Small Business Finance – Page 2 – NeeBo Capital Blogs

The Pros and Cons of Staffing Direct Lenders

A staffing company can be a very profitable business, especially now that the demand for temporary workers is increasing in North America. In Canada, more than 2 million people comprised the temporary workforce in 2012; temporary work grew by 14.2% from 2009 to 2012 while permanent work only grew by 3.8% during that same period.

In the US, the percentage of temporary workers grew from a1.3% in 2009 to 2.1% in October of 2014, representing 2.9 million workers.

But this increase in demand for temporary workers is also increasing the need for more staffing company funding. Staffing agencies need to keep on recruiting new workers and they also need to pay them on time.

And here’s where staffing direct lenders can help.

Pros of Direct Lenders

A direct lender is a funding source that lends its own money to you directly. There are no middlemen or brokers involved in the deal. For example, you can approach a bank for a loan, or hammer a deal with a factor for factoring services which can get you the money you need faster.

There are several advantages to this approach. For one, direct lenders offer a sort of a one-stop shop for your funding. You negotiate the terms of the loan or the funding directly with the funding provider. You therefore can also gauge the reliability of the source. Banks, for example, are regulated by government agencies, while you also have personal connections to family and friends who are willing to loan you money for your business.

Without any middlemen, you may also get the funding you need for a lower fee.

Disadvantages of Direct Lenders

There are also several problems that you will encounter when dealing with direct lenders. One is that you have to judge the suitability of the arrangements yourself. You will need to approach several lenders to find the best services and terms, and you may not have a wide selection of options to choose from. In contrast, a broker can help you find the best source of funding that matches your needs, and they know a whole lot more financing programs and sources.

The time you will save when dealing with a broker is also something you need to consider. The broker can lead you to lenders which are more likely to grant you your funding instead of having to waste weeks or months on an application that is likely to get rejected anyway.

Finally, the broker can also help you get a more favorable loan rate from a bank or negotiate to lower a factor’s fees.

It’s all up to you whether or not you should approach staffing direct lenders on your own. Just bear in mind that for a staffing company, time is of the essence, and payroll needs are waiting at the end of each week. A broker may be worth their fees if they can arrange for the funding you need ASAP and save you all the hassle of looking for financiers on your own.

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Is Factoring One Invoice Possible?

Let’s suppose you have your own business and you’re running out of working capital. But you are awaiting payment for one large invoice which can very well solve all your current financial problems. Is it possible to factor one invoice?

While you have a lot of single invoices worth thousands of dollars each, you have this single invoice that’s worth $200,000. But your problem is that you need the money now and not in 30 days.

Banks can’t save you because they take too much time to process loan applications. Besides, a bank loan is all but impossible when you have no other assets to use as collateral.

But you can use factoring. And even though factoring usually entails getting advances on invoices on a continuous basis, some factoring services offer spot factoring, which may involve factoring one invoice only.

How Spot Factoring Works

Essentially, it pretty much works like a typical factoring service. The factor buys the invoice from you, and then offers you a certain percentage of the value of the invoice as an advance. When the customer pays in full, the factor takes back the advance and the fees it charges from the customer’s payments and then forwards the rest to you.

Pros of Spot Factoring

Spot factoring, like other forms of factoring, is much easier to get than a bank loan, and the entire application process is much simpler and faster. With factoring, you can get the money you need quickly, so that you can meet payroll, service your most expensive debts, or take advantage of growth opportunities.

But spot factoring does have several advantages over regular factoring.

Here, you’re not forced to hand over all your invoices for factoring. You can choose which invoices or even which single invoice to factor. Since it can mean you only need the factoring service once, there are no locked in contracts to worry about. And that means there are no break fees when you leave a factoring service.

It’s this flexibility which can greatly appeal to small business managers. Perhaps you can pick the invoices with the largest value, or the ones which take a long time for complete payment.

Administrative fees may also not apply. For example, some factors charge annual fees, and this may not be applicable for spot factoring.

You may also maintain most of your customer relationships because customers pay you directly, unlike in factoring when your customers pay your factors directly instead.

Cons of Spot Factoring

Perhaps the most obvious drawback to factoring one invoice is the cost of the advance. Some factors may charge up to 30% of the value of the invoice. That can really cut down on your profit margin.

