Can Factoring Help a Small Business?

Can a factoring program help a small business succeed and grow?

Here is a case study summary of one of my clients:

ABC Sign Company (naturally not the real name) is a sign company in the Triad Area of North Carolina. For a number of years they made a reasonable profit with minimally increasing sales volume each year and with substantial concentration in the real estate sector (yard signs, banners, etc...). Then, the economy began to go south. 

Their largest customer (a real estate company) began demanding lower prices and began taking longer and longer to pay their invoices (a common occurrence) 

This began a downward spiral, ABC signs started to lose money on this customer's business. Now, in a cash crunch, ABC Signs held off paying taxes in order to just keep the doors open.(Bad idea).. Now, the IRS and NC Dept of Revenue suddenly became interested in ABC Signs...

After setting up a factoring facility (and having the factor taking over the monthly payments due for taxes) ABC Signs begin to finally succeed.

Before they started factoring their invoices, they had monthly sales of $20,000. After setting up a factoring facility, ABC Signs had (over a few months) increased their sales to over $60,000 per month. By relieving the monthly cash flow pain and stress, ABC Signs were able to concentrate on growing their company.

Another case study summary:

ACME Manufacturing Company had $425,000 a year in sales. The company made a 25% gross margin on sales. With sales are $425,000, they can expect to make a net profit of $42,500 a year.  However, their sales are limited by the amount of money the business has available to buy materials and pay employees.

   

Acme Manufacturing Company
Abridged Income Statement (Without Factoring)

Sales           Materials                    Payroll Overhead Net Profit (10%)

$425,000 $127,500     30% $191,250     45%    63,750.     15% $  42,500     10%

Note that, due to cash flow restrictions, Acme Manufacturing Company was constrained to sales of $425,000 a year. As a result, until Acme was able to accumulate more working capital, it was only able to have a net profit of $ 42,500 a year.  With a factor, Acme's business would not have a cash flow restriction. 

Once Acme Manufacturing decided to use factoring - they are no longer limited because of cash flow issues.  Acme now markets its business without the worry of paying vendors or employees. Acme now collects cash as soon as (within 3-4 days) it produces, delivers and bills for its product. Now, Acme Manufacturing Company increased sales to $1,000,000 a year. Acme also has the cash to take prompt payment discounts from their vendors (as much as 3%).  Acme sells its invoices at an average factoring discount of 4%. Now that Acme is factoring -

Acme Manufacturing Company
Abridged Income Statement (With Factoring)

Sales           Materials Less Prompt Pay Disc. Payroll Overhead (min. increase) Factoring Cost NET Profit (15%)

$1,000,000 $   300,000     30%      ($9,000)     (3% on Materials cost) $   450,000     45% $     70,000       7% $     40,000       4% (factoring all invoices) $   149,000

Factoring has nearly eliminated Acme’s cash flow restrictions. As result, Acme was able to double sales to $1,000,000 a year and take a 3% prompt payment discount from his vendors. Also, because overhead (building costs, etc..) do not increase at the same rate as other expenses, this helps net profit change from $42,500 to $149,000 a year.  This means that Acme Manufacturing Company made an additional $106,500 a year (a 350% increase).   

Over three years, (with no additional sales increase ) The owner of Acme has the potential to make an additional $319,500 !

Does this mean that factoring can help every small business? No. But, it may be beneficial to investigate this "other" funding option. 

Please feel free to contact me for more information on our many factoring options... 

{ Look for an upcoming post on funding dangers for small business }.