Small Business Resource Guide

Universal Funding Solution’s

Working Capital & Cash-Flow Guide

For B2B & B2G Organizations

Table of Contents A/R Financing Compared to Additional Sources….………..3

Private Investors…………………………………………………………3

Bank Loans…………………………………………………………………4

Venture Capital …………………………………………………………..7

Government Programs ………………………………………………..8

Equipment Leasing……………………………………………………………….8

How Much Does It Cost? .................................................................9

Typical Receivables Financing Transaction……. ……10

Receivables Financing (Factoring) Defined

While A/R Financing can help many business owners and executives who currently do not use it, A/R Financing does not work for every type of business. Companies who receive cash or credit card payments in full, and who do not wish to expand to customers requiring net 15 or 30 day terms, do not need to finance receivables. Also, companies which sell exclusively to consumers will not be able to use the services of receivables financing (although consumer finance companies exist to help such businesses). Therefore, such businesses as restaurants, most retail stores, online auction businesses, and the like cannot ordinarily make use of A/R Financing.

Requirements for A/R Financing are uncomplicated, yet somewhat different from traditional business financing. Any company who wishes to improve its cash flow with A/R Financing must meet two simple criteria. The company must:

1. Have verifiable invoices to creditworthy business or government customers.

2. Wait a period of time to receive payment for these invoices or have the ability to acquire additional clients &/or additional business if they had the ability to offer these payment terms.

Usually waiting about two weeks to two months is the optimal period of time, though some companies will finance receivables invoices that are paid in less or more time than this. These are the “Bare Necessity” requirements for an organization to look to an Asset

Based Lender to provide funding based on receivables. There are numerous other benefits and resources that an organization can acquire access to through a relationship with an Asset Based Lender and, as this guide aims to uncover, this type of relationship makes sense for many more organizations than most realized until recent years, Unfortunately many have still not yet acquired this valuable knowledge, something I hope to change!

How can you determine if A/R Financing will enrich your business? If any of the following describe your company and you have good invoices to sell, A/R Financing will provide at least one benefit. Additionally, if you simply had to focus on growing your business while having access to unlimited Working Capital you would grow substantially, then this may be right for you! The greater the number of these statements that describe your company, the more A/R Financing will offer you.

Financing is unavailable to pay operating expenses. Your company is growing. Your company is new or relatively young (in operation less than three to five years). Your company is a small-mid size business working for large more established customers. Your company could see substantial growth with access to Working Capital. Your company has a negative net worth but sells to creditworthy customers. You experience inadequate cash flow to purchase materials, pay suppliers, and/or meet payroll. You are turning away business that requires terms of 15 days or more. Your company would benefit from having additional working capital. You delay paying bills because of poor cash flow, which is damaging your credit standing. You could save costs by taking advantage of vendor discounts for cash. You need professional management of your billing and/or Accounts Receivable in order to give

closer attention to sales and/or product/service delivery. You need professional collection and credit analysis services. Your growth is being limited due to circumstances(i.e. IRS, Bankability, Debt, ect) not opportunity

The History of Receivables Financing Today the most common form of receivables financing fits conveniently in your wallet, the credit

card. A consumer makes a purchase from a merchant, who in turn sells this “receivable” to the credit card

company at a discount. The credit card company, acting just like an asset based lender, receives its money

by charging the merchant a few percentage points and deposits the funds, less a discount, into the

merchant’s bank account. They also accept the responsibility for collecting the payment. While we may

not call this receivables financing, it’s, truly, what receivables financing is all about – selling future

payments at a discount for immediate cash.

Aside from credit cards, the practice of receivables financing has been largely unknown in North

America (though this trend has changed with The Great Recession and The Financial Crisis of 2008), but it

has been around for a very long time: Roman’s issued promissory notes, at a discount. Even our founding

settlers, the Pilgrims, financed their trip to America through a pre-negotiated agreement with a London

businessman named Thomas Weston, an iron merchant. Since the Pilgrims did not have enough capital

for their journey, Weston advanced money for repayment at a future date, using as collateral the

Pilgrims’ receivables for the raw materials colonists shipped to London. However, he probably bought the

receivables at a great discount because of the high risk involved with transporting and receiving the raw

materials from America. Although, unorthodox in structure, it’s very inspiring to know that our original

settlers had enough Entrepreneurial Spirit and Business Acumen to utilize their current resources in the

most advantageous way to ensure they reached their future goals, which, at its core, is the fundamental

strategy of a relationship with an Asset Based Lender!

Receivables financing as it is now practiced in the United States began in the garment industry and

has grown steadily, expanding to other industries, including Manufacturing, Staffing, I.T, Software,

Computer Programming/Development, Short-Haul Trucking & Logistics, Distribution, and far too many to

list . Although until the 80’s, receivables financing was limited to large corporations involving very large

dollar amounts. That decade brought a change in our industry. With the savings and loan crisis during

those years, banks became much more regulated and cautious about lending money, especially to

businesses. Since then, standard practice for banks is to require at least three or more years’ of financials

from a business before they will even consider a loan request. Consequently, newer businesses or those

who don’t meet a bank’s uncompromising & rigid requirements need an alternative source of financing

for their businesses to grow and continue to expand. More and more of these organizations are becoming

educated on the benefits available to any organization having large companies and/or Government

customers with the ability to grow and therefore are turning to asset based lenders for their Capital

needs.