Deciding whether spot factoring is right for you depends greatly on your circumstances. It probably works the best only if you have a single invoice that is worth a lot more than your average invoice. If that’s not the case then what you really need is selective factoring. This is when you pick which of your invoices which will be factored. But if you keep on needing more capital on a regular basis then you may as well go for regular factoring, which will cost you a lot less.

Invoice Factoring for a Service Company

Are you a service company? It may seem like a simple question. If you offer services for a fee, then essentially you are a service company. And if you need extra funding, then perhaps invoice factoring is a viable choice.

How Does Invoice Factoring Work?

In many cases, when you offer a service, sometimes your client is a company that doesn’t pay right after you’ve completed the work required from you. You then issue an invoice instead which determines the date when the client should pay what it owes you. Usually payment is due in 30 days, but sometimes it can be longer.

With invoice factoring, you engage the services of a factor in lieu of a lender. The factor takes in your invoices and then advances you about 80% of the value of the invoice right away. When your client finally pays the invoice, you then get the rest of the money from the factor after the factor’s fees have been deducted.

It’s a fairly straightforward process, although there are variations. For example, it can be a continuing process involving all your invoices. Or perhaps only a few select invoices are involved, and it may even be a one-time transaction.

Benefits of Invoice Factoring for Service Companies

The most obvious benefit of invoice factoring for a service company is that your company gets the bulk of the payment right away, which can then be used for working capital. This is the money you can use to pay for your overhead and utilities, cover the payroll, and buy or maintain equipment and supplies. You won’t have to wait for a month to get the payment from your clients and as a result, your working capital won’t get depleted.

In addition, you get the approval for the invoice factoring service quickly, unlike when you apply for a bank loan and the entire process takes too long and the requirements are too stringent.

With invoice factoring, factors tend to focus on the ability of your clients to pay, so your own credit rating is usually immaterial. And because of this, the approval rate for invoice factoring is much higher and the approval itself comes more quickly. It’s not strange to get the approval within a matter of days.

So if your business is in dire need of money, invoice factoring will ensure you get your funds fast.

Additional Benefits

As a service company, you may realize that the services of a factor can also help streamline your business as well. For example, in most cases the factor takes over the collection of the payment. This can be a definite advantage because it frees your service company from having to establish its own collections department. At the very least, you spare your current employees from having to contact clients and collect the payment from them.

Another benefit of invoice factoring for a service company is that the factor can tell you which of your potential clients have a good history of paying in full and on time. This can save you from doing actual work for clients who don’t pay on time.

Supply Chain Financing

If you’re part of the retail, automotive, manufacturing, electronic, or automotive sales industry, then the state of your business probably depends a lot on the efficiency of your supply chain.

The supply chain is the path by which any consumer product is transported and sold from the manufacturer to the consumer. In between are the middlemen which facilitate the process.

As part the supply chain, it’s in your best interests that it works efficiently, but often that’s not the case and problems can arise. For example, you may get the consumer items from a supplier who demands that you pay cash immediately. Meanwhile, your own buyers may take 75 or even 90 days to pay what they owe you in full. This can truly put you in a bind if you suddenly find yourself having insufficient working capital.

How Supply Chain Financing Works

There are many types of supply chain financing (SCF). SCF refers to a broad variety of solution designed to maximize the cash flow of all parties in the chain. You can arrange to have such a solution custom-tailored to your circumstances.

For example, let’s say you’re a supplier to a retail store which pays you in full 75 days after receiving the items from you. The SCF provider can take note of the invoices and you can even track all the invoices approved by your buyers. If you don’t mind waiting, then the money owed to you will be paid on the maturity of the invoice.

But if you want to be paid immediately, then the SCF provider can advance you the money right away. The rates are generally favorable for you, because the risk is based on the retailer’s promise to pay fully on the maturity date on the invoice. You get almost the full value of the invoice, minus the discount charged by the SCF provider for its services.

You can then pick and choose which invoices you want to get your advance payment from. The money can be transferred electronically to your company bank account, and it can take only a day or two to arrive. The retailer then pays the SCF provider on the given date on the invoice.

Benefits of SCF

With the right SCF solution in place, it becomes a true win-win situation for all parties involved. For example, suppliers can get their money much earlier. Meanwhile, retailers can extend their payment terms so that they have ample time to sell their wares.

