News & Publications
Young Companies and Working Capital
An often overlooked issue confronting young companies is that of having sufficient working capital. The entrepreneurs who start up these companies pour their hearts, souls, and often, life savings into getting the enterprise off the ground. They are successful at finding just the right product or service to fit a need and the business begins to take off. Growth, however, is not always self-sustaining. Many times orders will overrun the capital needed to fulfill them. In these scenarios, the entrepreneur has to make some serious financial decisions that will affect the long term success of the company and the value that the owner will realize from his efforts.
One solution is for the owner to approach other investors. With this option, investors would be given a portion of the company for the capital that they contribute. The entrepreneur has to weigh the advantages of giving up a piece of the business that he/she has worked so hard to develop. Additionally, the process of “selling” that percentage to investors takes a significant amount of time and an even greater amount of energy. This process alone could impact the ultimate success of the company. Often, there are negotiations that drag on while bills need to be paid and orders need to be filled.
A second solution for the owner would be to seek out traditional bank financing. While this option may not include giving up a portion of the company to obtain the needed capital, it, too, is time consuming. Banks usually require a multitude of financial documents, verification of assets and revenue, and, most difficult to these young companies, a long period of operating history. They then take all of that information and send it off to a “committee” to make the decision. That committee may only meet once a month, which is not in the company’s best interests. The variety of hoops that traditional banks require the owner to leap through can take months to accomplish with no guarantee that financing waits at the end of the process.
KEG-Financial, Inc. provides a much better solution for these hard working entrepreneurs. We understand the need for working capital and how critical the time element can be. We don’t require that you have been in business for some arbitrary period of time, we don’t ask for financial documents that take months to secure, and we don’t pass off the decision to some faceless committee. Our evaluation process can take as little as a few days. We focus on the elements of your business that are producing the revenue and look to fund that stream. As business owners ourselves, we recognize that making sure orders and accounts receivables are able to be filled is critical. Buying parts, equipment, or paying your employees to complete those orders is time sensitive. We want to be a partner in your success without asking you to give up a portion of your business.
If you are a young, early stage growth company in need of working capital, give us a call to see how we may be a better solution.
WHY IS INVOICE FACTORING BETTER THAN A BUSINESS LOAN?
KEG Financial, Inc.
Why is Invoice Factoring Better Than A Business Loan When you need money. There are a number of options out there but many will depend on the age of the company and their credit history.
This is a huge concern as according to The Service Corps of Retired Executives (SCORE), 82% of Start-ups and Small Businesses fail because owners have a poor understanding of Cash-Flow Management and lack the ability to access it at required levels to fund their growth!
One option that is available to them is invoice factoring, also referred to as, accounts receivable financing or invoice financing (with some differentiations). This type of financing mostly requires that a company has customers who typically pay within terms and have outstanding invoices. Below, we will take a look at why invoice factoring is better than a business loan and when a company might be best served using this type of financing.
Doesn’t require taking on debt: Factoring does not require a company to take on additional debt. While it is often necessary for businesses to borrow money in order to get started and stay afloat, it is generally accepted that the less debt used, the better your Balance Sheet, Financials, Ratio’s and Investor Perception! Having debt makes it harder to get loans in the future, debilitates an organization’s leverage and also puts a lot of pressure on companies to pay it back. Factoring allows companies to receive needed capital without the hassle and risk of using a loan.
Money is received quickly: If a company needs money fast, there are few better options then invoice funding. In less than 7 days, a company can receive a large portion, up to 90% of their outstanding invoices. For companies with already established relationship with Southstar Capital this time can be shortened to around 24 hours. This makes it a perfect option when a company finds themselves needing a quick infusion of cash, needs to manage cash flow, or wants to ensure they are reporting the strongest financials they can.
