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50 • JULY 2011 • WORLD FENCE NEWS Alternative financing can help offset cash flow challenges presented by slow-paying customers BY TRACY EDEN HOT DIP GALVANIZED ORNAMENTAL IRON WWW.ALAMOFENCE.COM Ornamental Iron Fence & Gates The statistics may say that the U.S. economy is out of recession, but many small and mid-sized business owners will tell you that they’re not seeing a particularly robust recovery, at least not yet. There are various reasons for the Hot Dip Galvanized After Welded No Rust Fencing • Residential, Commercial & Industrial slow pace of recovery among small businesses, but one is becoming in- creasingly apparent: A lack of cash flow caused by longer payment terms instituted by their customers. Dealing with slow-paying cus- tomers is nothing new for many small businesses, but the problem is exacer- bated in today’s sluggish economy and tight credit environment. This is ironic given the fact that CANT-4 CANT-4SQ ⁄2 " - 4" - 41 ⁄2 COVER-4G Nylon Cantilever Gate Rollers and Safety Roller Covers Universal Roller Fits 3"- 31 Also Available Rollers To Fit 4" Square and 65 Authorized Locinox Dealer BEST VALUE IN AMERICA Call Us or Visit Our Web Site: www.alamofence.com A Division of Atlas Fence Co., Inc. Ph.: 713-981-1113 • Fax: 713-771-5046 Email: benitomgarza@alamofence.com " Round Posts. ⁄8 " Round Posts. TILT-A-WAY RESIDENTIAL & INDUSTRIAL OPERATORS many big businesses have accumulated large cash reserves over the past cou- ple of years by increasing their effi- ciencies and lowering their costs. In fact, several high-profile large corpo- rations have announced recently that they are extending their payment terms to as long as four months, including Dell Computer, Cisco and AB InBev. So here’s the picture: Many large corporations are sitting on huge piles of cash and, thus, are more capable of paying their vendors promptly than ever before. But instead, they’re stretching out their payment terms even farther. Meanwhile, many small businesses are struggling to stay afloat, much less grow, as they try to plug cash flow gaps while waiting for pay- ments from their large customers. Compare our quality! You will see there is a difference! Commercial Residential How alternative financing can help To help them cope with these kinds of cash flow challenges, more small and mid-sized businesses are turning to alternative financing vehi- cles. These are creative financing so- lutions for companies that don’t qualify for traditional bank loans, but need a financial boost to help manage their cash flow cycle. Start-up businesses, companies All operators meet UL-325 and CSA-247 (800) 523-3888 www.tiltaway.com info@tiltaway.com experiencing rapid growth, and those with financial ratios that don’t meet a bank’s requirements are often espe- cially good candidates for alternative financing, which usually takes one of three different forms: • Factoring: With factoring, busi- nesses sell their outstanding accounts receivable to a commercial finance company (or factor) at a discount, usu- ally between 1.5 and 5.5 percent, which becomes responsible for man- aging and collecting the receivable. The business usually receives from 70-90 percent of the value of the receivable when selling it to the factor, and the balance (less the discount, which represents the factor’s fee) when the factor collects the receivable. There are two main types of fac- toring: full-service and spot factoring. With full-service factoring, the company sells all of its receivables to the factor, which performs many of the services of a credit manager, including credit checks, credit report analysis, and invoice and payment mailing and documentation. There are various reasons for the slow pace of economic recovery among small businesses, but one is becoming increasingly apparent: A lack of cash flow caused by longer payment terms instituted by their customers. With spot factoring, the business sells select invoices to the factor on a case-by-case basis, without any vol- ume commitments. Since it requires more extensive controls, spot factoring tends to be more expensive than full- service factoring. Full recourse, non-recourse, noti- fication and non-notification are other factoring variables. • Accounts receivable (A/R) fi- nancing: A/R financing is more similar to a bank loan than factoring is. Here, a business submits all of its invoices to the commercial finance company, which establishes a borrowing base against which the company can bor- row money. The qualified receivables serve as collateral for the loan. The borrowing base is usually 70- 90 percent of the value of the qualified receivables. To be qualified, a receivable must be less than 90 days old and the un- derlying business must be deemed creditworthy by the finance company, among other criteria. The finance com- pany will charge a collateral manage- ment fee (usually 1 to 2 percent of the outstanding amount) and assess inter- est on the amount of money borrowed. • Asset-based lending: This is sim- ilar to A/R financing except that the loan is secured by business assets other than A/R, such as equipment, real estate and inventory. Unlike fac- toring, the business manages and col- lects its own receivables, submitting a monthly aging report to the finance company. Interest is charged on the amount of money borrowed and continued on page 52