In the end, everyone can improve their cash flow. Suppliers can use the money to stock upon the merchandise, while retailers can maximize their working capital because they don’t have to pay their suppliers immediately. And if they do, they may even enjoy a discount from their suppliers.

Most SCF solutions are not considered loans at all, so your credit won’t be affected. Suppliers essentially sell their accounts receivable, and all it costs them to get their money in advance is a very small fee.

The Rewards of Apparel PO Financing

Apparel businesses belong to a giant industry. In fact, the US apparel market is actually worth $225 billion, so there’s a lot of money to be made.

But it’s not always smooth sailing in the apparel industry these days. The entire industry needs to face new challenges head on, while traditional problems must also be faced. And one of these problems in this industry is the need for financing.

Uses for Additional Apparel Financing

There are many possible reasons why a company may need additional financing. A manufacturer has to deal with rising labor costs. A wholesaler needs to pay off manufacturers and suppliers while waiting for their retailer customers to pay up. Retailers need to deal with the volatile fashion industry in which a popular fashion item can suddenly become unpopular within a short time.

Companies can also use the money to expand their range of products, boost their advertising and marketing, increase their inventory, and pay for operating expenses such as payroll.

The money can also be spent fulfilling a large contract. Sometimes, a large contract may not be doable given the limited cash flow of a wholesaler or a manufacturer. There’s not enough money to produce the number of apparel items specified in the contract.

Obtaining Addition Financing

While banks are often the first choice when it comes to financing an apparel company, often they’re not the best option. That’s because the chances of getting a loan approved isn’t good. In addition, the entire loan application process takes a great deal of time to complete, even if the loan application is eventually approved.

This interminable loan application process can prevent a company from taking advantage of any sales opportunity in the meantime. And that’s why apparel purchase order financing may be the better option.

How Apparel PO Financing Works

With apparel PO financing, the purchase order is used as a means of getting the money needed to fulfill the purchase order.

Let’s say that a retailer customer asks for 1,000 pairs of jeans from a wholesaler, and promises to buy each pair of jeans for $100. That’s a great opportunity for a wholesaler who knows where to get them for $50 each.

But the problem is that the wholesaler doesn’t quite have enough money to buy 1,000 jeans from suppliers. And that’s where the apparel PO financing comes in.

The lender takes into account the size of the order, the trust-worthiness of the retailer, and your ability to deliver the order quantity. If everything checks out, the lender will pay your suppliers while it also does collection duty with your retailer customers. When your retailer customer pays in full, the lender then gets the payment and gives it to you, minus a small fee for the services they provided.

As you can see, with this arrangement you can boost your reputation among large retailer customers, and you don’t have to miss out on profitable opportunities.

The 3 Crucial Questions Purchase Order Finance Lenders Ask

Banks take a long time to decide whether or not to approve a loan application. Like all lenders, the primary concern of banks is to make absolutely sure that they will get their money back after a set period of time, plus interest.

And that’s why banks take a very long time to evaluate all your financial documents. They want to know that your company will still be up and running for the duration of the loan.

They will also want some form of collateral so that if you’re unable to pay back the loan they can at least get some thing from you to avoid losses. And of course, they will also need to see that you have an excellent credit history, as this indicates that you have a track record of actually paying back your loans.

But in purchase order finance, the state of your finances isn’t all that relevant. Neither is your credit history. The purchase order serves as collateral in a sense. What lenders consider important are the answers to these 3 questions:

How capable are your suppliers? In purchase order financing, the lender opens a line of credit to pay your suppliers. But you can’t fulfill the purchase order if your suppliers are not able to fulfill the needs of your customer. The suppliers must be able to deliver the goods in the required quality and volume on the timescales agreed upon.

What that means is that you can’t just pick a supplier that offers the cheapest product. You need suppliers who can meet all your requirements.

How good are you at executing the purchase order? While your credit history may not be all that important to the lender, your ability as a seller is crucial. The task may just be as simple as getting the products needed and then delivering them as is to the customer.

Or it may be more complicated; you take raw materials and turn them into finished products for your customers. Either way, you need to have a proven track record of fulfilling these orders.

It’s for this reason that many PO finance lenders insist on a completion schedule. You need to make sure that you meet the requirements.

