Small Business Acquisitions and How to Finance Them

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Two Businesses men shaking hands

KEY TAKEAWAYS

  •  When looking to acquire and merge another business, you should consider collaborating with M&A advisors or accounting firms to navigate the due diligence process, evaluate potential targets, and assess acquisition feasibility.
  • Create robust business plans for the merged entity, including efficient management structures, aligned mission statements, debt absorption strategies, and income projections, to secure financing for the acquisition.
  • Generally, the best type of financing for a small business acquisition would be an SBA loan, with the most common being the 7(a) loan. However, SBA loans come with very strict requirements so you should also look into a standard business loan as a back up option.

Acquiring another business can be a complicated task, but one that could very well be worth the effort to ensure the survival of your small or micro business. 

The time may also be right for considering an acquisition, as interest rates are low, making borrowing for an acquisition relatively cheap. Additionally, according to the most recent NFIB Small Business Optimism Index, the net percent of owners raising average selling prices increased 10 points to 36%, the highest reading since April 1981. 

While deal volume is not back at a pre-pandemic level, according to the NFIB, sectors such as liquor stores, home improvement businesses, e-commerce sites, medical businesses, manufacturers, and distributors are seeing high activity.

Reasons to Consider an Acquisition

One reason you may consider acquiring another business is that, now that we are (hopefully) in the waning days of the COVID-19 pandemic, your business may very well have taken a financial hit, and you may need to scale up by purchasing a similar business if you wish to survive going forward. 

Purchasing a similar business would give you an entirely new stream of revenue and a new pool of clients, as well as increase branding in your market – even if you’re a microbusiness such as an independent restaurant or retail store owner. If you’re an accounting or law firm or other type of business services firm or medical practice, it may even increase your client base to other regions of the country, depending on the location of the business you are seeking to purchase. 

Another potential reason to make an acquisition is that you may want to complement your business by offering additional services. For example, if you own and operate a construction firm that specializes in building houses, you may want to purchase a company that specializes in masonry and paving work so that you don’t have to subcontract that work whenever you build a new home.

Due Your Due Diligence

If you’re interested in making a strategic acquisition, your first task will be to work with an M&A advisor or even an accounting firm. While most banks are not interested in M&A advisory work for small businesses, there are several advisors that do specialize in handling acquisitions for small to medium-sized businesses (SMBs). 

Talk to your advisor about:

  1. Why you want to make an acquisition;
  2. What type of company you are seeking to purchase; 
  3. The location of the company in which you wish to purchase;
  4. The feasibility of merging your company’s balance sheet with the acquired company;
  5. The value of similar businesses in your industry and in your geographic location;
  6. A realistic amount you wish to spend on an acquisition;
  7. The logistics of merging your company with another, and
  8. How to fund the acquisition through debt.

A reputable M&A advisor should be able to do the due diligence for you and find you a list of companies in your area that may be a compatible target for an acquisition based on their business models, revenue, management structure and other factors. The advisor should also come up with a fair value of the acquisition target based on the financials of the target business. 

Create a Combined Business Plan 

Once you and your M&A advisor has found an acquisition target that meets your criteria and agrees to be acquired, you will have to produce new short- and long-term business plans for your new, combined entity in order to get financing to fund the acquisition. The basic ingredients of a business plan for a newly combined business typically include:

#1 Creating a New Management Team, Staff

Discuss with the head of the company that you are looking to acquire the logistics of combining your staff. Start with who will oversee the new company, and what functions each of you will have. If you are a microbusiness and the new company will only have 6 or 7 employees, then combining your respective workforces should not be too challenging. If your newly formed company will have 20 or more employees, you may wish to create new departments with new department heads, with each serving a different function.

Staffing redundancies, such as two people from each respective company essentially serving the same purpose, may be a red flag in the eyes of a prospective lender, so make sure your new staff structure is as efficient as possible. These factors will be crucial in the contingency –or 12-month plan– that you will need to present to a prospective lender to finance your acquisition.

#2 Creating a New Mission Statement in Line with Your New Capabilities

Your new company’s mission statement should detail the new array of products that you offer, how employees approach their work to reach goals and why your new company is improved in the way it provides products and services as a result of the acquisition. 

Next, ascertain the capabilities that your new entity has to offer in terms of sales. For example, the company that you are acquiring may offer eCommerce capabilities, while you have more retail locations. Post acquisition, your new company will offer both and your mission statement needs to reflect this. Your new company may now offer business-to-business, business-to-consumers capabilities or combinations thereof as a result of the acquisition. In addition to being a key component of your mission, these factors should be the benchmarks for your five-year business plan.

#3  Showing That You Can Absorb Debt

Typically, the company that you acquire will have some debt that you have to absorb. In order to get financing for your acquisition, you have to convince the lender that you can handle that debt, especially since you are using debt to finance the acquisition. 

Joshua Jones, Chief Revenue Officer at Kapitus, said the ability to take on new debt is key to acquisition financing.

“The [lending] bank is going to say, ‘does this asset (the acquired company) cover the new debt service on that business?’” said Joshua Jones, chief revenue officer at Kapitus. “Because now, you’ve just applied a whole new payment (through the financing of the acquisition) and the best way to show in your business plan that you can absorb that debt and increase your gross profit is either through efficiency gain or scale.” 

#4 Projecting Gross Income of the Newly Formed Company

Work closely with your accountant or M&A advisor to project a 12-month income. There are various ways to project income, and it is typically far more complicated than simply adding the gross income of your company to that of the company you are acquiring, so talk to a financial expert on this. 

“An effective planning tool is through the use of projections,” said Michael Kuru, a CPA specializing in family-owned businesses. “When a business is acquired, there is a strong indication of the gross income that should be generated. The experienced business owner should have an idea as to the underlying cost to generate that income.’

Obtaining Financing for an Acquisition 

Generally, the best type of financing for a small business acquisition would be an SBA loan, with the most common being the 7(a) loan. You may also want to consider a business loan, since the requirements for a SBA loan are typically stringent, require a high credit score, and are generally not easy to obtain. 

According to Jones, however, “An SBA loan will always be the most seamless with the acquisition strategy because it is going to provide the length of payback that’s more applicable to an owner buying a business and having the available profits to pay down the loan as a percentage of profits over time.”

SBA loans are typically offered by two different entities – a brick-and-mortar bank, or an accredited non-bank SBA lender (of which there are only 14). Many alternative lenders such as Kapitus do not directly provide the SBA loan, but have built a wide array of accredited lending partners and uses modern technology to underwrite, approve and manage the loan disbursement and repayment process, often in a timeframe that is much quicker than that of a traditional lender and often has fewer requirements.

Executing an acquisition could be an expensive and extremely complicated task. At the very least, however, buying another small business could help your business survive in the post-pandemic world. At most, an acquisition could help you thrive as it would allow your company to expand, scale up products and offerings, and ultimately pull in new business.

