Working Capital

How to secure business financing

Working capital can help with making payroll, updating inventory or covering unexpected maintenance costs, which can make the difference between growth and stagnation. For example, companies with seasonal business such as Landscapers, Pool Maintenance, HVAC, Wholesalers and Retailers typically see sales increase or decrease throughout the year. Traditional bank lending requirements are systemically about the same. Sometimes companies don’t meet specific criteria to secure a loan because of the established time-line in business, poor credit or even industry type. These are simply a few elements that could influence a bank’s approval or decline process.

Your company’s ability to meet its trade and short term debt obligations is very important. For businesses that provide Net-Terms to their customers’, cross-aging of receivables is significant. Bank’s and private lenders use internal formulas to determine the classification of debtors whose outstanding debts exceed (90) days, and represent more than (50%) of a company’s own debts. Depending on the risk factor appetite of the lender, they may chose to back out portions of the receivables or completely reject them. It’s crucial for your business to evaluate company’s receivables carefully because this not only affects your profitability, but the process is used by credit underwriters to determine how your company conducts business, and the likelihood of success or failure of your ability to pay back any outstanding debt owed.

Without having a structured plan of action the end result often ends in failure. This is why consulting with a reputable accountant and business lawyer can make a real difference. Other examples: The way you structure your company when incorporating will affect how you pay taxes, and even whether you can take your company public should you desire to raise capital. It is usually much easier to attract new investors into a corporate entity because of limited liability and the easy transferability of shares. Shares of stock can be transferred directly to new investors, or when larger offerings to the public are involved, the services of brokerage firms and stock exchanges are called upon.

Some people think self-incorporating is going to save them money, but later find out that limited liability entities AKA LLC, are required in some states to advertise before launching. If you plan to seek investment, the preferred entity of most investors and VCs is the C corporation, which is the standard corporation formed by incorporating. Limited Liability Companies, Limited Liability Partnerships and other entities are not favored due to the variation in rules between states and because they do not have the legal structure of shareholders, a board of directors and officers, which are standard components of investment.

If you have less than 35 shareholders, you’ll probably want to elect to be an S corporation for tax purposes. You must file the election form 2553 within a short time after incorporating, so be sure to check with the IRS regarding the filing and the deadlines. If you need to expand beyond 35 shareholders in the future, you can change your tax status back to a C corporation to do so.

Anytime you’re dealing with investor-related agreements and stock grants, you’ll want to work with a securities attorney. These areas are complex and vital to making sure you retain control and future benefits from your company. As a side note, the attorney you work with usually should not be a shareholder or a board member of the company. If he or she suggests this, then you should discuss the Professional Responsibility Rules of his or her State Bar with the attorney, phone the State Bar attorney complaint line to discuss the situation and make sure his or her actions are ethical. So, had you talked with a seasoned professional they could have explained this small caveat and much more.

Asset based lending

Asset based lending (ABL) is an excellent working capital solution that can help businesses with cash-flow needs that cannot be addressed through traditional bank lending. Whether it’s having greater leverage, less restrictive covenants, or enhanced flexibility; asset based financing facilities can be suited to meet the needs of various industries. Credit is provided based on your company’s eligible:

  • Accounts Receivable
  • Inventory
  • Machinery & Equipment
  • Commercial Real Estate

Working Capital

In contrast to other methods of financing, asset based lending can provide a cost effective way of obtaining working capital. Through the use of (ABL), companies are able to avoid relinquishing equity in their business, while achieving greater strength to grow and recapitalize. Some of the benefits are: expansion, supplier discounts, shareholder buyout and funding payroll.

Your business will have daily and weekly access to your established credit revolver when you request it. Depending upon your company’s size the facility can increase or decrease. The progression of client invoices is a key component that drives availability.

Factoring Overview

Maintaining steady cash flow is one of the most vital aspects of any business. Accounts receivable factoring is the financing of a company’s receivables that accelerates payments for merchandise that has been sold to its customers that have (30, 60, 90) day terms. Factoring can provide an average advance rate of (60% to 85%) of the invoice purchase price. In some cases depending upon client risk it may be as much as (90%).

Types of factoring available:

  • Recourse Factoring – The client bears responsibility to collect any invoice. Should a buyer fail to pay, the client must collect the payment. Note: (Better Factoring Rates) Complete liability to you with the associated expense of recovery.
  • Non-Recourse Factoring – The factor handles the collections process, and bears the liability should one of your client’s fail to pay an invoice. Note: (Higher Factoring Rates) No liability with less responsibility.

Factoring provides cash-flow to:

  • Grow Your Business
  • Remain Competitive
  • Bring Taxes Current
  • Cover Payroll
  • Pay Bills
  • Purchase Supplies, Inventory & Equipment
  • Strengthen Your Company’s Credit Rating

What are some benefits?

  • Easier to obtain than a traditional bank loan or credit line
  • Rapid turnaround of cash-flow – usually within 24 hours
  • Your client’s credit rating determines eligibility
  • Back office credit checks and due diligence saves time and concern
  • Availability of cash grows as your sales increase
Purchase Order Financing

Sometimes dreams do come true . . . Let’s suppose your company is fortunate enough to secure a large order from Walmart, Costco or Amazon. What’s the next step? Well, you need to purchase supplies, pay for labor and cover the cost of shipping before the goods can be delivered.  No problem there right?

Wait just a moment, not so fast! Is your company prepared to take on the expense of such a huge opportunity? In most cases your supplier wants payment up front, but your new customer has requested (Net-Term) payments of (30, 60 or 90) days. How is it possible to accomplish this arduous task? It’s called Purchase Order Financing (AKA) PO finance.

Here’s how it works —The PO finance company usually advances upwards of (70%) of a confirmed purchase to your suppliers. They will then pay your supplier or open a letter of credit. Once your business delivers the approved goods they will invoice your customer.

After collecting the payment from your customer, the purchase order finance company will remit back to you the difference between the value of the order, and the amount paid to the supplier, minus any fees or monies used in the transaction once the payment has been received.

Important note: Most factoring companies are uncomfortable taking on a client in need of both receivables finance, and purchase order finance. In such situations they will usually team-up with a reputable PO company to complete the deal.

Merchant Funding

Stratacus Business Capital does not work with credit card cash advance companies because the associated rates can be prohibitive. In specific circumstances where bank lending is not an option due to deplorable financials, or a credit score that falls below (680), It may be the only available alternative. This approach seems to be popular within the restaurant industry where the failure rate statistically climbs in the second year. The research was performed by H.P. Parsa, John T. Self, David Njite, and Tiffany King, and can be referenced in the 2005, Cornell Hotel and Restaurant Administration Quarterly.

Our client experience has been very successful when using a (Merchant Loan) which in contrast to a (Merchant Cash Advance) is quite reasonable in terms of rates and flexibility with loans that range from $150K to $2MM. To secure this type of funding your business must have a demonstrated monthly credit card volume of $150,000 or more over (12) months. The (Merchant Loan) company will run an analysis to determine, which month has the highest amount of transactions. The loan will be based upon this amount, but limited to (5%) of the gross annual sales. Therefore, the more money your business makes the more you can receive.

Merchant loans work much the same way as a regular term loan, but amortized over a (6 to 18 month) period. The fixed weekday payment is taken via (ACH) from your commercial bank account. In some cases, the funding company may consider using monthly cash flow in unison with credit card sales. This approach creates expansion into other industries such as: manufacturing, distribution, wholesale and service related businesses.