Good ABL Article

It’s been a while since my last post. 

Good news is it’s because we have been very busy.  Bad news is, I have neglected the blogosphere…I’m sure I have not been that sorely missed.  Anyway, there have been several very good pieces published by various industry sources lately.  I wanted to post this one today as it is a very timely article on asset based lending in our current market.  These are inded still tricky times we are living in..

Enjoy…

We have great customers!

Right..??

Back in the good old days, you know before the government took over GM… Before the likes of Lehman Brothers, Circuit City and countless others went belly up.  Back when doing business with any large, well known company was practically a guaranty of growth for your business. Your first class ticket to ride the smooth waters of prosperity.

You know…BEFORE 2008.

We all now (and at least for the foreseeable future) find ourselves living in an alternate reality.  One which causes business owners to question the health and life of even their best customers.  Even large, solid companies that are not running out of red ink while printing their quarterly financials, are holding on to their cash as long as possible.  The result?  Slower payments to their venders. 

Can a factoring company help in this situation?

Yes!

Most factoring companies spend a good deal of their underwriting process vetting their prospective clients’ customers.  And for good reason.

It’s the ultimate goal of both the factoring company and client to get paid for their receivables.  This is a crucial component of any factoring relationship.  Over the years we have helped many clients sail past the squalls and choppy waters of customers who posed a big credit risk.

So…here’s to partnership and smooth sailing; or at the very least a less bumpy ride!

Case Study

Recently Crestmark Partner Services was able to partner with a local MI bank to provide financing for a struggling manufacturing company. 

Case Study from Crestmark Bank

What Will My Customers Think?

Almost to the client we are asked this question.  Understandably this is a common concern of most new clients. 

First, lets understand that as discussed in my previous blog about  factoring,  it is not a black mark for a business.  In fact it is very normal for a business to have a line of credit.  Factoring is little more than a line of credit which utilizes accounts receivable as collateral.  Having a factoring line in place can help to put your business on a much stronger footing than your competitors.  You have the advantage of being able to positively manage your cash flow.

You might be surprised to find out from your customers that some of them are already familiar with factoring and may even be having some of their invoices from other vendors factored.

What do you tell your customers?

Tell them due to growth and to keep up with your cash flow you have decided to factor your invoices.  This is a positive step for your business and will allow you to continue providing your customers with the great service they have come to expect.  Your customers will continue to have the same level of contact with you that they have always had.

By the way, this is also a benefit to your customers as it allows them the luxury of paying on terms.  You’re not the bank…we are!  So, let the factoring company worry about when your customers are going to pay your invoices.

Communicating proactively and positively with your customers will go a long way in making factoring a smooth transition.

Last Resort Financing?

There has long been a misconception that companies who use factoring are dangling one foot over the abyss of financial ruin.  This perception is untrue and often the result of rumor and ignorance of what factoring really is and how thousands of business owners benefit from this type of financing.  

• Do business owners turn to factoring when they have experienced a downturn?

• Is factoring a good option for companies who have been turned down for a more ‘traditional’ line of credit?

The answer to both of these questions is, yes.  So, while using factoring to help a business owner take control of their cash flow and firm up their balance sheet to get them through a rough patch; it can also be said with a good measure of veracity that factoring can also assist a strong business grow and keep up with increased demand.

Many business owners turn to accounts receivable factoring because their cash flow is inconsistent.  A business may have a relatively small cash flow for part of the year, and when they are in their peak business cycle, their cash flow increases significantly. 

By factoring their invoices business managers and owners control this cash flow cycle.  They find that rather than being reactive to the ebb and flow of their cash flow, they can make their receivables work for them.  It becomes a much easier and less stressful event to say ‘yes’ to new customers or larger orders once business owners are confident they are not going to be strangled by tight cash flow.

Used correctly, factoring is a very effective tool for a variety of situations.

What is Asset Based Lending?

This is a very common question, and one that I am asked on a daily basis. 

To a business owner an asset can be many things.  It can be; real estate, equipment, inventory, personal holdings, equity, or accounts receivable.  To further muddy the waters different lending institutions often take various parts of the above assets and classify the line as an “asset based line.”  This is because as a lender any of these aspects of a business can be considered valuable collateral for a line of credit depending upon what type of underwriting standards that lender employs.

Now, knowing what the collateral can be I’m sure your question becomes; what does Crestmark Capital consider an asset for an Asset Based Line of Credit?  It’s really very simple. 

When you call and speak with us about an Asset Based Line of Credit; or ABL as it is generally known; you and I are going to be discussing your business’ accounts receivable and inventory.  Our ABL lines can be secured by your accounts receivable and inventory. Or if your business is one that does not have any inventory, such as; a staffing company or any service related company, we can also structure an ABL line just on accounts receivable.  This is often seen as one of the positive points of an ABL line as it leaves other assets of your business unsecured.  So, if you need to get an equipment loan or refinance real estate you can.

There are many benefits to an ABL line.  If you would like to talk about how this might work for your business, visit our homepage www.crestmarkcapital; to e-mail or call us.

What Is Factoring?

As defined by Wikipedia, www.wikipedia.org; Factoring  is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.

Okay, so what does that mean to you?

I always tell business owners who are new to factoring; our clients all have two things in common:
• They all provide a product or service to another business.
• Our clients all have a majority of their customers on payment terms.  Meaning, our clients have to wait to be paid for whatever product or service they have provided to their customer.
From this common intersection extend many avenues as no businesses are exactly the same.  All have various business challenges, invoicing processes, and diverse customers.

To further explain the definition at the beginning of this blog in real world terms, this is how a typical factoring transaction works:

Example:

• ABC Distribution has an invoice for $1,000.00 from their customer;
Widgets R Us.
• ABC Dist submits the $1,000.00 invoice to Crestmark to be factored.
• Crestmark enters the invoice into our accounting software, and advances 80% of the $1,000.00.

• ABC Dist gets $800.00 wired to their bank.  The advanced amount is available to our clients the next morning.
• Crestmark keeps the 20% (or $200.00 in our example) in a reserve account for ABC.

• 30 days later Widgets R US pays the $1,000.00.  Payment is made payable to ABC and sent to our lockbox.  We post the payment and assess a fee for factoring the invoice.
• In a few days time (as long as it takes for Widget’s payment to clear our bank) we release the remaining reserves to our client.

The bottom line result of the above example is;

ABC has the use of $800.00 of the original invoice amount within 24 hours of presentment instead of waiting the 30 days for Widgets to pay.  Assuming a 2% fee (insert disclaimer, actual fees vary) for the first 30 day period; the above scenario will net $980.00 of the original $1,000.00 invoice to ABC Dist.

If you would like to speak with us about how factoring may work for your company, please visit our homepage.