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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How to Increase Income for Your Commercial Cleaning Business

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Strategies to Increase Income for Commercial Cleaning Companies

Commercial cleaning companies were not spared from the tumultuous times brought on by the COVID-19 pandemic. As offices closed and in-building personnel-limits began, most cleaning companies had their revenue cut to the bone. There are, however, several strategies that commercial cleaning companies can use to help increase cash flow and profit  to help them recover, while also helping them during future slow seasons. Cleaning companies that capitalize on current customer trends and adopt new methods first are likely to see those changes translate into profit. In this article we will cover a collection of profit-boosting strategies aimed to kick commercial cleaning companies to the next level of profit.

Post-Pandemic Location is Key

As businesses adjust to post-pandemic office life, commercial cleaning companies may consider changing their area of operation to a new business hotspot. A side effect of businesses accepting remote work is an increased rate of headquarter relocation to cities with kinder tax codes or lower rent. Relocating your cleaning company to a post-pandemic tax haven like Seattle or Cincinnati can both help your own bottom line and open you to a new market of post-pandemic modern office spaces.

If you would like to learn more about the best cities for post-pandemic relocation, consider Kapitus’s comprehensive guide showcasing some of the top cities for relocation.

Another aspect to consider when choosing a new location, or when coming up with ways to improve in your existing location is assuring short travel time from your warehouse or office to the client. Working within a certain mile radius and/or using compact vehicles can both decrease your travel time and working in a metro area is one of the best ways to make sure your clients are grouped together in a convenient way for your staff. An added bonus – save some money on gas and other travel related expenses!

Separate Your Company from the Competition

While relocating to a city is one way to increase business, one certainty that comes along with a a move is the fact that competition will increase in parallel. Instead of having potential customers consider your cleaning business one of several options, separate yourself as the only option for a particular type of service. Depending on your company’s region and potential clientele, certain cleaning niche markets may be ripe for the taking.

Defining a niche will also work as a great pivoting tool in your existing location. 

Businesses that specifically service offices may benefit from expanding their window cleaning options as well as offering in-depth restroom cleaning services. Another avenue for commercial cleaning services is to market your niche toward colleges and universities. Another potential niche could even be unattractive cleaning services such as trauma cleaning or post-death services. The COVID-19 pandemic massively drove up interest in intensive sanitation services. Marketing your company as both a cleaning and sanitation service could be a key method to making your cleaning company even more attractive than the competition.

The bottom line is: Stepping into more specialized markets is a key method to making your business more appealing than a general cleaning company.  But, take note: many specialized cleaning fields require specific training and equipment, so do your research and learn what the clients in your community are looking for.

Strengthen Your Bid Customization Based on Long-Term Client Needs

When preparing your bid packet, there are certain strategies to make your company more attractive to long-term clients or those with high square-footage offices. When calculating your monthly rate for cleaning services consider what factors drive your rate. Long-term clients – like universities – may be interested in finding a company that charges by room rather than square footage; while offices with one large room will certainly be interested in square-footage rates. Long-term clients are most often either established businesses or government offices. Being that such offices work standard workdays, it may be effective to play up your company’s ability to work very early or very late hours.

One of the most effective means to impress a potential long-term or high-return client is after your first consultation, find their areas of elevated expectations like – kitchen or restroom cleanliness – and put specific language about their needs in the first draft of a prospective contract.

Is it Time to Reassess Your Rates?

Commercial cleaning companies should regularly compare their rates with local competition to see if they are still competitive. You need to be actively aware of competing prices. You need to also determine which companies offer the same services as you and consider ways to make your company the better deal.

In the event you lose a bid for a cleaning contract, reach out to the prospective customer, and ask which company they chose and what about your package dissuaded them. Your existing customers can also be a helpful resource in determining your rates. Create a customer survey asking which of your services are most and least effective. Rates should be determined on an individual and local level, as depending on the region in which you operate, identical services can have massively varying prices. Regularly watch pricing trends and be certain that your company is as competitive as possible.

Reduce Operational Costs

Commercial cleaning companies have exceedingly high overhead and operational costs. Keeping a steady flow of materials, trained staff and equipment can massively cut down on a company’s profits. There are, however, several methods cleaning companies can employ in order to assess your own overhead and see where profits may be slipping through operational gaps.

Purchase in Bulk: Suppliers that service cleaning companies traditionally offer bulk services at a discount. Determine what materials your staff uses most and invest in bulk purchasing in order to keep long-term profits high.

Increased Training and Management: Consider implementing training regiments beyond initial onboarding. Keeping your staff up to date with new machinery and finding where they work best through personalized training can help you and managers better decide where certain staff work effectively. Putting staff on jobs where they work efficiently is a clear-cut way to ensure materials aren’t wasted and machinery lives longer.

Workloading Software: Efficiency is key in the cleaning industry. There are several software solutions aimed at increasing productivity and in turn reducing expenses. Workloading software considers how long a certain cleaning task will likely take and create simulated schedules with maximum productivity. The most well-known workloading software created for cleaning companies is InfoClean. InfoClean allows users to input their own production rates and also allows easy comparison of staffing plans and cleaning techniques.

Tactical Financing to Increase Cash Flow

Commercial cleaning companies are often paid by invoices from their clients which may not become liquid for 60 to up to 120 days. Cleaning companies with a density of unpaid invoices may consider invoice factoring services. Invoice factoring is an agreement between a business and a lender who, in this case, is acting as a factor. Factors will buy a business’s unpaid invoices outright and pay approximately 95% of the invoice’s value immediately. The factor will then be responsible for collecting on the invoice when the customer eventually pays out. When the customer pays the factor, the factor will then pay a piece of the 5% to the business while also keeping a cut for services rendered.

If a company is doing business with a large number  of unpaid invoices, it is likely that the expedited cash flow of invoice factoring services could be a key part of your business’s growth. For companies who deal with one or two large clients especially, invoice factoring can help fund expansion that would regularly take much longer.

Another financing option to consider is equipment financing. While several cleaning companies choose to rent equipment like iodizers or carpet blowers, buying machinery through financing is an effective way to both get your staff familiar with specific machinery models and appear more prepared to potential clients. Equipment financing can also cover new vehicles or even office furniture for budding companies. A modern piece of equipment quickly becoming a necessity due to COVID-19 is the electrostatic sprayer. Often called ESS, electrostatic sprayers are one of the most effective sanitizing tools for both surfaces and droplets, but the machine itself is exceedingly expensive. By having an ESS in your arsenal, your company can more meaningfully assert themselves as a cleaning company with attention to sanitation as well.

If you would like to learn more about your cleaning company’s financing options, consider getting in contact with a Kapitus financing expert who can address your unique situation.

Final Cash Flow Considerations

Maintaining profitability for a commercial cleaning company is a uniquely difficult balancing act of high overhead costs but equally high returns. There is no one strategy to becoming a profitable business, but a meaningful first step is determining what your business does best and how to do it even better. Consider the strategies above as a check list and see which pieces work best with your unique business.

