Guest column: The credit crunch

Home Columns Guest column: The credit crunch

by Ramon Falero

Banks don’t seem to want to lend any money right now, and equity markets aren’t a great value proposition for many companies with investors skeptical about, well, everything.

U.S. Bancorp recently commissioned a survey of 1,004 companies nationwide with annual revenue of $10 million or less. Slightly less than one third surveyed said their bank provides everything they need when it comes to financing and other business services.

Yet business needs to go on. Companies still need to buy goods, meet payroll, cover seasonal adjustments and even seize market opportunities. So what are they to do?

More and more are turning to factoring; an alternative to asset-based lending that dates back to the Roman Empire and provides businesses with capital when needed. Factoring is not lending, but rather the purchase of accounts receivable from a business.

Let’s say a business has $50,000 in accounts receivable expected. Depending on the business, it might be weeks, months or longer before it’s in hand. Yet it has an immediate need to cover an expense, buy new inventory or tackle a wide variety of new business prospects.

Traditionally, an owner might have gone to a lender with which he has a relationship and received a loan backed with the expected revenue. Those loans are much harder to come by these days.

One example of a company unable to get traditional funding is a Florida-based hardwood flooring importer and distributor. This company has been in business for more than two decades and has annual sales of over $20 million. It recently changed its business model from selling to some of the largest big box retailers in the country to selling exclusively to specialty dealers, resulting in increased profit margins.

However, many of these dealers do not have the cash flow and have already exhausted their bank and credit card financing options. So the importer/distributor turned to factoring.

For years, factors have fought a stereotype, one that assumes they are a last resort or the business equivalent of payday lending. Yet asset-based or asset-backed lending, which is a specialty area for banks, isn’t cheap. In addition, getting money from a factor doesn’t make a company beholden to any banking covenants.

With the help of Liquid Capital, the flooring importer is able to offer clients exclusive financing offers. In fact, since March, Liquid Capital has

approved nearly $1.5 million in credit for approximately 90 flooring dealers in Florida alone. The average dealer is receiving $15,000 in credit leading to a 30% increase in sales for the importer.

In better times, many factoring clients do “graduate’’ to bank lending. But factoring often is the only option, especially for those that don’t have established banking relationships.

Oftentimes, companies choose to continue to use factors for credit and collection services, as many find it more efficient than creating their own departments. For example, Liquid Capital essentially acts as an accounts receivable department, offering a full-line of management services including processing and ledgering of accounts receivable, credit review and assessment, professional collection services and preparation of reports, including online access to accounts.

Each company’s factoring cost is based on its risk, industry and market position. While critics say it’s more costly than lending, those in factoring beg to differ.

If you have a chance to grow your business and you don’t have capital available, your competitors can take your market share, you can miss a growth opportunity or you can skip a payroll. If that’s the case, what is capital worth?

Liquid Capital of America Corp. is a franchise organization with more than 60 offices. Ramon Falero is a principal in Miami, and has worked in commercial banking. He can be reached at 305.603.7789.

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