This is especially true since 2008 when the economic difficulties started, and still continues today. Bank

lending has been seriously restricted for small businesses since then and ultimately confined to only the

largest, most success organizations with many years of success and financial security. To put it plainly,

from my personal experience as a Vice President for a large National Bank throughout this crisis, bank

lending to small businesses has essentially vanished with no likelihood of its return to come!

As a result, Accounts Receivables Financing has become much better known because asset based

lenders are financing businesses that banks are not interested in providing Working Capital or Cash-Flow

Solutions too. While this economy makes for tough times for business, many consider it a boom to the

receivables financing industry as it not only increases our business, but makes receivables financing more

mainstream and known to those who need it. In short, the benefits and the need for this Capital

Instrument is becoming more legitimate in the eyes of the world and Small business Owners are realizing

how they can maximize their growth through this type of relationship.

As we come out of this difficult economic period in the coming years, receivables financing will

continue to be needed and used – banks will still turn down companies seeking loans even after the

“constriction” is over – and asset based lenders will be there to fund them. In fact, most analyst expect

this experience to result in the financial industry realizing the need for these instruments in the

mainstream capitalization of Small Businesses and that most organizations will eventually acquire this

type of relationship to meet those needs because traditional lending will no longer have a product for

these needs.

How Receivables Financing Works

An Example Let’s say a business has a $100,000 invoice.. This invoice is billed to a good customer

who will take 30 days to pay. Rather than waiting that length of time, the business finances

the invoice and receives an 80% advance, or $80,000, in cash the same day from the asset

based lender through various means: a bank wire, electronic funds transfer, or perhaps a

check. The invoice is delivered to the customer who 30 days later pays the asset based

lender the full amount of the invoice, $100,000. With that $100,000, the asset based

lender reimburses himself the $80,000 advanced, keeps his discount of 2.5%, or $2500,

and pays back the balance, $17,500, to the client.

In essence, this is what happens with just about all receivables financing

transactions (though advance and discount amounts vary). A business pays, in this

example, $2500 to have $80,000 tomorrow, and gets the other $17,500 in a month.

Meanwhile, what has the $80,000 enabled the business to do? He can buy inventory to

make more sales, he has cash on hand to take advantage of discounts or simply pay bills,

meet payroll, pay taxes, Acquire additional clients through extending preferred payment

terms that he couldn’t previously offer or whatever the business might need to position

itself in the most advantageous position for success. The company has accessed instant

cash for an otherwise non-performing asset: receivables. No debt is generated, the

discount is paid after the payment is received, and the cash has enabled the company to

increase profits with greater sales volume, larger contracts/orders, and additional clients.

Further, the discount has more than paid for itself without even considering any of the

other benefits provided. You’re undoubtedly realizing why so many leverage receivables

financing to grow substantially!

Recourse and Non-recourse Receivables Financing

As all business owners know, any time credit is extended to a customer there’s a

chance that customer, for a variety of reasons, will not pay the bill. What happens when

an asset based lender buys an invoice which the customer doesn’t pay? The answer

depends on whether a recourse or nonrecourse receivables financing agreement is in

place, and the reason for nonpayment.

When the asset based lender and the client establish their financial relationship as

one with recourse, the asset based lender determines how long he will wait to be paid by

the client’s customers – usually a period of 90 or 120 days. If the customer does not pay in

that length of time for whatever reason, the asset based lender has “recourse” to the

client to recoup whatever amount is owed the asset based lender. In essence, the client

“buys back” the invoice previously sold. This can be done by swapping the old invoice for a

new one, taking a deduction from new invoice advances or rebates due the client, tapping

a reserve account, the client simply paying the asset based lender in cash, or a

combination of any or all of these. The buy back, or “charge back,” covers the asset based

lender’s unpaid advance, expenses and discount.

In non-recourse receivables financing, the asset based lender does not have a claim

against the client if the customer cannot pay. In such arrangements, the asset based

lender is assuming the risk of nonpayment (essentially offering credit insurance to the

client) which provides an added bonus to the client along with the other advantages of

receivables financing. Non-recourse receivables financing, according to the language of

most receivables financing agreements, is in effect when the customer is unable to pay;

that is, if the customer goes bankrupt, goes out of business, or otherwise can’t pay the bill.

However, if there is a dispute and a customer won’t pay, the asset based lender will have

recourse. The client is required to do what is necessary to satisfy the customer so the

invoice is paid.

Some larger asset based lenders that purchase invoices totaling $100,000 or more

per month may offer both recourse and non-recourse receivables financing, but others

provide strictly non-recourse funding. This is of benefit to the client; but keep in mind,

non-recourse asset based lenders must be even more careful about which customers they

will finance as they are at greater risk of losing money. Thus, they may be much more

selective about the clients and customers they will accept.

