Value vs Cost

It’s been quite a while since I posted here. Sorry...it’s been busy!

I’d like to share two brief stories today that build on my prior posts on the subject of opportunity cost and the broader question of financing smaller businesses.

Both of them illustrate the point that in many cases – far too many – business owners wind up doing damage to their businesses by thinking too narrowly about their financing alternatives.

I’ve explained in previous posts the issues that affect pricing in the spot factoring business. A couple of those, just as a refresher, are:

1) The factor has to assume that it’s possible that it will close only a single transaction with a client. So the dollar cost in terms of time and money invested in making the transaction can be quite high.

2) Transaction sizes are typically not very large, so the impact of high transaction costs is multiplied.

Because of the cost issue, the fee charged by a factoring company will necessarily have a higher component of cost-recapture than most financing transactions people are used to.

That’s the root of the “APR mistake”.

What’s the “APR mistake”?

It’s the assumption that converting a factor’s discount rate to an APR is a valid way to measure cost of money. And, more to the point, making bad business decisions on the basis of that assumption.

Thinking in terms of annual percentage rates makes sense when you are analyzing the cost of long term money. If not a 30-year home loan, then at least the duration of a normal car loan. It does not make sense when talking about a transaction whose duration is measured in days or weeks.

Thinking in APR terms makes sense when transactions are standardized and processing is streamlined. The origination and servicing costs on a per-transaction basis are a small part of the overall cost of funds. That’s not the case in a spot-factoring transaction.

So, what’s the “right” way to think about cost?

The right way is not to think about COST! It’s to think about VALUE!

The question is: what is the VALUE of the financing needed? Only if you can answer that question can you reasonably approach the question of cost. And the issue of VALUE can only be reasonably assessed in terms of opportunity.

Here are my two stories. They’re really not so much stories as they are data points, I suppose. Both come from my personal experience today—literally, on this Thursday November 4, 2010.

I’ve seen two spot factoring transactions today, one has closed and one is in process, in which the clients are much more sophisticated in financial terms than most small business owners.

One is a law firm doing business internationally with some big-name clients. The other is an accounting firm. If these guys don’t know how to evaluate financing costs I don’t know who does!

The law firm has been in business for over 25 years and is profitable. They have some clients that pay slowly, though, and they’ve maxed out their bank line. Rather than attempt to re-cast the bank debt in this environment they opted for a short-term solution to what they believe will be a short term cash need.

That solution is selling some high quality receivables. The APR, if they chose to look at the deal in that way, might seem quite high. But they recognize that the issue is not cost but value. And the factoring arrangement produces the result they need at the time they need it on terms they can live with.

The accountant has had a long and excellent professional career and is doing work for high quality business clients. But he’s only recently created his own specialty practice. He is owed a significant amount of money by good-credit clients but he can no longer fund his payroll out of his savings.

He went to his bank; the bank he has used personally for many years; and they wouldn’t even let him fill out a loan application. He hasn’t been in business long enough!

This person is very sophisticated financially. He researched all of the options that were open to him and he decided that a spot-factoring relationship was the best solution. He did NOT decide that on the basis of an annual percentage rate.

His decision was based on the VALUE of the financing to him, today; not on its cost.

I’m not saying that anyone should ignore cost. Nor am I saying that anyone should pay more than is prudent for financing.

But I AM saying this: the true cost of funds to a business owner is opportunity cost.

It is NOT the misused APR calculation that has kept many a business owner from making the best decision for his business.

Opportunity Returns

I want to get back to the subject of opportunity cost because it’s critical in the process of decision making in the context of limited resources.

The fundamental concept underlying this subject is that the important analysis of cost is RELATIVE, not absolute.

The cost of funds to a business cannot be properly analyzed except in the context of the available alternatives and potential opportunities.

Let’s take those one at a time.

If a business owner has access to:

a) a bank line of credit,
b) a home-equity loan,
c) a cash infusion from a potential partner,
d) a loan from a relative, or
e) funds from the sale of receivables,

the analysis of alternatives can be very complex.

Which has the lowest cost? Which has the longest term? Which requires giving up equity? Which gets family involved in business? And so forth.

The decision process will depend on the issues of highest priority to the owner. And the choice might, or might not be, the low-cost alternative.

