23. July 2009 by admin.

USA Today has a pretty easy way to view several forward looking indicators of our economy.  Check out the interactive graphs (with explanations) here.

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20. July 2009 by admin.

A few posts ago, I discussed the SBA “America’s Recovery Capital” program (”ARC”).  If you haven’t heard, the ARC program is what came out of the stimulus package to help small business.  The program is intended to help small businesses  that are having trouble making loan and interest payments.  How?  By issuing those same businesses more debt, of course.  These ARC loans are to be issued with no fees and no required principal payments for 1 year. 

I argued in my previous post that this program would not motivate banks to loan money.  Why?  Banks are businesses, not charities.  They are in the business of accepting fees for issuing loans.  They issue a loan wanting their money back, usually the sooner the better.  Not requiring principal repayment for a year goes against everything they believe in.  Also, the default rate is going to be higher on these loans (a fact agreed upon by the SBA), but the bank is going to have to spend the time and money to collect on the defaults.  Not exactly an appetizing situation for a recently battered industry, is it?

 I have spoken to a few local bankers here in central Texas, and I have not heard one say they were issuing these loans.  My guess is they would rather alter the terms of the existing loans instead of propping some of these companies up with more of their (now) valuable funds.

I found an article that I believe paints a good picture of the banks mentality when it comes to these loans.  I encourage you to read it here.

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15. July 2009 by admin.

The potential financial struggles of CIT and the impact it could have on small businesses, specifically ones that are factoring, has been a popular news topic the last few days.  There is one point many factoring clients usually don’t consider when evaluating factoring options, but might become a major factor should CIT fail.  It has to do with reserve accounts and when those monies are returned to the factoring client.

 A factoring client that has factored a $10,000 might receive an $8,500 advance.  Once payment in full is made by the client’s customer, the client will be returned the $1,500 balance minus the factoring fee (discount).  The question that come into play here is WHEN is that money returned?  Some factors return the money the next day, some the next week, some at scheduled intervals twice a month.  Either way, the factoring company goes from “lender” to “borrower.”  In other words, at some point they actually OWE their client money.  The amount owed could become significant if the factor utilizes a reserve account, which are funds held to offset fees or delinquent invoices.

If CIT does file for bankrupcy, what does this mean for their clients?  The first answer is obvious - they will need to find another factoring company.  The second is not so clear.  Clients that are owed money by their factoring companies suddenly become “unsecured creditors.”  Not an attractive place for a business needing immediate cash flow.

Look for this arguement to be used at some point when CIT claims it is too big to fail and will take down many small businesses with it.  In the meantime, any companies out there looking for a replacement to CIT’s factoring should give me a call!

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8. July 2009 by admin.

Last month, the SBA got involved in the bailout business and rolled out a new loan program designed to help small businesses in need of immediate cash.  The American Recovery Capital program, or ARC, is the name of that program.  ARC is designed to guarantee loans up to $35,000 for qualifying small businesses.  These loans have no lender fees or interest.  As you can imagine, banks are not necessarily lining up to issue these loans.  Let’s try to look at this from a lender’s perspective.

First, how do you define a “qualifying” small business.  The SBA defines qualifying as follows:

“Your small business must be an established business, have financial statements demonstrating it was profitable in one of the past two years, and be able to project sufficient cash flow to meet current and future loan payments over a two-year period from loan approval.  ARC loans are not designed for start-up businesses.  

Examples of qualifying loans may include credit card obligations for your business, capital leases, notes payable to vendors/suppliers, Development Company Loan Program (504) first lien loans, other loans to small businesses made without an SBA guaranty, and loans made by or with an SBA guaranty on or after Feb. 17, 2009.”

OK, so these aren’t bottom of the barrel credit companies, but not exactly blue chippers either.  I believe it is safe to say that these companies would not be receiving any type of loan if it were not for the SBA program.

