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.
Southeast Michigan Has a Lot Going
It is easy amidst headlines of climbing unemployment and bankruptcies abound in Detroit to become disgruntled, frustrated and just plain depressed about the current economic climate and the region’s future. If that is how you feel, you should have been among the 400 individuals that gathered along Detroit’s picturesque riverfront to celebrate the accomplishments of some of Michigan’s most outstanding businesses in technology, professional services and more. The Automation Alley Awards Gala was an fantastic event dedicated to celebrating all of the great things happening in Southeast Michigan - and what prudent time to celebrate. Hennessey Capital was honored to be among those honored. We salute all of the small and medium sized businesses that are making a difference everyday in our region. View the complete list of winners
