Have you turned over every stone to improve your company's cash flow? You're likely not alone in that feeling. Thousands of business owners every day feel like their companies are paralyzed and prevented from growing because they have tried every organic means of freeing up cash with no success. On this edition of "Deal Talk," host Jeff Allen explores an alternative but time-tested process that allows business owners to obtain the funding they need to keep their companies moving. Guest Donald Jacobs, Sr. Vice President of Midland American Capital, discusses the concept and benefits of "invoice factoring" for small businesses to help pay bills, debts and even fund capital improvements.
Alternative lenders have come up to step in and say hey, the fact that it's [a traditional bank] not going to lend you money, there are other alternatives out there so that you can get money to grow your business. The problem is that a lot of small business owners aren't aware of the many alternatives that are out there.
- Donald Jacobs
Jeff: Still struggling with cash flow problems? Well, if you're looking for different ideas on how to deal with this global accounting epidemic, that's what I'd like to call it, then you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world, this is "Deal Talk," brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on "Deal Talk" it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
Cash flow, we've talked about it on the program before. And cash flow as you know is something that you and many business owners, in fact, I would say probably most small business owners would have to deal with at some point in time. Today on the program I have somebody who is going to provide us with some different ideas on how to deal with your cash flow issues. And these are some things that we haven't talked about in the past.
And to help us do that, I'd like to welcome in a gentleman by the name of Mr. Donald Jacobs. He is Senior Vice President of Business Development at Midland American Capital. Don Jacobs, welcome to the program. It's nice to have you on "Deal Talk," sir.
Donald: Thank you, Jeff.
The easiest choice and the most traditional way for a small business to get capital is to go to a bank. The problem is that banks have gone through a dramatic change in the last 12 years since the financial collapse, and they don't necessarily have the ability at the present time to lend out as much money as they previously had in the past.
Jeff: Don, when I contacted you about joining us on this program, we spoke about ways to deal with cash flow that are kind of unique. But these, according to what you've told me, are not necessarily new ideas. Before we get into it I was wondering if you might be able to take just a minute though to kind of talk a little bit about yourself, who you are, and where Midland America Capital is, and what you guys do over there.
Donald: Midland Capital handles United States and Canada. We are a factoring alternative lending company, which means that we offer two core services. We offer accounts receivable funding. And then we do a combined purchase order/supplier funding, combined with accounts receivable so that if you needed help getting goods from China or across the street to pay for the supply for an order that you're fulfilling, we will be able to pay for 100% of those goods.
Jeff: We're going to get into the nitty gritty on these here in just a moment. But first of all I kind of want to hear from you, Don. Many businesses we've talked about on the program before deal with cash flow issues, regular basis, but business owners may decide not to seek funding through bank loans, etc. Instead they might opt to drive improved sales, get out there and pound the pavement. We just got to generate more sales, generate more revenue rather than incur more debt. Is this a sound approach to take, and if not why not?
Donald: In most situations what happens is a small business owner needs to grow his business and he needs capital to do it. So he has a relationship with the bank. He has a DDA account or a business checking account with the bank. And he goes to his business officer and he says, "Hey, I would like to get a loan."
And the bank after the financial crisis has gone through some major changes where in the past he may have been able to get a $50,000, $100,000, $300,000 line of credit, or a term loan that he could use as collateral to grow his business.
But with the world changing so dramatically after the World Trade Center and the financial collapse, banks have a very difficult time lending money now. You have reserved requirements have increased, their compliance requirements have increased, and it's very difficult for them to lend out money. So it may be that the business owner needed $100,000 and the bank is willing to give them $25,000. The $25,000 may not be enough for him to grow his business properly.
Jeff: I was just going to say, Don, I don't mean to jump in here and interrupt. But it would seem to me that this would be one of those things that for small business owners in particular this would be a particularly difficult problem for them to deal with when it comes to changed qualification procedures and processes in place with the banks, making it more difficult for them to get money. Would that be true?
Donald: What has happened is exactly that, Jeff. And that banks used to lend out X amount of money for loans. And they basically chop that into half so the amount of money that the bank is lending out is half the amount that they gave previous to the financial collapse.
So, alternative lenders have come up to step in and say hey, the fact that it's not going to lend you money there are other alternatives out there so that you can get money to grow your business. The problem is is that a lot of small business owners aren't aware of the many alternatives that are out there.
Jeff: Let's talk about the different sources of funding that are available in most cases right now to most people. And all they would have to do is go to Google or make a couple of calls to their accountant, or maybe even possibly an attorney or another business consultant that they might know and they'd be turned on to all these different sources and maybe some key contacts at these sources.
Let's talk about those first of all. If you will kind of a ranking order or a hierarchy, or maybe even call it a pecking order of those types of institutions or firms that provide capital. And maybe you could kind of tell us where they all kind of line up.