Smaller asset based lenders who deal in sums less than $100,000 per month are

usually strictly recourse asset based lenders. Recourse asset based lenders may be

especially careful and prefer clients who are financially stable (which very small clients

needing financing usually are not), and/or who have a large number of customers or very

stable customers which tends to limit risk. If an invoice isn’t paid and goes to recourse, the

client must be able to make good on the loss or the recourse asset based lender will lose

money. If a recourse asset based lender ends up with bad invoices from a client who can’t

make good on them, the recourse nature of the relationship does the asset based lender

little good and money can be lost.

When a business owner decides to finance, he should finance only those customers

whom he is absolutely certain will pay in a dependable manner. A common mistake with

clients new to receivables financing is to want to finance poor-paying or non-paying

customers. However, this is one of the worst things that can be done. Why? 1) Asset based lenders’ discount rates are usually based on the length of time a customer takes to pay. The longer an invoice is unpaid,

the higher the discount. The discount for an invoice that is unpaid after 90 days will be far higher than that for an invoice paid within 30 days.

2) When recourse occurs, the client must reimburse the asset based lender for the amount advanced plus the discount; thus, receivables financing non-paying customers may temporarily help the client’s cash flow problem. But a few months later when recourse kicks in, the client will have a greater problem than he did when he financed the non-paying customer’s invoice. In the long run, the client has harmed his cash flow more than helped it. If a client has poor paying customers, a collection agency is the best resource, not an asset based lender.

3) A bank makes money on interest as a loan is repaid. An asset based lender makes money on discounts generated as the client makes money. The more a client’s business grows and he finances his invoices, the more the asset based lender makes. Hence a client and asset based lender are business allies. If a non-paying customer harms a business, this will in turn harm a recourse asset based lender because the client’s cash position is weakened. A non-recourse asset based lender is simply out the money. In any case, everyone’s better off to finance good paying customers who pay from about two weeks to two months (30 to 45 days is best) and pay dependably.

Types of Businesses Which Benefit from Receivables Financing What types of businesses can benefit from receivables financing? The list is virtually

as long as the index to the Yellow Pages. Let’s review the kinds of companies who can

benefit from receivables financing and the kinds of customers they need to have. Any

company, whether starting out, experiencing a growth phase, or mature in years, needs to

ensure they have stabilized cash flow. If a company’s cash flow is good and always has

enough to pay its bills, meet payroll and taxes, and expand to its desired size unaided,

receivables financing isn’t necessary. However, if an organization has the ability to expand

and is currently limiting its growth due to limited capital then they can benefit

tremendously from this relationship. Receivables financing is one of the best ways to get

improved cash flow immediately as well as enable you to maintain stable Cash-Flow as you

continue to expand.

A company considering receivables financing will need to have at least one

customer whose invoices can be financed. Young companies several months to a few years

old, as long as they have good receivables, are often great candidates. Their customers

need to be other businesses, or government agencies such as school districts, city, county,

state or federal branches who have an agreed upon payment term restricting cash-flow for

work completed. The receivables should be with dependable, good-paying customers who

simply prefer to take longer to pay than the client should wait.

An organization wishing to maximize its growth potential should utilize all of its

resources to generate the maximum amount of revenue feasible with any given resource

that provides a positive net profit. Ultimately, you want to utilize these resources in the

order of largest Profit Margin down until you have exhausted all resources or are able to

utilize a preferred resource again. Now if we look at the Cash-Flow of an organization then

obviously utilizing your own Capital, as the owner, costs you nothing, therefore, this is the

preferred method to cover anything feasible, after this if you still have the ability to earn

revenue that will result in a positive net profit, considering the cost of acquiring additional

capital through financing of receivables, then it only makes sound business sense to do so.

Therefore, as a business owner you have to understand your organizations profit margins

and cost of offering payment terms to evaluate how and when it makes sense to utilize

this form of Working Capital, but if your business can grow through acquiring larger clients

and increasing net income then it will ultimately be in your best interest to ensure you

establish this type of relationship! Customers who are very large corporations often make

their vendors wait 60 or more days to pay, as part of the terms for doing business with

them. These customers are usually ideal for a relationship with an asset based lender.

Companies that sell strictly to consumers won’t have these receivables; however, if a

company invoices to both, the general public, as well as businesses or government, the

latter can be financed. A good strategy to improve a company’s cash flow is to accept

credit cards from consumer customers, and finance their invoices to business and

government customers. The best customers to finance are credit worthy, solid firms who regularly take

approximately two weeks to two months to pay. Accounts which fall outside of this window may not be cost effective to finance.

The Cost of Receivables Financing & How Does It Compare Calculating Profits- Does It Truly Make Sense To Do?

How can you calculate whether receivables financing will improve one’s bottom line? Below is a simplified Income Statement to determine if receivables financing will help.

