Understanding the Typical Types of Factoring

09:13 04 May in Blog, Business Funding

Factoring is a financing arrangement that is typically used by small and medium-sized businesses to help them maintain a steady cash flow. As every business owner understands, cash flow is important to ensure the successful, continuous operation of their business. This is why it’s important to know the different types of factoring.

In general, factoring means a company is turning over their invoices to a third party in return for receiving a portion of those invoices in cash within a few business days. Primarily, there are two types of factoring, recourse factoring and non-recourse factoring.

What is Recourse Factoring?

As a business owner, you are assuming a certain risk when you extend credit to a customer. Typically, the more reliable a client, the more favorable the terms you are offering. Some businesses even offer a discount if a client pays more rapidly. This type of factoring is called recourse factoring.

In fact, it is common for a company to issue an invoice with two separate terms such as offering a 5 percent discount if paid in 15 days and a 90-day net pricing. This means the client has 90 days to pay the invoice in full. Should the client not pay their bill in full at this time, the company would then begin collection activities which may involve refusing to ship additional product, having their accounts receivable department call the company about payment and in some cases, adding on a fee for late payment.

When customers refuse to pay, the business may turn over the collection activity to a collection agent or attorney.

However, if the business has opted to finance the invoice with a factoring company, they no longer must be concerned about collecting payment for the invoice.

The factoring company takes over the risk associated with the invoice, and the client is indebted to them. Om return, your business receives a portion of the face value of the invoice and the balance is held by the factoring company until the company pays the invoice. If the company fails to pay the invoice, the factoring company may ask you to substitute another invoice of similar value in its place.

This is known as recourse factoring.

What is Non-Recourse Factoring?

In some instances when a company borrows money, they are putting up assets such as equipment, real estate, or equity in the business. This allows the lender to seize, and in some instances, liquidate the asset to make themselves whole.

If the agreement between the borrower and lender calls for “no recourse” it means the lender has no option to turn to the business owner for any shortfall between what the company owed the lender, and what the liquidated assets provided.

In the case of non-recourse factoring, however, there is a slightly different meaning. When you deliver product to a customer, you do so under the belief the company will still be in business when the invoice comes due in 30, 60 or 90 days.

However, if you have factored that invoice, the factoring company is assuming that risk since they have given you a portion of the face value of the invoice up front. Should the company go out of business, and you have a non-recourse contract with the factoring company, the company will absorb that loss without any financial repercussions falling on your company. Non-recourse factoring typically only protects you and your business in the event your customer closes their doors before they pay their invoice.

If you are considering entering into any type of factoring contract, it is important to determine what your liability is should other problems occur with your customer. If the contract is non-recourse, talk to the factor to determine how they define non-recourse factoring.

At Capstone Capital Group, we work with small and medium-sized businesses to help them solve their cash flow problems. Contact us today and let’s discuss your needs and discuss your options for recourse, or non-recourse factoring.

An Overview of Factoring Agreements

09:00 01 May in Blog, Business Funding

Factoring agreements are designed to ensure a company who is using their accounts receivable as collateral, and the company who is accepting them as collateral, have a mutual understanding of their obligations. Like any other contract, factoring agreements are legal documents and are binding on all parties. Depending on the depth of your agreement with a factoring company, you will find the following information:

Sales of Receivables

This section of the agreement will include information on what agreement you have with the factoring company pertaining to what receivables will be included in the agreement. You should pay attention to this section, so you understand what you are agreeing to. For example, if you have agreed to only certain invoices, you do not want this section to be a “blanket” sales of accounts.

Credit Approvals and Withdrawals

This part of the contract will state what the company expects from you in terms of documentation to support an invoice. The factoring company may also have specific requirements you must meet if you want to change the terms offered to a company you are factoring invoices for.

Invoicing Assignments

This section of your contract will specify how you are to deal with payment for invoices you have assigned to the factor. Language must be included on the invoice issued to the client indicating they are to make payment to a lockbox controlled by the factor.

Fees and Commissions

There may be one or more sections of the contract that explain what fees and commissions are due to the factor. Before signing any factoring agreement, make sure you understand all the fees and commissions involved.

Advance Information

Your contract should specify how much the factor will advance against invoices. There may be different amounts for specific customers’ credit levels, and there may also be a maximum you may be allowed to have outstanding at any given time. This portion of your agreement should be reviewed carefully to ensure you understand the limits of the advance the factor is granting.