Brandon Wyson

Brandon Wyson

Content Writer
Brandon Wyson is a professional writer, editor, and translator with more than nine years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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What Are SBA Loan Collateral Requirements?

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Collateral requirements for SBA loans.

KEY TAKEAWAYS

  • There are multiple types of SBA Loans, including 7(a), SBA Express Loans and EIDL Loans. SBA loans, the most popular of which is the 7(a) loan, will typically use assets like real estate and inventory as collateral for security.
  • SBA loans, the most popular of which is the 7(a) loan, will typically use assets like real estate and inventory as collateral for security.
  • SBA EIDL loans, designed for disaster relief, may require collateral for loans over $25,000 based on individual circumstances.

Those seeking an SBA loan are likely familiar with the association’s sometimes confusing collateral requirements. Small business owners are required to name some amount of collateral when applying for an SBA loan, but it can be difficult to determine ahead of time how much collateral may be expected to finalize a loan or what necessarily constitutes collateral.

While there are several kinds of SBA loans, most common are 7(a) loans. Another kind of SBA loan currently in high demand is EIDL (Economic Injury Disaster Loans).  While 7(a) loans can be requested for any reason, EIDL are specifically disaster loans which have recently gained prominence as a form of pandemic relief. EIDL and 7(a) loans both have different collateral requirements. This article will explore exactly what each of these loan types require from borrowers in the form of collateral as well as other requirements of note. 

What Constitutes Collateral?


Before discussing collateral requirements, it is important to understand exactly what collateral is and what lenders and the SBA generally consider acceptable forms of collateral. Collateral, in its simplest forms, is an asset that a lender accepts as a form of security on a loan in the event of non-payment or a default. 

Examples of Generally Approved SBA Loan Collateral include:

  • Commercial or personal real estate
  • Accounts receivable
  • Standing inventory
  • Business vehicles
  • Equipment, and machinery

SBA 7(a) Loan Collateral and Requirements

SBA 7(a) loans are one of the most frequently sought loans by American small business owners and fall under three categories: Standard (7a), 7(a) Small Loans, and SBA Express. All collateral policies for 7(a) Small Loans and Express Loans are also true for Standard 7(a) loans up to $350,000.

7(a) Collateral Requirements

  • Loans up to $25,000 are unsecured and require no collateral.
  • Loans between $25,000 and $350,000 must follow collateral policies for similarly-sized non-SBA-guaranteed commercial loans.
  • Loans larger than $350,000 require the maximum amount of collateral possible from the borrower to fully secure a loan. The borrower must meaningfully demonstrate they have put forward all available collateral.
  • If a lender believes fixed assets do not fully secure a loan, they may also consider trading assets at 10% current book value.

Notable Variations

Both 7(a) Small Loans and SBA Express loans offer up to $350,000, but the SBA will only guarantee up to 50% of the loan amount for Express Loans. Guarantees for Small Loans are either 85% for loans up to $150,000 and 75% for loans greater than that.

7(a) Loan Additional Information

Applicants for SBA 7(a) loans must agree to an ABA (All Business Assets) lien. This means that all of an applicant’s business assets will be put as collateral for the SBA 7(a) loan. 7(a) applicants may also be subject to a UCC-1 (Universal Commercial Code) lien which gives a lender the legal right to access a business’s assets in the event a business defaults on their loan.

In addition to collateral, every person who owns at least 20% of an applying business must also sign a personal guarantee when seeking SBA 7(a) financing. A personal guarantee is an acknowledgement that the party signing is personally responsible for paying back a loan. Personal guarantees are essentially extensions of collateral. Instead of naming specific assets, however, an applicant agrees to use any assets necessary to pay back the loan.

When applying for an SBA 7(a) loan the lender will have the applicant fill out the “SBA Eligibility Questionnaire for Standard 7(a) Guaranty.” Which allows a lender to individually assess if an applicant has sufficient holdings to secure collateral.

SBA EIDL Loan Collateral Requirements

Unlike 7(a) loans, the SBA EIDL (Economic Injury Disaster Loan) program is exclusively distributed to small businesses that are suffering from a temporary loss of revenue due to a declared disaster. The EIDL program is currently accepting applications from businesses affected by the COVID-19 pandemic. The EIDL program has different collateral requirements than a 7(a) loan, notably because EIDL is a form of aid. Loans made through the EIDL program under $25,000 are still unsecured. Loans over $25,000, however, will require some form of collateral. Because the program often deals with disaster relief, the EIDL program will not turn away an applicant because they do not have a certain collateral value. If an applicant pledges the collateral available to them, a lender will often consider that collateral sufficient.

EIDL program applicants seeking loan amounts greater than $25,000 must also consent to a UCC-1 lien being placed on their business. Businesses applying to the EIDL program requesting more than $200,000 also require a personal guarantee from each person with a 20% or more stake in the business.

Collateral Overview

The SBA intentionally leaves collateral requirements vague in all loan programs. Necessary collateral is determined on an individual level between a lender and an applicant. More important than a dollar amount, however, is a business owner’s ability to demonstrate that they are committed to repaying a loan. Collateral in combination with personal guarantees and UCC-1 liens are mechanisms to assure loan programs are not taken advantage of or used unnecessarily.

Laying out strict financing requirements and cutoffs ignore the nuance of small business and may needlessly dissuade applicants. The most important step for a small business seeking a loan is discussion with a trusted financing expert. If your small business is interested in learning more about SBA loans and funding opportunities, get in touch with a Kapitus financing expert who can assess your options based on your unique situation.

Brandon Wyson

Brandon Wyson

Content Writer
Brandon Wyson is a professional writer, editor, and translator with more than nine years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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What Are The Best Types Of Corporate Loans

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corporate loans to suit your business situation

Corporate loans are one of the most effective financing options for companies seeking to fund a new project or simply improve their cash flow. A corporate loan accounts for any kind of financing offered to a business, not an individual. There, however, are several kinds of corporate loans, all with their own terms and requirements. Exploring the various types of corporate loans offered to businesses can be massively advantageous to those looking to make the most of their financing.

 Commercial Loans

Commercial loans stipulate that funds distributed by a lender may only be used for business purposes. Commercial loans act as an umbrella term for several purchase-specific business loans including commercial real estate loans. Commercial real estate loans can apply when financing any real estate purchase that will be used solely for business purposes; this can include general office spaces, retail locations and even apartment complexes. Commercial loans generally require considerable collateral from the business, almost always including the real estate or item being financed.

Commercial loans are generally reserved for larger companies since they are often used to fund large operations and have larger upfront costs.

Acquisition Loans

Acquisition loans are loans given specifically for financing a business’s purchase of a large asset from another business, or another business outright. Among the several types of corporate loans, acquisition loans often have the shortest window for both distribution and repayment. Acquisition loans, like commercial real estate loans, may only be used when purchasing an agreed upon asset, in this case another business or another business’s asset. Acquisition loans are often only given to businesses that do not have the liquidity for an acquisition but can meaningfully demonstrate to a lender that they have the capacity to take on the acquisition often through extensive collateral.

