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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2013

Factor for Funding

Consider alternative financing to help small businesses

The Great Recession has had an impact on virtually every business across the nation. Hit particularly hard were the small and medium-sized enterprises (SMEs) — the companies that many economists often refer to as the true engine of the economy. Tightened credit markets and damaged credit have complicated these businesses’ access to funding.

With SMEs’ business volumes plunging in the past few years, many have been forced to exit the market. For surviving companies that sell products to other businesses or to government agencies, incoming money hasn’t provided a constant cash flow.

Payment for products or services typically is received at a later date. Previously, when business operators knew that they would receive payments in 30 days, they could plan accordingly. For example, they used bank lines of credit to help cover operation costs until those checks came in. This allowed them to pay rent, make payroll, cover utilities, satisfy suppliers, etc. The Great Recession, however, has had a two-fold crushing impact on many SMEs:

  1. Suppliers began demanding payments ahead of product delivery, and
  2. Customers, especially major corporations, began pushing out payment terms to 60 days or longer.

This created the perfect storm of financial distress that led to damaged credit. As a result, surviving SMEs have been unable to qualify for lending despite the fact that the economy has begun to improve.

Commercial mortgage brokers are in a unique position to help SMEs, however. They can be aware if a company looking to purchase property will be hindered by problems caused by the turmoil of the past few years, and they can intervene to help solve these problems.

Take, for example a service company that has seen its business grind to a halt during the recession. The company looked for ways to reduce costs, and instead of laying off staff, its management decided to keep the employees and not pay payroll taxes. By the time business picked up, the company owed hundreds of thousands of dollars to the Internal Revenue Service (IRS), and a tax lien was put in place. The owner also needed to find a new facility and began discussions with a commercial mortgage broker.

The broker immediately realized that the company had no opportunity of qualifying for a loan: Its financial statements looked bad, cash flow was poor and the IRS was breathing down its neck. But the broker also knew about a financing method that could help the company meet the obligation to suppliers and resolve its situation with the IRS, namely invoice factoring.

Invoice factoring is a specialized form of business funding that uses a specific company asset, accounts receivable, to generate cash. Here’s how it works: Because an invoice is a financial instrument with a face value, designated payee and due date, it is an asset that can be sold — just like any other asset. When a company sells this asset (invoice) for slightly less than its face value, it gets immediate access to cash, which is referred to as a “discount.” The discount percentage on an invoice sale typically ranges between 2 percent and 3 percent, about the same as the merchant fee for payments received by credit card.

By using invoice factoring, that broker enabled the client to solve the IRS problem, satisfy suppliers and meet immediate payroll. With alternative sources of financing like invoice factoring, commercial mortgage brokers can help clients solve today’s common cash-flow problems and add a new niche to the services that they provide their clients.


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