Warranties and Representations

You will be required to acknowledge that your company is duly authorized to do business, that you are solvent enough to enter into an agreement, and the invoices you are factoring are legitimately owed debts to your company. The factoring company will make similar warranties about their solvency and authorization to enter into a contract with you.

Defaults and Termination of Agreement

This section of the contract deals with when a contract may be terminated, what events could result in your being in default of your contract, and what notices are required to inform the factor of your intent to terminate the contract. This is typically done only when a long-term contract is necessary and may not be included in spot factoring contracts.

Security Interest in Receivables

The contract will spell out the factoring companies interest in your receivables. This section of the contract will prohibit you from factoring the same receivables with another company or using the same receivables as a security interest in any other type of loan arrangement.

Conclusion of Factoring Agreements

Whenever a company has decided to borrow against invoices, there will be a contract involved. Your contract will be unique to the agreement you reach with the factor including what the term of the contract is, what fees are paid, and what will occur should your client default on an invoice. Be sure you understand the terms and conditions you are agreeing to.

If you are considering working with a factoring company to help improve your cash flow, contact Capstone Capital Group today. You can reach us by filling out our online contact form, by calling us at 347-410-9894, or by email at [email protected]

Understanding Non Recourse Factoring

12:21 16 April in Blog, Business Funding

Like any type of financing, accounts receivable factoring is a risk taken by the factoring company. In most cases, accounts receivable factoring is based on the creditworthiness of the underlying customer. Therefore, a factoring company does not provide financing for invoices that are made to an individual customer, instead they provide funding against invoices made to other companies, or to government entities. This is why we need to understand non recourse factoring.

Collection Activities and B2B Transactions

Typically, when businesses are completing transactions, they offer terms that may give a company up to 90 days to make payment.

In some instances, they offer discounts if an invoice is paid sooner. In the case where a company has opted to factor their accounts receivable, they turn the risk, and collection activities over to the factoring company. However, what happens when the customer does not pay their invoice?

If a company is managing their own accounts receivable, they may put forward demand notices, and hold the company responsible for paying the invoice with certain late charges which are normally laid out in their contract. Many contracts also have a recourse clause which may hold the company owners accountable personally for unpaid bills.

If payments are not made as agreed, you would typically stop doing business with the company until the invoice was paid in full. Chances are, you would likely require a deposit or full payment before doing additional business with the company. This is known as full recourse.

Meaning of Non Recourse Factoring

But, what happens if you are working with a factor and they have offered to factor your receivables with no recourse?

First, it is important to understand what no recourse means. In most factoring contracts, no recourse usually means that the factoring company will not seek payment from you under certain conditions.

The typical condition is the insolvency of the customer that occurs during the time of the factoring period.

For example, if you have issued an invoice that is due in 90 days, and a factoring company has advanced you cash against that invoice, the company would have to go out of business during the 90 day period between issuing the invoice and having the payment due.

What Non Recourse Factoring Does Not Cover

Even if your factoring company has agreed to factor your receivables without recourse, there are certain exclusions which you should be aware of. For example, in most cases, factoring advances will not be considered without recourse if:

  • There is a dispute over an invoice – if you have issued an invoice and your customer disputes the invoice, chances are, the factoring company will not allow you to walk away from the debt you incurred because of factoring.
  • You deliver products to non-paying customers – if you have a customer who has been consistently late paying invoices and you are still delivering product to them, you are increasing their outstanding amount owed, meaning the factoring company is at even more risk of losing money. Most of the time, you will be held responsible for these invoices.
  • You owe the company money – if you have a reciprocal arrangement with a company you do business with, and the company credits amounts you owe them against amounts they owe you, the factoring company may not grant you the ability to factor those invoices without recourse.

When entering into a factoring contract, it is important to understand the terms you are agreeing to abide by.

We make sure our contracts are easy to understand and you understand whether you are accepting funding against your receivables with or without recourse.

Capstone is a private finance company offering various solutions to businesses to provide them with more consistent cash flow.

Contact us today to request funding or to speak with one of our representatives to learn more about how Capstone can help your business grow and flourish.

Small business financing and invoice factoring | capstone

Understanding the Costs of Factoring

23:04 14 March in Blog

Text

Factoring your invoices is a great way to improve your cash flow. The ability to obtain immediate cash, instead of waiting 30 or 60 days for a customer to pay an invoice can help you grow your business faster, negotiate better terms with your suppliers, and make sure you are able to meet usual business expenses. For business owners, the cost of factoring must play a role in their decision-making process.

