I’ve been in the industry for almost 30 years like my guest, Kris. I can honestly say we’ve been through a lot of recessions before, but I don’t think either of us have ever experienced an overnight shutdown of the economy quite like this one. I think the knock-on effect is going to be felt through businesses alike for many months to come, and I think they need to be prepared to weather the ups and downs that they’re going to experience over the next few months.
Small businesses are facing many threats right now and for the foreseeable future. I think we’ve seen it both with existing clients and just generally out there that the biggest thing is revenue and the drop in revenue that a lot of people have seen when the shutdown started. There are many clients in many industry sectors that have all been affected. So, the drop in revenue is the first thing, and how is that going to impact them? How are they going to bolster that trade and get back those losses? Obviously, a drop in revenue for any company is catastrophic. Without revenue you’re not generating invoicing and money coming in, and without money coming in you can’t pay your employees. You can’t buy more inventory. You can’t keep the lights on. It’s that drastic, and ultimately that leads to losses and could lead to company failure.
The biggest challenge is the shutdown, the implications in revenue, and the effect on cash flow that that has caused.
Cash flow is the lifeblood of any business. If your revenue is down, your cash is here. Making ends meet is what we talk to a lot of businesses about right now, and with invoice factoring services, we are able to help them. The biggest challenge is the shutdown, the implications in revenue, and the effect on cash flow that that has caused.
What Is the First Thing a Business Owner Needs to Do to Prepare for the Upcoming Challenges?
1. Financial Forecast
Looking at your financial forecasts, you’ve got to basically start again if you’re losing a huge chunk of revenue because customers are not ordering. You’ve got to look at your costs and see if there are certain savings that need to be made immediately. A lot of people have managed to get a PPP loan or another SBA form of finance to help put a band-aid on that immediate impact. It has helped a lot of small businesses when they had to completely shut down, but it’s not the answer. It’s a temporary fix. You have to look beyond that now. So, for the next few months what are you going to do? How are you going to build that revenue? The PPP was only supposed to supplement people’s payroll costs for two, maybe three months if you could stretch it out. And thereafter it really stopped. It didn’t cover a lot of your necessary overheads either like inventory or keeping your business going. It just kept your employees paid. It wasn’t a working capital solution.
2. Receivables Management
The other thing is a lot of companies are finding that their receivables have been stretched. They’re not the only business that’s hurting. Their customers are as well. So, if their customers are taking longer to pay and their revenue is down as well, they’ve got that double impact. So, managing your receivables and making sure that your customers are paying as close to terms as possible wherever they can. Those are some really important things that businesses need to focus on right now.
3. Credit Management
When you run your business, you’re not necessarily an expert in credit management, and you’re not getting access to information that may change your mind on the future supplying of customers that you’ve dealt with for years. As tough as that sounds, you don’t want to be putting out goods to people that can’t pay.
Well-known retailers are failing left, right and, center right now. People that you think could afford to pay you in the past might not be able to now. How do you predict that uncertainty, particularly when you don’t have access to a lot of the industry credit management information reporting? Companies really have to tighten their belts. They’ve got to manage their receivables. Don’t be granting credit to new customers unless you’ve done your research. We’re asking our clients to talk to their customers and find out a little bit more about their business. Go deeper into that relationship. Who are their customers? Are they getting paid right now? Work with them. If you want to grant extended credit and it makes sense to do so, it will help your relationship with them long-term. Just be very mindful that there’s going to be a wave of insolvencies that’s going to hit. There are so many companies that are in financial distress right now. So, managing credit is really important.
What Specific Financing Challenges Can Business Owners Expect to Encounter?
Business owners are finding that the traditional sources of capital that they were able to go to have dried up. Whether it was an online lender that they used a couple of times a year, many of those lenders have shut up shop and aren’t around. The reason for that, obviously, is that without revenue coming in they can’t do their assessment of cash flow. They approve people based on deposits going through your bank account, and if you haven’t got any revenue then you’ve got no deposits in your bank account. They’re not as likely to lend as they used to be.
Expect Increases in Predatory Lending
Banks are also tightening up. They are predicting again a large default rate that’s going to impact them. So, they’re tightening their belt on their credit criteria. It’s much harder to get bank loans at the moment. With the limited availability of credit, there’s going to be an increase in predatory lending. Short-term money lenders will come in and charge ridiculous interest rates. That needs to be avoided.
