Compound Profit Blog

Washington is constantly urging banks to increase lending. In spite of this, credit remains tight. Small business loan originations continue to lag and credit card issuers have significantly reduced lines of credit and canceled thousands of accounts. The American taxpayers bailed out the banks hoping that they would make loans and stimulate the economy. But given the current state of the economic mess, lending is probably the last thing the banks should be doing. Since the current recession was caused by an overextension of credit, making additional loans available doesn’t make sense.

Every loan carries the risk that it will not be repaid. Before making a loan, a lender must first accurately price the risk. If this isn’t possible, the lender reduces risk by lowering the total number of loans that it originates or the dollar amount of the loans. It has yet to be determined how costly new initiatives, such as cap and trade legislation and the healthcare proposal, will be on business. The unknown cost of these and other current regulations are interfering with the accurate pricing of risk. Therefore, lenders are reducing their risk exposure by reducing the number of loans they make.

Another hurdle for lenders is the risk-adverse nature of bank regulators. Although presidents and Congress have urged banks to make more loans, bank examiners have required just the opposite. Bank executives across the country have demonstrated that bank examiners have become extremely cautious in determining the value of a bank’s assets, thereby requiring an increase in bank reserves. This results in a reduction of lending.

 In an effort to control the money supply, the Federal Reserve began paying interest on bank reserves it held on deposit. Reserve balances immediately went up, and they have been rising ever since. Banks can borrow at low rates and place those funds on deposit with the Fed receiving a risk-free, guaranteed rate of return. This effort by the Fed to control the money supply and encourage lending has actually backfired.

In today’s tough economic environment, this risk of default is greater than it has been in years. High unemployment and the reduced value of collateral, such as housing, has required banks to tighten their lending standards to comply with more stringent bank regulations. As lending criteria becomes tighter, fewer companies and individuals qualify for loans.

Current economic conditions and levels of government oversight don’t support additional bank lending.

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As I meet business owners at networking or social events within the Washington DC Metro area and tell them about what we do, the first thing I state is that Compound Profit is an “Alternative Business Financing” solution provider to the small business community. The first question that usually follows is… ”What is Alternative Business Financing?”

So what is Alternative Business Financing? In today’s tight economical times when traditional banking institutions have stopped lending money to small businesses and have slashed lines of credit by 30-50%, the small business owners must look at “Alternative Business Financing” solutions or tools to stabilize and grow their business. That answer makes sense but usually does not make the proverbial “light bulb” go off. So these are examples of Alternative Financing Solutions that are available to the small business owner to help them grow and expand their business:

• Accounts Receivables Financing – Factoring, as it is most commonly referred to, is the practice of selling a company’s customer invoices (B2B invoices) to an authorized 3rd party (otherwise known as the Factor) and they will advance your company up to 90% of the invoice amount, collect the money from your customers, and then refund you the remaining 10% minus their processing fee. Unlike banks or other lending institutions, these companies do not lend based on your credit, but focus mostly on your customers' credit worthiness and / or strength in repayment. This is a great way for businesses to better manage their cash flow, purchase needed inventory, or cover operating expenses. There is no need to wait more than 30 days to be paid by your customers when you could take that capital and generate even more revenue for your business in only a few days. Our Smart Capital Advance program is an example of this type of solution.
• Friends & Family - If a bank is not willing to give you a loan, sometimes friends and family are more than willing to provide you the initial seed money or working capital for your business. Usually, friends and family can be the best source of financing because they know you well, and understand the social consequences of you failing to repay their investment.  However, sometimes it is best to keep business and personal relationships separate; otherwise, you risk to ruin those personal relationships. If you do move forward with getting financing from friends and family, make sure that you get all agreements in writing, even if your family members insist that it isn’t necessary.
• Purchase Order Factoring / Financing – Similar to Accounts Receivables Financing, Purchase Order Financing is the advance of funds to a company, based on the amount of the purchase order, so that the company can fulfill the purchase order. Purchase Order Financing is a solution that enables small businesses to go after and fulfill large orders. When used correctly, this can enable you to grow your company quickly. As opposed to bank financing, purchase order funding does not rely on your business credit profile, but rather on the financial strength of your customers. In other words, if you sell products to large companies or to government entities, purchase order funding can be a great way to finance those sales. To qualify for purchase order financing, your company must sell products. An ideal candidate for this type of financing would be a product reseller or distributor who is buying products from a supplier and then shipping the products to the client. Purchase Order Factoring is one of our core solution offerings as well.
• Angel Investors - Angel investors are private parties, and sometimes businesses, that invest their own funds into selected businesses. The angel investor becomes, in essence, a stockholder in your company, and is as concerned about your business' success as you. Each investor establishes his own guidelines, application methods and standards.  Angel Investors do require a fair amount of documentation (i.e. business plan, sales forecasts, sales and marketing plan) before they will invest any funds. In addition to that, the business owner must be willing to give some equity in the business to the angel investor.
• Merchant Cash Advance - Merchant Cash Advance programs grew from accounts receivable financing solutions. Merchant Cash Advance is a financing solution based upon the merchant’s future credit card sales. Specifically, the lender purchases a portion of the business' future credit card sales at a discount, the rate of which is generally based on the business' sales volume and history. In order to receive a cash advance, a business must be operating for a minimum of three to six months and must process a minimum amount of credit card sales (around $3,000 a month). Many lenders provide a short online application that can be reviewed within 24 hours. After approval, most lenders can send the money within a week. The merchant will receive all the money, while the lender collects a fixed daily percentage of the business' credit card sales until the debt is paid in full. Our Merchant Card program is an offshoot of Merchant Cash Advance programs within the industry.
• Peer-to-Peer Lending - With peer-to-peer (P2P) lending, the financial transaction occurs directly between individuals or "peers" without any involvement of a traditional lending institution. Companies such as Prosper.com monitor an online marketplace where borrowers post their loan requests and are connected with lenders who "bid" on the chance to finance the loan. P2P business loans are usually limited to $25,000, and if you default on your P2P loan payment it can negatively affect your business credit profile.
• Equipment Leasing – Leasing vs. Purchasing is a question that small businesses ask themselves every time they need equipment. Leasing offers many benefits over actually purchasing the equipment. For example, leasing does not require large down payments of cash, which can be put to better use inside the business to pay for current operating expenses. In addition, some leases allow customers to expense 100% of each monthly payment, thus resulting in a real tax benefit to the customer. We offer many types of leases: Small Ticket Leasing, Commercial Leases, and Municipal Leases but this is a discussion for another day.