Chart 1: Sample Income Statement XYZ Manufacturing Company

Before Receivables FinancingAfter Receivables Financing

Gross Revenues $150,000 $250,000

Cost of Goods Sold $ 90,000 60% $150,000 60%

Gross Profits $60,000 40% $100,000 40%

Less:

Variable Expenses $22,500 15% $37,500 15%

Fixed Expenses $30,000 20% $30,000 10%

Overhead $52,500 35% $67,500 25%

Cost of Receivables financing 0 $6250

Total Expenses $52,500 36.25% $75,000 30%

Net Profit $7,500 3.75% $26,250 10.5%

Therefore a 2.5% “Cost” that allowed immediate Working Capital Increased Profit by nearly 7% , a 350% Increase In Profit

Additional Benefits Asset based lenders Provide Clients When most business owners seek financing, traditional sources they usually seek first are their own funds and those of private investors, then bank loans, and finally venture capital. Let’s compare A/R Financing to each of these as well as to other alternatives. Prospective Client Underwriting. Asset based lenders can quickly run credit checks on prospective customers, saving the potential disaster of unknowingly accepting a customer who might never pay. Most small business owners don’t have the know-how or inclination to check customers’ credit reports themselves, but jump at the idea of an asset based lender doing it for them. Professional Back-Office & Billing Support. Many asset based lenders take over a business’ billing responsibilities or even management of all their accounts receivable. This enables the owner of a small business to concentrate on growth, and saves a larger company the expense of such a department. Asset based lenders commonly verify invoices before making advances, which provides a built-in means of quality control and speeds up customer payments. Because asset based lenders normally report payment histories to credit agencies (and receive a lower rate on their cost of credit reports for doing so), customers often pay asset based lenders more quickly than vendors. Remove Discounts Required For Early Payment. Many businesses offer discount terms to companies to pay quickly. If a business offers 2% net 10, or a 2% discount if a customer pays in 10 days, it’s already discounting for quicker cash. Receivables financing can make such discounts unnecessary, offer many more benefits, and give access to cash within 24 hours for less. Especially for smaller and younger companies, asset based lenders can be a source of business leads, networking connections, and vendor sources. As an interested third party, often with years of business experience, the asset based lender can make observations and suggestions to enhance the daily operations of a business, trim costs, and increase income, often times becoming a vital role in a young businesses network success and business connections. Ability to Offer Competitive Payment Terms. Many companies come to an Asset Based Lender so that they can extend payment terms that are required in order to acquire contracts and/or orders from these large entities. The ability to no longer require 50% up front or payment on delivery are often 2 of the benefits required to compete with the top organizations in many industries. Working capital from Accounts Receivable Financing can be used to support credit purchases by customers, thereby increasing volume with current customers, and allowing sales to new customers that require credit terms. Remove Debt and Improve Company Financials. Since the programs and Capital will never show on the Balance Sheet of an organization you can use this to your advantage and ensure your organizations financials are reflecting the true attractiveness that investors or Banks should see when viewing your company’s financials Improve Company Credit Bureau. Often the debt of an organization is the largest thing affecting its credit bureau. You can utilize an asset based lender to assist you in order to pay this down and get it off your Balance Sheet in order to qualify for additional Commercial Capital. Purchase additional inventory/ Fill larger orders. Accounts Receivable Financing funds can support the purchase of inventory, which in turn means more products available to the customers or Working capital reserves through Accounts Receivable Financing can provide the resources to accept and produce new large orders before full payment is made. As an organization, often in a Purchase Order & Receivables relationship, grows with United they will begin to establish the needed Inventory their clients require for future orders or their goods. This can lead to no longer needing to spend Capital on Purchase Order Financing and being able to cover the time required for their 3rd Party Manufacturers. Relieve IRS Tax Debt Liability. United Funding Solutions and a select few organizations with the experience and personnel to handle these delicate situations can offer invaluable benefits and insight to businesses with IRS Tax Debt, Back Taxes, or even recent Bankruptcy. They will work through these situations and provide you the Working Capital needed to ensure your organization is thriving on the other side and you are well on your way to a sustainable successful organization! Provide Capital during Difficult Times When No Traditional Lenders Can. As you can see, asset based lenders provide a great deal more than simply improved Cash-Flow & Working Capital. They bring services and expertise