If a business owner has multiple opportunities, for instance:

a) bidding on a significant amount new work,
b) hiring additional staff.
c) buying more efficient equipment,
d) increasing marketing efforts, or
e) buying out a competitor,

the analysis can also be very complex, but will depend on two principal factors, the expected profitability of the opportunity and the cost of funds necessary to pursue it.

So the problem is one of finding the right balance between the potential opportunity and the cost of pursuing that opportunity.

Now, let’s simplify things so we can get to the point more easily.

Let’s say that there is only one potential source of funds and the cost of that funding is x%.

In that case, all of the potential opportunities would be measured against the cost of funds from that source.

And the question becomes: “Does the available opportunity generate a sufficiently higher return, after payment of funding costs, to make it attractive?”

So let’s take an extreme example, just for illustration.

Let’s say you have the opportunity to sell your product at a price that will generate a 100% profit. But you don’t have the money to make the product. The only source of financing available will cost 33% of the potential profit.

You can either: a) refuse the order and make no profit, or b) accept the order, pay the required cost of funds, and make a 66% profit instead of 100%.

Notice that the cost of funds here is cited ONLY in relative terms. It could be the equivalent of 15% per year or 50% per year. In this analysis it doesn’t matter.

What matters is that there are no other better alternatives that would allow you to earn the profit from the available business.

The cost of money RELATIVE to the profit opportunity is the name of the game.

Do you take the opportunity or not?

The opportunity cost in this example would be the 66% lost profit. Every business owner will have some threshold at which the cost of the lost opportunity outweighs the cost of the funds needed to move forward.

And every business owner should have a clear idea of what that threshold IS -- for that business at that time.

Good decision making is INFORMED decision making. And a solid understanding of the opportunity cost concept is critical to informed decision making -- especially in an era of limited resources.

What Matters Most to Business Owners

I’m going to interrupt my series of posts on the subject of opportunity cost to share some information about the motivations of private business owners that I found very interesting.

The data comes from the Pepperdine University Private Capital Markets Project, which conducts extensive regular interviews among both the providers of capital to privately-owned business and the businesses that seek private capital (as opposed, that is, to raising capital in the public bond and stock markets).

In the Winter 2010 edition of the Pepperdine report is a fascinating section entitled “What is most important to you as a business owner?”.

The three goals to which the participants were asked to respond were:

1. Maintaining current lifestyle.

2. Dramatically increasing lifestyle.

3. Financial independence (defined as increasing the value of their business by at least 3 times)

The possible answers were:

a. Most Important

b. Next most important.

c. Least important.

Here’s what I found most interesting.

The least important goal of these business owners, by far, was “Dramatically Increasing Lifestyle” with only 9.9% choosing that as their most important objective.

By far the MOST important goal, chosen by 67.3%, was “Financial Independence”.

Note the definition of “financial independence” is a function of building value in their businesses; specifically, increasing value by at least 3 times.

“Maintaining current lifestyle” was actually seen as more important than dramatically increasing lifestyle.

So these owners of private business are pretty much content with their CURRENT income. What’s really important to them is building value in their business to provide for their FUTURE independence.

This idea of weighing current benefits against future benefits is a fundamental issue in applying opportunity cost analysis, which is why I bring this topic up now.

In my next post I’ll get back to opportunity cost and bring this issue of motivation into that discussion.

Opportunity Cost -- The Concept

In my last post I suggested that the idea of “opportunity cost” was critical to a business owner’s decision making. Before getting more deeply into the analysis of that idea I think we’ve got to make sure we’re on the same page with respect to definition.

What is “opportunity cost”?

At its core, opportunity cost is the profit that a company loses (or forgoes) by NOT doing something.

Opportunities come in different varieties.

In one standard example there is a fixed amount of capital available and two competing potential uses. In that case the opportunity cost would be the expected profit from the option NOT chosen. In other words: I choose to take option #1 but, in doing so, I lose the potential profit from option #2.

More often in today’s economy we confront opportunity cost in a different sort of choice i.e. we can either expand our business or not; take advantage of trade discounts or not; pay on time to avoid penalties or pay the penalties.

In these cases the opportunity cost is the cost of NOT taking on that additional client or NOT bidding on that additional contract; or NOT getting the discount; or actually paying the penalty.

You get the idea.

If the availability of money is the controlling factor in that decision, then the cost of that money must be considered in relation to the opportunity available.

Let’s use an example that might be familiar to many. You’ve got a good idea for a business: a good product or service; the experience necessary to deliver it; a provable market; a good plan; but no money to put your plan into effect and no access to traditional financing.

