Commercial Finance Association Conference Recap
By Mike Semanco, President, Hennessey Capital
For those professionals involved with the commercial finance industry, the place to be in mid October this year was at our annual conference in downtown Chicago. The weather was great and the time spent at Navy Pier for the opening reception was filled with talk about what a difference a year makes in the credit world.
The attendance was up and I am not sure if it was due to the keynote speech by President George W. Bush or that we had a wave of bankers who were in attendance this year who could not make it in 2009 for a whole host of reasons.
One common theme throughout the week was the discussion on how factoring and asset-based lending were the products used by small and midsized businesses to help them get through the credit crunch. Even with the credit market showing a slight sign of easing, ABL and factoring is still the time tested way for businesses to finance their working capital needs, whether traditional means are available or not.
Panel discussions included insight on the current state of the debt and equity markets, financing for entrepreneurial lenders, the impact of global economics and technology trends within the commercial finance industry. It is apparent that credit remains very tight for small and medium sized companies, while there is a lot of money available to large corporations who have a broader choice of borrowing options. To achieve long term success, lenders must stay disciplined in following their credit and process guidelines. Technology is playing an increasingly important role in our industry, from marketing to sales management as well as in operational efficiency and customer service.
An opening session with former President Bush and a lunch session on customer and employee loyalty by James Kane, were highlights to the event.
Everyone at the conference agreed the economy is still fragile. The lending community is confident the worst is behind us and there will be opportunities to lend companies the money they need in this difficult environment. There is no question factoring and asset-based lending will remain a critical solution for businesses needing working capital. I have been in this industry for 17 years, which is a short period of time compared to other seasoned operators. One thread we all share is the passion to help entrepreneurs obtain the financing they need to grow their business. The convention provides a fabulous opportunity to renew acquaintances and make new ones. Sharing stories of successes, challenges, and experiences that we meet along our journeys is what really helps us connect as an industry. What a great industry it is!
Tips for Staffing Companies: How to Increase Working Capital
By Jeff Wright, Senior Vice President, Hennessey Capital
As we continue to see signs of an economic recovery, the strength and duration of it remains uncertain. As a result, companies are reluctant to hire permanent employees. Instead, they are turning to temporary staffing companies to fill their needs. The staffing industry is beginning to see an increase in the level of activity as businesses ramp up production and level of service. This can create a cash flow problem for staffing companies that do not have adequate cash reserves. Employees must be paid weekly or bi-weekly but must wait 30-60 days to collect from their debtors. This causes a drain on cash especially when they are trying to grow their business. They may also lose out on the opportunity to bid on new contracts, due to cash constraints. Management can inject additional capital or they can secure funding from third party investors. The challenge with either of these options is that current ownership may have to sacrifice a level of control within their business to achieve the desired outcome.
An alternative for staffing companies that face this cash crunch is to seek business financing. Since the staffing company’s primary asset is the people they contract out, it does create an accounts receivable that can be leveraged to generate the working capital they need to pay its employees and operating expenses on time and take advantage of new opportunities. If traditional banking sources are not available, a factoring company can provide an alternative source of financing. Factoring is the sale of accounts receivable or invoices at a small discount to obtain immediate cash. This type of financing gives businesses the ability to ensure growth without diluting equity or incurring debt. While factors are concerned with the long term viability of the company, their primary focus is on the debtor strength, the debtor’s ability to pay the invoices being purchased and the character of the management team. While traditional funding sources, like banks, may focus on the staffing company’s past, factors look at future opportunity and growth opportunities. A factoring facility is easy to qualify for and can quickly create immediate working capital availability to meet cash needs. Factoring can be used to bridge the gap between the time the service is delivered and the time the invoice is paid and helps in managing the in-flow and out-flow of cash for staffing companies that want to capitalize on the prospects that lie ahead for their in-demand service.
10 Tips for Selecting the Right Factor
When entrepreneurs need working capital for their business, a quick way to obtain cash is by leveraging your accounts receivable. Factoring companies are a great source for this type of financing. Although factoring is a pretty vanilla process, the company providing the factoring can come in many flavors. A referral from a trusted source, banker, CPA or attorney, is a good start to finding the right company.
Below is a checklist of things to consider when seeking a factoring partner.
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Relationship, partnership- easy to work with, straightforward process, easily accessible.
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Do they have capital to lend or is their credit constrained?
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Do they have resources that can complement their financing if needed- leasing, real estate lenders, consultants, etc? It’s important to be connected to other resources and entities that can help grow your business.
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Factoring should be flexible, so watch for monthly minimums.
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Fully understand your costs. Ask about exit fees, service fees and documentation fees.
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Local flavor and relationship. Not always a necessity especially if references check out.
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Industry expertise beyond factoring.
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Ability to transition from factoring to line of credit without switching entities.
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Relationships with banks are key for future introductions.
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Community relationship. Are they making a difference in your area?
Using Working Capital to Complement a Current Bank Line of Credit
By: Toby Dahm, Senior Vice President, Hennessey Capital
Before Reese’s Peanut Butter Cups became one of our favorite Halloween treats, nobody thought that peanut butter and chocolate could be combined to become something so delicious. In the finance world, there is an often overlooked recipe for growth financing that creates a win/win/win scenario. That recipe is to utilize factoring as an incremental financing tool in addition to an existing bank loan.
Hennessey Capital has utilized this strategy to propel many companies to a higher level of revenue and profitability, while enabling the client to maintain a very competitive financing cost structure. For most small and middle market companies, a bank loan provides the lowest cost financing that they have access to. However, it is common that a bank is comfortable at a certain level of exposure to a client, but the client’s growth trajectory creates a financing need that exceeds the bank’s comfort level. This is where factoring can be the perfect tool to fill in the funding gap and enable the client to achieve success.
The benefit is that the client can very quickly put the factoring facility in place to complement the bank loan at very little fixed cost. The factoring facility becomes a tool to finance their working capital needs as their growth accelerates.. By providing up to 85% financing of accounts receivable, without diluting any equity ownership, the factoring facility enables the client to access cash immediately, instead of waiting for their customers to issue payment. Factoring provides great flexibility to the client by being able to finance the rapid growth when it is needed, while providing the choice to terminate the program when it is no longer needed due to expansion of the bank loan or a reduction in working capital growth.
An IT staffing company was able to utilize this program to take on additional work that enabled them to grow from $2 million in annual revenue to over $10 million during an 18-month period. Although Hennessey’s factoring facility was replaced by an expanded bank loan, the client has continued to grow at a strong pace and is now achieving annual revenue that exceeds $100 million. Another IT consulting firm utilized a factoring facility with Hennessey Capital to enable it to expand its base of consultants on one project from 10 employees to 75 employees over a 90-day period. As they demonstrated their performance and profitability on this project, their bank agreed to increase their financing to replace the factoring facility.
Just as chocolate and peanut butter can be combined, a bank line and a factoring facility can also be combined to form a very healthy 3 way partnership between the bank, the client and the factor.
Where To Turn When Your Bank Credit Line Shrinks Pt. 2: Factoring
Joining us for part two of our previous episode, as we talk more about which strategies work best when your credit line shrinks. In this podcast, we discuss how many entrepreneurs are seeking factoring as an easy and smart way to increase their business’s working capital. The current credit crunch has put a spotlight on factoring - this podcast explains why and how it can be used as a viable option to increase cash flow. We also answer the question; “how does the cost of using asset-based lending or factoring differ from utilizing a bank for funds?” Hennessey Capital President Mike Semanco also shares the one thing business owners should do to keep their business growing during this challenging time.
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