Marketing Dynamite, Inc. “MD” [not the actual company name] was a small manufacturer of custom made products. It designed and produced accessory items as specified in purchase orders from its customers, often large corporations.
When MD first contacted Invoice Bankers, its gross revenues had reached approximately $80,000 per month. Its gross margin averaged 30%, and MD was hopeful it would be able to increase margins somewhat as its sales rose. MD knew that it would need additional capital if it were to accept larger orders for its products as it would have to wait a month or two after it had paid its vendors before it would be paid by its customer.
When MD contacted Invoice Bankers about obtaining capital based on its accounts receivable, its main concern was to make sure that adopting this type of financing would not affect its relationships with its customers. This concern was whether MD’s customers would see MD’s use of accounts receivable-based financing as some indication that MD was unstable financially and also a concern that MD’s customers would not have systems in place that would enable them to relate with Invoice Bankers.
The president of MD discussed this with Greg, a principal at Invoice Bankers, at some length. Greg explained that Invoice Bankers was often able to provide capital to businesses such as MD’s based on MD’s accounts receivable, and that this type of financing is often referred to as Factoring. Getting back to MD’s concern, Greg suggested that in his experience, the best approach was simply for the president of MD to call her core customers — as part of an overall call to check and see how MD was doing with its customers. As a part of this conversation, the president would also mention that MD was thinking of stabilizing its cash flow by using Factoring of some of its receivables — and wanted to ask if the customer had other suppliers that did this and thus had systems already in place, or whether these would need to be set up — and in general, was the customer open to MD doing this.
The president indicated that she would do this. When she made these calls, she discovered that her customers already had other suppliers who were using Factoring and had systems in place for this — and were in fact pleased that their suppliers were taking steps to stabilize their cash flow, since one of the customers’ main concerns was that their suppliers manage their business so they could continue to provide a steady supply of the products that they relied on.
In her conversation with Greg, the President then raised a second concern, which was whether Factoring was really the best way for MD to obtain the financial capital they needed. The president was exploring other options, ranging from working to obtain a line of credit from a local bank, to obtaining investment — either from friends and relatives — or from suppliers — or possibly even from outside investors.
As the president worked through this process, she created a table listing each of the options — what the feasibility of each approach was given the current stage of the business — and what the true costs were for each option.
As is often the case, there was no single best solution — instead the best solution depended on the current economic climate (and thus the overall availability and cost of capital and financing), the condition of the business, and the level of risk / entanglement which the owners of the business were comfortable with and felt they had the time and energy to manage.
In this case, the president determined that obtaining a line of credit from a local bank would involve a lengthy and uncertain process — in fact, the only real certainty in the process was the fact that the bank would require exhaustive documentation, and a lot of collateral that was free and clear. While the interest rate on a line of credit was likely to be low, the bank would also require MD to constantly meet a number of restrictive covenants and supply it with constant reporting, as well as tying up all of the principals of MD personally.
The bank line of credit also would be fixed at a set amount, and increasing it would require another application / review process with the bank.
Obtaining outside investment for MD also turned out to be problematic
— the business which MD is in, does not lend itself to going public, which is a standard way that investors can cash out of their
investments. The founders and owners of MD also were not ready to sell the company, and did not want to be under pressure from outside investors to do this. Also, the cost to MD of giving up ownership positions would be quite high assuming that MD did well in the future
As the president worked through the table of financing options, the idea of Factoring increasingly seemed to be a good fit with the current situation of MD.
It was true that the direct financial cost of Factoring was higher than some of the other options — at the same time, it was available to MD now, and it would grow as the company grew, and it did not encumber the agility and decision-making of MD with a new set of investors / owners.
As the president of MD grew more interested in using Factoring, she began the process of narrowing the number of potential financing companies that MD would consider, comparing them against Invoice Bankers.
She found that a number of companies offered artificially low rates as teasers — but that these companies then added-on a range of service fees which made the final cost significantly higher than Invoice Banker’s simple, transparent discount fee.
She also found that there was a large difference between standardized financing companies and custom-financing companies like Invoice Bankers.
Standardized financing companies had a standard set of approaches and procedures which they follow without exception. If your company fits within these parameters, then the standardized approach works well. If anything unexpected happened, the standardized approach could have negative effects. For instance, if an invoice remained unpaid for more than 60 days, or was only partially paid, the standardized financing company would automatically send out computer-generated collection letters and then angry collection calls. This would not help MD’s client relationships.
As she worked through these comparisons, MD’s President increasingly appreciated the direct, open, professional approach of Invoice Bankers.
She appreciated the fact that at Invoice Bankers, her relationship was with Greg, a company principal, not with a mid-level staff person.
Based on these factors, she decided to begin working with Invoice Bankers.
The president of MD wanted to make introductions, and then Invoice Bankers contacted MD’s major customers and worked out the relationships with each customer — ensuring that the factoring process went smoothly and was not a frustration / problem for them.
In its first three months, MD factored approximately $50,000 per month of its receivables.
When MD wanted some funds it would send copies of its invoices along with a request for funding over to Invoice Bankers. Invoice Bankers would then verify the invoices with the customers according to the relationship process it had set up, and then send the funds to MD electronically by wire or ACH, often within a day or two.
Besides using the cash for its operating needs, particularly payroll, MD also used the available cash to support additional carefully targeted marketing, thus accelerating the growth of its business.
As its business expanded, MD was able to avoid the typical cash flow crunch which increased growth creates by simply increasing the amount of financing it obtained from Invoice Bankers. As a result of having growth funds available, in the 18 months after it began its relationship with Invoice Bankers, MD nearly doubled its annualized revenues.