Donald: The path of least resistance that you see for most business owners is to go to the local bank and see if they can get a business loan. So a bank would look at their financials, would look at the FICO Score for the business, the FICO Score of their owner. And based on historical records, the last two years the profitability of the company, they would decide whether that should be green-lighted or was a loan they couldn't do.
They couldn't go to the bank. There are SBA programs which is a hybrid loan. So 50% of it is a government loan, and 50% of it is through the bank. So there are certain requirements that are structured in order for it to qualify as an SBA loan. And then there are certain economic loans that are out there, but most of the economic development loans are geared up and how many people that you would hire. And a lot of it is geared up to real estate type loans.
So taking that type of loan structure aside then you would get into alternative lending. The top of the hierarchy for alternative lending is ABL Lending, asset-based lending. Asset-based lending is using your inventory as collateral so that if something were to happen they have your inventory that they could take to compensate and reduce the risk so they wouldn't take a total hit if the loan went bad.
Then there's factoring. Factoring uses the invoice as collateral. So it's a different kind of structure than the ABL lending, which takes the inventory. Then there would be ACH lending, which is automatic clearing house where they reduce their risk by taking the money out of your account automatically on a daily basis. It's electronically transferred so you make the payments on a daily basis as long as your account is operating.
And then the last choice would be hard money. And hard money in many situations they would say, "Hey, make 12 payments, make 12 checks out, sign them, and pre-date them per month, and I'm going to cash those checks. If one of those checks bounce, you're going to be hearing from my lawyer." So those are basically all the terms that are out there.
Jeff: Donald Jacobs is Senior Vice President of Business Development at Midland American Capital. You're hearing his conversation with me, Jeff Allen, right here on "Deal Talk." We're talking about alternative ways to deal with the cash flow issue that you might be facing.
Donald, in all of those scenarios or with all of those choices we just talked about, the traditional and the alternative choices, where do most business owners do you think tend to gravitate? Or to what do they gravitate toward to help them of all of those choices that we just talked about?
Donald: The easiest choice and the most traditional way for a small business to get capital is to go to a bank. The problem is that banks have gone through a dramatic change in the last 12 years since the financial collapse, and they don't necessarily have the ability at the present time to lend out as much money as they previously had in the past.
But that's normally the path of least resistance. The problem is that in this economy that is so sluggish, lots of businesses don't show profitability. So if you don't show profitability, the bank is not going to say yes, so what do those businesses that are breaking even or making a small amount of money do? And when they get a big order that comes in and they can grow their business, do they have to pass it up, or are there other alternatives for them to gathering money?
Jeff: And that's where we're going to go ahead and we're going to now make that transition in this conversation Don, and we're going to talk about something that I know that you know a lot about. And we're going to key in on one particular source of alternative funding, or maybe it's a process of alternative funding that we'll be learning about for the first time.
The alternative out there that many people may not be aware of but that could prove very fruitful to them does have to do with this factoring methodology that you've talked about. First of all, tell us what factoring is and how long it's been around, and why it's worked so well?
Donald: Factoring has been around for a very long time. It started really in the 18th century, ancient Roman times that merchants used it. It's a guaranteed trade credits. So Rome was shipping to Egypt, and they needed some type of funding for it to go on to the boat and to pay for it for that long passageway from Rome to Egypt. So factoring really started that way.
And then it really took over the medieval times and Europe. They really took hold and became a very popular form of lending. And currently if we're going to the time chart, the number one country when it comes to the most amount of factoring done in the world happens to be China. And the second country would be the United States. But if you combined all the European countries together, probably European block there's more than the United States. It's about a 3 trillion dollar industry.
And in 2015, believe it or not, it was at an all-time high. So the most amount of factoring ever done was done last year. And I would imagine that this year we'll probably have 15%-20% growth from there. So it is gaining in popularity even though it's been around for a long time because it's tough to small businesses out there. And the way that the banks really stop lending has created a lot more popularity towards factoring.
So the beauty of factoring is that it has a tremendous amount of flexibility. But the biggest advantage of factoring is that there's no real dollar limit.
Jeff: Why do you think that factoring has not grown so much in this country and why is that it's kind of been slow to catch on here?
Donald: I don't know if it's slow, but in China there's a tremendous amount of businesses out there that are growing very rapidly. And I think that factoring, just because of the enormous amount of growth... GDP in the United States is somewhere around one- and three-quarters to two percent, where in China even though it has gone down dramatically it's still 4%-5% growth. So the GDP growth is much stronger in China than right now than the United States.
So I think it's just more common practice. If you see the amount of factories and the amount of orders that are coming in, many factories don't have enough money in order to fill their orders, so they use factoring instead of going to the bank. An order comes in from an importer in the United States for $300,000 and the factory needs $100,000 in order to produce those goods. It's very easy for them to show, "Hey, I got this purchase order coming in, can you lend me the $100,000? And then when the client pays me I'll pay you back.” It's a very easy way to conduct business.