These are just some examples of alternative financing solutions that are available to small business owners. By using these alternative sources of capital, many business owners will be able to grow their business to a point that they do become creditworthy in the eyes of their financial institutions. Compound Profit is the #1 Brand in Alternative Financing and we have a variety of solutions to help small businesses grow and expand their business.

Anuj Mehta, Regional Director/Principal Advisor

Phone: 877-386-3716 ext. 221

Fax: 877-490-4224

http://www.cprofitdc.com

amehta@cprofit.com

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The loan broker – myth or reality?

Lost in the sauce of all the rhetoric about 'increasing loans to small business', improving working capital', enhancing SBA loans, etc., all chiefly to help small businesses grow, is, 'what about the small businesses just trying to ride-out the storm'? They aren't or weren't growing, they were maintaining. Making money, employing people, buying goods, but year in, year out, about the same size.  America is full of such businesses, and they are vitally important. 

But in the autumn of 2008, a perfect storm hit this vital sector of the economy. With the financial meltdown, the customers of these businesses had their access to capital reduced. Banks either reduced existing lines of credit or pulled them in all together, and furthermore, they stopped making new loans.  So what do you do? You slow down your payments to the people you owe: vendors, landlords, even banks. Other vendors, needing the business to continue, put up with this. Same for landlords as long as it doesn’t get out of hand. 

But banks can’t do that. They aren’t allowed to, as the regulators get after them. So now, banks have portfolios of loans in default, typically called “special assets”. These often get moved from the normal loan servicing department to ‘special asset’ departments - the loan workout people.  And now, the businesses aren’t getting service calls from their friendly banker, they are getting calls from hard-nosed people wanting their money NOW.

Before 2008, there were people who routinely helped in this situation: the loan brokers.  They would review the portfolios of special assets and then go find other institutions with an appetite for more risk to buy these loans.  Well, that money is GONE.  So, here we have a situation where banks have more ‘special assets’ than ever, and no place to get rid of them. They are stressed out. On the other side we have good, hard-working business owners who did nothing wrong, getting hard-nosed collection calls.  They are stressed out. Certainly, nobody involved in these situations is happy.

Let’s spread some happiness.

By connecting with the special asset managers in banks, profit advisors with Compound Profit can identify bank loans with businesses which fit our smart cash advance criteria.  Perhaps the bank’s special asset manager even makes the introductory phone call. The business owner will likely be very receptive to someone offering a way out of the terrible place they find themselves in. They will be incented, and likely won’t have an issue with a small fee if it offers a solution. The banker as well is incentivized-they have a bad loan they want to get off the books, so they may be quite happy to absorb some fees - take a small discount - to get rid of these loans.

So, we set-up the smart cash advance, work with the bank so that they can deduct funds from the advances to start to amortize the loan, with the balance going to the business. This one nudge may be enough to get the business back on a growth track. Or even with no growth, maybe now THEY can pay THEIR creditors on time so they in turn can increase the cash flow for a large group of people.  All because we want to make some people happy.

And long term, chances are that the newcomers to Smart Cash Advance will come to appreciate this flexible product and will prefer it over more traditional funding vehicles going forward.  And since most people like to spread good news, they will tell all their friends.

Reynolds Dods, rdods@cprofit.com

Compound Profit-New Jersey and eastern Pennsylvania.

Phone: 877-386-3716 ext. 240 / Cell: 609-289-6256

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Accounts Receivable Factoring Fees Are Often Misunderstood

One common misconception with the accounts receivable factoring fees is that the invoice factoring "discount” rate is an "interest" rate and therefore must have an annual rate of interest. Many business owners incorrectly believe that selling an invoice at a discount from the face value is a loan. Hence, they incorrectly assume there is an interest charge.

