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Sweet marketing music

Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Beverly McGuire
October 2005

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Factoring can bridge cash gap for growing firms

However, what happens when you have no collateral to support a bank loan or perhaps family and friends are unable to lend money to fund new business or new equipment you might need?

For a growing number of businesses, factoring offers one solution to their cash flow needs.

What is factoring?
Factoring is the selling of accounts receivable to an investor, known as a factor, to receive a cash advance before the actual invoice due date (which could be 30-90 days). Factoring differs from borrowing in that the accounts receivable are actually sold rather than being offered as collateral.

Factoring has historically been used in the textile and garment industry. They needed raw materials to manufacture and distribute their products. Suppliers expected payment before shipping goods, but clients wouldn’t pay until delivery (and even then wouldn’t pay for days or sometimes months).

Today, factoring accounts for billions of dollars in financing each year. The factoring market is well established and covers a wide range of industries. However, not all business owners are familiar with it nor is it taught in business schools.

Factoring is most often used by growing or surviving companies.

Fast growth creates an outsized need for working capital, and a business owner may find that the receivables base is growing faster than cash flow. Until growth levels off, it’s difficult to catch up.

Sometimes a business cannot afford to wait for payment after delivering its product or service. The business may need to meet payroll expenses, rent or other overhead. Or perhaps the money is needed to buy supplies to fill incoming orders. In any case, businesses are finding that factoring can provide access to cash today rather than in a month or two.

How does factoring work?  Factors buy invoices you generated to your most creditworthy customers. In most deals, the factor will advance between 75 percent to 85 percent of the value of the invoices up front. When the invoices are paid, they’ll advance the rest of the money, minus their fee.

Here is an example: Company A sells products to Company B for $100,000. Company B accepts delivery of the product and is then invoiced by A with payment terms of 30 days. Company A decides to sell the invoice to a factor who disburses funds to A in an amount equal to approximately 80 percent of the face value of the invoice ($80,000).

The remainder of the invoice’s value is held back in case B does not pay the whole amount due. This reserve will be given to A (minus the factor’s fee) upon payment by B. Company A now has the funds available for payroll, operating expenses, taxes or anything else.

Any business that generates business-to-business or business-to-government invoices can factor, including businesses with no collateral and no earnings. Factoring can work for a wide range of industries, such as employment agencies, trucking and manufacturing.

The key criteria that determines whether or not a company will qualify for factoring is the quality and reliability of its commercial customers. A company cannot expect to be factored if it does not have good accounts receivable.

There may be an application fee and due diligence. Factors don’t look at your business plan or your personal credit rating. What they do review is the creditworthiness of the customers whose invoices you are wanting to factor. Factors will only buy invoices that they think are collectable provided these payments aren’t over 90 days.

Fees may range from 2 percent to 5 percent of the value of your invoices. The greater number of days advanced, the greater the fee.

Fat margins needed
Factoring can be an expensive way to raise capital so consider your profit margin. Because factoring adds to overhead, it may not be ideal for companies whose profit margins are less than 25 percent.

For example, if somebody is importing commodities where the markup is very low, it doesn’t pay to factor. If you have a product like costume jewelry, where the markup is 200 percent, it’s easy to chop a percent off the invoice.

Factoring is not a substitute for instituting a sound, long-term financial plan. If you’re a troubled company and use factoring basically to keep yourself afloat, you could be setting yourself up for a problem.

Factoring can work in synergy with traditional credit lines. Many of today’s Fortune 500 companies employ this type of financing to supplement their working capital needs. Factoring can reserve the bank line for an “as needed” basis, thus extending the life of the line.

Factoring can also help pay down the line when used. Since this is not a loan this form of financing will not appear as a liability on your balance sheet. This strengthens your company’s position when seeking bank funding.

[contact] Beverly McGuire is a certified cash flow consultant with Aspire Funding Solutions in Maplewood, which helps small to mid-sized companies increase cash flow: 651.771.4844; admin@afundingsolution.net; www.afundingsolution.net