Jeff: We're going to continue our conversation on factoring as a way to deal with your cash flow issues, as a way to solve those problems if only temporarily, but it'll really help you to regain some traction and continue to move forward with your company and grow your business all at the same time while you wait for those receipts from you customers to come in.
My name is Jeff Allen. My guest today is Mr. Donald Jacobs from Midland American Capital. We'll continue our conversation when "Deal Talk" returns right after this.
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Jeff: If you'd like to listen to "Deal Talk" and have something that you can refer to with regard to the content over and over again as you need it, morganandwestfield.com, that's where you can find the complete transcript of this show. And don't forget also too when you're on the road or wherever you'll go, you can also hear this program "Deal Talk" available on iTunes, Stitcher and Libsyn as well.
My name is Jeff Allen with my guest today Mr. Donald Jacobs. He is Senior Vice President, Business Development at Midland American Capital. And we're talking about alternative solutions to help you deal with your cash flow issues. And we're talking about the idea of factoring. This is something that Donald knows quite a bit about.
Donald, we spoke a little bit. You kind of talked a little bit about what factoring is, how long it's been around, and that it is growing as far as the solution is available to many businesses all across the country through companies in fact like yours, Midland American Capital, for example. But what I'd like to talk to you now is about instances where in fact factoring can be used, the types of businesses or operations that could benefit by factoring, and how those companies actually use this to combat their own cash flow issues.
Donald: Thank you, Jeff. We offer basically to different services, which is rare in the industry. At Midland we offer both purchase order and accounts receivable funding. So what is accounts receivable funding based on the invoice amount that you have. So if you had an invoice for $100,000, we would advance you $80,000 at the time that your goods ship. So rather than waiting with 30, 60, 90 days with your client's pay, you get paid right away.
And when the client pays what we call the getter. you get to 20% that we haven't paid you already minus our fee. So what does that do for you? What it really does is it increases your cash flow. So if you have an order that's going out, sometimes it could be very, very critical on your cash flow if you have that $100,000 ad on the street.
And you have to pay your employees, you have to pay taxes and other types of expenses out there, you don't have the cash flow to do it so you get behind and it creates all different types of wrinkles to your business. So by us giving you that money we could basically improve your cash flow so you don't have those issues.
The number one thing that that really does is it rebuilds your credit so that down the road you may be able to go to a bank and say, "Hey, look, I pay all my bills on time and therefore I should be able to get an increase on a distance revolving line of credit that I haven't been able to get into the past.” So many people use factoring in order to improve their credit. The increase in cash flow allows you to grow your business where before you had to pay off, you had no cash in order to pay for goods. So by the increase in cash flow you also have more goods to be able to build up your inventory and have a much stronger business.
We also do purchase order funding. And what is purchase order funding? Another term for it is called supplier funding. So say you got a big order in from a big box store for blankets, and you needed to buy a container load of blankets. And that container load of blankets is going to cost you $300,000. Many businesses don't have the $300,000 in order to pay for the goods to the factory because, especially if it's a new situation, the factory's not going to give you terms. If it's a situation where you're buying overseas it's very rare that the factory would give you terms. So you need to come up with that money.
A company like Midland or a factoring house with those purchase orders would be able to give you 100% of the cost in order for you to buy those goods. For example, I presently have a deal where it's tequila. And he is buying tequila and he got a huge distributor in the United States to carry his goods, which is a wonderful thing for the business. But the first order for the tequila is $200,000. And he doesn't have the $200,000 or he doesn't have the $125,000 that he needs to pay for the supplier to fulfill the order.
By him going to a factoring house he can get those goods paid for, and we will pay directly to the factory so that he can fulfill that order and to grow his business. So it basically allows a business that if they needed funding from soup to nuts we could pay for the entire transaction. And the beauty of factoring is that it does it without incurring any other debt. So if you went to a bank and you borrowed money from a bank on your balance sheet, you would see that you borrowed $100,000 and $200,000, or whatever the amount of money that you borrow from the bank.
When you go to a factoring house, instead of you making a dollar you may make 90 cents, but the debt never shows up on your balance sheet. So it looks like it was funded through the business. So you can use our money and we don't take any percentage of your business that an angel investor or an equity house will take with it. So you don't have a partner. You could do whatever you want with the money; it's an excellent alternative if you can't get traditional funding.
You can use our money and we don't take any percentage of your business that an angel investor or an equity house will take with it. So you don't have a partner. You could do whatever you want with the money; it's an excellent alternative if you can't get traditional funding.
Jeff: How do you get your money? In other words what slice, what percentage here do you kind of if you would extract. You mentioned that the invoiced amounts are actually kind of invoiced at a discount, which means that you get that percentages taken out, which is what?