“Accounts receivable factoring fees are more analogous to the business owner selling an asset (the invoice) at a discount. The invoice is an asset that the business owner chooses to sell to a finance company at an agreed-upon discount from the face value of the invoice”, says George Douvas, CEO and Managing Partner of Compound Profit of Southern California.

Demystifying Accounts Receivable Factoring Fees

Let's say a business owner has a $1,000 invoice in January and receives 80% or $800 from a finance company in advance. Instead of paying the owner the remaining 20% or $200 when the invoice is paid by the customer 30 days later, the finance company deducts $40 and pays the business owner $160.  Everyone will agree the invoice was purchased for $40 off the face value, or at a discount of 4% for January's transaction.

Let's say this occurs not only in January, but each month for the rest of the year.  In total, the business owner has 12 X $1,000 invoices, for a cumulative yearly amount of $12,000.  A the end of the year, the finance company will have deducted 12 times a discount fee of $40 on each invoice, or a total of $480 per year.

So, in a year, instead of receiving $12,000 from the yearly sales, the business owner receives $11,520.  The $480 discount is only 4% of the total $12,000 yearly sales value.

Many business owners incorrectly assume the annual cost of financing receivables is upwards of 50%, thinking that 4% per month for twelve months = 48% - wrong!

Douvas says “I am often amused when a client says that a rate of 3% for 30 days of accounts receivable financing is too high.  If a client’s customers offered to pay their invoices using a MasterCard, Visa or American Express, would they accept that form of payment?  Most would agree that this method is preferred and are often losing 2, 3% or even more; on top of that, they will be waiting longer for their money to arrive and they receive zero additional services from their credit card processors.” 

Compound Profit of Southern California provides complimentary evaluations of the key aspects of a company’s business and specializes in providing working capital, cost reduction and marketing solutions for businesses.  Additional information regarding CProfit South California can be found at http://www.cprofitofsoutherncalifornia.com

Compound Profit provides working capital and equipment to companies. With decades of experience in finance and business, Compound Profit's team empowers clients with the know-how to make their companies profitable and healthy. Launched in Texas, Compound Profit has expanded nationwide and operates under a successful franchise model. For more information, visit Compound Profit's website: http://www.cprofit.com/

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In Search of Financing?
                   ...when your Bank had to Say NO

By Robert J. Jacobs, Account Executive - Small Business Alternative Financing Specialist

There is a little known and under-utilized, short term financing facility that is available to small / medium size retail merchants. This type of financing is not a loan so it does not burden your financials. It is typically called a Cash Advance Program by the funding sources that offer them.

Cash Advance Program Overview:
The funding source offers financing to retail merchants by providing an advance on future credit card sales for the purpose of purchasing inventory, equipment, supplies, etc... If the retailer accepts credit cards as a form of payment, there is a high probability that they will qualify for this type of financing. Business owners with credit scores of 500 and higher are usually accepted. Based upon the results of a short due-diligence period, the merchant is advanced the funds to purchase inventory, equipment or supplies, etc., needed for their business. The funding cycle is typically 10 days or less for qualified businesses.

Typically, the merchant then has up to 6-months to pay off the advance through their daily credit card processing. The financing company, along with its credit card processor, manages the merchants processing and withholds a small percentage of the merchants credit card daily sales until the advance funding, plus a fee, is automatically paid to the funding source. This is a modified form of receivables financing, utilizing a merchant's cash stream from credit card sales as a means of automated repayment. In essence, cash is advanced to the business, and an automated system is set up to repay the cash advance through withholding from credit card transactions - repaying a small portion of the cash advance every time a customer makes a purchase.

The fee is based upon: credit worthiness, length of time in business, length of lease, monthly credit card volume, average monthly sales volume and past business history. No application fees. No points. No catches. No personal guarantees or UCC-1 filing. Pre-approvals usually within 24 hours.

Does Your Business Qualify?
Qualifying for a $15,000 to $350,000+ advance on future credit card sales is easier than you might think:

1. Do your customers use credit cards to pay for their purchases?
2. Have you been in business for at least 3 months?
3. Can you provide current merchant processing statements from the past 3 months to confirm at least $5,000 per month in credit card sales?
4. No open tax liens, judgements or bankruptcies?
5. Acceptable business credit?
6. Good standing with business landlord with at least 1 year remaining on the lease?

Summary
This is an innovative system of funding, designed especially for the small retailer. If the business owner does not qualify for a line of credit with the bank, or has maxed out their existing line of credit with the bank, or wishes to preserve their line of credit with the bank, this type of funding program is available to nearly any business that has been open at least 3 months with monthly credit card sales averaging at least $5,000.

Robert Jacobs is an Account Executive with Compound Profit. Mr. Jacobs helps small to medium size business owners get capital for growth and cash for operating expenses... when the bank has to say no. Visit his web site at http://www.cprofitrj.com for more information. He can also be reached at (877) 386-3716, ext 134.

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