Term Loans

Corporate term loans are agreements between a lender and a business where a lender gives a specific amount of money with a fixed repayment schedule. Term loans are most often used for financing one-time purchases like equipment or vehicles, but they are also used as basic working capital. Term loans can have either a fixed or floating interest rate; floating interest rates will change depending on if an underlying index rises or lowers. Depending on the agreement, term loans can either be taken out in a single payment or in several smaller increments.

Revolving Credit

Similar to term loans, corporate revolving credit gives businesses access to a specific amount until the terms of the agreement end. Unlike term loans which pay out in capital, revolving credit allows businesses to draw and pay in the credit amount as many times as they like. Revolving credit is essentially a maximum loan balance that businesses can treat very similar to a line of credit, but revolving credit agreements are open-ended and do not have a specified end-date.

Self-Liquidating Loans

Self-liquidating loans refer to loans that finance projects, the revenue of which is then used to repay the loan. Self-liquidating loans are most often used by seasonal businesses or businesses with trackable busy periods. Self-liquidating loans can be used to buy inventory or machinery in preparation for a busier season. Once seasonal customers decrease and the need for working capital decreases, the business can use the increased profits made available by the loan to pay back their lender. To qualify for a self-liquidation loan, businesses often need to demonstrate through accounts-receivables records that their business has a cyclical busy season or many seasonal customers that would justify self-liquidation.

Asset-Conversion Loans

Asset-conversion loans act almost identically to a self-liquidating loan but are repaid by liquidating a business asset like accounts receivables, equipment, or inventory. Asset-conversion loans expect that whatever asset that would be liquidated to repay a loan is also put up as collateral. Asset-conversion loans, then, are traditionally in the amount equal to the value of the business assets put up as collateral.

Cash Flow Loans

Cash flow loans are used to fund daily operations like inventory, payroll and even rent. Cash flow loans are traditionally paid back with incoming funds. Before being approved for a cash flow loan, lenders traditionally consider a business’s accounts receivables and existing cash flow and then propose the terms of the loan to the business owner. Cash flow loans typically have more lenient credit requirements and require little collateral. Because of the loan’s higher risk, cash flow loans have comparably high interest rates and sometimes require blanket liens as part of the loan agreement.

Cash flow loans also have comparably high originations fees. The several increases in rate seen in traditional cash flow loan agreements come in exchange of the target business’s lack of assets or credit history.

Working Capital Loans

Working capital loans cover the same day-to-day expenses as a cash flow loan but are generally much longer agreements and used by larger businesses who may have cyclical clients or trackable busy and slow seasons. Working capital loans can last upward of 25 years especially when secured with a bank. Banks generally offer the most generous rates, but applying businesses must have a long-standing history of profitability, good credit, and a detailed history of positive balance sheets. To maintain liquidity during slow times, a working capital loan agreement may increase cash flow during and ease the burden of slower seasons. Working capital loans, then, are often reserved for businesses that can meaningfully prove to banks or private lenders that their existing assets, good credit, and long history of operation justify long-term financing.

Bridge Loans

Bridge loans, also called interim loans, are given to businesses often as a short-term loan before they secure long-term financing. Bridge loans essentially bridge a gap in capital so a business can reach a certain goal or new financing terms. Since bridge loans are created with a short-term goal in mind, the loan’s interest rates reflect traditional short-term financing; they have generally high interest rates and are often backed by collateral. An example of when a bridge loan could specifically benefit a business when acquiring new office space. A bridge loan could free up liquidity to purchase a new office space while the business owners wait to sell their old space. The most common corporate use of bridge loans, however, is when waiting on finalizing long-term financing. Bridge loans have comparably fast application-to-approval time in exchange for their higher interest rates and shorter terms.

 

Corporate Financing Options

With  several options for  corporate financing, businesses should do their research and determine which type of financing is best suited for their needs. For example: While commercial loans can be used for a wide variety of financing possibilities, more pinpointed, short-term financing like bridge loans or cash flow loans may better suit specific circumstances.

The most effective way to learn what corporate financing option is best for your business is to get in contact with a financing expert. If you would like to learn more about your options when seeking a corporate loan, get in touch with a Kapitus specialist who can address your unique situation.

Brandon Wyson

Brandon Wyson

Content Writer
Brandon Wyson is a professional writer, editor, and translator with more than nine years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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How SBA Loan Forgiveness Works

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George Washington on a dollar bill, mouth covered with default? sign

Not every small business owner is going to succeed on their first try, as roughly 20% of small businesses, on average, fail in their first year of operation according to the Bureau of Labor Statistics. This past year has seen even worse with approximately 140,000 small businesses failing due to  the COVID-19 pandemic. 

It is important to learn from your business failure and move on. After all, as author Sinclair Lewis once wrote, “Failures are finger posts on the road to achievement.” So, if your small business failed to take off the way you hoped and you have an outstanding SBA loan, there is some good news: there are steps you can take to have at least some–if not all–of the loan forgiven. 

No matter what type of SBA loan you took on for your business, be it a 7(a) loan or an SBA Micro Loan, if you have defaulted on a payment, you should talk to an attorney who specializes in dealing with the SBA, and consider applying for the SBA loan forgiveness program.

But, before you begin the process, there are several factors to consider when dealing with a delinquent, non-PPP SBA loan:

#1 Renegotiating With Your Lender

If you miss an SBA loan payment but are still holding out hope for your business, you’re going to get charged a late fee, so it is important that you keep a record of your payments as some lenders might not even alert you when you’ve missed a payment. Lenders generally don’t like to lose customers or money, so they most likely will seek to collect from you before they contact the SBA.

Some lenders may attempt to renegotiate the terms of the loan by offering a new loan repayment plan. If your business has been struggling due to the pandemic but is ready to get back on its feet soon, this may be a viable option for you as some lenders may offer interest-only payments until a new loan restructuring is complete. 

#2 How Does it Work?

If your business is no longer viable and/or you cannot renegotiate with the direct lender and apply for loan forgiveness, the first thing you need to understand is that applying for it will not guarantee that the entire loan amount will be forgiven by the SBA.

Once you apply, the SBA will evaluate your case and step in only after the direct lender has made every effort to collect on the defaulted loan. Afterwards, the SBA may purchase back 50% to 85% of the loan, and then turn directly to you, the borrower, to pay back the remaining balance. If you cannot pay back the remaining assets in full, you can submit to the SBA an “offer in compromise,” wherein you agree to pay back some or none of the loan, depending on your circumstances. 

This is the area in which you need to consult with a finance specialist or attorney who specializes in SBA loans, because the attorney can argue on your behalf that your loan should be fully forgiven. If you cannot pay back the remaining portion of the loan that the SBA states that you owe, it may actually seize your assets, which obviously is not a pleasant option. 

#3 Drawbacks of SBA Loan Forgiveness

Applying for SBA loan forgiveness requires some unpleasant steps. 