Customer Creditworthiness

One of the primary considerations a factoring company will review before determining the amount to advance you, as well as the interest rate you will pay is the creditworthiness of your customers. Keep in mind, since you are factoring the invoices you issue, the type of business they are in, as well as the strength of the customer are key factors.

Size and Term of Contract

Many factoring companies will require you to sign a long-term contract for factoring services. In many cases, the company may insist you factor all invoices to get a better rate. This is often a hurdle for companies who do not want to turn over their entire accounts receivable base to a third-party. There may also be hidden fees which makes the cost higher than originally disclosed.

Typical Costs Associated with Factoring

Generally, you will be able to get 65 to 80 percent of the value of your invoices issued to you within a few business days of the factoring company receiving the invoice. Factoring in these cases can cost between four percent and seven percent of the face value of the invoice. In some cases, if the customer takes longer to pay than anticipated, you could be facing additional fees.

In addition, many companies charge set-up fees and if you work through a broker, you could be paying a brokerage fee as high as three percent. It is important to review the terms of your contract before beginning the process. If you are interested in one-time invoice factoring, long-term invoice factoring, or temporary factoring, these could all play a role in the fees you will have to pay.

Recourse or Non-Recourse Business Factoring

It is important to keep in mind that if you are working with a company that does not require recourse in the event an invoice is not paid, you may be paying a premium for this. When an invoice is paid later than it should be, you could also be charged a premium for the “late” days.

When you are considering factoring invoices, the best thing you can do is work with a company with a proven track record in your field of expertise. Some companies charge more for areas of business they are unfamiliar with, or they avoid businesses they feel are too risky. You should always work with a factoring company offering flexibility in terms as well, the more innovative, the more likely you are to find a true partner.

At Capstone Capital Group, we take pride in offering a variety of programs to meet the needs of customers. We offer innovative solutions to your financing needs. We never tie you into a long-term contract and we always work hard to find a solution that best meets your needs. Whether you are looking for help factoring invoices for one customer, or for all your customers, we can help. Contact our offices today at  347-410-9697 or by Email at: [email protected]. You can also fill out our online form for easy approval for your factoring.

music royalty funding

Developing a Strategic Funding Plan for Your Small Business

13:14 25 November in Blog

Every business requires cash to remain fully operational. This is a must, regardless of the size of the business. While most business owners have strategic plans in place for business expansion, marketing, and hiring talent, few of them have a well-thought out plan for obtaining the capital necessary to keep the doors open.

Business Failure and Cash Flow Management

There are numerous studies that indicate the percentages of businesses which fail during the first five years of operation due to a lack of financing. Undercapitalization can be problematic; you are unable to fulfill large customer orders, face difficulties hiring new staff members, and may be unable to pay your overhead costs. This does not have to be the case; having a plan in place to ensure your business finances remain healthy begins with a plan.

Developing a Strategic Plan

As a business owner, you have a general idea of what times of year you may have cash flow problems. This may be because you have already been in business a year or two, or simply because, as a startup owner, you have carefully evaluated the market and understand seasonality. Based on this information, you must make decisions about your financing to ensure your business continues to grow and thrive. This means developing a strong financial plan.

Identifying Realistic Goals

One of the first things you will have to consider is what goals you want to set. This part of your overall plan should include your plans for growing your business; this means you need to decide how many, and how large, your new clients will be, and whether you need new staff members to accommodate new customers.

Once you have identified your goals for growth, you should decide how you intend to finance the growth. Remember, new customers are a great addition to any business, but you must be able to fulfill their needs. This typically requires an influx of cash which means you will need to decide as to how to get access to cash.

Options that are available to small, and medium sized business owners are somewhat limited, and what you do not want is to have a lender dictating how you can utilize the funds you borrow. For some businesses, borrowing money can be challenging; particularly if you are facing a cash crisis, or a growth spurt.

Understanding Your Funding Options

Many businesses turn to traditional bank financing. This can create additional problems for your business because you are taking on debt. Debt tends to weaken your balance sheet, and you are now facing new monthly payments to repay that debt. This could exacerbate your cash flow problems. Additionally, if you need an immediate cash influx to meet the needs of a new customer, you could run out of time before the loan is approved.

Some entrepreneurs feel their best option is investing their own cash into the business. While this is an admirable position, this could put your personal financial status at risk; if you are unable to generate sufficient income to extract that investment from your business, you could face financial difficulties at home.