You approach someone who has the money to back you, who might agree to furnish the capital in exchange for a share in the business.

The cost of funds in this case is not the annual percentage rate that your backer might earn. The true cost is what you would lose by NOT moving forward. As they say: “It’s better to have 50% of something than 100% of nothing.” This is not the mindset found in the traditional borrower/lender relationship.

But then let's say your business gets going and the demand for your product is good. Your customers are pleased and want to buy more. You’ve now got another problem.

You have to pay your staff weekly and your suppliers in 30 days but your customers don’t pay you for 60 days.

Your working capital can’t support an increase in your business volume even though the demand for your product is there. You still can’t access traditional financing sources and your partner has put up all the money he’s willing to.

So there’s another opportunity cost problem. If you can get your money in 5 days instead of 60 days, maybe you can double your business volume. The analysis of the cost of capital is NOT the annual percentage rate that you would calculate as if you were buying a car.

The cost that should be driving your decision (assuming, again, that you do not have access to a bank line or a home equity loan) is the difference between the profit that you could earn by expanding your business (or decreasing other costs) and the cost of the capital that will allow you to do that.

As long as the profit from the opportunity available is sufficiently greater than the cost of the funds needed, the opportunity should be considered.

Remember: It’s not appropriate to measure the cost of funds that ARE available against the theoretical cost of funds that are NOT, in fact, available.

Businesses focused on growth have to be oriented to recognizing and siezing opportunity.

And so it is the analysis of opportunity cost that has to drive the big decisions.

The Cost of Factoring # 2

In my last post I continued to explore the differences among the basic types of factoring relationships.

The traditional full-line factoring relationship typically involves more money, minimum required transaction volumes, minimum required commitment periods, a broad array of services and better credit.

Spot factoring, on the other hand, typically involves smaller transactions, no required minimum time periods, no required volume commitment, weaker credit and, essentially, a single service.

The cost in time and effort to establish a traditional factoring relationship can be recaptured over a known minimum period of time and volume of transactions. This leads to a pricing structure that is more closely related to the factor’s cost-of-funds. Frequently these relationships will require a basic cost-of-money element stated in terms of a spread over the prime rate, but they will also typically include a range of service fees.

For example: there might be a fixed additional fee applied to each invoice purchased, a processing fee for collections, an accounting and reporting fee and fees for all money transfers. An annual account maintenance fee might include the costs of analyzing required updates of the client’s financial statements and new credit reports and UCC searches.

While the stated cost-of-funds in such a relationship is an easily understood item, the total cost of the relationship has to be evaluated in light of the charges for the various services provided.

The spot factoring company, on the other hand, because it’s pricing is predicated on a single transaction rather than a longer-term commitment, will most often quote an “all-in” fee based on the face amount of the invoices being purchased.

The cost-of-funds element of the spot factor’s pricing will typically be a smaller component of the total cost than would be the case for the traditional full-line factor. That is because the spot factor has to accept the possibility that it will complete only one transaction with a prospective client. If that is, in fact, the case, the time and effort required to establish the relationship and close that single transaction will be a much larger element of its cost than the cost-of-funds itself.

In fact, the spot factoring company will almost always lose money on a single-transaction relationship.

We are all accustomed to converting costs in a financing relationship to an annual percentage rate. And most of us have certain benchmarks; like the interest rate on a car loan, a home mortgage or a credit card; against which we measure those costs.
In factoring relationships those benchmarks are of minimal value.

In the case of full-line factoring, the benchmarks have minimal value because of the range of services provided in addition to the value of the funding itself.

In the case of spot factoring, the benchmarks have little value because the nature of the relationship and the costs associated with it bear little resemblance to the relationships in our normal benchmarks.

Especially in the case of spot factoring, the cost that is most important to analyze and understand is OPPORTUNITY COST.

That is, answering the questions:

a) What is the value of the opportunity that the factoring arrangement allows me to pursue that I could not otherwise pursue? or

b) What costs can I AVOID by having the money owed to me NOW rather than, say, 45 or 60 days from now?

I’ll address the opportunity cost issue in my next post.

The Cost of Factoring #1

In my last post I wrote about the differences in expected duration among the three basic types of factoring relationships. And I concluded with the point that those differences also caused the pricing of each to vary.

My next few posts will address the issue of pricing.