That’s a threat for a lot of people. Previously, they could draw on friends and family or personal savings. That may not be an option anymore, so the challenge that they will really face is access to capital. It depends whether or not you need a quick injection of working capital—like a small business loan—to get you over a hump. You also need to predict your medium to long-term working capital needs. That’s something that people shouldn’t forget right now. You may be able to get a loan. You may be able to borrow five thousand dollars off your aunt or whoever it might be but that’s not going to see you through November, December, January time.
Even if you have a bank line of credit, maybe your profitability is taking a hit. Maybe you’re going to breach one of the covenants. You could be thinking you’re okay but actually heading for a crisis without realizing it.
What Might Happen if Someone Breaches a Covenant with a Bank?
It’s difficult to say what might happen if you breach a covenant with a bank, but usually the bank will certainly reach out to them and talk. Maybe there’s a cure provision in your loan agreement. Maybe they’ll issue a waiver for a certain issue that’s come up. Banks are going to want to work with you if you’ve had a good track record, but if you’re seeing your revenue has just disappeared and you’re facing significant losses, you may find that you get a default notice and you’ve got to find a solution quickly. So, it is very difficult times for everybody. The challenges are going to last with us for some time, unfortunately.
How Can You Find Long Term Financing to Support Your Business Through Upcoming Challenges?
Long-term financing right now is a challenge for many people, but there’s some good news out there. We’re seeing a lot of inquiries for factoring services where maybe people have taken out two or three different online loans. They’ve stacked them, but the business has great receivables. They still are getting good orders. Those are the types of clients where we can get them into a factoring facility very easily. Factoring immediately helps to pay off that high-interest debt, and really get them into something that’s going to work better.
MCA Loans During a Recession:
We’ve seen clients with stacked MCA loans before. We have taken on a client with five stacked MCA loans and a tax lien. The repayments for those alone were suffocating him. So, when he came to us, we helped him get rid of that repayment obligation. If you are saddled with these loans, you’re going to want to keep out of a default. But ultimately, it’s going to affect your business credit. If you do slow down on paying your vendors because you’re paying all these loans just to keep them current, you’re going to find your credit is being impacted. So again, there’s a double-edged sword to this.
When it comes to MCA or other short-term funding options, you want to look at alternatives. It’s okay to pay them off. That’s a good thing, but if you’re finding that you just can’t make ends meet because the repayments are really expensive, take look at a financing solution that will improve your cash flow instead of hurting it. Invoice factoring is a great solution. It improves your cash flow starting on day one.
Factoring During a Recession:
If you have great commercial receivables, a factoring company can help you and will be an answer for you. One of the most important aspects of factoring is that even if you’ve hit that bump in the road, we’re not going to turn you down. Just because you’re now making losses or your revenues drops, if you’re still trading business to business receivables on open terms, we can help you leverage money out of your open A/R.
Does Credit Affect Your Financing Options?
Personal credit is not an issue to us, so if that’s taken a hit at the moment, don’t worry. We don’t even look at it most of the time. Personal credit is simply not important for factoring approval. We want to look at who your customers are and what your products or services are. Looking at your customer credit is going to be very important. That is really how we will approve your financing facility with us, but we also have access to so many different reference agencies and information out there. Monitoring customer credit is what we do all day long, so we can get notifications from companies like D&B or Experian. So, your customers’ credit is important, but don’t worry if you’re finding your customers are stretching out their payments. That’s okay. We expect that at the moment. We are reasonable.
We want to understand what you’re doing to try and turn things around and using us to check customer credit is really important. You don’t want to be taking on new customers that really don’t have the ability to pay you. We’re experts at providing guidance or advice about customer credit worthiness. We’ve done this for many years. The whole crux of our business is monitoring business performance because that’s how we lend to our clients. So, we’re very on top of monitoring any trends that might be going down, whether it’s getting information from credit reference agencies or sharing information with other factoring companies. We typically have a lot of early warning signs that there could be a problem and we’re proactive about managing on the collection side.
You might not necessarily realize that you’re 10 days beyond terms. We will. We’ll let you know if your customer is late on paying your invoice. We want to make sure you get paid. If there’s a shortage of cash on the other end, then you have the confidence to know that you’re fairly high up that list for getting paid due to the relationships we already have with your customers.
Factoring not only gives you the cash you need to help weather this storm and grow your business, you can look at it as outsourcing your receivables management. We’re going to look at your invoices, make sure that you have terms on there, make sure you’ve addressed it to the correct customer or correct entity, and we’re going to take over that relationship if you want us to. There’s a number of ways we can do this, but a lot of people don’t want to be saddled with following up on those customers. Instead, they want you to play good cop/bad cop. They don’t want to be that person that has to chase for the debt. They want to get a new sale. You can use us to politely and professionally follow up on that receivable, freeing you—the business owner—to talk to your customer to get more sales.