  • First, you must dissolve your business entirely and liquidate all business property. This means selling everything related to your business, including equipment, computers, office furniture, etc. 
  • Second, be aware that asking for SBA loan forgiveness will make it difficult for you to obtain an SBA loan when you move on to your next venture.
  • Third, asking for SBA loan forgiveness will negatively impact your business credit score and, potentially, your personal credit score if you were the guarantor of your business. This will make it more difficult to raise financing from both traditional and alternative business lenders in the future.

#4 Would it be Better to File for Bankruptcy?

Every business situation is unique, but if there is truly no hope for your small business, chapter 7 bankruptcy may be an option to explore. This type of bankruptcy would allow you to keep your assets and stop collection on any outstanding debt from business credit cards and loans. 

It is also very complex and costly, however. Chapter 7 would require court filings, as well as follow any legal procedures required under the Small Business Reorganization Act of 2019, which was enhanced under the CARES Act passed in March 2020. Legal fees and court appearances will add up and a court may still decide that you have to liquidate some of your assets to pay off a portion of debt still owed to your creditors. 

Again, this is an option you should discuss at length with a bankruptcy attorney or finance specialist. 

Keep Moving Forward

Once your SBA loan has been forgiven or wiped clean, do not be discouraged. The day will come when you can try running your own business once again. Learn from your mistakes and come up with another great idea for a new business! Remember, financing options will still be available to you even if you need loan forgiveness or declared bankruptcy.

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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What Are The Best Long Term Working Capital Loans

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Loan options for securing working capital

KEY TAKEAWAYS

  • Banks generally offer are a good long-term capital loan options, but they have strict requirements, lengthy approval times, and possible prepayment penalties, making them suitable for established businesses with strong financial histories.
  • Private lenders provide competitive rates and flexibility on repayment schedules and term length. They rarely enforce prepayment penalties, typically offer quicker funding and are a good choice for businesses seeking more flexibility.
  • SBA loans offer terms similar to banks and typically come with lower interest rates. However, they come with strict requirements and a complex application process. They can be a viable option for businesses who do not have an immediate need for financing.

Maintaining a steady flow of working capital, otherwise known as operating capital, is the basis of a successful business. Many businesses, however, may have trouble keeping a steady flow of working capital even though they are profitable . Companies with seasonal highs, cyclical customers, or only a few clients accounting for large percentages of income may find their working capital is uneven. An effective means to securing an even flow of operation liquidity, then, is seeking long-term working capital financing, which businesses can use to  cover daily operational needs including payroll, ordering, and even rent.

As businesses look for ways to secure annual operational costs, it is important to understand what long-term options are available and which is best suited for the unique situation of the business. Starting a relationship with a financial institution can also be lucrative for businesses seeking other financing services like invoice factoring or specific equipment financing, as those services are likely to be offered by banks as well as private lenders.

Types of Long-Term Working Capital Loans

Bank Loans

While banks generally offer the longest-term capital loans at comparatively low rates, these loans often have exceedingly strict requirements for applying businesses. Before approval, banks will typically want  to see that the applying business has a long-standing history of profitability, good credit, and a detailed history of positive balance sheets. Bank loans for securing long-term working capital often have terms from as short as 3 years to as long as 25. Banks, however, often take the longest in distributing approved funds, sometimes as long as 60 days . In addition, they will sometimes enforce a prepayment penalty so be sure to thoroughly read and understand your contract before signing on the dotted line.

Private Lender Loans

Seeking a private lender to secure a long-term working capital loan is often a great alternative to banks since private lenders can offer competitive rates and more flexible requirements in exchange for shorter terms. Private lending working capital is often underwritten by a private investment bank, or individual, and tends to have more flexible repayment structures. Unlike traditional banks, private lenders very rarely implement prepayment penalties if a business repays a loan in full after 6 months. Private lender loans often have competitive rates, and terms up to 2 years. Private loans have some of the quickest funding time, even as little as hours after approval.

SBA Working Capital Loans

SBA loans are provided by traditional lenders like banks or even private lenders, but they are secured by the Small Business Association, meaning that if a borrower fails to pay back a loan, the SBA will cover a portion of the losses. SBA-guaranteed loans often have terms as long as banks, 3 to 25 years. But, because these loans are guaranteed by the government, they have very strict requirements and an intensive application process. Depending on a chosen lender, funds can become available anywhere from the day of approval to multiple months.

Asset Based Working Capital Loans

While asset-based financing is usually associated with short-term funding solutions, a company can still seek long-term working capital financing with their existing assets. Instead of using invoices as collateral, larger assets like real estate paired with equipment can lead to agreements that secure long-term capital. When dealing with an asset-based lender, there is no universal rule to determine how much asset collateral a business may need to secure a loan, but long-term capital often requires long-term commitment of assets like commercial real estate, vehicles, equipment, or even intellectual properties. Most asset-based, long-term working capital loans have terms from 1 to even 30 years. Asset-based financing agreements tend to take slightly longer to reach a borrower, often 1 to 2 weeks after approval.

FinTech & Online Loans

FinTech, or financial technology lenders, are likely the best way for start-ups or businesses with a less than stellar credit and revenue profile to find long-term working capital financing options. Fintech loans typically have very easy application processes and businesses can often get same day approval on one of several FinTech financing options. After finalizing an agreement, a business owner can have gone from application to capital in as little as a day. FinTech loans vary significantly by lender. And the sheer density of marketplaces and options means that rates are regularly subject to change. Terms often can range from 6 months to 5 years and as explained, FinTech loans are often the fastest way to secure capital with the least up-front revenue.

Cash Advance  

While not the best option for every business and every situation, Merchant cash advances are an unexpected, but viable, option for long-term working capital. Cash advance lenders can sometimes increase terms to levels that compete with traditional long-term working capital loans. Cash advances, however, are not loans. By agreeing to a long-term working capital deal with a cash advance lender, a business owner is selling a piece of their own future revenue at a discounted rate. By extending a payback period by 12 or 24 months, a cash advance can act quite similar to other long-term working capital options. Unlike short-term cash advances, long-term agreements generally demand that borrowers have good credit and balance sheets. 

 Choosing a long-term financial strategy is often daunting. Depending on your business’s size and field of operation, certain financing options may prove more helpful than others. If you would like to learn more about your long-term working capital options, feel free to speak to a Kapitus specialist who can address your unique situation.

Brandon Wyson

Brandon Wyson

Content Writer
Brandon Wyson is a professional writer, editor, and translator with more than nine years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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What is Non-Notification Factoring

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Financial Advisor with Client going over options.

Non-notification factoring is a type of invoice factoring arrangement between a business and their factor that limits the interaction between the factor and the customer as much as possible. There are a variety of reasons why a business may pursue a non-notification factoring deal, but the results for the business, factor and client are often the same as traditional factoring deals.