Donald: The way that it works is that we don't get paid directly from our client. So if it's the case where it's combined purchase order and accounts receivable, and the factory needed $80,000 to complete their order, we would pay the money directly to the factory. Then the order would come in and an invoice will be generated to the client that’s ultimately going to buy the goods. At that time it would convert over to accounts receivable and there will be a bump up, so that it would be 80% of the invoice amounts with it.
Then the client would pay, the debtor, the one that's going to end up with the product, we'd pay to post off this box. And once we receive that check we would give the 20% we haven't given already minus our fee. And that's how it would be.
Jeff: OK. And as you mentioned, too, this is helpful toward the credit standing of the company as an added plus. Are there any companies that would just rather choose to continue to work with a company such as yours, for example, Don, on a regular, ongoing basis to handle their receivables or entirely for them?
Or is that not the business that you provide? In other words, you're there for a specific purpose for such an occasion when cash flow is difficult. But you're not there to handle receivables at all times, 100% of the time for a company are you?
Donald: Most factoring houses do have a year annual contract because there is a certain amount of start-up cost for any factoring and fees to do it. So a normal account really does last for a year.
But we also have accounts that you have for a long time. For example, the hospital industry is famous for paying very, very late. So many people that are on the hospital and supply hospitals cannot wait for 90 days that a hospital normally takes in order to pay.
So we have many of those type of accounts that stay with us. We also have a lot of staffing companies. And staffing companies, they're the model of cash flow issues in that the more you grow, since you're hiring people in order to be used in other companies, your payroll. The more people that you hire the higher your payroll is, the tougher it is for you to manage your cash flow.
So there's large numbers and a high percentage of staffing type companies that use factoring just as common center and others. So there are companies that basically really need factoring in order to survive and use factoring for long periods of time. Basically for the time that they're in business they will continue to use a factor.
What has happened though, because it's a sluggish economy, is more mainstream companies are coming into the fold and also using factoring, saying, "Hey, I'm having a tough time. I can't get money from a bank so I'll use a factor.” And basically you're going to use factoring for a year or so, get through the difficult time, build up enough of a cushion where they may not use this.
If they use this for specific transactions, so they get a big order from a big box store and they need to fulfill that order, or they get a big military contract, or they get a government contract, or they get a big order from Home Depot and they need money in order to fulfill that order, they would go to it.
So the beauty of factoring is that there's no minimums and you can factor as much or as little as you want so you can use it for a specific transaction. And then not use it for a couple of months, and then get a big order in and use it. Or you can just use it for parts so that you could take four or five accounts and say, "Hey, these accounts will generate enough money, or if I get advances off of them, I'll have good cash flow and I won't have to worry about meeting payroll, or taxes, or having enough inventory, I'll only factor part.”
So the beauty of factoring is that it has a tremendous amount of flexibility. But the biggest advantage of factoring is that there's no real dollar limit. So if you got an order in and you're lucky enough to get an order in from a big account, and it was a million dollar order. And say you were a half a million dollar business, how are you going to be able to fulfill that order? With factoring there really, really is no issue. The bigger the order is and it's a good getter, you have no issue fulfilling that order.
Jeff: We kind of now have a really good lay of the land here, I think, Don. I guess my last question might be for this discussion is who would not be suited to factoring as far as a business is concerned that is in need of a solution to help them with their cash flow issues? Is this something that is appropriate for all businesses?
Donald: In order for it to work in the factoring type situation, you need an invoice. So retail is not good. It is online and customers are paying you, it's no good. So you need to be business to business, and it needs to be in a situation where you're waiting 30, 60, 90 days to collect your money so that there's an invoice.
Jeff: Don, let's go ahead and wrap up then by providing your contact information should anyone have any questions or be interested in obtaining that information you say that you have there.
Donald: The name of the company is Midland American Capital. My name is Donald Jacobs. I'm a Senior Vice President, Business Development Officer. And my direct telephone number is 516-393-2659. And my toll-free number is 800-753-3300. And my email address is firstname.lastname@example.org.
And I'd be happy to send out information about the industry, not necessarily specifically about Midland, but you should have a thorough understanding of what factoring can do for your company and a thorough knowledge of stand-alone accounts receivable and purchase order funding, and if it would be a good fit for your particular cash flow issues.
Jeff: The gentleman is not only knowledgeable but he's extremely sincere, and I want to thank you so much for joining us today.
Donald: Thank you very much, Jeff.
Jeff: That's Donald Jacobs. He's Senior Vice President, Business Development at Midland American Capital. I hope that you got a lot out of this discussion today, I know that I did. I try to learn something each and every time I step behind this microphone with our guest. Once again, we want to thank Don for joining us on this program.
"Deal Talk" is brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen, thanks so much for listening. We'll talk to you again soon.
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