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In light of recent developments at CIT Group, one of the largest credit protection providers in the U.S., it is clear that there must be alternatives to traditional methods of trade credit protection. In today’s economic environment, it is simply insufficient to ask a potential customer for a credit application up front, check a few references, and fail to stay on top of an ongoing review.
That’s why FTRANS is migrating its customers to an innovative credit scoring model. This model uses front-end credit data to qualify a small business’s B2B customers, eliminating the need to purchase blanket insurance on all of a business’s trade credit. This strategy, similar to how B2C companies issue individual credit checks prior to extending personal credit, enables small businesses to make better- informed decisions on which customers are worthy of trade credit.
“In today’s economic environment, it is simply not enough to ask customers for a credit application up front and check a few references,” said Dan Drechsel, CEO of FTRANS. “At FTRANS, we’ve developed a model to help our customers determine the creditworthiness of their buyers. Small businesses need stability now more than ever and using a credit policy based on solid credit information is one way they can insure themselves without entirely relying on a third party.”
And FTRANS clients like it.
“We switched to a credit scoring model because we can’t afford to take a hit from bad loans and there’s no guarantee our credit will be fully insured by third-party lenders that may not be able to withstand the recession themselves,” said Mark Wecker, CFO of Southland Graphics. “FTRANS’ credit scoring policy is a simple, precautionary step I can take to ensure that I’m working with the right customers and protecting my business.”
Sramana Mitra writes about FTRANS on her Deal Radar blog today. Deal Radar highlights the details and marketing opportunity of emerging companies to watch. The article outlines the history of both John and Dan, explains how FTRANS works, and the FTRANS target.
On of the most interesting parts is an explanation market opportunity for FTRANS:
“The total addressable market for FTRANS is made up of SMBs in the US with annual sales under $200 million. These businesses sell more than $8 trillion goods and services to other domestic businesses and governments annually and self-fund these transactions at $1.2 trillion, annually. Firms with over $200 million in sales have greater access to reasonably priced capital and can operate credit systems for just about 2% of sales while smaller firms may spend 3%-5% to operate credit systems. FTRANS sees an opportunity to move this financing to financial institution, such as banks and thereby facilitate more efficient access to capital for SMBs.”
The article notes that there were $8 trillion in sales for companies that could significantly benefit and grow from the FTRANS product offering.
The July August issue of FORTUNE Small Business lists the 100 fastest-growing small public companies in America. Many of these companies are confronting the downturn, growing profits and rewarding investors. The list is based on revenue and return to investors. For the full list, click here.
The most common question we get at FTRANS is: how is your solution different from factoring? Before we get into that, let’s recap what types of factoring are out there:
- True factoring is the purchase of accounts by a third party and a transfer of risk from the SMB to the factor. Not only is it very expensive, but it also puts your reputation at risk, as factoring invoices is done on a one-off basis and there is no incentive for a factor to maintain your solid client relationship.
- ‘Receivables Discounting,’ an alternative kind of factoring, that you are liable for and is now more common than True Factoring. It’s expensive as well, and again, there is no incentive for a receivables discounter to carefully manager the relationship with your buyer.
Now that doesn’t sound like the best way to run a business. Let’s break it down more and look at the 5 key ways FTRANS is different from factoring:
- FTRANS is significantly less expensive than factoring and accounts receivable discounting. Traditional factoring costs as much as 20 % – 30% of an invoice. FTRANS costs significantly less than that.
- FTRANS is a customer-friendly alternative to factoring. With FTRANS, you have the discretion to maintain your customer relationships. You still send the invoices, and your buyer sends payment to a lockbox, addressed to you.
- Unlike factoring, where the SMB makes discrete decisions on factoring each invoice, our system facilitates the capture of 100% of your A/R. You see a continuous view of your cash availability position with the bank, and you can drill down into the detail of your credit administration.
- Due to the credit background investigation completed by FTRANS, you have ongoing significantly enhanced insight into the credit quality of your buyers.
- Any disputes you face as a borrower, you now have the assistance of FTRANS as a professional third party.
On the other hand, FTRANS preserves a key advantage of factoring – its operational simplicity. We provide you with virtually the same ease-of-use as accepting a credit card for payment. FTRANS designed this new approach in B2B trade credit to be simple, safe, and based on familiar business processes.
According to an article in today’s USA Today, small businesses vital to economic recovery are increasingly going bankrupt. This is likely happening for two reasons:
1. Their customers are going bankrupt so they aren’t being paid outstanding balances
2. Capital is tied up in accounts receivable
We all know that it is virtually impossible for SMBs to receive sufficient bank loans or generate the credit necessary for their business to thrive. Even with the meager stimulus checks beginning to circulate from the federal government, the overriding issue for most SMBs is not having the cash on hand to hire more talent, pay off debt and/or take on more customers.
In fact, did you know that it currently takes a small business 56 days to get paid by its customers (probably more in today’s economy). And, according to AMI’s Q2 2009 SMB surveys, “restricted cash flow” is one of the major challenges facing SMBs both in the U.S. and around globe. As such, now more than ever, it’s essential that small business owners only partner with vendors & suppliers that are in good economic standing. Additionally, having access to the capital commonly tied up in accounts receivable should be the number one priority for small businesses, as those funds represent many businesses largest untapped resources.
If I were to offer some quick advice for small business owners, I’d strongly suggest making sure that you know why your customers buy from you, choose those customers carefully and do everything you can to generate access to all of the assets available to you – whether its government stimulus, a small bank loan or uncovering capital tied up in accounts receivable.