Invoice Factoring

Before we delve into how non-notification factoring differs from more traditional factoring, it is important to understand exactly what Invoice Factoring is. 

Invoice factoring, sometimes referred to as receivables financing, is the process in which a financial company buys a business’s unpaid invoices for a percentage fee. Factoring massively expedites cashflow for participating businesses, as invoices from accounts receivables that would regularly take 30, 60, or even 120 days to become usable capital can be sold to a factor and quickly turned into cash. When a factor buys an unpaid invoice, they will pay up to 95% up front. The factor will then pay out the remaining percent, minus fees, to the business when the customer pays the invoice. Typically, once a business is approved for factoring, the factor is responsible for collecting on the original invoice meaning the factor, not the business, will then reach out to the customer to redirect collection. This final step functions differently in a non-notification factoring deal.

Normal Invoice Factoring Versus Non-Notification Factoring

Traditional invoice factoring agreements function near-identically for the business, but changes happen in the dealings between the factor and customer. Once a business and factor agree to a non-notification deal, all notifications sent from the factor to the customer are done through white-label forms or forms on the business’s branded stationary or email signature instead of the factor’s. This means that even though the customer is still corresponding with the factor when paying their invoice, it appears they are dealing with the original business.

To further conceal the factor’s identity, payments sent from the customer via postage will often be sent to a PO box instead of directly to the factor. Electronic deposits from a customer will also pay directly to the factor, but because all notifications are sent either with the business’s email signature or branded stationery, it will appear as though they are paying the business directly. Non-notification factoring is a service that attempts to make the invoice process appear more seamless to the customer. By paying invoices that appear to be directly from the business instead of a factor, customers are simply given a more streamlined version of their part of an invoice factoring deal.

Qualifying for Non-Notification Factoring

Traditional invoice factoring qualifications are less stringent compared to other financing options like loans and can be a good choice for businesses like subcontractors. When applying for factoring, a business’s credit score is not nearly as important as the credit scores of the customers who will eventually pay out the invoice. Non-notification factoring, however, will likely have several more requirements. Factors will often look for you to meet several criteria when choosing to make a non-notification deal with a business including:

  •  2 years or more in business
  • Low risk of bankruptcy
  • Minimum invoicing rate of $250,000 per month
  • 1 year or more of accounts receivables data
  • Credit-worthy clients
  •  Your business must fall within services or manufacturing includings

Exact requirements will often vary depending on the factor a business chooses to partner with. When making a non-notification factoring deal, expect that a factor will consider at least some of the requirements listed above, and may have additional requirements not listed. 

When to Consider Non-Notification Factoring

Non-notification factoring is a service specifically for the benefit of your customers, particularly when you don’t want them to know you are using a factoring company. Non-notification factoring can also improve a business’s relationship with a customer, as the business’s name and branding will be present for every step of the invoice process. Non-notification factoring may also help in the event a business and customer’s contract restricts the use of a factor. Such contracts usually bar a factor from sending notifications to the customer, so non-notification factoring often means a business can take advantage of the cash flow benefits of factoring and stay within the grounds of their contract. Businesses seeking a non-notification factoring deal because of contractual obligations will often need to share the contract with their factor.

Any time where a third-party contribution may hurt the relationship between a business and their customer, non-notification factoring may be an effective compromise. Non-notification deals, however, require a strong relationship between a business and their factor, as the factor must essentially act as the business when collecting for the invoice.

Weigh your Options and Speak to a Professional

Every financial situation is different. The most effective way to learn if you would benefit from a non-notification factoring deal or invoice factoring in general, is to speak to a lender or a financing professional. Invoice factoring is a massively helpful tool in increasing a business’s cash flow without the potential of debt brought on by a loan. If your arrangements with a customer could benefit from increased discretion or if you are interested in learning more about how a non-notification factoring deal may help you business, get in contact with a Kapitus specialist who can address your situation.

Brandon Wyson

Brandon Wyson

Content Writer
Brandon Wyson is a professional writer, editor, and translator with more than nine years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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Purchase Order Financing For Government Contracts

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contract

KEY TAKEAWAYS

  • In general, PO financing allows businesses to fulfill orders and cover supplier costs without impacting their ability to cover operation costs.
  • With PO financing you do not have to rely on personal credit to get a loan, rather, lenders rely on the credit of the government, when using this financing to to land federal contracts.
  • This financial product can offers up to 100% funding and provides flexibility for businesses with customizable payment plans and loan sizes.

The money set aside for federal government contracts is set to grow even larger in the second half of 2021, and as business owners prepare to try and get their pieces of the pie, one of the financing vehicles that can help them is government purchase order financing.

What is Purchase Order Financing?

Purchase order financing, (PO financing) is a form of short term business financing that enables your business to pay suppliers to get paid for goods and services avoiding the risk of late delivery and losing government contracts. It is offered by both traditional and alternative lenders.

The advantages of using this type of financing are endless. Through PO financing:

  • The lender will take on invoice collection responsibility with your customer;
  • You can maintain your existing cash flow without having to take on new debt;
  • You can fulfill orders and cover supplier costs without impacting your ability to cover operation costs, and 
  • PO financing will allow you to grow your business by showing potential customers your ability to quickly supply goods and services.

By using alternative lenders such as Kapitus, the application will be simple; depending on the creditworthiness of the customer, your PO Financing rates can be as low as 1.25%, and you often can get approval within a day. 

Government Contracts Are a Gold Mine

The federal government offered $682 billion worth of contracts to private businesses in 2020, a 14% increase from 2019, and is set to offer an even higher amount in the next fiscal year, making it a gold mine for both small and big businesses alike. Contracts for health care providers and medical equipment suppliers jumped 50% in 2020, due in large part to the COVID-19 pandemic. Contracts for IT services – a field in which many small businesses operate – have grown by an average of $6.8 billion year-over-year since 2015, while contracts for miscellaneous services such as small construction and architectural projects and legal services are also expected to increase this fiscal year. 

Small businesses are expected to continue to benefit from government contracts this upcoming fiscal year, as the federal government’s contracting program will continue to ensure that a “fair proportion” of federal contract and subcontract dollars is awarded to small businesses. 

The government, under its Small Business Goaling Report, reserves contracts that have an anticipated value greater than the $10,000 micro-purchase threshold, but not greater than the $250,000 simplified acquisition threshold exclusively for small businesses. It also authorizes federal agencies to set aside contracts that have an anticipated value greater than the simplified acquisition threshold exclusively for small businesses and authorizes federal agencies to make sole-source awards to small businesses when the award could not otherwise be made.

Simply put, whether you’re a small medical research or supply company; a construction firm; an IT company; a law firm or even a small car dealership, there are all sorts of government contracts out there waiting for your business to bid on. 

PO Financing for Government Contracts 

If you do decide to try and take a slice of the government pie by bidding on a contract, you’re most likely going to need PO financing, since most government contracts require a large amount of materials. No matter what type of government contract you are bidding on, be it a Work-in-Progress or a Finished Goods contract, PO financing will enable your business to fill orders and avoid the risk of late delivery that could cause you to lose a government contract altogether. 

