Web Exclusive: Managing Cash Flow in the Credit Crunch

Web Exclusive: Managing Cash Flow in the Credit Crunch

How the printing industry can benefit from factoring

By Sol Roter

Banks don’t seem to have any money to lend right now – or at least none they want to – and equity markets aren’t a great value proposition for many companies, with investors skeptical about…well…everything.

U.S. Bancorp recently commissioned a survey of 1,004 companies nationwide with annual revenue of $10 million or less that showed slightly less than a third of those surveyed said their bank provides everything they need when it comes to financing and other business services. Yet business needs to go on. Companies still need to buy goods, meet payroll, cover seasonal adjustments, and even seize market opportunities. So what are they to do?

More and more are turning to factoring, an alternative to bank lending that provides businesses with capital when needed on a flexible formula basis that is proportional to sales. The factoring “line” grows as the sales to credit worthy customers increase, giving clients an opportunity to capitalize on market opportunities

How it Works

Let’s say a business has $100,000 in accounts receivable expected, and depending on the business it might be weeks, months, or longer before it’s in hand. Yet they have an immediate need to cover an expense, buy new inventory, or tackle a wide variety of new business prospects.

Traditionally, they might have gone to a lender with which they have a relationship and gotten a loan secured by the company’s assets. Those loans are much harder to come by these days due to tighter lending policies, and if they can be obtained they have lower limits and much stricter covenants.

As a printer, have you ever been in a situation where you were waiting on a check from a very large job and needed that check to cover payroll? Even the healthiest of operations sometimes find themselves in this situation and need lines of credit to help smooth out the cash flow bumps. That was the case of a successful, mid-sized commercial printer who came to Liquid Capital when their previous factoring company went out of business.

The Canadian printer, specializing in four-color printing for major retail chains, knew his factoring company required one or two days to process the money so he went to them on a Monday to have money in time for Friday’s payroll. On Tuesday the printer was told the factoring company was out of business – not all factors or banks have sufficient resources to service their clients’ needs. The business owner was three days away from missing a payroll when he contacted Liquid Capital. We completed our due diligence and wired the money for payroll into his account prior to the deadline.

From then forward we have continued to provide our client with same day funding which has enabled him to survive the downturn and in fact prosper having expanded his business volume by about 40%. Previously, the printer’s customers were paying in just under 60 days; we have reduced the payment cycle to, on average, 36 days.

Overcoming Misconceptions

Factors have fought a stereotype for years, one that assumes they are a last resort or the business equivalent of payday lending. In reality, factoring is a cost effective, flexible, and responsive form of trade financing that allows clients to grow and prosper in both good and bad economies. In addition, getting money from a factor doesn’t make a company beholden to any banking covenants or the requirements of equity partners.

Factors not only provide money, but a full outsourced credit and accounts receivable management solution. Many times companies choose to continue to use factors for credit and collection services alone, with many businesses finding it more efficient than creating their own departments.

Each company’s cost of factoring is based on their risk, industry, and market position. While critics say it’s more costly than lending, those in factoring beg to differ.