These are some of the reasons why more companies, particularly a company that is still growing, new to the market, or is facing seasonal slowdowns often turn to factoring for the cash they need to keep their business operational. There are a couple of different options available to companies when they elect to use their accounts receivable to secure the funding they need.

Advantages of Factoring

One of the best reasons to use your existing accounts receivable to obtain the cash you need is you do not incur any additional debt. Basically, you are getting an advance on money that is already owed to you. For some businesses, factoring their purchase orders may be a good option as well; this allows you to meet the needs of a new, or existing client without borrowing money and going into debt. Both invoice and purchase order factoring allow a business owner a great deal of flexibility. Some of the benefits include:

  • Nearly immediate cash – factoring is faster than a bank loan; typically you can get the cash you need within a few business days.
  • Terms to customers – you do not have to run a cash only business to have the capital you need. You can offer your customers extended credit terms.
  • Accept larger orders – when you are facing an internal cash crush, you may not be able to take on larger customers and fulfill their needs; with factoring, you have the cash you need.
  • Growth and competition – factoring allows you to grow your business and be competitive in your field.

Factoring should be a part of your strategic plan to both grow your business and have the capital you need to expand your business. Capstone Capital Group is here to help businesses who are ready to learn about the various ways they can finance their business needs. For more information on Capstone, please call us at (212) 755-3636 to speak with a representative today.

Why Staffing Agencies Should Know About Factoring

09:13 14 November in Blog

Staffing agencies need working capital to meet their weekly payroll obligations. In many cases, there is a gap between billing their clients, and paying the workers who are sent to job sites. Staffing agencies have obligations to those workers assigned to outside employers, but this is not where the expenses end. Office expenses including equipment, marketing, and internal employees also require resources.

Working on the Bottom Line

We all understand cash flow is necessary to ensure any business thrives. Staffing agencies have a unique business model — businesses contract with staffing agencies to provide a labor pool for a specific period of time — unlike any other business. When a staffing agency signs a contract with a business, they typically have an agreement to pay invoices 30 to 90 days after an employee has filled their vacancy. This is problematic since it impacts a staffing agencies ability to fulfill their financial obligations. This leaves staffing agencies with few options:

  • Pay staff members late
  • Pay rent, utilities, and other payments late
  • Pay temp workers late, partially, or only after the employer has paid
  • Curtail your marketing (no money for staff to seek new clients)
  • Take out a loan

These options are frightening; paying staff or employees late means you are going to have issues retaining some of your best staff, and temporary workers. Paying your invoices late could mean you are accruing late fees and penalties. Lack of funds for marketing means you are not growing your business; and finally, taking a loan out is complicated; most temp agencies do not have sufficient capital, assets, or credit scores to support a traditional loan.

Why Factoring Makes Sense

Imagine being able to tap a portion of the money owed to you before your customer pays their bill. This would allow a staffing agency to pay their bills on time, increase the potential for employee retention, and not have to go into debt to meet their financial obligations. This is a win-win for everyone involved; employees are paid on time, your marketing efforts are funded to keep your business growing, and your non-employee obligations are paid without worrying about costly late fees.

Type of Factoring

Staffing agencies have a couple of options for factoring their invoices. How a staffing agency elects to use factoring is largely dependent on how challenging their cash flow is. The first method, involves emergency cash to meet your current. This is known as spot factoring and allows you to select one, or more invoices and “redeem” them for a specific amount of cash based on the amount of the invoices. This method allows you to meet your immediate obligations and can be effective if you are facing a one-time issue.

Spot factoring has many benefits; first, it is generally less expensive than a short-term loan, a staffing agency gets access to capital quickly, and because there is no long-term obligation, you can factor an invoice any time you need a quick influx of cash.

For a long-term solution to cash flow issues, many staffing agencies opt to factor most, or all invoices. This process is often easier since a staffing agency can then turn over the invoice at the time it is issued and get nearly immediate access to cash. There are two methods that may be used for this type of factoring; discount factoring and collection factoring. Let’s examine how these types of factoring work:

  • Discount factoring – discount factoring occurs when you sell a block of invoices to a factoring company. The company then provides you an advance against those invoices, which are used as collateral. Once the invoice is paid by your client, the factor then deducts their fees, and the balance is remitted to your company. Typically, this method works well for start-ups, or for those companies with ongoing cash flow needs.
  • Collection factoring – when an established company, with positive net worth and profitable operations needs cash, they may opt for collection factoring. This type of factoring is done in two parts. First, the factoring company takes over the collection of your invoices; they basically assume any risk that might be associated with a customer not paying their bills. The factoring company charges a commission for accepting this risk.