What’s the credit quality of your customer? One of the first things the lender will do is to verify the purchase order to see if it’s authentic. Purchase order scams are not uncommon nowadays. Then they will check to see if the customer is reputable and has a good credit rating. It’s their ability to pay, not yours, which really concerns the lender in this case.

The answers to these questions may determine the size of the advance you can get, the types of fees you need to pay, and even whether your loan application is approved or not.

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A Typical A/R Loan

Accounts receivable loans are a special type of asset based lending. In this case, the asset is not the inventory, the equipment, the building or land. The assets in this case are the accounts receivable, which serve as proof that you will receive payments from your customers in 30 to 90 days.

For a clinic, A/R means the payments which can come mostly from insurance companies paying for the treatments of your patients. For a medical device company, the customers may be hospitals and clinics who bought equipment you manufactured or distributed.

Usually, a loan with accounts receivable as security will get you about 70% to 90% of the value right away. If you receive a loan, you will have to pay an annual interest rate which can be anywhere from 6% to 20% of the loan amount.

You still need to process and handle the invoices yourself, and the collection of the payments may still be your responsibility. However, your lender may insist that all customer payments should be immediately sent to them.

Factoring

Invoice factoring is a special kind of loan, because technically it is not a loan at all. It involves a “sale” of the invoices. Like an A/R loan, you get an advance on the value of the invoice, and the factor collects the payments for you. You can get regular reports as to the status of the invoices. When the customer pays in full, the factor then gives you the rest of the payment after it has deducted its fees.

Factoring can have several variations, depending on the agreement. In some cases, a factor may not be able to get its advance back from you if the customer files for bankruptcy. In all other cases, the factor can demand its advance back if for any reason the customer defaults on the debt.

There are several benefits to factoring. One is that a small clinic may be spared of having to worry about collecting their accounts receivable altogether. The factor can handle them for you, and you won’t have to talk to insurance companies who are almost always reluctant to make payments. Factors may even investigate potential customers and identify the ones which have a poor credit history. If you own a medical device company, such customers represent a high risk to your business.

Regardless of what kind of 2014 medical A/R loans you get, in general they are much easier to secure than regular and (unsecured) bank loans and lines of credit. It’s even possible to get this type of financing even if your own credit is not so good. What’s more important to lenders is that the credit of your customers is excellent. After all, the payments for the loan ultimately come from your customers.

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Benefits of a Medical Credit Line for Businesses

While a loan or a factoring agreement can help your medical business, the Holy Grail for most players in the healthcare industry is still a medical credit line for businesses. These credit lines may be unsecured or secured by assets, but either way they can be a boon for your company.

You get access to more cash to run your business. You cannot overemphasize the importance of cash for any medical company. The entire industry depends mostly on insurance companies paying them on time and in full, and that’s not always a sure thing. Insurance companies are notorious for taking their sweet time in making payments, and often they may not agree to the full amount. That means a lot of your working capital is tied up in unpaid accounts receivable.
You can use the cash for a wide variety of business-related purposes crucial to your company. As the head of a medical company you need to make payroll and pay for overhead. What’s more, you’re in constant need of medical supplies such as bandages, gloves, and syringes. You need to maintain your medical equipment properly, and every now and then you need to upgrade your equipment so that you can compete with other companies which offer the same products and services as you do.
You only borrow the amount you need, when you need it. When you take out a loan for $200,000, you’ll need to pay interest on this amount even if you don’t actually use all of it. But a line of credit with a $200,000 limit is a different matter altogether. If in a month you only use $100,000 then you only pay interest on $100,000.
You can set the limit to an amount which you can actually pay. This is quite evident when the line of credit is based on your accounts receivable. Your receivables tell you how much money is coming to you, and that will determine the limit of your line of credit.
Getting a credit line is quick. It may only take you a few days, and in some cases the money will be available in a day or two. This is crucial when you need the money for a very pressing situation. For example, you can’t ever be late when it comes to payroll or paying for your utilities.
Sometimes you only need to pay the interest for the amount you owe for that month. It’s much like a credit card. Your loan agreement may only require you to pay the interest, although that means you won’t be able to get more funds for that month unless you reduce the balance of the loan.

To set up a credit line of business, you’ll need to show proof that you your company is in a solid financial state, and that you have the credit history that justifies the trust placed upon you by the lender. You’ll need to prepare your documents, and you may have to offer your inventory, equipment, or your invoices as security for the medical credit line for businesses.