How about pricing?  Surely the banks will be compensated for lending money to clients that the SBA admits will have a “higher than average default rate.”  The SBA will pay prime + 2% to the lender for their trouble. (remember, they are interest free to the client for a period of time).  Banks will not receive principal back for the first year after disbursement, a feature that flies in the face of everything banks believe in.  Also, banks will have to absorb administrative and liquidation costs themselves.  Hardly motivation to put money to work.

I hope this program works.  But my gut tells me few loans will be established under this program, which is probably just fine for the banks.

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7. July 2009 by admin.

I am always poking around on the web, looking for free information that can help me or my clients grow their business (after all, what is good for my clients is good for me, right?).  I thought I would post a few of the websites I have found helpful over the years.

Quickerbetterwiser.com - Gene Marks is a CPA, consultant and small business owner that is constantly writing articles around the topic of small business.  Many of the articles that he writes for publications nationwide can be found on his website.

CNN Money - Small Business - The giant CNN and Money magazine have a joint site that provides current news and information for business owners.  I have found the most relevant to be located in the Small Business section.

Business Management Daily - This website has many columns provided by experts in their field.

Docstoc.com - Millions of forms used by other business owners are shared on this site.  If you need a document, check here first.

Entrepreneur.com - The home of Entrepreneur magazine has tons of great information and interesting articles targeting small business owners.

RealSmallBusiness.com - Plenty of information here regarding HR, Sales and Marketing, and Management of your small business.

Obviously, there are probably hundreds of thousands of helpful websites out there.  If there is one that you find extremely helpful, please send it to me.  I’d love to take a look at it!

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1. July 2009 by admin.

Most people are unfamiliar with factoring, and thus ask the wrong questions.  Yes, fees are important, but they don’t tell the whole story.  Below are some questions you should ask a factoring company when you are analysing your options, and more importantly, the reasons why you should ask.

1.  How long do I have to factor with you?  Factoring contracts are notorious for their “claws” or “handcuffs.”  Most factoring contracts have a term of at least 1 year and prohibit you from switching to another factoring company without paying a large “termination fee.”  Furthermore, contracts typically auto-renew, so a company that is not paying attention could inadvertently sign up for another year of “handcuffs.”

2.  Is there an application fee?  Factoring companies love to charge application fees.  These fees are non-refundable if you choose not to factor with that company.  To some factoring companies, application fees are a revenue generator as they generate a large amount of fees from potential clients even if they have no intention of funding them.

3.  Does the factoring company keep a reserve account?  Reserves are the difference between the payment from your customer and the discount kept by the factoring company.  These funds are technically the client’s money, but many factoring companies don’t pay these back right away.  They may keep a certain percentage to cover any write-offs or other charges or only issue rebates twice a month.

4.  Explain ALL of your fees to me.  Usually, a potential client will call a factoring company and ask for their rates.  The factoring company will usually be more than happy to tell them the discount rate, which is the rate a factor will charge you for using their money.  While this seems straightforward, most of the time it is not.  Let me present an example to assist in understanding. 

If you call up and ask a factor for their rates, they may say 4% for 30 days.  What does this mean?  Nothing, if you don’t know what the advance rate is.  Since the rate charged for factoring is based on the face value of the invoice, a factor that charges 4% with a 70% advance is more expensive than a factor that charges 4% with a 90% advance.  Also, what if the payment arrives in 20 days instead of 30?  Is the rate prorated to only 20 days or must the client still pay for 30 days?  What if the payment arrives on day 31?  Is an additional 4% taken?  How about wiring fees, due diligence fees, monthly monitoring fees, monthly minimum fees.  All these fees and costs need to be fully understood.

5.  Do all payments from customers have to come to the factor?  Many factoring companies require all payments from all customers to come through them, even if you are not receiving funding from those invoices.  This can cause a delay in getting the cash to you.  The best situation is for the factor only to receive payments for the invoices being factored, while the rest of the payments continue to go to the client.

Factoring accounts receivables can be a flexible and straightforward means of business financing.  However, many factoring companies make a living based on unnecessarily complex charges, contracts and fees.  Do your research to make sure you understand the details of your factoring relationship.

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