Managing cash flow in the credit crunch

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Banks don’t seem to have any money to lend right now, so what are companies to do?

Banks don’t seem to have any money to lend right now — or at least none they want to — and equity markets aren’t a great value proposition for many companies with investors skeptical about, well, everything.

U.S. Bancorp recently commissioned a survey of 1,004 companies, nationwide, with annual revenue of $10 million or less. The results showed slightly less than one-third of those surveyed said their bank provides everything they need regarding financing and other business services.

Yet, business needs to go on. Companies still need to buy goods, meet payroll, cover seasonal adjustments and even seize market opportunities. So what are they to do?

More companies are turning to factoring, an alternative to bank lending that provides businesses with capital when needed on a flexible formula basis, proportional to sales. The factoring “line” grows as the sales to credit worthy customers increase, giving clients an opportunity to capitalize on market opportunities.

Let’s say a business has $100,000 in accounts receivable expected and, depending on the business, it might be weeks, months or longer before it’s in hand. Yet, they have an immediate need to cover an expense, buy new inventory or tackle a wide variety of new business prospects.

Traditionally, they might have gone to a lender with whom they have a relationship and gotten a loan secured by the company’s assets. Those loans are much harder to come by these days, due to tighter lending policies. If they can be obtained, they have lower limits and much stricter covenants.

As a mason, have you ever been in a situation in which you were waiting on a check from a large job, and needed that check to cover payroll? Even the healthiest of operations sometimes find themselves in this situation and need lines of credit to help smooth out the cash flow bumps. That was the case of a successful, self-made small- to mid-sized mason based in San Antonio, Texas. This mason often is hired by school districts to perform stucco work, lay concrete and brick, cut stone for buildings, and complete a variety of other construction-related projects.

Because of delays in state and federal funding, school districts often are late to pay out on construction contracts. By the time the contractor submits the payment application for the completed work, it can take up to 60 days to receive the full payment. Depending on the size of the job, the client has payroll to meet for about 10 to 15 employees at a deadline well before 60 days after project completion.

Liquid Capital was able to provide the working capital this masonry client needed to pay his bills and payroll on time, during the waiting period between project completion and receipt of payment.

Factoring services become increasingly important as masons take on more projects for school districts and other government-funded work, which can be late on payouts. Businesses that experience fast growth also can utilize factoring to keep up with accounts receivable. Factoring helps businesses maintain good credit ratings, by allowing them to pay their bills on time.

Factors have fought a stereotype for years, one that assumes they are a last resort or the business equivalent of payday lending. In reality, factoring is a cost-effective, flexible and responsive form of trade financing that allows clients to grow and prosper in both good and bad economies. In addition, getting money from a factor doesn’t make a company beholden to any banking covenants or the requirements of equity partners.

Factors not only provide money, but also a full outsourced credit and accounts receivable management solution. Many times, companies choose to continue to use factors for credit and collection services alone, with many businesses finding it more efficient than creating their own departments.

Each company’s cost of factoring is based on its risk, industry and market position. While critics say it’s more costly than lending, those in factoring beg to differ.

If you have a chance to grow your business and you don’t have capital available, your competitors can take your market share, or you can miss a growth opportunity and, perhaps, a payroll. If that’s the case, what is capital worth?

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