However this good news does not paint a complete picture. The successful stimulus package expired in May with $1.9 billion loaned that month. As a result of its expiration June saw a steep drop-off; a two-thirds decline in dollars loaned, to just $647 million. Theses levels of lending are the lowest in years; even lower than in fall 2008, the beginning of the financial meltdown.[statistics from NY times] There is already data suggesting that July will provide similar results.

The reason for the dramatic drop in money lent through the SBA program is that the guarantee has dropped from 90 percent to 75 percent of the value of the loan. This drop in guarantee not only makes the loans more risky for the bank but it requires 250% more capital to make the same loan.

“If I make a $1 million loan with a 75 percent guarantee, I need 10 percent of the $250,000 that is not guaranteed, or $25,000, as a capital requirement. If the loan is guaranteed at 90 percent, then I only need $10,000 in capital allocated toward that loan.” – NY times

This means that a new bill that sets the guarantee back to 90 percent should improve the current situation dramatically. Luckily, there is a new stimulus bill that would accomplish this, however it is currently stalled in congress, and there is no telling when or if it will pass.

While the bank lending is subject huge shifts in availability based on the action or inaction of congress, alternative forms of financing provide a stable and reliable source of funding. These loans are not provided on the basis of government backing and thus availability is dependent on market factors. As well, these businesses are less regulated than the big banks, which allows them to be more flexible and accommodating to their clients.

Factoring: Reliable Financing is a post from: Factor Direct Capital

Here are a few examples of businesses that would likely be turned down by a bank but would be a great candidate for factoring:

- A highly leveraged importer that sells to large retailers.

- A start-up Recovery agent that does jobs for large auto-finance companies.

- A small landscape company that won a contract to maintain a large commercial property.

In the current lending environment, these businesses would be hard pressed to receive a bank loan. However these businesses would be able to get the working capital they need to continue or expand operations through factoring. So, how come the banks won’t deal with a company but factors will?

To answer this question we must look at the difference between the two types of lenders. Banks provide funding by issuing debt that is to be paid by their client. Factors provide cash through the sale of an asset; they buy existing debt from their client that is to be paid by their client’s customer. All finance companies are primarily concerned with the credit of the parties that are obligated to pay them. This means that banks are going to look at your business’s credit, and factors are going to primarily focus on the credit of your customers. This allows the businesses listed above to receive funding based on companies that are far more credit worthy than themselves.

Another key benefit of Factoring is highlighted by the example of the highly leveraged importer. Banks are likely to turn down a loan application from a business that is highly leveraged, regardless of that business’s credit, because they already have a great deal of debt on their books and are thus viewed as risky. Factoring is an “off the balance-sheet” transaction, as it creates no new debt. This is good for companies that are looking to get a bank loan and want to clean up their financials but still need working capital. It’s also good for businesses that are already highly leveraged and just need that last extra bit of financing to get them to the next level.

Leverage your customer’s credit is a post from: Factor Direct Capital

With the S.B.A. taking a big hit, business’s have increasingly turned to asset based lending as it is usually the only option left open to them. Asset based lenders will lend when banks wont for two main reasons. First, the amount of funding is determined and secured by the value of an asset. The second reason is that asset based lenders are forced to take a more hands-on approach by monitoring transactions rather than simply collecting periodic payments. These extra steps to manage risk enable asset based lenders to make loans where banks will not, but it also leads more expensive funding.

Despite the high cost, the demand for financing is high and asset based lending provides much needed supply. However the venture into asset based lending might require a bit of homework for the business owner as there are many forms to choose from.  Purchase order financiers, inventory lenders, accounts receivable factors, equipment financing companies, real estate lenders, etc. are all asset based lenders and each unique type of financing has a different set of benefits, draw-backs and affects on the bottom-line.

However, it appears that asset based lending will continue to increase it’s role in the lending environment. The new initiative that would make S.B.A. loans more appealing to bankers is in the early stages of working its way through the Senate and House. Even if it passes, it might take a considerable amount of time before it is enacted into law. This means that S.B.A. lending levels are likely to stay historically low and business owners will have little other choice but to turn to asset based lenders to get access to the capital their businesses need.

Asset Based Lending is a post from: Factor Direct Capital

Direct lender

First and foremost, make sure you are working with a direct lender. There are many websites that appear to be legitimate factoring companies but they are actually just brokers that will pass off your information for a commission. This is not the worst thing that could happen, but dealing directly with a lender ensures that you can decide what company is the best fit for you. (rather than which company will give the broker a larger commission)

Familiarity with your industry

Some factors specialize in one industry, whereas others deal with all types of businesses. Going with an industry specific factor will ensure that they are knowledgeable in your field. Even if a factor does not specialize, ask if they have worked with businesses like yours in the past. This will ensure that the factor is a good fit for your business and vice versa.

Account management

It is best to have a dedicated account manager. This will make dealings less confusing and more personal as there will be only one person to contact for all of your factoring questions, needs, concerns or issues. As well, you will build a relationship with that person, which means they will be more likely to cater to your needs and will work harder to keep you happy with their service.

Time it takes to disburse the funds

Considering how fast they can respond to requests for funds is important because factoring is about timely cash. If a factoring company cannot get you funds on the same day or within 24 hours, it should not be hard to find one that does. A 2-3 day wait time could be the difference between making payroll on time or not.

Customer relationship management

You have worked hard to build relationships with your customers; you do not want a factor to disrupt this. Ask the factor about their collections policies and how aggressive they are with collections. Some factors will allow their client to handle collections or offer non-notification factoring if this is a concern.

