Having been in the factoring business for 30 years one of the most frequently asked questions I get from outside the industry, is why do companies factor their accounts receivables. Even before my inquisitor finishes that sentence, they always seem to follow it us with, “they are going out of business aren’t they?” Factoring has been around for thousands of years and is an important form of financing in global trade. Truth is, someone going out of business is very low on the list or why businesses factor. AeroFund Financial, my company doesn’t want a customer who is going out of business. I don’t want to be Larry the Liquidator; I want to help businesses grow. If my customers succeed I am succeeded.
One of the most difficult and expensive tasks in any business is finding new customers and it’s no different here at AeroFund. If we only dealt with customers ready to go out of business, I would eventually go out of business myself. To grow a business you need to retain customers, not liquidate them. Our incentives are very much aligned with our customers. If we do a great job and a reasonable cost, they can grow and retain more profits. That in turns allows them to find our services useful and important and can afford to use our services for a longer time. Just think what your business might look like if you could keep a customer longer. Imagine what it would that does for sales.
Here is an example. Say you add 10 new customers a year and after two years you had 20 customers. In your 3 year you also add 10 new customers, but you lose 10 of the original ones. The end of year 3 you would still only have 20 active customers. Baring that none of the 10 who left because they were going out of business, now imagine you could retain the original 10 for an additional year. At the end of the year you wouldn’t has a net of 20, you would have all 30. That’s a 1/3 increase in your sales without having to add new customers or spend extra money on sales to find new replacement customers. Another words all you have to do to increase your sales is retaining your customer by doing a great job, add value and making sure you are keeping up with their needs.
So let’s get back to why companies factor. At the top of the list would be to improve cash flow to pay bills, build inventory, take discounts and handle increasing sales. Many of our customers come to us because they have had an increase in sales and don’t have the capital to carry large receivables. Many times they have hit or exceeded the credit limit set by vendors and even their banks.
The next question you are sure to ask is, why don’t they go to a bank or the SBA to either get or increase their credit lines? There are several answers to that as well. The main assumption is they have poor credit or have defaulted on loans or have been late on payments in the past, sometimes that’s true. The more likely reason is the banks and SBA won’t give them the size credit line they need to run a growing business. The SBA as well as banks also have strict guidelines, formulas, covenants and restrictions to determine how much you qualify for. What every CEO knows is, banks only hand out umbrellas when the sun is shining. If you don’t have secondary collateral to back up the loan, sorry.
Additionally Banks fear growth. Banks don’t like businesses that grow 10,20,30% without the necessary equity needed to fund it, and they aren’t in the equity business. The SBA on the other hand the SBA might be comfortable with growth and be willing to lock you in a strict term loan agreement. If you continue to grow after you used up the SBA capital getting out of that SBA loan can be burdensome and costly with prepayment penalties fees and timelines.
These reasons are the reason factoring exists. Since factoring is dominated by privately owned companies, they don’t have to follow the same conservative guidelines that the banks must use. At AeroFund, like most factoring companies, we look at the underlying collateral of the accounts receivables to determine how much money we can loan. Factors are not frightened by growth, personal credit, or past performance, factor’s love growth. You grow, we grow. Factors look at your business and your sales the same as you do. If a customer wants to buy the goods or services offered and they are creditworthy and have the ability to pay, you, as well as we want to do business with them.
Another reason business chose factoring, is to free up cash on the sales that have already been made. Many companies build up their accounts receivables while increasing their payables. If you’re running your business correctly and you are selling you goods for more than what you paid your receivables are growing faster than the credit from your vendors. If you purchased $50,000 in goods hopefully you sold them for $100,000. That means someone owes you $50,000 more than you owe your vendor. The same holds true for services, but instead of goods, it might be labor. That $50,000 was to be used to pay your rent, salaries, taxes and other expenses. Your employees, landlord and the government aren’t willing to wait to be paid, so businesses come to factor to free up those accounts receivables and get the company’s cash moving again.
There are so many reasons companies turn to factoring. Collections services, money transfers, PO financing, the list goes on. You are not only borrowing money from a factor, you are gaining a complete accounts receivable department. Factoring is a partnership. A factor could be your rich Uncle, your parents, a business associate or a professional company such as AeroFund, a well-capitalized specialty finance company. Where are your Rich Uncle, might literally cry Uncle as your needs start to grow and require more money, AeroFund like our competitors can reach deep into the well and keep pulling out the cash you need. You get the deep pocket partner you need without the need to give up equity in the company you poured your heart and soul into.