What is the Difference Between a Loan and Factoring?
A receivables management service doesn’t come with an MCA or a bank. With Eagle Business Credit, you’re going to get an account manager who is there for you to bounce questions off of. We are happy to help you understand how everything works. We’re human beings with empathy. It’s not just a system. We do provide an online portal that’s available for you to go upload your invoices, look at your payments, and check your reporting.
Ultimately, we want to create an open dialogue where you can communicate your new challenges and we can understand how we can help you. Factoring is so much more than just money. It is a relationship where we can connect you with other lenders if necessary. If you’re looking for equipment finance or something else that you need, talk to us and we usually have a great solution available to you.
Why Is Factoring Such a Good Fit for Small Business Financing Needs Right Now?
First and foremost, factoring helps your cash flow. If revenues are going down, and your money coming in isn’t as fast as you’d like it to be, how will you pay your bills or employees? Purchasing more inventory and being able to boost your revenue requires predictability of your cash flow. Strong cash flow is the most important thing you can have, and factoring gives that to you. Once you’ve sent your goods out and issued an invoice, you don’t have to wait 30 or 60 days to get paid. You will get paid the next day after you submit the invoices to us. Suddenly, your cash flow problem has gone away. Factoring bridges that gap in your sales cycle between fulfilling an order and collecting customer payment.
Recourse vs. Non-Recourse:
Many companies are struggling with cash flow. So, many of their customers are taking longer to pay. Without factoring, you run the risk of your customer not paying. There are two main ways to factor invoices: recourse or non-recourse facilities. The difference is who covers the credit risk. With recourse factoring, that means if the customer doesn’t pay or goes out of business, ultimately the factor can recourse it or charge it back to you, the seller. Non-recourse is the opposite. The factor will take on that credit risk, and a lot of people need non-recourse factoring right now because it really takes not only the cash flow worry away but also the credit risk.
Benefits to Factoring:
Another benefit to factoring is the facility is going to grow in line with your business. As you grow and make more sales, you can obtain more funding from your factoring company. That’s awesome. It’s very unlike a bank loan or line of credit where it is gone once you’ve maxed everything out or you’ve spent everything. Factoring is flexible and your facility will increase with your sales volume.
Factoring is not a loan. You don’t make any repayments. It is not debt. We’re going to purchase your invoices give you a prepayment for those. We get paid by your customer. So, this is a cash flow tool that is quite liberating compared to a loan or MCA with repayments causing cash flow strain. Instead, you know that each time you make a sale, you’re going to get paid. It’s a completely different form of financing and very flexible.
Can You Have a Loan and Factoring?
Factoring can work in conjunction with other lenders as well. As long as the factoring company has the receivables as collateral, you can obviously go out and finance equipment, real estate, whatever else you need. As long as we have those receivables, factoring works in tandem with so many other forms of finance. Especially right now where people have a PPP loan, factoring is an option. PPP will help you make your payroll for the next few months, but you still have the ability to go out and take a factoring line as well to help you with your working capital.
With a good strong cash flow, your business credit is not going to be affected. So, you may be able to go out and get discounts from your vendors for early payment because your cash has now been accelerated. You can do that when you’re not waiting to get paid.
Ultimately, we’ve seen our clients over the years use it for so many different purposes. We finance so many different industries and different walks of life. Whether it’s transportation clients and they need money just to make the fuel for the next load or whether it’s a construction company or manufacturing company, we can provide strong cash flow through invoice factoring.
What Industries Benefit from Factoring?
We can help so many different entities and one thing that we are proud of is how we’ve managed ourselves over the last few months. We haven’t changed our business model at all. Our facilities are the same. Our fees are the same. Our transparency is still the same. We’re not taking advantage of anyone or doing things differently because there is a greater need for financing.
Funding doesn’t stop because your revenue has dropped or if you’re starting to make losses. We won’t charge you more money because of it. That’s a backwards way of operating. Factoring has always been a strong way of financing businesses during recessions. It’s a very different form of finance. It’s a relationship-based tool and it goes beyond a loan.
If you talk to us about particular challenges that you’re having, we’ll try and brainstorm it with you and figure out a solution. We know that our role is to help you from point A where maybe you’re in a desperate need right now to point B where hopefully you either are self-financing or you can graduate into a bank facility.
That will be the end for this episode of The Money Factor. We know it’s difficult for lots of businesses. We are here to answer any questions you have. Please reach out to us we’re more than happy to help you.