quickly went to, “I need a new driveway or retaining wall.”  Within a year we thought we had enough business for one of us full time and a small office in the basement.  A year and a half later we had an office manager, and a couple of employees and we were both working in the business full time. 

Whenever owners of small or start-up businesses ask around about financing they are often advised to look into an SBA loan.  When you started thinking about getting an SBA loan, how did you research the process and how did you get started? 

Around that time we already had a $60,000 working capital line of credit and an additional $15,000 line of credit secured by our building, plus a HELOC on my home.  We knew nothing about SBA loans.  We already had depository and lending relationships with a couple of Tier 1 banks so we started there.  They explained the process to us, looked at our P&Ls and Balance Sheet and gave us packets outlining the process step-by-step.

With your existing lines of credit, you had already been through the underwriting process before. What was different about applying for an SBA loan?

The level of paperwork involved.   We learned it wasn’t just a lot of paperwork for us; it was a lot of paperwork for the bank too.  We also had a misconception.  We thought, here was the SBA with a pile of government money to help small businesses to grow the economy.  We found out that the banks are really lending their own money and the government was just acting more like the FDIC, as a back up.

The bank was much pickier than for a standard line of credit.  The SBA wanted to know specifically how you were going to use the money and how it was going to impact your business.   In the end, both banks told us this is going to be a mess.  It’s going take a lot of your time and your chances of getting approved for the loan are maybe 30%. We were bankable but weren’t nicely fitting into the criteria.  They explained that we were not a minority or female owned business.  We weren’t doing work for the government. 

To come – Part 2:  That’s not the end of the story though.  You tried again! 

This post is part of a series on funding small and medium sized businesses; first-hand accounts from people who have been through it from knocking down SBA loan hurtles, to how venture capitalists and private equity partners think, to what’s new in getting an old school line of credit. 

Dave Price started his landscaping design and architecture firm in Atlanta with a $100 investment.  Fourteen years and several local and national awards later, Bennett Design & Landscape’s designs have been featured in Southern Living and Atlanta Homes & Lifestyles. 

Sandra Chesnutt is a Marketing Senior Manager with Ftrans.  Ftrans combines outsourced accounts receivable management with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.

For businesses seeking small business loans or working capital loans, the process may seem like a Catch-22, or no-win situation.     Generally, loans are secured by collateral such as accounts receivable, inventory, real estate, and other assets.  But, according to the Wall Street Journal’s article, Collateral Damage in Lending, the collapsing value of assets such as inventory and equipment is causing a collateral gap and resulting in many businesses falling short of loan eligibility.   Thus, these small businesses must still pledge the usual collateral, but, increasingly, small business lenders are requiring cash or other highly liquid assets as secondary sources of repayment.   The Catch-22 is that often these cash requirements are equal to the loan request amount.   As a result, small business owners find themselves asking, rhetorically, “If I have the cash, why do I need the loan?”  

Accounts receivable remain one of the most important assets of a company.  They are the primary generator of cash.  Tighten and reduce your cash conversion cycle by reducing your business’s accounts receivable days outstanding to generate more cash.   To do this, consider your business’s complete revenue cycle from customer acquisition to invoicing to payment receipt.  Is your business following accounts receivable best practices?  What is the propensity to pay and credit worthiness of your customers?   How does the business handle aging receivables?  

Companies such as Ftrans offer complete accounts relievable and credit management solutions that help businesses address cash and revenue cycle concerns.   Implementing these best practices enables accounts receivable funding for your business without a Catch-22.

As reported by the Wall Street Journal, small and medium size businesses continue to have limited access to credit.   According to Federal Reserve Chairman, Ben Bernanke,

“The formation and growth of small businesses depends critically on access to credit,” Mr. Bernanke said in the text of his remarks. “Unfortunately, those businesses report that credit conditions remain very difficult.”

Absent credit availability in the form of small business lending, businesses must actively manage their cash conversion cycle, which is the time it takes to convert a business’s cash consuming activities into cash payments.   In other words, businesses must manage to a low cash conversion cycle which means having cash tied up in business operations for as few days as possible.  Clearly, a shallow credit market highlights the importance of managing to a low cash conversion cycle as this may be one of the few ways for businesses to have the liquidity necessary to fund their operations.   

How do you manage your cash conversion cycle?   Focusing on revenues and expenses is important.   However, equally important, and perhaps more complex is developing a better understanding of your business’s working capital situation.   Analyze your accounts receivable and accounts payable outstanding days, including inventory, to understand how movements in each affect your cash conversion cycle.   Good cash cycle conversion management equates to better revenue cycle management which equates to an increase in the health of a company.   For more information on cash cycle conversion, click here.   Additionally, consider solutions from companies such as Ftrans which provide full accounts receivable management solutions.

It’s not that banks don’t want to see a small business recovery.  In fact, they are indeed under political pressure to lend to SMBs and help build the recovery. 

Yet, Our research indicates that the community banks that typically serve SMBs  just aren’t structured to handle the the highly specialized risk assessments required to successfully underwrite C&I loans.  Nor are they staffed right now to properly manage the rigorous monitoring of these loans.

Dan Drechsel, Ftrans CEO, explains further. 

[youtube=http://www.youtube.com/watch?v=FKSi4vaocYg]

Next:  Banks say they aren’t lending because there is no demand.  Do you believe that?

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