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.

Direct lender: Equity VS Debt is a post from: Factor Direct Capital

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.

In contrast, factoring does not create any new liabilities. The only part of the balance sheet that is affected by factoring is assets; factoring converts one asset, accounts receivables, in to another asset, cash. This provides liquidity particularly for businesses that have a large base of receivables.

Factoring is a form of finance that focuses on cash flows and receivables. However there are other items that can have a dramatic effect on a business’s cash position besides accounts receivables, such as inventory, accounts payable, capital expenditures, and debt service. The liquidity gained through factoring can be used to off-set hardships in the other areas. For example, a growing business will usually require increased investment in inventory and eventually capital expenditures. This means that cash will flow out of the reserves and into theses accounts increasing working capital requirements. However, factoring gives access to the funds that would otherwise be locked up in accounts receivables. This gives the business a faster cash-to-cash cycle and thus ability to operate more ‘lean’ in regards to cash. In most situations this can more than offset the cash flow issues that arise in a growing business.

Other forms of financing can also be used effectively as a means to finance growth, however factoring is one of the few financing options that is not limited to some predetermined dollar amount. Factoring is only limited by the size of accounts receivables, and thus will grow in line with sales.

Factoring from an Accounting Perspective is a post from: Factor Direct Capital

www.youtube.com/watch?v=cqxMcQ-CckY

Informative video on factoring is a post from: Factor Direct Capital

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.

Sign Companies benefit from Factoring is a post from: Factor Direct Capital

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. There is no doubt the MOP was working at full pace to move as much product as possible. However, this can create huge cash flow issues.  MOP will be forced to finance all production costs as well as the large purchases of raw materials that not only will be needed to replace the inventory that has been sold, but also anticipate materials needed to meet increasing demand. Meanwhile, MOP will also be financing their customers purchase for 30 days or longer. This can easily stretch the finances of a company and create a short term situation where too much cash is flowing out and not enough is flowing in. Without factoring, a fast growing company would eventually be forced to pass on potential business as they would run out of cash necessary to finance new sales. However MOP was smart and factored their invoices which gave them the ability to turn their 30 day debt into immediate cash. This is cash they used to finance sales, and meet the crucial demand for their product in the Gulf of Mexico.

Factoring is also an extremely flexible financial tool. This is important for MOP because there is no good way to anticipate how big this spike in demand will be or how long it will last. However, factors are only financing for 30 days. This means that the executives at MOP can adjust the level of financing they receive from their factor as conditions change.

Factoring provided the financing needed to keep the cleanup efforts in the Gulf going as well as helping a business capitalize on current conditions. This is a prime example of how factoring funds should be utilized. For more information on this story click here.

Factoring’s Role in the BP oil spill is a post from: Factor Direct Capital

That is the essence of the Community Express program that offers smaller loans, from $5,000 to $25,000, and the most streamlined application process among SBA loans. The program aims to fill a key void in small businesses lending by targeting smaller companies that are traditionally underserved by banks.

To be exact, these businesses remain underserved by banks, because Superior Financial Group is a non-bank lender. Banks are currently tight in their lending, especially for small businesses. This is why non-bank financing has become increasingly prevalent in this recession. Small businesses have turned to sources of financing that wont waste time and will approve their funding requests. This means that non traditional lenders have become the essential suppliers of capital while the banks are on the sidelines.

These non traditional lenders come in many forms. Community Express loans are a solid an option in this respect. However businesses that cannot qualify still have alternatives. Asset based lenders provide a range of financial products that can provide much needed access to capital. PO financing, factoring are two asset based financial tools that are generally available to businesses that have been turned down by other lenders. These forms of finance help leverage the credit of a business’s customers. This means businesses can gain access to capital based on their customer’s good standing.

One fundamental problem with PO financing and factoring is that it can only be utilized by businesses that have commercial clients IE B2B companies. However, a merchant cash advance can fill the void for retail businesses and provide much needed access to capital. It essentially borrows against a business’s future credit card sales to provide an immediate lump sum. This is another non bank solution to small business financing.

The moral of the story for small business is to think outside the bank. Alternative lenders will provide quicker and faster capital with less probability of getting turned down thus less wasted time. Truly superior value when compared to a bank.

Sam’s club SBA lending highlights a new trend: fast capital 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

Asset based lending is generally (but not always) utilized as an alternative to less expensive bank loans simply because  asset based funds tend to be more expensive. If it is truly used as an alternative, or in other words, bank loans are not available then asset based lending is a great avenue to gain access to the vital capital needed to maintain or grow business operations.

In the case of the State of California, they have an asset in the form of office buildings that have been valued at as much as $2 billion and they would like to use that money for operations. However, California would also like to maintain use of the property. For this situation, a financial tool called a “sale lease-back” is what California is considering utilizing. In a ‘Sale lease-back” California would sell the building to a financial institution for a lump sum of, lets say $2 billion. The financial institution then leases the property back to the State of California. This allows the State to access the equity in the building while still maintaining use of the asset.

Businesses can use similar tactics to gain access to capital even without a balance sheet full of large assets. Purchase orders, accounts receivables, and inventory are all assets that can be used as collateral to gain access to capital.

The main advantage to asset based lending is that it is widely accessible to businesses in all types of credit situations. Whether it is a new business with no credit, or a business that has had credit issues in the past, asset based lenders can almost always make the situation work. As well, this lending situation will allow these businesses to a build credit history that they can use to qualify for different types of financing in the future.

Factoring, PO financing, inventory finance, equipment finance, sale lease-back, merchant cash advance are a few of the many options for financing that are widely available to companies that fit their lending model.

State turning to asset based lending is a post from: Factor Direct Capital

Factoring is a great way to get quick the cash your businesses needs. Factoring allows businesses to access the money owed to them in the form of a receivable. The money is already earned by the business, factoring simply allows you to use that money.

Factoring provides more control over your company’s cash flows as well. Some Factoring companies let  you to pick and choose which invoices to sell which gives the business owner the ability to control cash inflows, not just outflows. Any business owner that has stressed making payroll knows the value of having access to cash when it is needed. Factoring can provide timely money and the piece of mind that comes with it.

Away from making payroll, factoring can help your position with suppliers and customers. On the supplier end, factoring funds can be used to make payments on time as to not strain the relationship you have worked hard to maintain. It can also be used to take advantage of early payment discounts as to cut costs. On the customer end, factoring can be used to differentiate your offering by extending 30 day payment terms. Further it can be used to finance large deals or busy periods so that your business can fulfill all its deals and/or not have to turn down business due to lack of capital.

Meet Payroll, Pay Suppliers, etc 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