from which nearly any business, and certainly a young and growing business, can benefit. These additional benefits and resources do not cost anything, are often invaluable to the success of their clients and how quickly they grow to reach the size they hope to become, especially in industries that do not have back-office Receivables, Billing, and Finance experience as a fundamental strength needed to succeed! Furthermore, contrary to almost every other professional relationship in the business owners network their relationship with an Asset based Lender provides a relationship with someone whose success is directly correlated to the success of his organization! After all, the more his organization grows the more Capital he will need to continue growing, thus the larger his need for their relationship. Establish a strong credit history. .Accounts Receivable Financing can be an essential tool for establishing a positive credit history by facilitating timely payments to suppliers and reduction of debt to creditors. Avoid new liabilities &/or Pay down debt. Accounts Receivable Financing is not a loan, but the sale of an asset (the invoices), and as such, does not add any new liability to a company's balance sheet which means a stronger financial picture of the company. With Accounts Receivable Financing, the rigidities of traditional funding are removed; the funding grows with the company making it capable of taking advantage of business opportunities which require ready available cash. For companies that either cannot qualify for traditional debt financing or that simply do not want to incur more debt, Accounts Receivable Financing is a good alternative means of short-term financing. The money obtained from a Accounts Receivable Financing contract can be used for the company's debt reduction, which in turn reduces interest expense and finance fees for the company. Consistently make payroll & meet financial obligations. When payroll is due weekly, but the invoices issued to the customers are on trade credit, which means they are paid after 30-60-90 days or more, Accounts Receivable Financing can provide the funds to meet this basic operating cost on a regular basis. Generating predictable cash flow can enable a company to consistently meet all financial obligations and avoid the possibility of bankruptcy due to inadequate working capital. Make timely tax payments. Accounts Receivable Financing also provides funds that can be used to meet tax obligations, allowing a company to avoid liens and penalties from underpayment. Weather seasonality and downturns. Companies can use Accounts Receivable Financing funds to cover operating costs, especially when customers are delaying payments beyond normal terms or demand has diminished temporarily. Retain customers and employees. Predictable cash flow for delivering goods and services to customers and for meeting obligations to employees increases retention rates and reduces turnover costs, improving the stability of an organization. Improve credit monitoring. Factors provide critical analysis of customer creditworthiness to clients on an ongoing basis, enabling improved customer selection and the avoidance of large losses, which eventually means improved security for the company. Take advantage of supplier discounts. Accounts Receivable Financing funds can be used to purchase supplies on discount terms (volume or cash purchases), thereby reducing the costs of raw materials. Reduce supplier credit costs/ Qualify for preferred pricing. A company can pay suppliers more quickly with funds received through Accounts Receivable Financing, reducing or even eliminating the costs of supplier credit, after paying suppliers in a timely way for a certain period, companies can often negotiate advantaged pricing and increased supplier lines. Improve money collection. Accounts Receivable Financing companies are expert in managing the invoice collection process, meaning reduced collection costs, faster collection times and improved overall collection rates with lower bad debt expense. Faster paying customers. A recognized benefit of Accounts Receivable Financing is that some customers, knowing that a Accounts Receivable Financing company is involved, are willing to pay their invoices faster so that their credit rating is not impaired and they know a professional firm is involved (or a 3rd Party). Factors usually report payment history to credit agencies which establish the credit rating for most businesses. From the point of view of the adherent, faster paying customers should mean a lower Accounts Receivable Financing fee.

Eliminate early payment discounts to customers. With the ability to convert receivables into cash through Accounts Receivable Financing, there is no need to offer early payment discounts to customers which are often a more costly and much less effective approach to generating the needed cash flow. Retain equity and control. Accounts Receivable Financing provides funding without the sale of company equity or the loss of operating control. Investment in technology. Capital from Accounts Receivable Financing can be used to upgrade or acquire new technology that can increase productivity and improve quality, thereby reducing operating costs and even increasing sales. Improved Organizational Efficiency. With a stable and predictable flow of cash, management of the company can focus on operations, strategy and planning for the future of the company. Credit screening of potential clients. A factor will provide the company with credit information on any business that might be considered as a potential new customer, enabling the company to make good credit decisions. Capture growth opportunities. The money received from Accounts Receivable Financing are directly tied to the sales of the company which means that if the sales increase, also the money collected will amount higher and will be available for further investment in the company. Operate at full capacity. With Accounts Receivable Financing, working capital becomes available to add labor and materials so that a more efficient, full level of production can be achieved. Purchase additional inventory/ Fill larger orders. Accounts Receivable Financing funds can support the purchase of inventory, which in turn means more products available to the customers or Working capital reserves through Accounts Receivable Financing can provide the resources to accept and produce new large orders before full payment is made. Invest in sales and marketing or product development. By using additional capital to generate new business, a company can increase market share, develop new channels for client acquisition, and corporate profits. Investment in new services and products helps a company to remain competitive and often establish a market advantage, allowing it to ask for premium pricing and higher profit margins.

A/R Financing Compared to Traditional Financing When most business owners seek financing, traditional sources they usually seek first are their

own funds and those of private investors, then bank loans, and finally venture capital. Let’s compare A/R Financing to each of these as well as to other alternatives.

Private Investors 1. Equity

Private Investors Most startup businesses begin with private investment from the owner’s personal

resources, and/or those of relatives, friends, past business associates, and perhaps angel investors. When the owner’s personal funds (and often credit card limits) are exhausted, he looks to people he knows who might be willing to help. In most cases, those funds eventually run dry so the business owner, if he hasn’t already, will often give up substantial amounts of equity to obtain more money. As these funds are used and additional funds are needed to keep the business going, more equity may be demanded by private investors.

Over time, the owner not only has accumulated a heavy debt load, he may have lost majority ownership of, as well. This may also cause friction between the owner and investor/s who may differ in their perspectives as to how the company should be run.

