Business Advice for Arizona

I was surprised to read that headline.  Economic confidence among small business owners rose to its highest level in 14 months in April 2008.  Discover Card commissions Rasmussen Reports, LLC,  to survey 750 small business owners every month and that headline reflects its recent findings.  On closer examination, however, small business owners rate economic conditions “fair to poor.”  Here are the actual numbers:  percentage of business owners who say the economy is getting better doubled from 16% in March to 31% in April and the number of owners who see the economic getting worse declined from 69% in February to 51% in April.  These numbers certainly show improvement, but they aren’t all that inspiring.  The most optimistic business owners were those in business for less than 2 years.

As we come out of this recession, where are small businesses turning for financing.  I’d like to give you a couple of stories about recent transactions at The Interface Financial Group (IFG). 

The Interface Financial Group is one of the few factoring firms that will finance sub-contractors in the construction industry.  Until the recent economic turmoil, IFG targeted companies with $250,000 to $5,000,000 in sales.  In December 2008 IFG financed a window distributor and installer who had done about $6 million in sales for the first half of 2008.  Then, the contracts that he had on his books for the second half of the year didn’t mobilize.  Sound familiar?  His competitors went out of business. 

IFG Knows Construction!

A general contractor on a mixed-use commercial/residential project approached him to supply and install the windows.  He took on the business, who wouldn’t?  He ordered the windows from his usual supplier.  But when the time came to take delivery of the windows and install them, his supplier refused to ship the windows because the supplier was owed money on previous orders that had not been paid.  IFG was able to structure a transaction, including subordination from two banks, where IFG advanced money so that the window supplier was paid.  He shipped the windows, and our client installed them.  The client completed the progress billing to his general contractor, and IFG was paid about 53 days later.  Usually, IFG is able to complete a transaction in 48 hours; because of the bank subordinations, this transaction took longer – 8 business days. 

Our usual transaction size is $25,000 to $50,000.  The transaction just described was for a total of about $500,000.  The next transaction is on the other end of the spectrum.  In March I talked to a staffing company in the construction industry that had done about $8 million in revenue for 2008.  But, as we all know, business died in the latter part of 2008 and early 2009.  He was having trouble making payroll.  Sound familiar?  He liked the concept of our “use it as you need it” service, but he didn’t want to have his customers notified that he had sold the invoice to IFG.  On a Wednesday afternoon he changed his mind and called me.  I visited his office on Thursday morning and funded him by the 1 p.m. wire deadline on Friday for a total of about $16,000.  IFG was paid about 45 days later.

The survivors will need financing as we come out of this recession.  The Interface Financial Group is fast, flexible,  and cost-effective.

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Franklin Roosevelt said that “All we have to fear is fear itself.”  Reading today’s newspapers might bring up the comment “all we have to fear is what we read in the paper.”  Today’s environment is more difficult than a year ago, but there is financing for small businesses who sell to middle market commercial customers.  Factors look at the credit quality of the customers more than they look at the credit quality of their client.  This is especially true for spot factors, or invoice discounters, that deal with small businesses.  They have developed other risk management techniques that allow them to finance small, new businesses, businesses with uneven earnings history, for example.

Here’s a story of a small business that needed funding.  They make sport bags.  They manufacture here in the western U.S.  They have created a niche, not by being the cheapest, but by being creative, by being able to do small runs, and by have very short delivery times.  They just got a big order from one of the national sports leagues.  But they don’t have the money to purchase the raw materials to manufacture the bags.  They have been in business for many years, but they don’t qualify for bank financing because their earnings history is uneven.   But they do have receivables from other credit worthy customers, like major sports equipment manufacturers.  They can’t wait to be paid on the outstanding invoices before they need to purchase material to fill the new order.  This is a perfect case for invoice discounting/spot factoring.  They can sell the invoices that they are waiting to be paid on and use that money to start filling the new order.  The set up takes about 48 hours; they don’t have a commitment to sell any more invoices unless they want to. 

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I sent out my monthly newsletter on Tuesday “No, The Sky Is Not Falling.”   After a few more days of momentous news, I thought it would be good to review the idea once more.

In tough times, my mother-in-law used to say “This, too, shall pass.” I’m not sure that it ever made me feel better at the time, but it certainly is a true saying. Here are some excerpts from today’s editorial in Investor’s Business Daily: “This Too Shall Pass.”

Wall Street: Old timers will recall F.I. DuPont or Goodbody & Co. Not-so-old timers remember E.F. Hutton and Kidder Peabody. Now we can add Bear Stearns and Lehman Bros. to the storied names that have fallen.

We drop these names (and we could have mentioned a hundred more) for two reasons: (1) to remind readers that this isn’t the first time an investment bank or brokerage has gone under, and (2) to point out that the country has always survived and grown.

In fact, what’s happening now is quite normal in a financial system characterized by booms that lead to excesses that then require financial corrections before any renewal takes place. We’d be hard-pressed to remember a bear market when one or more financial firms didn’t go out of business.

In the oil crisis of the 1970s, for example, major financial companies such as Penn Central and Franklin National went bust. The booming ’80s saw hundreds of banks go belly up due to bad loans made to the farm sector and the Third World, and, later, S&L loans to U.S. homeowners.

The ’90s? Remember the Long-Term Capital Management debacle in ‘98, following the Asia Crisis in ‘95, and coinciding with Russia’s ruble meltdown? Then, too, we heard predictions that the world as we knew it was ending. It wasn’t.

Yes, the problems to be worked out this time seem scarier than most. And watching institutions like Bear and Lehman fail, and Merrill Lynch taken over just like that, doesn’t inspire , .

But they’re no different from other investment firms of the past that have paid the price for making too many bad decisions or taking too many risks in what is already a high-risk business.

How long all this will last is anyone’s guess. But this a big country, with a highly liquid market and a still-strong economy. We’ll get through it.

For financing small business, follow this link.

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