Beginning or expanding a business can be an exciting venture.  But to do so successfully, a business owner is going to need capital.  That comes from either the owner’s personal check book or financing extended through a bank. 
 
To secure financing through a bank, a business owner must understand the 5 C’s of Credit.  These guidelines are used by financial institutions as a way of analyzing a borrower’s request for a loan. 

Let’s take some time to examine each of the 5 C’s of credit:

Cash flow – 1st form of repayment

Does the company make money? Has the company made money for the last three years?

• A business owner may feel he needs additional capital to run a business, but he must also demonstrate the ability to repay the loan being considered. 
• In determining this, a bank will analyze the “EBITDA” ratio which looks at a business’ Earnings Before Interest, Taxes, Depreciation and Amortization.  Broadly speaking, it’s the measure of the cash flow generated by a business.  This is the cash flow available to repay the debt once the company has met its other payments required to sustain the business.

What is the loan going to be used for?

• Banks like to know if the loan proceeds are going to positively increase cash flow. Remember cash flow is the 1st form of repayment.
• A sound business plan will ensure the business understand how to use the loan proceeds to increase cash flow and grow the company.

Generating a cash shortage or outflow is easy -- just let your expenditure exceed your liquid assets (e.g., primarily cash in the bank). Sure, your business may have millions in sales on the books, but since the payments from your customers aren't due for another 60 days, you need to be able to stay in business, pay your bills, and keep turning out product until those checks arrive. See how easy it is to generate Cash Outflow?

Remember if your business sells on terms or credit, which is what a majority of small businesses do, and you are growing rapidly, you will run out of cash. It's going to happen! No matter how big your margins are you will run out of cash. If you understand that, if you model that, you can probably get financing for it – just not at your local bank.

If Cash Outflow is the problem, then factoring with Factors Southwest is the solution. We provide Cash Inflow!

One of the most important lessons a business owner has to learn, often painfully, is that cash really is king. We are talking cash flow. Simply put, it doesn't matter how much money is coming in the future if you don't have enough money to get from here to there. Employees can't wait on paychecks until your customers pay. Your landlord doesn't care that you're talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.

More businesses fail for lack of cash flow than for lack of profit. Why is this? Two main reasons:
1. Business owners are often unrealistic in predicting their cash flow. They tend to overestimate income and underestimate expenses.
2. Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.

So what is the difference between cash flow and profit?
Profit is the difference between income and expenses. Income is calculated at the time the sale is booked, rather than when full payment is received. Likewise, expenses are calculated at the time the purchase is made, rather than when you pay the bill.

Cash flow is the difference between inflows (actual incoming cash) and outflows (actual outgoing cash). Income is not counted until payment is received and expenses are not calculated until payment is made. Cash flow also includes infusions of working capital from investors or debt financing.

Yes, cash flow and profit are different. Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities. Profit, also called net income, is what remains from sales revenue after all the firm's expenses are subtracted.

Cash flow is actually more important for the small business owner to focus on than profit. Companies can make a profit but still have a negative cash flow and not be able to pay their bills. Not recognizing this difference is one of the biggest mistakes a small business owner can make. Small business owners need to prepare monthly cash budgets in order to make sure they know their cash flow positions.

On Saturday February 20, 2010, the Factors Southwest team “Pink Punch” participated in “Par it in Pink;” a golf tournament at Starfire. The event was organized by Two Gals Events and was intended to raise funds for the Susan G. Komen For The Cure organization. Not many know the foundation was organized by Susan’s sister Nancy in 1982, and has galvanized women from around the country to stand up and take an active role to raise breast cancer awareness. Saturday was no different in bringing together women from a variety of backgrounds for a common cause.

Factors Southwest was proud to be a major sponsor of this event. We met some great women and made some nice connections. One of the contests at the tournament was “best decorated cart;” and FSW was determined to win. Tee off wasn’t until 8:00 am, but the FSW “Pink Punch” team was at Starfire at 6:30 putting the finishing touches on the work of art that totally nailed the contest. Click here to check out all of the photos.

