Most companies will need to borrow money to finance their operations. Even the best and most profitable companies have to deal with timing issues affecting cash inflows and outflows. These include the time it takes to: produce or purchase a product; sell and deliver the product; and then to collect the associated invoice. The ability to borrow and the terms under which a company can borrow are largely determined by where it stands as judged by the traditional five c’s of credit: character, capacity, capital, collateral, and conditions.

The more profitable a company is the more options it has for financing and the cheaper that financing will be. The irony is that the less your company needs money the more lenders you will find, the more you need money the fewer options you will have. For those companies that are having trouble finding financing both factoring and trade finance offer viable, affordable solutions. Remember that in business profits equal success; the more the better. It is your profit margin that will determine whether your company can effectively use factoring and trade finance options.

To really know how much profit your company is making you need to have accurate and timely financial statements. It is surprising how many entrepreneurial companies fail to meet this requirement. Try running at full speed with your eyes closed and see how far you get. You will have the same success running your company without good financial information. You can start as simply as tracking cash in and cash out. Many good accounting programs are available at affordable prices for those with some accounting knowledge. Accounting help is available at many different service levels from a part time bookkeeper to a full service accounting firm for those in need of assistance. You will find that lenders love good financial information and that your success in finding affordable money will be greatly increased the better the financial information.

Timely information is extremely important. If you only find out today what happened 90 days ago you may be too late to make adjustments that are needed for success. I have seen many companies fail because they simply did not know what was really happening. You can grow broke if you do not realize that you are losing money on each sale.

Trade finance is paid for when the product that is being purchased or financed is sold to your customer and the associated invoice is factored. The factoring advance needs to be sufficient to repay the money lent plus the associated fees with some margin for safety. In our program we usually look for our advance to be no more than 65% of the amount of the sale to the customer. If your costs for buying or purchasing a product are less than this amount you may effectively finance 100% of your costs. If there is a shortfall you will need to put in the difference to bring the transaction within margin. You can then look at what is paid for the financing and your resulting profit and determine if enough is made to make it worthwhile for you.

When evaluating factoring feasibility you need to look at the cost you will incur given your average AR turn days and your net profit margin. For example, if your receivables turn in an average 35 days and your factoring cost is 3% you need a profit margin of at least 3% to break even. The greater the differential the more attractive factoring is as an option and the more quickly other financing options will develop. One additional consideration with factoring is that a good factoring service provider will lessen the in house work that you need done for credit, accounting and collection. This will increase efficiency and should result in cost savings in these areas.

An Insider’s View by Tom Cavanaugh

BEWARE! 

Reading all those detailed provisions in the contract with your financing source can be tedious at best.  Often the “boiler plate” seems innocuous enough to skip through.  However, there are two important provisions in any financing contract that require very close examination.  If you look closely at nothing else you must pay attention to:

• The Minimum Monthly Fee Clause and
• The Minimum Term Clause

In our industry the more onerous these provisions are the less likely they are to be discussed.  The key words are Watch Out and Read Carefully.

A minimum fee clause requires that the Client pay the financier a certain sum per month.  If normal business activity does not produce the required fee amount the Client must make up the difference with cash payments just like any other bill that you receive.  This can be a problem and a surprise expense for any company which has even normal sales fluctuations.  For a seasonal business this fee can become truly burdennsome when business is at the seasonal low point.

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