Fees

Every factoring arrangement has factoring fees; they are calculated as percentage of the face value of an invoice. However some factoring companies will charge other ‘setup fees’ or ‘service charges.’ It is probably in your best interest to avoid these factors, or at least to fully understand their fee structure before you commit to them.

Volume requirements

Virtually all factors have a certain monthly volume range that tends to be a guideline for clients they will work with. Some factors will deal with clients that have receivables volumes of $100,000-10 million monthly, and other factors might deal in the $5,000- 100,000 range. Point being it is important to know which factor is suited for your business volume.

In addition, some factors will require their clients to factor a monthly minimum amount of receivables whereas some have no monthly minimums. Choosing a factor with no monthly minimums is the most flexible arrangement as you are not obligated to factor in the event it is not needed.

Contract length

Lastly, some factors require that you have at least a year contract with them. Others offer month-to-month contracts. You should consider how long factoring will be needed for business operations before you commit to contract. If you will need it for well over a year then this should not be an issue, but it is smart to not over commit. Contracts can always be extended, but getting stuck factoring when it is not longer advantageous should be avoided.

What to look for in a factor? is a post from: Factor Direct Capital

This could potentially be troublesome for the finances of your business. You have to cover the costs while completing the deal then 30 days after its finished. This has not been a problem in the past, but you’ve also never had such big deals in the past. A deal this big could cause a huge cash flow problem for your business. Also, you have never dealt with them before, what if they are not prompt on payment? You could miss payroll or be late paying your suppliers. But you don’t want to lose this deal. What do you do?

Well a great place to turn in this situation is to an accounts receivables factor. They can approve an applicant for funding in as short as 48 hours, and disburse funds upon invoicing. This means you can make the deal and not fret about the cash flow position the 30 days terms might put your business in.

Factoring is also a good tool to use when you are competing for a customer; offering flexible payment terms is a way to differentiate your offering and win more business. Factoring can enable your business to extend payment terms without creating a cash flow crunch.

Factoring also helps when taking on a new customer in that, factors will do a credit check on all of your debtors. This provides valuable information on your customer’s ability to pay for the orders they make. There is nothing worse then not getting paid for your sales; factoring can help prevent this situation from happening, allowing you to focus on your credit worthy customers.

Don’t Stress 30 day Terms is a post from: Factor Direct Capital

Purchase order financing is a very good way for a business to get started with limited capital. Purchase Order financing, or “PO financing” occurs when a company agrees to make a purchase from a business that does not currently have the resources with which to fulfill that order. A financial institution that does “PO financing” will then provide you with the funding necessary to fulfill that order in exchange for a small piece of the action. If your business is right for purchase order financing, your first client could be your ticket to funding.

Another tool that can be incorporated into their beginning stage financing strategy is account receivables financing. This financial tool sometimes referred to as “Factoring” will help you maximize limited initial capital. It does this by providing access to the money that would otherwise not be available until your customers account becomes current. This keeps crucial capital invested in your upstart and may reduce the capital requirements necessary to make the upstart financially feasible. This form of financing is also good for growing companies, inventory based companies and companies that have seasonal slow periods.

As mentioned above, purchase order and accounts receivable financing are financing options that are particular to a specific business model, which is businesses serving other businesses. Therefore if the upstart’s customers are strictly personal consumers then these options are not available. There is merchant cash advance financing that leverages the future sales of personal customers much like accounts receivable financing leverages the B-2-B sales. However this option is less ideal for upstarts as merchant account financing will give funds based on the companies sales history.

There are other financial tools for even more specific businesses models. There is freight bill financing for trucking companies, letters of credit financing for international shipping and importing, and various forms of financing to secure equipment for use in a business. Point being that there are many different financing options that are tailored to the needs of specific types of businesses and researching the lesser known avenues of receiving funding in a specific industry is worth while. This will allow you to better understand how much initial money you need to produce by giving you a better picture of what stage in the game you can start receiving funding from financial institutions.

Angel investors are often ideal, but be sure that you are not seeking out an angel just because you are not familiar with the other avenues of funding available to you.

More ideas for start up financing is a post from: Factor Direct Capital

To increase small businesses access to loans a $30 billion “Small Business Lending Fund” (SBLF) will be created. Access to this fund will be limited to banks with less then $1 billion in assets as to target smaller community banks that are a staple of small businesses lending. The funds will given to banks with a sliding scale interest rate that gets lower as small business lending is increased compared to previous years. For example, if a bank were to increase their small business lending 10% or more compared to 2009 numbers, the rate they would pay for the SBLF funds would be 1%; if small business lending stayed the level the rate would be 9%.

The initiative also provides incentive for states to continue and build upon their successful and innovative small business programs. It would allow states to use federal funds for these programs that might otherwise be on the copping block because of states budgets.

This initiative also has a few tax incentives that may help keep some businesses afloat as well as spur investment in small business. The first of which is eliminating capital gains taxes on small business investments. As well changes to the tax code that allow small businesses to immediately write off qualified capital investments. Further a provision will accelerate the rate at which depreciation on plants and equipment can be deducted.

The last provision in the initiative is the enhancement of SBA programs which should provide increased access to capital. To accomplish this, the maximum size of various types of SBA loans will be increased; more than doubled for most types of loans. This applies specifically to the 7(a), 504, and SBA express loans. Within this provision there is a section addressing the need to assist in the refinancing of commercial real estate that might otherwise be in danger of foreclosure or liquidation. This is available only to “owner occupied commercial real estate,” in other words, small businesses owner that own the space they run their business out in.

Keep an eye out to see if this initiative gets passed. It has the potential to provide much needed help for small businesses. We will keep you updated.

Obama’s Small Business Lending Initiative is a post from: Factor Direct Capital