This is an interesting take on what it means to be a direct lender. To summarize, almost all financial institutions lend money that is not ‘their money,’ it is their customer’s deposits. This is why they are able to offer such attractive terms; they pay .005% APR on deposits and loan it at 5% or higher depending on the applicants credit.

It would look much different the bank’s loans were coming out of equity. It is said best in the above article: “If you look at your own expected return on capital for the money you hold, are you prepared to give it to someone else for a three or four percent return that may be secured, but hardly guaranteed? The answer in most cases is absolutely not.”

This is unique way to explain what business owners already know; Equity is not cheap. So in an effort to keep capital cheap banks use other people’s money. The author of the above article argues that this makes banks an intermediary of the real source of capital and therefore not a direct lender.

This is an interesting take. Traditionally, entities are not a “direct lender” if they are simply brokers which package deals to be sent to the actual source of capital (in return for a commission). That source of capital is a bank, which is distinguished from a broker because they hold funds intended for lending.

Regardless of what degree an organization is an intermediary of capital, the only entities that can be considered true direct lenders are private mortgage lenders or other asset based lenders. This is why their cost of borrowing is much higher than that of banks; they are lending either entirely or predominately out of equity.

This fits into a point made in another post by the same author, where he stated asset based lending is essentially renting equity. This is most accurate in regards to a factoring and PO financing. Companies that offer these financial tools make money through fees that come directly out of earned profits. [This is in contrast to traditional loans that add to overhead.] This means that the financer essentially has an equity position on the deals they finance.

This is a solid solution for more short or mid term financing situations when cheaper, bank financing is not available. “Renting” equity is much less expensive long term than giving up a piece of the action forever.

It is often said that factoring is an “off the balance sheet” form of financing, but what does that mean?

The term has relevance when compared to other forms of financing. More traditional financial tools issue debt in return for financing thus adding debt to the ‘liabilities’ section of the balance sheet. This affects the company’s debt to equity ratio, a key measurement of business risk, and can affect their ability to take on other forms of financing or even jeopardize their standing with current financiers.

This video offers an honest explanation about factoring, how it works, and its associated benefits and drawbacks.

Sign fabrication and installation companies get can get a wide range of project sizes. An associate I recently spoke with handles orders from $1000 to $60,000. A common problem for this gentleman’s business is when the projects on the higher end of that range are significantly past due. This puts stress on his business’s cash flows and can hinder his ability to take on new business or even threaten his ability to make payroll.

In this specific case, the big projects took precedent over the smaller projects. This sometimes lead to a situation where 70 percent of the money outstanding on his aging report was from one large deal, therefore he wasn’t seeing or expecting much money to come in from other sources. Although the money was no longer coming in, his suppliers, employees and expenses still needed to be paid. The longer that invoice remained outstanding, the more he depleted his cash reserves and the more stressful his situation became.

This is why he decided to speak with us. We can provide a simple solution to this common cash flow problem with our factoring services. Factoring is essentially the sale of an invoice at a discount. In return for this discount the business receives immediate funding. This means that the large receivable is no longer sitting idle on his books; it is in his bank account ready to be reinvested into his business.

This gives companies the ability to book new business with confidence, knowing that a slow payment won’t lead to a cash shortage and all the accompanied stress that situation brings.

Whether it is one big project, or a quick spike in demand, factoring can prevent having to turn down new business due to cash flow issues. This keeps operations humming along and most importantly, profits coming in.

Generally speaking a business owner can only control when they make payments IE their cash out-flows. To some degree they are at the mercy of their debtors for their cash inflow. However there is a way to gain control of both your cash in and out-flows: factoring.

Factoring gives the business owners full control of their cash flows through the sale of accounts receivables. By selling receivables to a factor, the business receives an immediate cash advance. This is essentially controlling when a customer sends payment. However if cash flow control is what you are seeking it is important to pick a factor that offers the right terms.

Some factors require year long contracts with monthly minimum factoring volumes. This can work well in some situations but to be fully flexible the key is partnering with a factor that allows the business to pick and choose which invoices to sell and when to sell them. This gives businesses the ability to utilize the financing when it is needed but save on the factoring fees when it is not a vital. As well it provides the perfect amount of funding at any given time.

Recent data shows that SBA lending in Southern California is up about 50% over the same period last year and dollar volume of these loans has nearly doubled. This appears to be good news for small business and supports the notion that the economic stimulus enacted in 2009 reached the right hands.

However this good news does not paint a complete picture.

The oil spill in the Gulf of Mexico has created huge demand for a wide array of resources needed to help in the cleanup process. There is probably no better example than MOP Environmental solutions Inc. They have a patented material used to clean up oil spills. Obviously MOP was going to see a large increase in demand for their product. However huge spikes in demand can create cash flow issues, especially when offering 30 day payment terms.

This is where Bibby Financial Services enters. They provided a $750,000 factoring faculty so that MOP would have the financial capability to complete orders and keep the clean up efforts going at full pace.

This is a prime example of how factoring can help a business’s cash flows.

In an overly simplistic model, janitorial companies really only need two things; supplies and employees. Most of these supplies are durable goods and represent more of an upfront cost. The cost of labor is periodic and represents a large portion of the total cost of operations.

This is an important as it relates to cash flows of janitorial companies. As we all know, payroll is not an expense that can be delayed a few days or weeks; it must be paid on the day it is due. This is by no means a ground breaking insight, but it is key to janitorial companies, particularly those that service businesses.

Businesses will often demand 30 day terms on janitorial services. With 30 day terms there is always the possibility that payment will come late. Usually this is not a huge problem but if cash reserves get tight, and payday is on the horizon, delayed payments could create stressful times for the owner of the janitorial company.

However there is a solution available to janitorial companies; that solution is invoice factoring. Factoring has a whole list of benefits, but the key advantage for janitorial companies is it offers dependable money. Factors are in the business of buying invoices from their clients. What this does is grant access to the capital that would otherwise be locked up in the form of a receivable. Most factors can disburse funds within 24 hours of their client’s request, which gives business owners tight control over their cash in-flows.

This gives the business owner the luxury not having to depend on a payment coming in to make payroll. If funds are needed a factor can provide them quickly and dependably. This is why factoring can provide business owners with piece of mind.

Most Repossessors have the same problem; slow payment. The finance companies that employ recovery agents know better than anyone what delaying payment does to their finances. However, their cash flows are improved at the recovery agent’s expense. In response to this situation, recovery agents have employed a few different strategies.

First, and most obvious, is to sit on a solid cash reserve. This ensures that there are no cash flow deficiencies, and provides the ability to wait for payment. Sounds simple enough but in reality this is a luxurious position to be in. Not all businesses can build up that cash cushion and even the ones that can have to work hard to maintain it.

Another common strategy

I read a financing expert’s Blog post about his experience helping a client get funding. It provided a much needed reality check as to how financing availability is not static; rather it’s constantly changing and even financially strong, profitable businesses may find that funds are not as easy to get as they once were.

“I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.

So why were they looking for financing?

Their primary and only institutional lender could no longer underwrite the type of business they were in.