Simplistic, Fast Process: In order to receive a bank loan or a line of credit it is necessary to provide a number of proofs that you are a good credit risk. A company will need to provide all of their financial statements, have very good credit and have been in business for a good amount of time, generally more than 3 years. In contrast, a company looking into invoice financing, will not be approved based on this information. While a factor may want background information on the particular company they will be doing business with, the biggest concern will be the credit of the entity (debtor) that owes on the invoice. This takes a lot of pressure off the company in need of money and makes complete sense after all, no matter how good your organization may be, if your customers don’t pay you then you probably aren’t going to turn out very successful.
YOUR COMPANY never has to pay back the money: Because the money given out is not a loan, it does not have to be paid back. As a result, there are no payments, principal and interest, to be made. The invoice is paid back by your debtor when they were planning to pay and receive no hassle about early payment, thus increasing customer satisfaction also!
Outsourced collection duties: Not only will we give the company a lump sum of money up-front, they will also handle collection duties for ALL invoices. For businesses without a collection department, this provides a much needed and valuable service. For companies with a receivables department, this provides a HUGE savings that mitigates or eliminates the cost of financing, as well as, eliminates the need to offer discounts for receiving payment sooner than credit terms agreed upon. Again, this savings lowers or eliminates the financing cost!
Finding Your Money Tree
Finding capital is one of the hardest things small and medium size business entrepreneurs have to do. Since 2008, when the biggest of the big banks brought our economy to its knees, the smallest of the small-business community is still strapped for cash — despite the fact that larger small businesses, medium-sized businesses and larger business are having an easier time as restrictions ease up, according to the Federal Reserve and the National Small Business Administration.
Small to Medium size businesses today are forced to grow on credit. Unfortunately, not only is credit hard to come by but many business owners have been hit so hard by the last five years of tight money, they might not even really be “credit-worthy” — or should we say as credit-worthy as they might have been just a few years ago. Plus it is so hard for start up businesses to even establish credit within the first three years in operation.
Last month, Pepperdine University published its Private Capital Index for the Third quarter of 2013. The big news in the report is the difference between where these entrepreneurs are looking for money and where they are finding it. It’s not really a surprise, but here is where they are looking:
59 percent are looking at the bank
57.2 percent turn to business credit cards
49.9 percent access their personal credit cards
48.4 percent sought out a personal loan
44.2 percent went to friends and family
Most of the business owners visit the big national banks. After all, that’s where they have their checking account, maybe a credit card, why wouldn’t they go to the national bank? Unfortunately, they don’t leave the bank with a loan — as many as 90 percent of them leave without a loan. So where are they finding the money they need?
71 percent found success with friends and family
58 percent with their personal credit cards
57 percent used trade credit
54 percent used business credit cards
27 percent found success at the bank
Although 27 percent is a little better than the 10 percent I suggested, that still means that most business owners are going to leave the bank empty-handed. Not a ringing endorsement when you consider the TV and radio ads we hear every day claiming this bank or that bank is the “small business” bank.
The next option most business owners choose to take is going to the local bank or Credit Union. Having worked in the Credit Union for many years in the past I have seen several people walk out with no hope. Credit Unions however are getting the message that small businesses are a good investment for them. Often times Credit Unions will even partner with other Credit Unions to pull funds together for small commercial cases. Still most Credit Unions do not have a tolerance for lines of credit over $15,000.
Local Banks however are getting smarter. Many of them have started adding other services but all choices are still made based on a clean credit score and often will not grow with you. Since businesses have been funding their payroll and suppliers on extended credit and credit cards, those credit scores are looking rough. Plus having a fixed line amount limits your company on what jobs you can bid on.
What have been left out of these statistics are alternative banking options. When business owners get told no they run to family and friends. Even worse they put everything on a high interest credit card with huge compounding interest and accruing more debt. There is actually other steps you can take between begging family or going to the local loan shark. There is crowd sourcing using the web to sell off equity in your company to individuals. Then you can get advances on credit cards. Best of all you can try Asset Based Lenders.