PO financing for government contracts allows your company to:

  • Bid on large government contracts by providing 100% funding for the transaction;
  • Have greater availability to funds than standard business orders;
  • Not have to rely on personal credit to get a loan, rather, lenders rely on the credit of the end-customer (and who has better credit than the federal government?), and 
  • Have access to flexible payment plans and loan sizes, depending on the business cycles and opportunities.

In all, while government contracts are highly competitive–especially for small businesses–your company needs to be ready with the supplies when you bid on them. PO financing will give you the funds and the flexibility to grow your business when you are ready to grab a piece of the government pie. 

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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A Doctor’s Guide to Medical Practice Loans

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Close up of a senior woman and her daughter having a doctors appointment

Getting financing for health care practices shouldn’t have to be as complicated as surgery. 

No matter what type of health care professional you are, you’re going to need state-of-the-art equipment, computers and office space to ensure a successful practice. 

A variety of medical practice loans exist that considers the unique needs and qualifications of health care professionals, such as high student debt, the fact that medical office revenue streams are more unique than other types of businesses, and irregular insurance payments.

Financial pressure ramped up on the US healthcare system during the COVID-19 pandemic, as many providers were forced to replace outdated equipment, expand their facilities and hire more professionals. Post pandemic, the demand for financing in this sector should be on the rise to tackle higher patient volumes and the need for new equipment and technology to accommodate new practice offerings, such as telehealth.

Given the need for financing, there are a lot of options out there. Healthcare financing, depending on the lender, can apply to (but is not limited to):

  • Independent primary care physicians
  • Ambulatory care facilities
  • One room surgical facilities
  • Specialists, such as orthopedists, ophthalmologists and podiatrists
  • Optometrists
  • Veterinarians
  • Dentists
  • Mental health professionals
  • Chiropractors
  • Alternative medicine specialists
  • Licensed masseuses 

Types of medical practice financing include:

Alternative Lenders Such as Helix Healthcare Financing

If you’re a health care practitioner that needs financing, there are a lot of traditional lenders out there ready to offer you deals. Those deals, however, could require long wait times and complicated application processes. One alternative lending process you may want to explore is online lending. 

As such, Kapitus offers a variety of lending options through its Helix Healthcare Financing, an online financing option that specifically addresses health care practices. With Helix, you can get a wide array of financing options with a pricing grid that is tailor-made for independent medical practices and that can meet your unique cash flow needs. 

The qualifications for Helix financing are most likely simpler than the requirements from traditional lenders. You’ll need:

  • A FICO score of at least 600;
  • A practice that is at least six months old;
  • An annual revenue of at least $120,000, and
  • You must be a licensed practitioner. 

Helix financing can give you the ability to consolidate debt and get rid of those high interest credit cards you may have been using to finance your practice and can offer you everything from equipment financing and revenue-based financing to term loans to increase your cash flow. 

The bottom line with Helix and other online lenders is that they are generally more accessible and may be able to offer a better cost of financing than traditional lenders. Their emergence over the past year has been in direct response to the difficulty many medical practitioners have had in getting financing from traditional sources, especially after the financial crisis brought about by the COVID-19 pandemic. 

SBA 7(a) Loan

The most widely used vehicle for medical practice financing is often the one that is the most difficult to obtain: the SBA 7(a) loan. This is often sought after by medical practitioners because it typically offers the lowest APR rates and carries loan terms longer than most traditional lenders – 5 to 25 years. It also carries a maximum loan amount of up to $5 million, and 85% of the loans of up to $150,000, and 75% of loans greater than $150,000 are guaranteed by the SBA.

It does have its drawbacks, however. If you’re just starting your practice, this is not the type of financing for you, as an SBA loan usually requires years in business and a strong business credit score. It also requires collateral for loans of more than $350,000. Because the terms are so favorable, competition for this type of financing is fierce. You also are going to run into:

  • A long, competitive application process,
  • An extended underwriting process, and
  • A long timeline to capital access.

Traditional Bank Loan

The pros of traditional bank loans are that many banks offer financing products specifically tailored to the unique needs of health care practices. These loans, however, are difficult to obtain as they usually require years in business, high credit scores and high annual revenues. 

Approval for a traditional bank loan and access to cash can often take months, so this might be the right type of financing if you have long-term plans such as acquiring another medical practice or looking to purchase new real estate to expand your business. 

Term Loan

A term loan is a lump sum of cash that is paid back over a predetermined period of time. While term loans are offered by traditional banks, online lenders have become increasingly popular in the post-pandemic era as they more often offer lending services specifically designed to meet the needs of healthcare practices, have less stringent borrowing requirements than a traditional bank, and a quicker approval process.

Because online lenders generally may be willing to take on more risk than banks, however, they may charge a higher APR. You should take the time to explore the different pricing grids offered by various online lenders to see what is right for you.

Short-Term Loan

Short-term loans are generally provided by alternative lenders and are great if you need cash quickly. You generally can obtain these loans if you have a high, predictable monthly cash flow. 

If you are a veterinarian looking to quickly purchase a new dog kennel or a chiropractor looking to buy new beds for your patients, for example, this may be the right product for you. 

Keep in mind, however, that while the processing time for short-term debt is relatively quick, these types of loans typically carry a higher interest rate relative to a bank or SBA loan. 

A Business Line of Credit

Business lines of credit act like credit cards for your business and are offered by both traditional and alternative lenders. They could be ideal for mental health practitioners who are not seeking to purchase specific medical equipment, but perhaps are seeking furniture, larger office space and computer equipment. 

The advantages they offer are that, like credit cards, you will only pay interest on the money borrowed, and they will offer you quick access to funds and flexible repayment terms. They are not ideal, however, for one-off investments, and like a credit card, the fees and interest rates can add up if you’re not careful in your spending. 

Equipment Financing

Equipment financing is offered by both traditional and alternative lenders, but through online lenders, the borrowing terms are generally more relaxed and approval is often quicker. It is a great financing tool if you are a medical specialist such as an independent orthopedist and are seeking a new x-ray or MRI machine, or perhaps new computer equipment. Collateral on this type of financing is generally not required, and they are often easier to qualify for. If you are just setting up your practice, this could be a great financing tool for you, as you will own the equipment rather than leasing it.

The general cons of equipment financing are that the funds can only be used to purchase the equipment you specified in the terms of the loan, and that certain pieces of equipment that may become outdated quickly may carry higher interest rates. 

The Bottom Line

As a medical professional, you shouldn’t have a difficult time finding financing that is right for you, as lenders generally consider health care practices to be more lucrative than other business sectors. You should sit down with your accountant or financial expert to go over which type of financing is best for your particular practice, and target what the best terms and rates will be for you.

