Traditional Bank Lending Becoming Difficult For Small Businesses

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Liquid Capital is Experiencing Record Numbers As Businesses See Positives in Factoring

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. That's good news for factoring companies such as Liquid Capital.

U.S. Bancorp recently commissioned a survey of 1,004 companies nationwide with annual revenue of $10 million or less that showed slightly less than a third of those surveyed said their bank provides everything they need when it comes to capital 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 and more are turning to factoring, an alternative to bank lending that provides businesses with capital when needed on a flexible formula basis that is proportional to sales. The factoring “line” grows as the sales to credit worthy customers increase giving clients an opportunity to capitalize on market opportunities.

Factoring or “accounts receivable financing” allows a company's balance sheet to remain strong because Liquid Capital actually purchases invoices from its clients and does not take an equity position. Clients incur no debt and maintain control of their business. And unlike banks, Liquid Capital doesn't require the lengthy process, personal credit score, business history and restrictive covenants necessary for traditional debt. Businesses can have cash in hand in as little as five to six days.

“With cash flow problems, even a growing, profitable business can get into trouble,” said Sol Roter, one of Liquid Capital's founders. “If a large account fails to pay invoices on time, even if they take 60 or 90 days, there can be trouble.”

Previously, most U.S. factoring clients were manufacturers or distributors selling to retailers, but over the last 25 years service-related industries such as staffing, transportation, telecommunications and many others have grown to comprise more than 65 percent of Liquid Capital's clients.

Liquid Capital's primary clients range from small, growth-oriented businesses to more established, mid-sized companies, but all represent an integral part of the national economy. More than 90 percent of Liquid Capital's business services involve accounts receivable financing, but it also offers additional financing solutions such as purchase-order financing (used to finance the purchase or manufacturing of specific goods that have already been sold) and equipment financing.

Perhaps more importantly, Liquid Capital offers clients an extensive package of financial management services that includes processing and ledgering of accounts receivable, credit review and assessment, professional collection services and preparation of all reports, including 24/7 online access to detailed information on aged accounts receivable along with credit histories and available customer credit. The services allow clients to focus on operating their business without the need for a credit and collections staff.

Such “back-office” administrative support is provided by a billion-dollar factoring corporation and is commensurate with services offered by some of the largest factoring companies in North America.

“We literally replace their credit and collections department,” said Brian Birnbaum, another of Liquid Capital's founders. “For example, if a small trucking company is doing $50,000 in monthly volume and we charge a nominal fee for our financial management services plus provide them with all the funding they need, that company couldn't come close to buying those same services for what we're charging them for the year.”

Even though factoring is recognized worldwide as a trusted method of financing short-term cash flow, it is not as common in the United States as elsewhere. For example, factoring volume is much larger in countries such as, Italy, France, Germany and the United Kingdom, even though the U.S dwarfs their economies.

But that is quickly changing. Liquid Capital is experiencing record-setting growth in 2011 and Birnbaum said he expects factoring in the U.S. to become more commonplace in the next five to 10 years as growing companies seek financing based on their receivables rather than equity.

“When banks look to make bank loans to companies they look at how much working capital and equity a company has, how long they’ve been in business and other factors,” Birnbaum said. “As a factor, we look at what credit-worthy receivables a company has as the main criteria for lending. If you have $200,000 in receivables and $20,000 equity, you might be able to get a $30,000 to $40,000 from a bank. But with Liquid Capital you can get $150,000 to $160,000.”

Liquid Capital offers clients 30-day contracts, unlike some competitors who require long-term agreements. It will also fund as many receivables as required, whether it's a single invoice or all invoices a client owns. And if a client experiences tremendous growth, Liquid Capital offers a nationally syndicated program that ensures funding. “It's impossible in our system to run out of money,” Birnbaum said.

Even if a business is showing phenomenal growth, it sometimes outstrips a bank's requirements for lending, but Liquid Capital helps the bank keep a satisfied client by funding the client's business when the bank is unable to do so. The average client uses Liquid Capital's services for two to three years.

However, Birnbaum said some companies still falsely attach a stigma to using a factor. He said it’s an unjustified concern and one that could unnecessarily hinder a company’s success.

“They think of factors as the lender of last resort. I’d like to think of factors as the lender of first resort,” Birnbaum said. “Let’s say you’re dealing with a major retailer. If you get an initial order for $50,000 to $75,000, that retailer is only going to be concerned about what happens if the product takes off. How are you going to be able to fund and meet the increase in sales?

“If you’re dealing with a bank, when your line of credit is used up you can’t get any more money. When you deal with a factor, the more receivables you have, the more money you get. There’s never a credit limit. Factoring is a much bigger positive than a negative.”


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Brian Birnbaum
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