A/R Financing Many Asset Based Lenders finance receivables. They welcome startup companies

and especially desire those with excellent growth potential. Because the lender’s income is tied to the financed receivables of a client, both the lender and client increase their income as the client’s business grows. Meanwhile the business owner maintains full ownership of his company. As mentioned above, Asset Based Lender’s do not seek a stake in nor control of a client’s company. While Asset Based Lenders want a client’s business to run smoothly and they can often offer valuable advice, the business owner maintains control and full business ownership. 2. Availability of Funds

Private Investors Often private funds from all known resources of the owner eventually are

exhausted, and other means of financing must be sought. The larger a business grows, the more difficult finding private investors can become. Doing so means a deeper hole and further debt.

A/R Financing While extremely small Receivables Financer’s resources may be limited, most will be

able to accommodate a client’s growth. If a client grows too large for a very small ABL to fund, larger affiliates are available and usually quite willing to step in. What’s more, because the A/R Financing volume has become larger lower discounts may be available when making the transition to a larger Asset Based Lender.

After A/R Financing over a period of time, your cash-flow will often stabilize and Financing may no longer be needed. If a business owner desires a lower cost bank loan, they may now be in a position to qualify for one. Nonetheless, many business owners choose to continue A/R Financing to take advantage of the extra services they have come to appreciate from their Asset Based Lender: Accounts Receivable management, billing services, credit screening and guidance, collection services, IRS Monitoring and many more. When leveraged correctly, it is often in the businesses best interest to continue this relationship from a cost perspective, as well. Feel free to look at my E-Book on “Asset Based Lending Industry Overview” for much more in-depth look at the benefits you can get from a relationship with an Asset Based lender.”

Bank Loans 1. Application

Banks To obtain a loan, business owners are typically required to provide at least two or

three year worth of tax returns and business financials, including Income Statements and Balance Sheets. Companies who have not been in business this long, and therefore cannot provide these documents, need not even apply because they will be turned down at their first inquiry.

Business plans are commonly required and some banks will demand the loan applicant be their banking customer for quite some time, maintaining checking or savings accounts, Certificates of Deposit, and other banking products. This gives the bank time to assess fiscal habits and patterns which assists them in determining the level of risk associated with lending money. However, being a bank customer in no way obligates the bank to provide a loan, and even bank customers of many years’ standing cannot expect their business loan applications to be approved. Many are not.

A/R Financing Companies who wish to finance larger volumes will often be required to provide tax

returns and business financials. Asset-based lenders of smaller businesses often do not have such a requirement. Many welcome new and startup companies who obviously will not have such documentation.

While larger one’s may require a business plan, most small and medium sized asset based lenders do not. Because most prospective clients will have no previous experience with a particular financer, requirements for using that financer’s service do not exist.

Asset Based Lender’s will expect clients to complete some legal agreements in order to secure their funds. Because they take risk on a regular basis, they naturally need to take precautions to minimize this risk. The paperwork you might expect from most is discussed in my EBook “How To Get Started In Receivables Financing”

2. Increasing Line Amount Banks

When a borrower needs additional funds beyond a loan already granted, he must reapply for another loan. Like the first time around, the same paperwork will be required and will again take weeks or even months to learn of approval.

A/R Financing Once an A/R Financing account is established, receiving a new advance is simply a

matter of supplying new invoices. Customers need to be approved only once to obtain future advances for invoices to them. Additionally, your limit is directly correlated to your ability to grow your business and as you acquire additional business your availability to capital will always increase proportionately, ensuring that you never find yourself in a position where you cannot take advantage of an opportunity due to a lack of capital!

Bank Loans Cont’d 3. Credit Standing

Banks Any applicant who has poor or questionable credit, those who have declared

bankruptcy just once, people with records of criminal convictions, judgments, and other negative public record information will not find bank loans available to them.

A/R Financing Like banks,asset based lenders will perform due diligence when setting up new

accounts. Public records will be searched for liens, judgments &, bankruptcies. Criminal history a history of judgments, tax liens, and uncollected debts usually lead an asset based lender to decline an applicant.

A bankruptcy and lower credit standing are usually less of a concern as long as the company’s customers’ credit is solid. If a company has UCC (Uniform Commercial Code) liens filed on its assets, particularly in which its receivables are held as collateral, these will need to be worked out before A/R Financing can commence. If they can’t be, an asset

based lender will usually decline an application. These liens are often held by banks if a prospective client has a loan or line of credit; the bank is usually willing to subordinate its position to an asset based lender if it’s not their primary collateral.

If a tax lien is in place or a client is in bankruptcy, an asset based lender may be able to help the client through this by working with tax authorities or a bankruptcy trustee to make regular required payments, taken from client advances.

While many A/R Financing clients begin their relationship with an asset based lender with marginal credit, A/R Financing can help improve their credit standing. By having adequate cash on hand to pay bills promptly, companies can see gradual improvements to their credit rating because they pay their bills on time.