In any kind of financing relationship there are several elements that affect cost: size, duration, cost of origination and servicing, and risk of default, for example. And, of course, the provider of the financing has its own cost of capital to cover.

I started my career in the commercial mortgage business. One of the first things that I was taught was that it takes as much work to make a $1 million loan as it does to make a $10 million loan. Essentially the origination process is the same regardless of size. So, the smaller the transaction, the higher the relative cost of origination.

In the same way, the shorter the duration of the loan, the greater the impact of origination cost. Recapturing origination cost over one year will obviously require a relatively higher rate than recapturing that cost over ten years.

The same general issues hold true in the factoring business. Even though the duration of factoring relationships isn’t as long as those of mortgage loans, the principle is the same.

The longer duration of the traditional, full-line factoring relationship, allows pricing to be relatively lower because the factor’s costs are recaptured over a longer period.

In the case of a spot-factoring relationship, where it is possible that the relationship will consist of only a single transaction, origination costs will represent a larger component of transaction pricing.

The traditional, full-line factoring relationship will also typically involve a significantly higher volume of funds advanced than will the spot-factoring transaction. And the higher the volume, again, the lower the relative cost of establishing the relationship.

I’ve also noted previously that the companies that enter into full-line factoring relationships tend to be larger firms with longer track records and better credit than those that seek spot-factoring relationships.

Those characteristics obviously command lower pricing commensurate with lower risk.

So, the size, duration and credit risk in the typical full-line factoring relationship are significantly different from those in the spot-factoring relationship and those will all affect pricing.

More on this subject in our next post….

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.

The Right Tool for the Job

In our last post: “The Notification Issue”, we identified three general types of factoring relationships:

1. The factor buys all of the client’s accounts receivable and essentially takes over the client’s entire AR function. Some people refer to this as a traditional, full-line factoring relationship.

2. The factor buys all of the invoices due from one or more specified customers of the client. This is a hybrid sort of relationship that falls short of the full-line model but is more complete than the spot-factoring model.

3. The invoice-by-invoice purchasing, or “spot factoring” model. In this case there is no commitment by either party beyond the purchase and sale of the specified invoices.

In our last post, the distinction among these three general types of relationships was drawn in terms of the need to notify the client’s customer of the existence of the factoring transaction and to obtain acknowledgment of the transaction from the customer and an agreement to re-direct payment.

There are other important distinctions, though.

One of them is the expected duration of the relationship.

The full-line, traditional factoring relationship is intended to be a long-term, comprehensive solution to the client’s need. For whatever reason, the client will typically need not only a financing facility but also an accounting and a collections facility.

Setting up this kind of relationship requires time and investment on the part of both the factoring firm and its client and so there is usually a requirement that the client commit to:

a) a minimum duration of the relationship; a year or maybe two, and
b) a minimum volume of receivables sold to the factor; usually stated in terms of dollars per month.

Companies entering into this type of factoring relationship will usually be larger, well-established and stronger firms that could access other sources of financing if they chose to, but that find value in the full-line factoring model.

The second of our two general types of relationship—the hybrid—is also a longer-term, but less comprehensive, solution. In such a case the client might have one or more steady, sizable customers and a relatively permanent need to accelerate collections but might not have the ability to get traditional bank financing or to establish a full-line factoring relationship.

In the spot-factoring transaction the essence of the relationship is its short-term, use-it-as-needed nature. No commitments are typically required that either party—the factor or the client-- do any additional business with the other. That doesn’t mean that they WON’T do other business, it just means there’s no obligation.

This is in complete contrast with the traditional, full-line factoring relationship; where the factoring company knows it has a minimum amount of business for a stated minimum period of time. The spot factor might establish a relationship with a client; complete one transaction with that client; and never have any further business with that client.

The two extremes of our notification spectrum correspond to extremes of expected relationship length. And, as we’ll discuss in our next post, will also have very different pricing parameters.

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.

The Notification Issue

There are three general structures used in receivables-factoring relationships:

1) the factoring company can buy all of its client’s receivables (and even take over the administration of the client’s entire AR process),

2) the factor can agree to buy all of the receivables of one or more specified customers of the client, or

3) the relationship can be on an invoice-by-invoice basis with the factor purchasing receivables only as and when the client needs the service. This third type of process is called “spot” factoring.

One of the important differences among the different types of factoring relationships is the extent to which the client’s customer must be notified of the sale of its invoice.