Staffing agencies must spend a lot of time cultivating new clients, and attracting new talent to meet the needs of those clients. Worrying about having the necessary cash flow to meet day-to-day obligations is challenging. Contact Capstone Capital Group at 347-410-9894 or email them at [email protected] to find out what type of financing solution would work best for your staffing agency.

Factoring Decision

When Factoring is the Right Decision

14:20 05 September in Blog, Business Funding

Some business owners are uncomfortable about the idea of factoring their invoices; however, they are more uncomfortable about taking on debt. This means when a company is facing a cash flow problem, wants to hire additional staff members, or needs material to fulfill a large order, they may not know where to turn. One of the first things to do is identify the problem, determine what you need, and then find a solution.

Problem: Short-Term Cash Flow Problems

Immediate business expenses, such as rent, utilities, and payroll cannot be ignored. Let’s face it, if you are unable to pay your employees, you stand a chance of closing your doors; most people are not willing to wait until you get paid to get their paycheck. Your options are limited; you need a way to get immediate cash to meet your obligations.

Your solutions include borrowing money from your local bank, taking a cash advance against your credit cards, or factoring your invoices. Borrowing money from your bank, unless you have an existing line of credit, is time consuming and will likely not occur fast enough to assist you. Credit card advances are seldom a good idea; you will pay high upfront costs for the privilege, and the overall interest rate could be as high as 25 percent. This means factoring is likely your best option and here is why:

  • You can use spot factoring – business owners need not turn over all their accounts receivable for immediate cash needs. Instead, you have the option to factor only sufficient invoices to meet your immediate needs.
  • Timely cash disbursement – generally, receiving cash against your invoices occurs within a few business days. This can be very helpful if you need to have cash. Unlike a bank loan, once you have signed the proper documents, and have your invoices approved, you will have the cash you need to meet your obligations. Since factoring does not involve a bank loan, your company does not incur any additional debt.
  • Cost effective solution – unlike credit cards where you pay a fee to access cash, or loans where you may have to pay application, and other fees, factoring is a cost-effective solution. You can collect on your accounts receivable before they are due, and you pay a fee to the factor. Businesses of all sizes, and in all industries, have used this method of getting working capital when they are facing short-term cash flow problems.

Problem: Long-Term cash Flow Issues

Spot factoring is the ideal solution when your cash flow issues are temporary. However, some businesses have ongoing issues maintaining a sufficient cash balance to meet their obligations. In these cases, options are more limited; options include bank lines of credit, reducing the terms you offer customers, or factoring your accounts receivable. It is important to understand the pros and cons of each option.

While bank lines of credit can be helpful, you will have to accept the fact your company will be in debt. To compound this, chances are, if you seem to be facing regular cash flow issues, it may be very expensive, and potentially impossible to get a loan, or line of credit. Banks typically look for a strong balance sheet, excellent cash flow, and a proven track record. This means if you have a start-up, you may not have the option.

Reducing your customer terms is risky; if your customer base is accustomed to a 30, 60, or 90-day period to pay invoices, and you cut the time in half, or begin a cash-only process, you could negatively impact your bottom line. This means, over the long-term, your cash flow will be worse, not better.

Using accounts receivable factoring, can provide you the long-term solution you need. In effect, you reach an agreement with the factor, and they take over the collection of your accounts receivable. There is an added benefit to this as well; since you do not have to worry about collections, you can focus your efforts on building your business. Rather than having a staff member dealing with collections, you can use their talents elsewhere; this can provide numerous benefits for your business.

Nearly every business will face a cash-flow problem at some time; particularly in the early stages. Some businesses need short-term cash solutions because of seasonal business swings, or because they have just landed a significant contract. Think about the possibilities; and if you think that factoring may be the right decision to help you meet your cash-flow needs, contact Capstone Capital Group by phone at 347-410-9697 or by email at [email protected] and see how we can help you find unique funding solutions.

Telling Customers about Factoring

Explaining Your Decision to Use Factoring to Customers  

10:22 22 August in Blog, Business Funding

Once you have decided to use factoring for your cash-flow needs, one of the most important things you will have to do is communicate with your customers. Once you have turned over your invoices to a factoring company, your customers will receive a document called a Notice of Assignment indicating you have turned over the collection of their invoices to the factor.