4. Repayment

Banks

loans are typically paid back in amortized monthly payments which include principal and interest, much like house or car payments. These loans are often for a period of seven years. Interest is based on the client’s credit rating and current prime rate.

A/R Financing Because A/R Financing is not a loan, there are no principal or interest payments to

make. Discounts are paid (rather than interest charged) based on the client’s industry, customer’s credit standing, volume in receivables, and your clients average days outstanding. These discounts are retained by the asset based lender when customer payments are received and/or deducted from advances, so there is no added work involved and no loan payment to budget.

Generally asset based lenders will require clients to finance a minimum dollar volume of invoices each month for a specific number of months, particularly if a bankruptcy or tax lien is involved this may be a requirement to mitigate risk. If this volume is not met, minimum charges may be collected. However, most asset based lenders negotiate monthly minimums and terms. This gives clients great control over the accounts they finance and the discounts they pay to ensure they have the ability to utilize this when it is appropriate and fund internally when it is not.

*United Funding Solutions does not charge minimum fees if client has no need for Capital.

Bank Loans Cont’d

5. Collateral

Banks When providing a loan or line of credit, banks routinely require collateral be

provided which at least equals twice the amount borrowed. This collateral is secured with a UCC filing with the Secretary of State, which places a first lien on the collateral and gives the bank first rights to the collateral in the event of default. Usually all assets of a company, and often personal assets of the business owner, are required as collateral. These personal assets are secured by a personal guarantee, which stipulates the borrower is required to pay back the debt from personal assets if the business defaults on the loan.

A/R Financing Asset based lenders also routinely file a UCC lien, and like banks, will require they

be in first position with these filings. Collateral will usually consist of at least the accounts receivable of the company, while other assets are often included as well.

Most asset based lenders require personal guarantees to be signed as part of their security; some do not but price their clients appropriately for this additional risk.

6.Security Accounts/CompensatingBalances

Banks Some bank loans and lines of credit require compensating balances. These are the

funds a business is required to keep in a deposit or reserve account, apart from the loan. It acts as on-hand collateral for the bank and helps offset what the bank perceives as risk. It is also a means of yield enhancement for the lender, making the effective interest rate of a loan higher than the stated interest rate.

Collateral requirements and compensating balances often lead to a common complaint by those turned away by banks: the people who qualify for loans are those who don’t need them, and those who need loans don’t qualify. One also is reminded of this joke…

Question: What is a banker? Answer: Someone who offers you an umbrella when the sun is shining, then takes it

away when it starts to rain.

A/R Financing Asset based lenders do not require compensating balances or reserve funds to be

on hand to begin A/R Financing. Reserves may be built up over time and can be tapped in the case of customer nonpayment, but they are not necessary at the onset of A/R Financing. Also, for certain clients an asset based lender can establish a reserve account balance to ensure there’s a specific balance always available to mitigate any risk of unpaid invoices. Though this may initially appear a negative, it is often a tremendous benefit for new business owners who lack the Capital to handle a significant loss that can occur from a non-payment on a client’s receivables!

Venture Capital

1. Business Plan

Venture Capital Venture Capital companies routinely demand thorough and detailed business plans

before providing funds. Future financial projections are expected, as are sophisticated market analyses and marketing strategies. Extended experience and unique expertise on the part of business management is expected as well.

Venture capital firms receive a large number of professionally created business plans that represent months, even years, of preparation. Yet despite these painstaking efforts, the percentage of projects actually funded with venture capital is extremely low. In difficult economic times, venture capital can virtually dry up and disappear.

A/R Financing

Very few A/R Financing companies require a prospective client to provide a business plan. If one is already on hand, it will be welcomed and studied. Yet preparing a business plan is generally not needed for businesses wishing to finance their receivables. More important to an asset based lender is an organizations Operating Agreement which defines who has the ability to make decisions and obligate the organization.

2. Equity Venture Capital

Venture capitalists will require a significant share of equity in any business they fund. This may be majority ownership from the outset, or a minority stake to begin. However, future cash infusions will demand additional equity shares. Venture firms frequently expect to control a funded company and place hand-picked staff in key management positions. Business owners who wish to maintain complete control of their firms cannot consider venture capital as a means of financing.

A/R Financing. Asset based lenders do not want to gain control of businesses they fund. While they

can provide expert guidance and management of important receivables functions, controlling a client’s company is not their desire. An asset based lender has his or her own company to run, and prefers to generate income from discounts, not equity.

Government Programs

1. Application Gov’t Programs

Many government programs are intended to help small (and what are sometimes referred to as “disadvantaged”) businesses, which are minority- or women-owned. SBA loans are administered by local banks and regulated by the government. That means such funds for which you might apply are controlled by someone with a banker’s frame of reference who must conform to government regulations. Does that sound like a “borrower-friendly” arrangement? The requirements for meeting any of these programs are fairly restrictive. Most do not provide large sums of money and like any government-related funding, require the patience of Job to wade through the initial paperwork…wait…fill out more paperwork…wait…and after several months…learn your application has (probably) been declined.

