An Alternative to Factoring
As the owner/operator of a small business would you like to have cash available? No longer have to worry about meeting payroll, or having cash on hand to buy inventory or raw goods for that next big order? Of course you would! The question is how to arrange this without the high price of factoring.
In factoring, your customer sells his accounts receivable to a factoring company. The factoring company charges a fee for every account as well as only remitting 80 to 90 percent of the face value back to customer. In addition the factoring company takes possession of the receivable which can lead to erosion and loss of communication to the customer base. There is now a possible solution available.
Several banks in the Tampa Bay market are now offering a product to the small manufacturer called Business Manager. The Business Manager product is administered by a host bank but works similar to factoring. There are fees associated with the program, but not as high as those that are charged by a typical factoring company. The basic details of the product are listed below.
- The bank and the customer agree to the Business Manager option.
- The bank, using a line of credit with zero payments and zero percent interest, agrees to fund the eligible receivables of the customer.
- The customer sends a letter to change the remittance address for all of his customers to a P.O. Box that is owned by the bank.
- The bank does not take ownership of the receivables but rather manages the cash flow. Receivables are funded against the line, and when the checks are received the line is paid back down.
- The bank has the customer set up both an operating account and a reserve account. When the customer sends in his receivables, the bank funds them usually within 24 hours. The reserve account holds 10 percent of the funded receivable in the case of charge backs. In addition the bank will charge a fee on the receivables. I have seen that fee range from .25 to 2 percent during the time I used this product. At the end of each month, the bank balances the line against the reserve account. Any amount over the 10 percent is remitted back to the operating account of the customer. If there was a shortage, the bank would debit that amount from the operating account to bring the reserve back to 10 percent.
- The customers still owns his accounts and any that are charged backed or become more than 61 days delinquent, are handled by the customer’s normal collection policies.
- The Business Manager product is reviewed and renewed on an annual basis.
So why would the banks use this product instead of just setting up a line of credit? There are several reasons listed below.
- The bank controls the stream of the cash being remitted.
- The bank only needs to manage the P.O. Box. They do not have to collect payments.
- The program eliminates much of the risk of traditional accounts receivable lending.
- Borrowing bases are calculated automatically within the program, and reporting is vastly improved with real time availability.
- Because of the control and reduced risks, banks are willing to fund this type of product for small businesses versus processing numerous lines of credit.
Traditional bank loans only account for 18 percent of the total amount of funding to small businesses. Alternative funding sources such as the Business Manager Product, are one of the many tools that a small business can use without having to go through the traditional bank loan process.