It is important to ensure you have addressed this prior to this notification being received, and ensure that your customer’s questions are answered. Some of the common concerns your customers may have include:

Will this impact the quality of service and products I receive?

It is important to let your customers know that outside of invoicing, your relationship will not change. You will still be providing the highest level of quality products and services. Remember, customers, want to be assured their business is not impacted by your decision. The more you can do to assure customers that most things will not change, the more likely they are to be comfortable.

Is your financial status in question?

Make sure your customers understand that your decision to factor is designed to improve your finances. Improved cash flow means more access to materials, ability to hire new staff for upscaling, and ability to pay your bills on time. Remind them that factoring is not a loan, that you are not taking on additional debt, and discuss the benefit of not having to track down payments; factoring allows you to continue offering the same terms they currently enjoy, versus cash and carry.

What changes does this make to my billing?

Your customers should be aware they will get their invoices from the factoring company, and they should remit payment to the address on the invoices. Explain to them the factoring company is merely taking over the function of accounts receivable management; this will help put them at ease. Customers will still contact you directly for new products, or services.

Offering Understanding of Factoring Benefits

Chances are, if you are a small, or medium-sized business involved in an industry unfamiliar with factoring, you may be asked about the benefits of factoring. There are some simple ways to educate your customers about these benefits including:

  • Ability to grow business— because you do not have to worry about waiting 30 to 90 days to receive payment, you are able to go after additional contracts and still offer payment terms to customers.
  • Regular cash flow— because you do not have to wait for payment from customers, you have cash when you need it. This means your suppliers are being paid, your employees are being paid, and you can meet your obligations without going into debt.
  • Freeing internal resources— when an external company is handling your accounts receivable, your internal staff is freed up to handle other tasks. This may include customer service, marketing, or help with research and development. This is a bonus; freeing up internal resources also means lower overhead; you need not hire additional staff members to handle tasks.

After Factoring Begins

Once you have addressed the initial concerns of your clients, it is important to let them know how payments will be made going forward. Ask if there are any documents they require from you to ensure the process goes smoothly. Address any concerns about changes in due dates, or other concerns they may have. Should any questions arise you are unable to answer, contact your account manager at the factoring company.

Keep in mind, you will still be in contact with your customers for many issues, including new orders, service needs, etc. Make sure they understand ahead of time, that billing issues, payment issues, or any issue related to payment or invoices should be directed to the factoring company.

Should You Change Methods

Just as is the case when you start factoring, if you should decide to end your relationship with a factoring company, it is important you speak with your customers. Any change in how they receive, question, or pay their invoices must be communicated to your customers.

Factoring your invoices can result in new growth, and a more stable cash flow you’re your business. If you have questions about factoring, or how it can work for your company, we encourage you to contact Capstone Capital Group today at (212) 755-3636. We are here to help you grow your business to its full potential.

 

Small Bank Crisis

The Crisis Facing Community Banks and the Small Businesses Who Rely on Them

16:13 21 August in Blog

Publicly traded banks recently hit record stock prices. The sudden increase in value was dubbed the “Trump Trade” because investors believe his policies will be positive for a growing economy and banks would—and should—be at the center supporting such an economy.

Since the election in November, bank stocks have risen around 24% and continue to remain positive as larger banks remain hopeful of soon to come tax reform and new regulatory relief.

What is seldom covered in the news is the negative impact that Dodd-Frank, aka “Too Big to Fail”, legislation is having on the community banking sector all across America. While activists touted this legislation as a safeguard for consumers, little thought was given to the effect on smaller organizations.

When the law was enacted, there were no provisions that discriminated by the size of a bank. The legislation, which included over 2,000 pages of reforms and regulations that all banks were required to implement, put a huge strain on the community banks to meet these blanket compliance standards.

The regulations were applied evenly to all banks, causing smaller community banks to have a higher regulatory burden than their multibillion-dollar competitors. The cost of compliance for community banks has led to a growing trend of mergers to bulk up and become larger regional banks.

What is Happening to Small Banks?

Midsize and larger banks are experiencing increased positive growth in accumulating assets and increased loan production to companies that meet all of the risk criteria outlined by Dodd-Frank. At the same time, community banks are struggling to meet the cost of compliance with the new regulatory scheme.

In order to cover the cost of compliance, small community banks are merging and are becoming regionally positioned banks to reduce the cost of compliance and overhead. Although this may be good for the banks as they are better able to handle the costs associated with compliance, it is a negative trend for small businesses as it limits their access to banking services and credit.