If you have an immediate need for cash, waiting for these loans (which must be paid back) is often detrimental to their success. I can’t count the number of exasperated (and often nearly desperate) small business owners who have sought A/R Financing after experiencing nothing but frustration in applying for these scares funding programs.

A/R Financing Companies who wish to finance larger volumes will often be required to provide tax returns and

business financials. Asset-based lenders of smaller businesses often do not have such a requirement. Many welcome new and startup companies who obviously will not have such documentation. While larger one’s may require a business plan, most small and medium sized asset based lenders do not. Because most prospective clients will have no previous experience with a particular financer, requirements for using that financer’s service do not exist.

Asset Based Lender’s will expect clients to complete some legal agreements in order to secure their funds. Because they take risk on a regular basis, they naturally need to take precautions to minimize this risk. The paperwork you might expect from most is discussed in my EBook “How To Get Started In Receivables Financing”

2. Re-applying for More Funds Gov’t Programs

When a borrower needs additional funds beyond a loan already granted, he must reapply for another loan. Like the first time around, the same paperwork will be required and will again take weeks or even months to learn of approval.

A/R Financing Once an A/R Financing account is established, receiving a new advance is simply a matter of

supplying new invoices. Customers need to be approved only once to obtain future advances for invoices to them. Additionally, your limit is directly correlated to your ability to grow your business and as you acquire additional business your availability to capital will always increase proportionately, ensuring that you never find yourself in a position where you cannot take advantage of an opportunity due to a lack of capital!

Repayment Gov’t Programs

like business loans, create debt and typically are paid back in amortized monthly principal and interest payments.

A/R Financing Everything described about A/R Financing in the section on Bank Loans applies in this section.

Applying for A/R Financing is a breeze compared to applying and waiting for government programs, and there is no need to re-apply for more funds once your account is established. Finally, you have nothing to repay because you’re not borrowing money, but selling an asset.

Equipment Leasing

Generally, equipment leasing can help businesses with cash in two ways: 1. When a business needs equipment, a leasing company purchases the equipment – computers,

machinery, vehicles, what have you – then leases it to a client, who makes a monthly lease payment, much like leasing a car. The advantage is that you don’t have large capital outlays for such purchases, and obsolescence isn’t your problem. Having this equipment can enable you to take on new jobs or customers without large cash outlays. This can often work hand-in-hand with A/R Financing, as long as the asset based lender and leasing company are not placing a lien on the same collateral, which is usually not a problem. Leasing companies want to lien the equipment leased, while asset based lenders want to lien the company’s receivables.

2. If you need cash and already own equipment that has value, some leasing companies will provide a lease buy-back arrangement. That is, you sell them your equipment for a lump sum of cash, then make monthly lease payments as you continue to use the equipment. Asset based lenders and leasing companies often work side-by-side. Both target the same market (companies needing funds) and offer complementary products which don’t really compete with each other. Asset based lenders provide cash for any business need, leasing companies provide cash for equipment, or the equipment itself. Both make their income from strengthening clients’ businesses. In fact, some A/R Financing companies offer leasing products, and some leasing companies’ finance receivables on a limited basis and vice versa. If you are currently A/R Financing and think leasing could further help your business, your asset based lender will probably be able to make a referral. Likewise, if you are using a leasing company and would like to finance receivables, ask your leasing agent for the name of a good lender who handles a company your size.

The best customers to finance are credit worthy, solid firms who regularly take approximately two

weeks to two months to pay. Accounts which fall outside of this window may not be cost effective to finance.

Appendix A: The Cost of Receivables Financing & How Does It Compare

Calculating Profits- Does It Truly Make Sense To Do? How can you calculate whether receivables financing will improve one’s bottom line? Below is a simplified Income Statement to determine if receivables financing will help.

Study this statement (the Cost of Receivables financing is based on $250,000 worth of invoices at 2.5%). Then insert a real

company’s figures, and see if receivables financing can significantly improve the bottom line. In order to estimate what

Gross Revenues might be with receivables financing, ask: “How much could this company make if it had an unlimited

supply of cash on hand?” Perhaps it could double revenues as XYZ has in the example; perhaps they would be less,

perhaps more. At any rate, run the numbers and see if receivables financing makes sense. If it does, you might ask: “Can

this business afford not to finance receivables?

Chart 1: Sample Income Statement XYZ Manufacturing Company

Before Receivables FinancingAfter Receivables Financing

Gross Revenues $150,000 $250,000

Cost of Goods Sold $ 90,000 60% $150,000 60%

Gross Profits $60,000 40% $100,000 40%

Less:

Variable Expenses $22,500 15% $37,500 15%

Fixed Expenses $30,000 20% $30,000 10%

Overhead $52,500 35% $67,500 25%

Cost of Receivables financing 0 $6250

Total Expenses $52,500 36.25% $75,000 30%

Net Profit $7,500 3.75% $26,250 10.5%

Therefore a 2.5% “Cost” that allowed immediate Working Capital Increased Profit by nearly 7% , a 350% Increase In Profit