On this post I am sharing an article written by Mr. Larry Stephenson. He is with one of my highly recommended factoring companies. It is a worthy read, enjoy:
Consolidation in the banking and commercial finance industry has made it even harder for the small to medium size business to be successful. Let’s put aside for our purposes here all the other challenges this group of entrepreneurs’ face.
The big banks have no interest in the small manufacturer, distributor or service provider because lending to him or her is just too risky in their eyes. Wall Street would punish them severely for not posting ever increasing earnings as well as operating efficiencies. The big banks must stay in their comfortable environment of lending only to the nearly risk free companies or to the consumer where fees and costs can be readily passed on to the user.
Well then, would it not make sense that if the big banks don’t want the small to medium enterprise then surely the ever growing population of small community banks would embrace their needs. Today these new community banks are popping up seemingly on every busy corner near large shopping areas. Unfortunately, I’m afraid you can’t look for help here unless all you’re looking for is a fully collateralized real estate loan. Safeguarding deposits and making real estate loans are their stock and trade. Loans to actually support the success of these smaller enterprises we’re discussing are not made here. The doctors, lawyers and real estate people who form their board of directors are the original bank investors and they are looking for steady conservative growth. Growth, safe growth, which will someday in the future provide the owners with a payday when they sell to a larger bank who will then sell to the "Big" bank.
It’s nearly impossible to sustain or find a business opportunity, other than at the retail level, where the entrepreneur can provide all of the cash needed to run and grow the company. The small to medium business enterprise needs working capital financing in almost every case. Success in this size business is its own worst enemy as far as working capital needs is concerned. Growth in sales requires increases in inventory levels to support this very growth. And, success in growing sales directly multiplies the investment needed in accounts receivable as well. Success in business, as you can see, is directly related to the accompanying growth in accounts receivable and inventory and the inherent need for outside working capital borrowing. Does it not then make sense to find a way to margin the realistic values of these receivables and possibly inventory in such a way as to support this growth?
The important job of providing working capital for these companies rests with the factors and finance companies who best understand these businesses and their borrowing needs. As touched on above the opportunity to provide this financing is the product of the banking industry abandoning these entrepreneurs for, in their mind, more fertile ground.
The factoring and finance company industry is made up of a few very large players and a large number of smaller niche players with individual areas of expertise. The large players, even in this financial sector, have become so large they too are ignoring the needs of the small to medium business. They now prefer to only do business with companies with revenues in excess of $10 to $15Million. They also steer a wide path around enterprises just starting up or facing financial difficulties whether these difficulties are determined to be short lived or more serious.
The real task or opportunity to finance these businesses with revenues under $15Million or experiencing short term financial stress rests with the medium to smaller national and regional factoring and finance companies; which would appear to be a good match of needs and similar sizing.
These sources of finance have the financial strength to support the growth and working capital needs of their borrowers. The primary reason they are able to do what the bigger institutions shy away from rests with the attitude of their senior management. These individuals are able to look at struggling companies and approve a borrowing facility that takes into consideration all of the pluses and minuses. The loan can be made if the borrowing company has good, honest management willing to continue to work hard to be successful. They are able to look deeply into the company and its management finding innovative ways to structure the loan even when the company is losing money or the IRS or other challenges stand in the way. With the proper structure they can work with companies having financial difficulties until they have overcome these difficulties or grown to such a size that they can now borrow from the larger institutions.
Companies finding themselves in such a situation need to seek out this caliber of financial support. Usually one of your trusted advisors can get you in touch with such a company. Your accountant or lawyer or even a friendly competitor should have knowledge of where to secure this financing. You may even be able to obtain this knowledge from the bank that has declined your most recent request for financing.
Don’t despair, there are lenders out there very much interested in the success of these manufacturers, distributors and service providers and willing to provide the working capital financing needed to grow the business.
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Thanks for reading!
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