Look to non-banks to help finance growth

score Question:
My business is expanding rapidly, and I'm finding my company short of cash to continue its growth. I've been to my bank and to a couple of others, and I haven't been able to get the additional funding from them. Any ideas?

For growing companies, success often brings in a new set of problems.

A business started with a modest capital base that hits a wall on a winning formula for growth and profits might find itself tight for cash. The investment in assets needed to support sales has exceeded the capital base.

I can understand the bank's position - they are looking at hard assets toward which they can lend you some additional funds, but I also suspect the assets are already being utilized.

So what can you do?

It's like marathon runners when they say they've "hit the wall" - their bodies literally run out of glycogen, an energy source, during a race. Unless they can draw on sources of energy stored in the body and muscle, their race is over.

Rapidly growing businesses have their own version of hitting the wall. It's that point at which expansion depends on additional funding, either through additional captial investment or assumption of more debt. They need the additional cash to buy more inventory and labor to support sales while receivables are tying up cash.

There are alternatives to traditional bank financing, such as receivables, equipment, machinery and inventory that can be used for temporary financing during the company's growth period.

Accounts receivable are probably the most effective means to handle short-term or seasonal nees by constructing a flexible and affordable bridge across their short-term cash-flow needs.

The process of turning accounts receivable into quick cash is called "factoring," and there are firms making this their business.

One of these in Rockford is JMB Business Funding. I talked to Joanne Blaser, manager and owner, about the process of factoring.

"Our business is tailored to meet the needs of our clients for short term cash," she said. "The client sells their accounts receivable to us on nonrecourse basis for us to collect. The process is easy. They pay the clients 70 percent to 90 percent of their value and assume the credit risk.

The client needs to mark the invoices with a note stating that they have restructured their bank financing and the invoices are to be paid to a specific lockbox. Additional accounts receivable can be added at the time of billing and shipping. This may continue until the cash-flow position had been resolved."

Factoring has been done for firms of all sizes, including some of the major manufacturers of Rockford, she said. "Industries that typically use factors on a regular basis are employment agencies, textile transportation, medical, courier service or cable installation."

So when should a company consider using a factor? Some companies use it during start-up, when they are building a client base and credit information is not readily available. Credit verification is an integral part of a factor's business, which can relieve the client of the expense and responsibility.

Some use it during an expansion phase; others use it for credit verification, since factors maintain extensive histories on thousands of companies.

Bill Bryan is a counselor with the Service Corps of Retired Executives. SCORE offers counseling, workshops and seminars on small business operations. You can reach Bryan through SCORE, 515 N Court St. 815-962-0122, for information and appointments.

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