Why accounts-receivable financing is worth considering
Access to capital and cash flow are the lifeblood of any business, and those in the cabling industry are no exception.
Access to capital and cash flow are the lifeblood of any business, and those in the cabling industry are no exception. A cabling-contracting business cannot survive just because it has an exclusive market, a regional territory, or even a huge contract from a major local exchange carrier or cable company. The key to survival is having ready access to capital and managing cash flow.
So, when a cabling-contracting business lands that big job, it often cannot sustain the increased payroll or additional equipment expenses for the 90 to 120 days it takes to get its money from its client. A bank may refuse to finance a contractor in such a situation for any number of reasons, including that the company is too new to sustain such growth, it has large concentrations in accounts receivable due to that big job, or the competitive and unpredictable nature of the cabling industry.
When banks say no, the answer to a financial crisis may very well be a factoring company.
What is factoring?
Factoring, or accounts-receivable financing, has always been available to “big business.” But recently, small businesses have begun to use this service as well. The finance industry is beginning to realize that the cumulative total of “small business” potential is larger than that of so-called big business, and the industry is beginning to work at making small businesses aware of this alternative financing option.
Factoring companies play a vital role in financing the economy, especially for companies that work with large, well-known clients. For undercapitalized companies, the increased cash flow provided by factors can make the difference between profitable growth and failure.
Simply stated, factoring works like this: the contractor sends a copy of its customer’s invoice, along with back-up documentation, to the factoring company, which then advances the contractor a high percentage of the invoice’s face value and retains a smaller percentage until the customer pays the invoice. There is no waiting weeks or months to get paid. Factoring invoices lets contractors get the money they have earned and need to carry on business or expand. Because the contractor’s invoices are the collateral, a factor, unlike a bank, will not overanalyze the contractor’s personal or business credit.
A key difference between factoring and bank financing is that with factoring, you use your customer’s credit line as collateral, rather than your own. A bank loan, on the other hand, is based on your company’s credit worthiness and your ability to pay back the loan. When you factor, the more credit-worthy customers you have, the higher your credit line.
Meeting the industry’s needs
At some time or another, many cabling contractors have had cash flow problems that include: trouble covering payroll; difficulty paying real-estate, payroll, or income taxes; letting accounts-payables go past due; inability to take on new projects; inability to purchase new equipment; lack of access to volume discounts; and having a big job that consumes all available cash.
Because the factor generally looks at the credit-worthiness of the clients-even if the contractor has had a business or personal bankruptcy, tax liens, or slow pays-factoring will give a contractor the cash flow that is needed immediately.
The communications-cabling industry is not new to factors. Factors are experienced at dealing with cable operators as well as telecommunications providers, such as Cox Communications, Comcast, Time Warner, Verizon, SBC, and MCI. Familiarity with companies of this type, and their methods of payment, helps make the funding process a smooth one.
By eliminating the wild swings in cash flow that many contractors know all too well, factoring can enable timely payroll administration, payments to suppliers, and can allow the contractor to negotiate best-pricing and terms agreements with suppliers. In some cases, the ability to obtain discounts and get favorable material pricing has made up for the cost of factoring.
Unlike many banks, factors do not have a one-size-fits-all attitude toward financing. They do not immediately deem a contractor “too small,” or “too new.” Nor will a relatively low net worth or a zero-profit from the previous year necessarily eliminate factoring as a possibility. Factors consider themselves proactive rather than reactive, and emphasize creative structuring of deals as a means of meeting contractors’ needs. A factor with experience in the communications-cabling industry and who understands the industry’s dynamics and needs can put that knowledge to work tailoring a financing plan that works not only on paper but, more importantly, in practice.
A contractor who calls a factoring company with a funding request does not have to wait days to get answers from a loan committee. For example, one contractor that spent 25 years installing underground and aboveground networks throughout North Texas saw revenues decline 50% when the Internet bubble burst and the telecom industry sank. When the contractor’s bank withdrew the credit line and the contractor could not meet its supplier or payroll obligations, it turned to factoring. The cash-flow boost let the contractor meet immediate demands and, ultimately, survive the downturn.
Today, the contractor has the opposite problem-rapid growth that requires cash as fuel. In this case, factoring helps the contractor pay subcontractors on time as well as take on bigger jobs.
While factoring companies may be seen as competition to traditional lenders, some banks are actually sending clients to factoring companies. These banks have concluded that it is in their best interest to refer the business to a company that can help their clients. When the client is bankable again, the bank believes the client will return to it to borrow.
Factoring is flexible enough to be a one-month solution or an ongoing strategy. When evaluating a factoring transaction, borrowers should consider the cost of financing in the context of the benefits received rather than on a standalone basis.
When compared to other financial alternatives, factoring is cost-effective and efficient.
MEG ROBERSON and TINA TERRY are business development managers with Allied Capital Partners, LP (www.acplp.com), which provides accounts-receivable financing to companies in the cabling industry.