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.
PO Financing- the ideal financing tool for the right situation
By Mike Semanco, President, Hennessey Capital
For many entrepreneurs, landing that large purchase order is just what the doctor ordered. You worked hard to win the client, outlasted the competition and are in a position to build on your success. The team celebrates until someone asks, “Do we have the cash to purchase the large amount of supplies needed to deliver the project?”
Growth can be a major drain on a company’s cash and a major reason why we stress the importance of cash forecasting.
Although purchase orders are covered in the Uniform Commercial Code as an asset of a business, it is not an asset that is easily financed, unlike accounts receivable, inventory, equipment or real estate.
Purchase order financing is offered by very few finance companies and is usually best suited for distributors. Manufacturers and service providers are not ideal candidates for PO financing due to the concern of performance risk. PO Financing for distributors allows for the securing of goods by way of letter of credit (promise to pay once certain stipulations are met), so that the distributor can increase its buying power with suppliers. In the case of a distributor, they are not responsible for manufacturing the product so performance risk lies with the supplier. PO financing will be structured so that the supplier will not receive payment unless they produce the proper product as defined in the PO, which eliminates the issue of performance risk and thus satisfies the PO funding source.
PO financing carries more risk to a lender than traditional A/R financing thus the cost is more than traditional A/R financing. Due to the increased cost, companies must make sure they have sufficient margin in the order. PO financing is typically used in conjunction with an A/R line of credit or factoring facility so that once the product is received by the end user, invoices can be financed and the cash can be used to repay the PO funding source. This opens up the PO finance facility to be used for new orders.
Purchase order financing is not ideal for every business but in the case of a distribution model where product needs to be purchased and sold to large entities or retailers, it could be a great tool to secure the cash needed for new growth.
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.
Credit Shortage Threatens Supplier Growth
Detroit Free Press writer Susan Tompor sheds light on the challenges that lie ahead for small to medium sizes businesses, particularly in the manufacturing sector. As analysts proclaim that the recession is over, how do small manufacturing shops access the capital they need to re-set production and re-hire workers? Read the article
4 Months and Still Going…
Multiple media outlets reported of the consistent 4-month uptick in SBA lending. Better yet, all signs indicate that this type of lending will continue to increase through the remainder of 2009. “I think it’s a continuation of the impact of raising the percentage that we guaranteed to 90 percent and the elimination of the fees to the borrower,” said Richard Temkin, U.S. Small Business Administration District Director. “And the banks’ credit requirements perhaps are loosening somewhat, though that seems to be a slow process.”
So, what does this mean for small businesses? This is an encouraging trend that hints that credit markets are starting to thaw from the deep freeze of early 2009 and that banks are increasing lending. For entrepreneurs who have been struggling for the past year, this is good news. Those who are fortunate to still have a traditional bank loan are more likely to keep it. Those of you thinking about starting a business and considering a SBA loan, might just be in luck. Overall, this is a positive sign that Michigan may have hung the “open for business” sign back outside its window.
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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Access To Capital
We recently held a webinar discussing how entrepreneurs can gain access to capital and how to determine what type of financing makes sense for their business.
Take a listen below…. (it’s about 20 minutes long).
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Welcome to the Conversation!
This is the first post of capital conversations, a podcast and blog about making sure small busineses find the financing they need to succeed.
