Many companies started by begging or borrowing from friends and family, or
maybe stealing from their personal savings for their cash flow option. Those
friends and family saw the potential and wanted to help out the founders because
of relationships with them. As those companies grew, they were faced with
increased cash needs yet they were not old enough to have a balance sheet that
reflected all their hard work. They had to find a way to expand their available
cash to fuel the growth of their business. There are a number of ways to get that
cash – I want to discuss two of them.
Loan to Value Financing
Where would you go? Many times you would head off to your bank or credit
union for a loan against your assets. Your assets have value and the lender
would extend credit based on that value, hence the term “loan to value
financing”. The loan amount would be based on your company’s hard assets
and/or the private assets of you as the Principle Owner of the company.
The cash needed to fuel your growth is gained through debt secured with the
assets of your company (and possibly your personal assets). The process can at
times seem lengthy to determine the actual “worth” of your assets. You will be
required to provide usually two to three years of financial documentation
including tax returns, income statements, balance sheets, etc. all to see if you
qualify. NOTE: loan to value financing will typically give you the lowest cost of
capital – the process may take a while, but when you get the commitment letter
from the lender you should celebrate!
But I want to talk to you about why factoring can be your company’s best cash
flow option. As anyone who has applied to lenders (banks and credit unions) can
attest, the business owner’s view of the value of their assets and their business
can frequently be different from the view of the lenders. The risk associated with
the credit request is often times deemed greater by the lender than the borrower.
What happens when loan to value financing is unavailable?
Quick Cash Flow Options
So, what other options can you pursue for quick cash flow or working capital for
your business that is not based on your personal or company’s hard assets?
Well… what about the soft assets of your business? A typical company’s largest
untapped asset is its accounts receivable.
Instead of accessing cash based on the credit of one business (yours), access
the cash based on the credit of the multiple businesses your company serves.
How would that work, you ask? That’s factoring!
Let’s Investigate Factoring
These are the simple steps to factor:
1. Choose a Factoring Company that will support you not just now but also help you
in your business journey.
1. Send the Factor your unpaid invoice(s) from whichever company you choose.
2. The Factor will quickly do a one-time assessment on the company’s ability to pay.
3. Usually within 4-5 business days you are given the green or red light.
4. Once that company or companies are OK’d by the Factor you are able to submit
your new unpaid invoice(s) and receive an initial cash payment (80-90% of the
invoice) within 24 hours.
5. When the Factor receives full payment of the invoice the remaining payment is
made to you minus the Factor’s fee for their service.
Sound quick, easy & painless? Great cash flow alternative to loan to value
financing? You bet!
Contact us to see how Factoring can help your business.
Now, don’t get me wrong! Banks and financing institutions offering loan to value
financing can be very beneficial under the right business conditions and once you
have established the proper financing credentials but, more on that in a future
post. Ask us about your Personalized Road Map to Financial Success.