In most cases, the headquarters of the smaller bank is absorbed by the acquiring entity and the bank loses its proximity to the local business community.

Dodd-Frank made it almost impossible for smaller companies to borrow from the bigger money center and regional banks because of the risk rating system required by the legislation. The last bastion of hope for small businesses was the community bank.

Community banks are generally formed by successful members of a local community who pool their capital together to support and invest in their local community. When these institutions are forced to grow by regulatory forces, they often change their mission as they have a number of competing constituencies throughout their new region. While the merged bank may remain in the community, their mission frequently changes and the loans they make—or are willing and able to make—changes.  All of these changes are negative for the growing small businesses that have historically relied on the community banker for their financing needs like working capital, equipment leases, real estate loans etc.

Dodd-Frank policies have led to numerous mergers, allowing midsize banks to take over the operations of community banks. Larger bank take-overs means a change in business practices for the community banks involved in said mergers. In many instances, there are complete staff turnovers, and larger banks simply do not personally know the local markets and the small businesses previously involved with the community banks.

Currently, President Trump has ordered a review of the Dodd-Frank regulations by Treasury Secretary Steven Mnuchin. Hopes are high in favor of a reform involving less complex regulations, but it is unclear what will actually come of these talks and how any alterations will affect the community banks and, in turn, small businesses.

This Negatively Affects Small Businesses

Historically, small business owners developed long-lasting relationships with community banks and relied on those personal connections to receive desperately needed funding and capital support larger banks would never consider providing.

Community banks have modernized their lending operations—as all financial institutions have—though they rely on the five C’s of credit: Character, Collateral, Capacity, Capital, and Conditions. With the new mergers, the larger banks heavily utilize algorithms that take these variables into account, as well as others, but it is not the same as a loan officer who lives in the community he lends to and who may be aware of a small business, its impact on the community, and the character of the owners.

Displacing small businesses from the bank puts these businesses in difficult situations. Many rely on the attentiveness and support of the community banks they use to maintain their liquidity and competitive advantage in the market in which they compete. However, with the decreasing number of community banks and the lack of access from midsize banks, these small businesses have very few places to turn for help.

This is Where Capstone Comes In

Capstone has seen a significant increase in clients who are seeking factoring and purchase order financing as a result of the community bank merger phenomenon. “The Castaway loans, those where the bank advises its client that it has three to six months to find a new lender, are increasingly crossing our desk”, said Joseph F. Ingrassia, Managing Member of Capstone Capital Group, LLC.

Castaway loans are typically larger than your average factoring transaction and require cooperation from the bank casting off the loan and the client. In many instances, the bank has to convert a portion of the revolving inventory and accounts receivable loan into a term loan to facilitate the client’s exit while Capstone pays off the preponderance of the revolving credit facility with a new factoring facility.

To accommodate these loans, Capstone has skilled staff that negotiates with banks to ensure they cooperate with our new clients and receive the substantial pay-down the bank is seeking. Term loans are rated differently than revolving credit facilities and are in terms of risk ratings under Dodd-Frank. Our staff understands Dodd-Frank regulations and what a cast-off bank can and cannot do. Successful negotiations result in a settlement that ensures the bank gets paid in full, the client’s business is not impaired, operations are not interrupted, and the new facility we put in place is sufficient to support the growth of the company for the next 12 to 24 months.

Thankfully, other options like factoring and purchase order financing help fill the gap and ease the burden of transferring debt to another lender by providing small business owners with vital cash flow quickly.

Capstone Capital Group, LLC specializes in providing business owners with options. Our factoring and purchase order invoicing services allow qualified business owners to gain access to necessary cash flow faster so they can stay afloat and remain competitive.

If you’re ready to learn more about the options available to you, call us today at 212-755-3636 or contact us online www.capstonetrade.com.

