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There were times when I lay down on the floor at night, close to crying, and said, “I’m done. I can’t make payroll.” Then my wife would come over and kick me and say, “Get up and figure it out.” One time, I got a customer to prepay us. Another time, I came into the office and said, “Oh, by the way, we’re changing payroll dates.” That bought me 10 days.
This month’s issue of Inc. is full of 3-minute case stories of entrepreneur productivity. The above quote comes from Josh James of Omniture which recently announced its acquisition by Adobe. It caught my eye because of how honest it was. If you are running a small business, you have to have had the same gut twisting night at least once. Josh is a creative guy and he brought creativity to solving his cash flow crunches.
What was the most creative approach you ever took to solving cash flow problems?
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.
FTRANS was included in an article about entrepreneurs taking therces of financing stigma out of borrowing against receivables, in an article in the Wall Street Journal by Simona Covel. Covel explores a receivables discounter, FTRANS, and a supply chain financing company.
The article notes that all of the companies that facilitate borrowing against receivables sometimes experience push back when pitching the program. However, as was the case with Synovus Bank in Tampa, after working with the FTRANS, banks and clients find the value in it. The article notes that after 1 1/2 years, Synovus Bank in Tampa is now aggressively pitching the FTRANS program, in an attempt to branch out from real-estate lending.
The page one article in today’s Atlanta Journal-Constitution tells the story of 600 plus creditors of Peanut Corp. of America probably getting “cents on the dollar” due the bankruptcy of the company. These creditors range from large manufacturers of food product to small growers of peanuts. (I started to say “small peanut growers,” but that opens questions of ambiguity and charges of being redundant!)
This is not the usual bankruptcy that one might have predicted from a decline in the financial condition of the company. This bankruptcy was reportedly caused by the company’s lax enforcement of sanitation practices that resulted in salmonella contanimation, something not visible even if one used a microscope on the financial statements.
Whether financial or bacterial in cause, the result is the same — the unsecured creditors who provided much of the capital for this company are simply out of luck.
What can a company do to protect itself from this risk of customer failure? Traditionally, there were three solutions:
- Require payment in advance or on a credit card, which the CFO likes but the sales team hates;
- Do a really good job of credit decisioning on each potential customer, which is time conuming, requires skills most companies do not have, and will not spot all problems; or
- Buy credit insurance.
The third option, buy credit insurance, is a good option for large companies, but not really an option that is availabile for most smaller companies. And, today, most of the credit insurance carriers are not writing coverage for new clients.
A fourth alternative is now available: Trade Credit Express from FTRANS, which enables a B2B seller to outsource much of the credit administraiton and payment risk of operating an in-house credit system, and be paid for invoices in 5 days rather than 50.
The need to protect your company from the financial failure of your customers has never been greater. And, the economy will probably get worse, but more on that later. Meanwhile, I continue to look at the jars of peanut butter on the store shelves and wonder if they are safe to eat. And, I continue to be proud of the the fact that if an FTRANS client had sold to Peanut Corp., their loss would be minimal.
Never has this statement been more true than it is today for many American businesses. The world credit crisis that began in mid-2007 has caused the global credit markets to contract and US banks to become much more restrictive in their lending.
Over the years, I have started many successful companies, and I am impassioned about the growth of American small business. Particularly in this economy, entreprenuers have to be creative to be successful. While there is a restricted access to capital from traditional forms of financing, in this credit crisis, there is significant opportunity for B2B sellers to grow their businesses by granting to their buyers more credit on more flexible terms. At the same time sellers are growing their businesses, they are building relationships with buyers that can be an enduring competitive advantage for years to come.
I started this blog to explore the many benefits of outsourcing trade credit, and I look forward to discussing alternative sources of financing with you.
