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Tech Startups Find a Friend in Factors

by: Paula Moore, Business Journal Senior Reporter
from: The Denver Business Journal, Small Business Insights

July 6, 2001 print edition

Many young technology companies looking to improve cash flow quickly are turning to factoring as a way to get back on solid ground.

New technologies concept.Factoring — when a financial company basically “buys” a company’s accounts receivables — is becoming especially popular as more startups fall prey to a slowing economy.

The Invoice Bankers Inc., an Englewood-based factoring company with national reach, has noticed inquiries about its service jump in the last six months.

“The more the economy slows, the tighter banks get with loans and the more business we do,” said Mike Stanki, head of business development at the Westminster office of Commercial Finance Group. The Burbank, Calif.-based company has done $30 million a year in business here in recent years.

The practice has become so popular here that even Wells Fargo & Co., the Denver area’s biggest bank, has embraced it through its business-credit subsidiary.

Factors buy their customers’ invoices, or accounts receivables, for cash. The factoring company purchases an invoice for a sum that’s most of the invoice amount. Then the factor gets the money due on the invoice and pays its customer the remainder of the invoice amount, less a fee of usually 2 percent to 3.5 percent.

Factoring can sound like a get-rich-quick scheme, but when handled by qualified practitioners, it’s not. It can be a good way for companies that can’t qualify for bank loans to get the cash they need to operate and grow.

It’s especially attractive to companies that must spend money faster than they bring it in, such as temporary employment agencies that pay their temp people weekly but get paid by customers only once a month.

When invoices become past due, though, some factors won’t collect on the bad debt, so as not to interfere with their client’s relationship with its customer. But others do. Commercial Finance, for example, has a whole collection department in Las Vegas.

“We finance the receivables while our customers wait to be paid,” said Greg Curtiss, Invoice Bankers’ president, and also a lawyer, certified public accountant and former venture capitalist. “We don’t look at our customers as much as we look at their customers — who’s paying them. The key is the quality of the credit of our customer’s customer.”

Locally based Invoice Bankers, which started in 1983 as CS Capital Corp., got into factoring in the early 1990s and now does that business nationwide. Most of the small and medium-size companies it serves, whose monthly receivables are generally $15,000 to $500,000-plus, are located outside Colorado. Those clients range from dot-coms to temp agencies, but as many as one-third are in the construction business.

“It takes forever for subcontractors to get paid,” said Curtiss.

Commercial Finance’s stable of clients includes tech concerns such as software and information technology companies, but also trucking firms, an optics manufacturer and even a farm.

“Our clients are typically companies with high-growth opportunity that can’t get bank financing,” said Stanki. “A bank would say you’re a good company, but your ratios don’t fit our lending requirements.”

Factoring’s Roots

Reputation Customer Service Connected on MatrixFactoring has a long history, though it’s not nearly as ancient as another old practice that’s getting new interest: bartering. Factoring started about 200 years ago in New York City’s garment industry. Banks were, and still are, reluctant to lend money to clothing makers because of their business’s seasonality and, therefore, riskiness.

Over the years, factoring’s reputation became sullied because many companies used it only if they were in financial trouble. Since the practice expanded beyond the garment business and New York 20 years ago, however, it’s become more sophisticated and its image has improved. Even Xerox Corp. recently raised $450 million based on its receivables.

Factoring is now a $100 billion-a-year business.

But being a successful factor can be a mixed blessing. Its customers may outgrow it and move on to other sources of financing such as banks and venture capital.

“We hate to lose clients,” said Curtiss, owner of Invoice Bankers. “But we like to see them succeed.”

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Copyright 2001 American City Business Journals Inc.