 

Merger articles

https://globenewswire.com/news-release/2017/03/27/945580/0/en/Two-of-the-Best-Banks-in-America-Join-Forces-in-Bank-Merger.html

https://globenewswire.com/news-release/2017/04/11/958795/0/en/Sussex-Bancorp-Announces-a-Merger-With-Community-Bank-of-Bergen-County-NJ.html

https://globenewswire.com/news-release/2017/03/23/943784/0/en/Northwest-Bancorporation-Inc-to-Acquire-CenterPointe-Community-Bank.html

http://www.mbvt.com/about-us/community-bank-merger/

Why mergers are big now

https://www.americanbanker.com/news/bank-m-as-super-shoppers?tag=00000151-16d0-def7-a1db-97f03ca50000

Resulting issues for small businesses

http://www.freep.com/story/money/small-business/2017/02/12/community-banks-hopeful-lawmakers-target-financial-rules/97690526/

https://www.icba.org/news-events/latest-news/2017/05/01/more-than-100-icba-community-bankers-meet-with-president-trump

Ways to keep Debt under control by Capstone

Getting Business Debt Under Control

09:00 08 August in Blog

One of the many reasons business owners are unable to grow their business is because they have too much existing debt. This can mean they are unable to borrow the funds they need to expand. Whether expansion involves new equipment, hiring new employees, or upgrading facilities, strong cash flow, and lower debt makes a difference.

Evaluate Your Current Debt

The first step in getting your debt under control is to understand the type, maturity, and cost of your current debt. Business owners who have resorted to using credit cards as an additional credit source could be paying in excess of 20 percent in interest. Create a table of the balance, interest rates, and monthly payments so you know exactly what you are facing.

Create a Plan

One of the first things you should consider is speaking with your creditors. Credit card companies, banks, and vendors are often happy to discuss terms with you before you start facing difficulty paying your debts. Here are some common tips:

  • Credit card and bank loans — consider asking for interest rate reductions. This may be effective if you have a good payment history, and if you have offers from other companies for your business. Additional offers can be used as a bargaining tool.
  • Talk to your vendors — if you have good relationship with your vendors, ask about changing payment terms. If you are currently paying invoices on a Net-15 basis, try to get a Net-30 agreement. This may give you more buying power, allow you to generate extra business, and give you some breathing room.
  • Discuss all aspects of financing — bank loans, lines of credit, and other similar loans often have a personal guarantee attached. You may be able to negotiate this out, change the amortization for a loan to reduce monthly payments, eliminate prepayment clauses, or change due dates to be more in line with your cash flow.
  • Consolidation of debt — if you have multiple lines of credit, or outstanding loans, look into the possibility of rolling the balances all into one loan. This could mean one monthly payment instead of several, and you may also be able to get a reduction in interest rates, or better terms.

Saving With Smart, Timely Payments

Getting your debt under control involves more than negotiating with your creditors. Another step you can take is managing how you make your monthly payments. First, payments should always be on time; this not only helps preserve your business credit rating, but it also helps you avoid costly late fees which merely add to your debt. Paying ahead when possible can also save you interest over the term of a loan, just be careful of prepayment clauses you have been unable to eliminate.

Boosting Business For Added Cash Flow

While it may seem counter-intuitive to work towards new business while attempting to get your debt load under control, the fact is more cash flow allows you to pay your debt in a more timely manner, and begin operating your business on a cash basis. This may require some creative financing solutions; for example, if you need immediate cash to invest in materials to deliver a large order, you may think you have no options but to borrow money again which seems counterintuitive to what you are trying to accomplish. There are some options however including:

  • Receivables financing — if you are like most small and medium-sized business owners, you are probably owed money from customers. Rather than wait the full 30 or 60 days until those invoices are due, consider selling some, or all those receivables for immediate cash. While you will get less than face value, this could provide an immediate influx of cash.
  • Purchase order financing — rather than use existing invoices, you may also opt to use purchase order refinancing. This method of financing allows you to get the much-needed cash to fulfill big orders by using the order to borrow money. This allows you to purchase the materials you need to fulfill the order without incurring additional debt.

Think About Your Business Model

If you are maintaining a large inventory for future orders, consider talking to your vendors about optional ways of doing business. Perhaps you can purchase materials as needed, or you can return excess product at the end of a job; remember, inventory on hand may be good, but if it is tying up your cash flow, it impedes your business growth.

Nearly all businesses have some debt, however, debt can cripple a business to the point of leaving you with no options. Capstone Capital Group offers a range of financing options for small and medium-size business owners. Contact us today, call us at (212) 755-3636 and speak with one of our highly skilled representatives and let us see how we can help your business get your debt under control.

Download: Infrastructure Investment & Jobs Act – Contract Opportunities and Funding Analysis

Capstone wants your business to take full advantage of the opportunities (or use projects) available through the Infrastructure Investment & Jobs Act recently signed into law.

Download

    Logo

    Submit your information to be directed to the download page.

    Privacy & Terms