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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What Is Staffing Factoring And How Does It Work

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Understanding Staffing Factoring

Staffing factoring is a subset of invoice factoring, a type of business financing commonly used by several industries to maximize cash flow and more effectively fund day-to-day operations by allowing businesses access to expedited cash without taking on debt.  A company performing invoice factoring services – commonly known as a factor –  purchases invoices at a discount from business-to-business (B2B) and business-to-government (B2G) companies. The factor pays out a portion of the receivable upfront. This means that the capital from an invoice that would usually payout in 30, 60 or 90 days is immediately usable. Factors will take anywhere from 1% to 3% of an invoice as a fee and pay out the remaining amount of the invoice to the company when the invoice is actually paid. Staffing factoring, which is also sometimes referred to as payroll factoring, specifically applies to staffing companies which organize and assign temporary employees. Staffing agencies regularly partner with factors because invoices from temporary workers traditionally take several weeks to pay out.

How Staffing Factoring Works      

Similar to traditional invoice factoring, staffing factoring offers cash for unpaid invoices.  Because the factor is purchasing your invoices, you won’t be making monthly payments like in the case of a business loan. Instead, the factor pays you a percentage of the invoice upfront, then once the invoice has been paid by your client, the factor will pay you the rest of the invoice amount minus fees. 

Because invoice factoring involves three parties – a staffing agency, a staffing agency’s customer, and a factor company – there are more steps to the process than you would find with more traditional forms of financing.  Here’s how staffing factoring works, step by step:

  1.     You invoice your customer.
  2.     You sell the invoice to the factor.
  3.     The factor pays you an advance on the invoice
  4.     Your customer makes payment on the invoice to the factor
  5.     The factor forwards you the remaining amount, minus any fees

Recourse or Non-Recourse?

Companies may have to decide whether to use non-recourse loans or recourse factoring when partnering with a factor. Recourse factoring means that in the unlikely event an invoice is not paid, you – the staffing agency – are essentially responsible. Non-recourse factoring, however, means that the factor will take the bulk of the risk in the event of an unpaid invoice. Many factors offer non-recourse agreements that apply only when an invoice is unpaid because an agency’s customer company is declaring bankruptcy.

Depending on a staffing agency’s size and cash flow, either recourse or non-recourse factoring may be a viable choice. A factoring company may offer better terms to a staffing company if they allow for recourse factoring. If a staffing agency and their customers have exceedingly good credit, a factoring company may pursue non-recourse. Every agency’s situation is unique, so consult relevant parties before deciding whether to pursue recourse or non-recourse factoring.

Is Staffing Factoring Right for Your Business

Staffing agencies frequently turn to invoice factoring to improve cash flow. Staffing companies are especially vulnerable to gaps in capital since agencies are typically paid anywhere from two weeks to up to three months after staff are assigned in either permanent or temporary staffing roles. Staffing factoring most directly benefits companies that have a consistent flow of invoices or a large staff of temporary employees. Staffing agencies looking to increase their number of temporary employees, then, could greatly benefit from working together with a factor. Instead of paying temporary employees with the previous week’s paid-out invoices, a staffing factoring company allows an agency to pay their temporary employees more directly and efficiently.

Qualifying for Staffing Factoring

 While staffing factoring is not a loan, agencies may need to consider certain qualifications to partner with a staffing factoring or payroll funding company. Like any other financing company, staffing factoring companies may want to see that an agency’s invoices are consistent and meet the minimum threshold for invoice factoring. When seeking staffing factoring, an agency’s own credit is considerably less important than the credit of the agency’s customers. Staffing agencies with less than perfect credit are still very likely able to qualify for invoice factoring if the credit of their invoiced customer is strong. Factoring companies may also prefer agencies that have been in business for more than two years. Staffing agency invoices from temporary employees are especially attractive to factoring companies because the outstanding invoices will almost certainly be paid since the temporary employee already completed their hours. Staffing invoices are traditionally submitted with timecards as well which act as a secondary guarantee that services were rendered.

Benefits of Staffing Factoring

Cash flow:  The most direct benefit to staffing factoring is a quick increase in cash flow. This quick increase in on-hand capital can alleviate cash gaps that could impact day-to-day operations. 

No Associated Debt: Rather than taking out a loan, staffing factoring lets a staffing agency hold more capital without the traditional expectation of repayment. Once a factor purchases a staffing agency’s invoices, the factor will take on the collection of the invoice. Both loans and factoring are strategies to expand an agency’s amount of liquid capital. While a loan offers capital in exchange for the guarantee it will be repaid, factoring simply expedites money already guaranteed to an agency from their own invoices.

Better Customer & Employee Experiences: Companies offering invoice factoring services are not borrowers. Working with a factor is a partnership. Factors are financial companies and will often be more than happy to meet and consult with an agency to determine the best financial moves for their unique business. Factors may also be able to help agencies make better informed choices about which customer companies to partner with in the future.

Cons and Potential Problems with Staffing Factoring

 Staffing factoring has one key downside that may turn away staffing agencies. Transactions with staffing factoring companies typically charge a 1% to 4% fee. Depending on the cash value of an invoice, agencies may decide that the fee paid to the invoice factoring company may not be worth the cost. Larger staffing agencies may then forgo staffing factoring in exchange for other kinds of capital guarantees.

Recourse factoring may also push some businesses away from staffing factoring. In the case of a recourse factoring agreement, if a customer merchant cannot pay an invoice, the staffing agency is fully responsible for the amount drawn. An agency, then, may consider the factoring agreement superfluous since they are still accountable for the bad invoice. When partnering with a staffing factoring company, agencies should weigh whether to pursue non-recourse or recourse factoring based on the credit and trustworthiness of their own customers.

Bottomline on Staffing Factoring

Cash flow is king in the staffing industry. If an agency has more capital on hand it can maintain higher liquidity after payroll, and widen its prospects. Depending on the size of a staffing agency, invoice factoring can expedite growth as efficiently as a loan, but without the worry of taking on debt. 

Invoice factoring agencies are an invaluable partner to staffing agencies. Working together with a factor allows an agency to take better-calculated risks when partnering with new clients and can benefit an agency’s credit. As an agency expands and builds a relationship with its factor, an invoice factoring company can quickly become a resource for making more informed business decisions.

 When deciding to partner with a factor, staffing agencies must consider how valuable on-hand capital is at their current capacity. For example: if an agency can use expedited capital to keep its business sustainable, staffing factoring can be a great resource. If a company has a density of unpaid invoices that leaves most of their capital on a weeks-long countdown, staffing factoring can speed up opportunities for growth that would regularly take much longer.  

Invoice factoring offers agencies the financial flexibility to potentially take on larger accounts and expedite their own growth. Especially in the staffing industry, having more on-hand capital makes your agency more competitive, well-positioned and poised to grow.

If your agency is interested in learning more about invoice factoring and staffing factoring, get in touch with a Kapitus financing specialist who can walk you through the options available to you based on your unique situation.

 

Brandon Wyson

Brandon Wyson

Content Writer
Brandon Wyson is a professional writer, editor, and translator with more than nine years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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