In the “full-service” sort of relationship described in #1, above, all of the client’s customers are typically instructed to re-direct all of their payments to a bank lock-box. The terms of the lock-box arrangement are such that customers don’t necessarily have to be told that their invoices are being sold to the factor. For some clients this kind of anonymity or administrative simplicity is important.

In the selected-customer sort of relationship described in #2, above, it is sometimes the case that a lock-box might be used and no specific notification of sale is required. Often, however, the arrangement requires a notification by the client to the customer that the client has established a financing relationship with the factor and that, from a given date, all of that customer’s payments must be sent to the factor or its bank.

The customer will usually be required to acknowledge that it will make the payments to the factor as directed and that it will not change the arrangement without the written consent of the factor.

In the spot factoring business, notification is a much more important and formal
process without which transactions cannot ordinarily be done.

The typical single-invoice Notification will have several elements:

a) the client notifies its customer that the invoice is being sold to the factor,

b) the client directs that payment be made directly to the factor,and

c) the client asks the customer to acknowledge that the goods/services have been provided; that they meet the contract specifications; that payment is due as shown in the invoice; and, that the customer will pay the factor directly.

This is typically known as “full notification”.

This process, obviously, requires much more effort on the part of all of the parties involved. It also gives the client’s customer more power (i.e. the power to refuse)in the process. When establishing a spot-factoring relationship, this is often the place where the process breaks down.

Without proper notification and acknowledgment, though, the factor cannot be sure that the invoice it is buying is valid and that, if it does buy it, it will be paid properly.

In a full-notification relationship, it is in the client’s best interest to discuss the notification requirement with its customer very early in the process. It can save everyone involved a great deal of time and trouble.

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.

What a Factor Is NOT

It’s just as important to know what factor IS NOT and DOES NOT do, as it is to know when a factor can be just the right answer to your cash flow problem. A few key points:

1. A factor will not normally buy accounts owed by individuals.

Let’s say you are in the home renovation business and most of your customers are individual homeowners. That’s not normally going to work for a factor. The laws governing commercial transactions and those governing consumer transactions are quite different in many respects and the factoring business focuses on the commercial market.

So, if your customers are businesses, that works; but if they are individuals, it doesn’t.

2. A factor is not a debt-collection agency.

There ARE collection agencies, of course, and if you’re at the point with a receivable where all other avenues have failed; especially if the amount involved is too small to justify litigation; the collection agency might just be your answer. You’re probably going to get a small percentage of what’s owed and write off the balance. That’s NOT factoring.

The factoring company wants to buy receivables that are fully expected to be “paid-as-agreed”. It’s just that the business that is owed the money needs it sooner than “as-agreed”.

3. A factor doesn’t want to just look at your problem accounts.

Actually most factors will not consider purchasing receivables that are over-due by more than a certain number of days. The factor doesn’t want to buy problem accounts/invoices. The principal problem the factor is in business to solve for a client is it's need to accelerate cash receipts. (There ARE factoring companies that will essentially take over a client's entire accounts-receivable operation; but those cases usually involve larger businesses than this blog is targeting.)

In most cases, as counter-intuitive as it might seem, your best bet in working with a factor is to target your most dependable customers’ receivables for sale. Dependable means just that—it doesn’t mean quickest to pay!

The more dependable the customer’s payments, the less uncertainty in the relationship, the easier it is for the factor to get comfortable with the proposed transaction.

If you’ve got a customer who sometimes pays in 10 days and sometimes in 120 days, that’s tough for anyone to underwrite. But even if your terms are “net 30 days” and you have a customer who always pays between 50 and 60 days, the dependability of that experience will probably more than offset the lack of adherence to stated terms.

4. A factor is NOT A LENDER!

This really needs to be emphasized. When you deal with a factor you are not BORROWING. You are selling an asset, the account receivable, in exchange for another asset—cash.

The idea that money is being lent/borrowed and that the charge for that money is interest, is very deeply ingrained in many business owners’ psyches. But that is NOT the essence of the factoring transaction.

Both the nature of the relationship and its financial structure are quite different in factoring vs. lending, as we’ll discuss in later posts.

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.

A Business Owner's Catch-22

The lead story in the NY Post’s business section this morning tells of a NJ business-owner who can’t get a loan from his bank.

“Where’s the news in that?”; you might ask.

Well, it’s not news, as we all know. The point of the Post’s article is the bank’s motivation for turning down the owner's loan request.