Seriously, we met so many businesses at “Par it in Pink” who didn’t mind sharing how much trouble they were having obtaining traditional banking loans. Once they understood what FSW did and how we could assist their business with working capital, we could open the dialog to specifics on what FSW could do for their business. Aside from the support Factors Southwest was able to provide the Komen Foundation, team FSW enlightened our new business friends with finance options I’m not quite sure they new were available to them. 

At the end of the day, “Par it in Pink” rewarded Factors Southwest with a couple of commemorative bottles of wine for best decorated cart; and FSW made business connections that will change the finance direction of our new business friends towards profitability. What happened Saturday reaffirms what we believe strongly at FSW; “we are contributing to economic growth one invoice at a time.”

Contributed by Emily Amparan-Business Development Officer (Emily@factors-southwest.com)

Beware of what you wish for! If you are wishing for a really cheap loan and think an SBA loan is the answer to your prayers, then think again. There are many things to consider but right now it looks like the wait list for an SBA loan just got really big! Click here for more details: SBA Wait List

Maybe it is time to start looking at the alternatives: www.factors-southwest.com

If you thought factoring was a form of financing for the near dead companies then think again. Factoring is gaining popularity as banks continue to retreat from small business lending. Savvy businesses are not waiting for the banks to come back and instead are looking to alternative forms of financing such as factoring.

Want more proof? Click here for a great article from Inc.

Want to talk to a factoring company? Go to www.factors-southwest.com

Credit terms or trade credit is the set of terms a company extends to its customers to allow them to buy goods and services on account without immediate cash payment, thereby creating accounts receivable for the company and accounts payable for their cus¬tomer. Trade credit is the largest use and source of working capital for businesses. The average turnover for accounts receivable is approximately 44 days, meaning that it generally takes over a month and a half for a small or medium-sized company to collect the cash it is owed for by its customers.

While trade credit can help a business sell more, it can also cause serious cash flow problems. The length of payment terms is a battle for working capital. Basically, the extension of trade credit is a free loan for the customer and the chance of collection decreases as the invoice ages. The customer (buyer) wants to extend this free loan for as long as possible so they can use the capital on their end. The business (sellers) wants the cash as soon as possible to manage their own expenses. The result is a work¬ing capital tug-of-war, which ultimately restricts growth.

So how can a business still offer trade credit and ensure it has cash to meet payroll and other expenses? Contact Factors Southwest (www.factors-southwest.com) to find out about our factoring lines of credit. Factors Southwest can put a stop to the working capital tug-of war!

A little over a year ago, we took on a new client who was a spin off from another successful company.  The client specializes in software development and utilizes engineers from Mexico to service and maintain operational efficiencies. The idea behind using these engineers from Mexico is similar to companies outsourcing work to India.  It is cheaper. 

During the underwriting process, we were aware of a payment plan this client had with the IRS for past due payroll taxes.  The plan included an agreement to keep current for 2009 with their quarterly payments.  We received confirmation of these payments throughout the year as we watched them grow!  They continued to increase their business while recruiting employees from Mexico. 

Towards the end of November when we were happily collecting holiday cards in the mail, the IRS slipped one of their “cards” in and it is safe to say, it wasn’t a holiday card.  We received a levy from the IRS on this specific client’s A/R.  Unfortunately we had to stop funding our client until we could figure out what had happened.

The IRS Agent handling the case noticed the payroll tax payment for 3rd quarter was significantly less than the two prior quarters which was an indication to her that potentially our client’s business was going out of business and therefore she pulled the trigger.  She filed levies on the client’s A/R and sent letters to their customers directing payment to the IRS.  Our client had been reducing costs and as they continued to migrate their work to the engineers from Mexico, their payroll taxes continued to reduce.  They were doing everything right to continue to make their business successful and now not only was the client struggling to deal with a cash flow shortage since we had to stop funding for a short time; they now had major PR damage control to deal with.   

Just when we wonder if all those IRS seminars we have attended are worth it, it is safe to say and our client can now vouch that they are worth it.  Information we had learned through these seminars helped us weed through the red tape of the IRS and allowed us to start funding our client within 48 hours of the levy.  Once Factors Southwest started funding again, our client was able to use this as part of their damage control to their customers and just last week our client submitted a new contract with an existing customer that increased the monthly volume by double.

Singing the IRS Blues? Go to www.factors-southwest.com