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How Useful is an Asset Based Medical Business Line of Credit?

It’s very difficult to secure a loan these days, especially if you want a medical business line of credit. Fortunately for you, you do have assets you can use to secure a line of credit. As a medical company, you can use your equipment or inventory as security and you can even get a loan based on the value of your accounts receivable. With an asset based medical business line of credit, you can borrow money up to the limit determined by the value of your assets.

These limits all depend on the particular lender you partner with. For example, a lender can offer up to 85% of the value of the invoices, while also offer 50% or even 75% of the value of the inventory.

So what are the benefits of getting this type of funding?

There are numerous types of medical businesses which can take advantage of this type of financing. Hospitals, clinics, hospices, and nursing homes are all ideal businesses. Medical clinics which offer specialized services can also be eligible, such as dialysis centers and diagnostic clinics. Even medical supply and equipment suppliers will also benefit greatly from this type of funding.
It may actually be somewhat easier to secure an asset based loan than you think. The requirements are less stringent than an unsecured loan. You only need good financial statements and reporting systems. If you will use your inventory, your products should be commonly sold. If you’re using your accounts receivable, they should involve creditable, trustworthy customers and payers.
It doesn’t take too long to secure a line of credit. It can take as short as a month. That’s not long, compared to how long you need to negotiate with a bank to avail an unsecured loan.
The interest rate isn’t high as you may have feared. It’s certainly lower than what you’d need to pay if the loan is unsecured, since the lender can simply seize your assets if you’re unable to pay back what you borrow. And the line of credit is much less expensive than medical factoring, since you still have to process the invoices and collect the payments from your customers yourself.

To assuage the concerns of your lender, you may want to establish a more long-term financing relationship instead of one that only lasts a few months. You may also be asked to personally guarantee the loan. In most cases, the lender will require the payments from your customers to go to them directly.

But despite all these drawbacks, an asset based medical business line of credit can work wonders for your company, as they can ensure that you have the working capital you need to keep your business afloat without experiencing any major cash flow problems. You can meet payroll, improve operations and even grow your business with the help of a line of credit.

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Traditional Ways of Obtaining Working Capital for Growing Companies

If you’re running your own business, at some point you will have a need for additional working capital. You may, for example, encounter some difficulties in navigating the business “waters” and perhaps your revenue and profits are taking a beating because of a recent crisis in your industry. You may also be thinking about growing your business, and for that you’ll need more working capital as well. But getting working capital for growing companies isn’t exactly easy these days.

So what are your options?

Traditional bank loan. Despite what you may have heard, a bank must always be considered when you need money. This is especially true if you need money for a one-time problem, such as buying raw materials to fulfill a very large order or purchasing an expensive equipment that will enable you to offer new services.

Unfortunately, for many growing companies this option may not be exactly easy to get. You can approach your bank and make inquiries, but the loan application can be truly complicated and time consuming as well.

Government loan. This can be just as hard to get as a traditional bank loan, and some say it’s even more difficult. In fact, you can expect the entire process to include a lot of red tape, since the government is involved. This has forced some companies to give up even before the their loan application is being evaluated.

But if you do get this loan, the benefits can be substantial. Government loans come with comparatively low interest rates, and they often offer very long and flexible repayment terms.

Loans from friends and family. Who else would want you to succeed, but your family and friends? Some of these people do more than offer encouraging words. They may even offer additional funding. And when they do, their closeness to you may mean that the interest rates and the repayment terms can be very generous.

The problem with this option is twofold. One problem is that you don’t always have friends and family who are willing to lend you the amount you need. What if you need hundreds of thousands of dollars, or even millions?

The other problem is that if you are unable to repay the loan, you may be damaging essential personal relationships. This is the kind of situation that gave birth to the adage that friendships and serious business loans don’t mix.

Credit cards. Some people use their own credit cards to get additional working capital. While this may be fine for a short-term need, the rather high interest rates don’t make this option ideal for long term needs.
Adding a business partner. You can sell a percentage of your company for cash which you can use as working capital. This can bring in the money you need, but keep in mind that you are ceding future profits to someone else. In addition, you need to have a very clear agreement as to what your partner’s role will be in the company.

All these traditional methods come with their own drawbacks, which is why alternative methods for working capital for growing companies are becoming much more ideal.