The article does bring up a very important point, though, because it specifically identifies the proposed USE of funds and the “Catch 22” nature of the owner’s situation.

The business featured in the article is 23 years old, profitable and grew by 16% last year!

The owner needs financing to hire additional salespeople. If he could add the staff he could increase his sales even faster but, and here’s the issue of course, he can’t hire the people without the cash to make the payroll.

This is a successful business that can become even more successful, but it can’t add sales staff because the new sales revenue will lag the payroll cost.

This is exactly the kind of situation that needs an asset-based solution! It’s not a problem business, it's a good business with a problem. It needs to accelerate cash receipts.

The owner could very likely establish a relationship with a factoring company allowing him to sell enough of his accounts receivable to generate the cash needed today to hire the new staff he wants.

This could be a temporary arrangement, funding the added payroll until the sales made by the new staff begin to generate the cash flow to support them. Or, it could become a longer-term part of his overall cash management and business growth strategies. Both options are available in the factoring market.

It’s just not necessary for an established, profitable and growing company to give up the opportunity for even faster growth because the banks are not willing to lend.

There are other solutions!

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.

It Takes Money to Make Money

The old saying might be trite but it’s true. The fuel of business is money.

If you’re like many businesses these days the gas gauge looks broken: you’re running on empty.

It’s the perfect storm:

•Your bank line is either maxed out, reduced or maybe even cancelled.
•New bank financing is nearly impossible to obtain.
•Your home equity line might be in the same shape as your bank line.
•To add insult to injury, your customers are taking longer and longer to pay.
•The cash on your balance sheet is near zero but the payables balance keeps growing.

And if all that’s not bad enough, you’ve had to pull back on your marketing activities because if you DID get a new client or contract you wouldn’t have the cash to get the job done.

When there is no cash and no credit what’s the fuel source? How CAN you go after that new client or contract?

The answer might be staring you in the face!

On your balance sheet, usually right under the entry for cash, is the figure for your accounts receivable. In that big number that represents what your clients owe you; the number that’s become a real thorn in your side; might well be the solution to your problem.

How can that be possible?

It’s possible because the laws that govern commercial transactions usually allow those receivables to be SOLD. You can actually sell your right to receive the money owed to you and in doing so you can convert that receivable into the cash you need to pursue that client or contract.

And the transaction is NOT a loan. It’s simply the sale of one asset—the receivable—for another asset—cash. There is no new debt on your balance sheet.

The process is known as factoring. It can be used for one invoice; for the invoices of one or more specified customers or, in some cases, to an entire accounts receivable portfolio

How that’s done, why it’s been a well-known practice in many industries for decades, and how it can help businesses keep moving forward when other funding sources disappear,is the topic we’ll be writing about in this blog!

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.

Introducing The Liquidity Factor

Welcome to our new blog. We’re calling it “The Liquidity Factor”.

The type of “liquidity” we’ll be discussing in these posts is FINANCIAL liquidity: meaning cash or access to cash.

For your businesses, adequate liquidity -- having cash when it’s needed and in the amounts needed -- is as important as having enough water is to the health of your body.

The “factor” part comes with two explanations.

1. We buy invoices (accounts receivable) from other businesses that need to get paid faster than their customers are going to pay them. In financial language that is called “factoring” and those of us in the business are called “factors”, and

2. Business owners know that when there’s not enough cash to make payroll, for example, gaining access to that cash is the most important factor to their continued operation.

So the topic we’re going to be addressing is the “liquidity factor” as defined in two ways:

A. The PROBLEM that lack of liquidity causes business owners, and

B. The SOLUTION that a factoring relationship can provide.

To get the conversation started let me make just a couple of points:

• For many businesses, especially in the service industries, the largest single item on their balance sheets is Accounts Receivable.

• When you provide a product or service to a customer and you agree to wait for payment, you are financing that customer’s business.

• If one of your largest assets is the money your customers owe you, you are in the finance business in a significant way, whether you recognize it or not; whether you want to be in it or not.

• If you don’t want to be in the finance business, there are alternatives.

Exploring those alternatives. Analyzing their impact on the financial health of your business. Helping you gain or re-gain control of your business finances.
That’s what we’ll be addressing in these posts.

I hope you’ll find them of value and I invite comments, questions and suggestions—whether you agree with me or not—at any time and in any form.

The Interface Financial Group has been helping businesses with their cash flow needs since 1971. Solving cash flow problems is what we do.