Banking Overview

Lawyer's Comment: Many growing businesses are struggling now within the standard banking institutions. They cannot get loans or are mired down in the quagmire of qualifying for a loan which seems like it will take forever. Loans to small business have decreased dramatically during this financial crisis. Many rapidly growing companies without a banking relationship or a line of credit (LOC) simply don't have access to working capital so neccessary in order to accelerate growth or survive a "cash-crunch" They have to turn to alternative financing. Borrowing from friends and family is a sensitive and often emotional process. Venture capitalists (VC) usually want control over the company. Angel investors are more available for start-ups and technological innovation. The best scenario is to leverage the good credit of the customers the company already has earned and invoiced. Factoring invoices is historically known as "Accounts Receivable (AR) factoring." This process allows the small company to sell their assets (AR) in exchange for cash (at a discount). Factoring is not a loan and it does not appear on a balance sheet. With a properly negotiated factoring agreement, both sides can arrange a business relationship which is mutually beneficial. The factor has an asset purchased at a discount and the business has ready cash for immediate use improving their business processes. There is a closing fee paid to the factor upfront in order to cover the fee and administration of the exchange and it ranges from 3-5% of the total amount factored per month. The overall cost is probably more expensive than a traditional bank loan, but it is faster and the money is not extra cash-flow that ultimately has to be paid back, like a loan does! Beware any factoring company that requires a term committment or hides fees within the contract which punish the user for lack of volume or include minimum factoring velocity per month. The contract, if there is one required, must be negotiated by sophisticated financiers familiar with the factoring industry.