When applying for factoring or an ABL working capital line, there are things you can do to help guarantee success. Here are three big ones.
In part one of this series, we discussed how the traditional banking environment, continues to struggle to make working capital available to small and mid-size businesses.
We were given a first-class ticket inside the thought process of a non-traditional lender when we spoke with Sean Lelchuk of Far West Capital, to some of the things that small business owners can do to better prepare themselves for a positive answer when applying for a working capital or Asset Based Line of Credit.
Related Article:5 Surprisingly Cheap Forms of Small Business Financing
Advice Not Just for Alternative Lending
Today we carry that forward another step as we look at the next three key things a small or mid-sized business can do to maximize their opportunity for approval when seeking working capital.
“It’s important to note”, says Lelchuk, “that these tips are also valuable guideposts when looking for capital from any traditional lender, investor, bank or alternative lender. They are not exclusive to ABL or Factoring.”
Financials: Aren't Just for Taxes
I had a client tell me once that he only prepared his profit and loss statement for his business when it was time to do his annual taxes. Otherwise, throughout the year he knew he was profitable because he had money in the bank.
As the only employee of his business and not having a very complicated business, perhaps for him, that rang true. For most business owners, however, this would not be a good practice.
In speaking with Lelchuk I asked, “What frequency should a business owner have his financial picture available to him,” Lelchuk replied, “As a general rule of thumb, the financials of a business should never be more than, at the most, a few days behind.”
It’s So Important to Keep Accounting Up to Date
“If they are keeping up with their entries into QuickBooks or whichever financial software they use and keeping the basics like invoicing, payables, and just general ledger entries up to date than at any given time a business should readily be able to determine where they stand for the month, week, and for the year in profitability,” Lelchuk said.
Why Does It Matter to a Lender How Current My Books Are?
It's important for any lender to know that the business owner stays in touch with where he or she is at in regards to profitability. “If they are headed down a path of incurring a loss it's important to a lender to know that that business owner will be able to catch that and change course quickly,” said Sean.
Both traditional and nontraditional lenders want to provide a business with capital but not if they feel they might be throwing good money after bad and thereby increasing their odds of losing their investment.
Most Lenders do not necessarily want to lend to companies who are not profitable, but for certain none, I have ever found want to lend to a company who doesn't know if they are profitable or not. Keeping your financials up to date tells a lender that you have your eye on the ball and you can adjust quickly no matter what comes your way.
Collections: Keep Them Under 45 Days
Most of us do not like collecting money. It's usually not enjoyable to have to call a client who has gotten behind on paying an invoice. Each time we have to do it we fear alienating or annoying our client and we don't want to seem desperate.
Days Sales Outstanding (DSO)
Known as the DSO or “Days Sales Outstanding,” Lelchuk indicated “Forty-five days is about the point that once a company's DSO exceeds that we begin to need to have a greater understanding as to why it is taking them so long to collect on their outstanding receivables. Below 45 days we consider to be within the normal timeframe.”
Staying on top of your receivables by having a dedicated person or collections process by which to keep your customers as timely as possible is something that alternative lenders will look at and ask you to explain what that process is. Obviously, if you're receivables are below the benchmark 45 days there's not much inquiry or concern.
Liens : Do You Know if There Are Any and Who Has Them
It's surprising to me when talking with business owners how many of us do not know very much about liens. Typically managed by the Secretary of State for each state, Missouri's Secretary of State UCC Division defines it as follows:
“The Uniform Commercial Code Division is the central filing office for the perfection of personal property liens. These liens are perfected by filing a UCC-1 Financing Statement showing the name and address of the debtor and the secured party along with a description of the collateral.”… “Information on these filings, either by a listing or copies, is provided to any requesting party.”
Where Would a Lien Have Come From?
Typically any time a business enters into a lease, loan or other financing transaction - the party lending the money will file a UCC financing statement with the Clerk of Court in their county or the Secretary of State.
Why Would My Business Have a Lien?
The purpose of a lien or UCC is that it tells other potential lenders that another lender already holds a claim to whatever collateral it has cited in its financing statement. This helps lenders avoid loaning money on something that the business does not fully yet own.
If your business has borrowed money in the past, whether it be a direct loan, a line of credit, a lease or installment loan on a piece of equipment, virtually any financial transaction where the business was indebted to another party, it is very likely, at some point, a lien was filed.
How a Lien Can Impede Your Borrowing Ability
lien priority is determined by the chronological order in which it was filed. If a lender files a lien against something in January then his lien has a priority over any lien filed in February and so forth.
Make Certain That Your Receivables Are Free and Clear
When a business goes about looking for working capital through asset based lending or factoring the single most important thing that a lender must have is a clear first position lien on whatever collateral they are using to lend against.
In the case of ABL and factoring their primary collateral is the company's accounts receivable. If the company's receivables are encumbered through another lender having put a lien on them, then until that lien is extinguished most of the time another lender will not lend against the receivables.
Investigate Before Applying
I consistently recommend to businesses that they do their own lien research on their business prior to applying. That can be done through several services that charge a nominal fee to do so, such as CT Lien Solutions, or through a visit to the local clerk of court or your state's Secretary of State's office.
In many States, liens are valid for a period of time, usually five years and must be renewed. In other States, liens may remain in force until manually canceled or terminated. Either way, don’t get caught off guard. Know who holds a lien on any assets of your business, what assets they have a lien against, and what amount of debt remains to be paid.
Related Article: You Can Do It: How to Start a Business Without a Loan
Working With Existing Lenders When You Need Help
In a follow-up article, we will examine how to work with existing lenders to persuade them why they should step aside on their lien in place, to allow your ABL or Factoring partner to establish the lien position he or she requires to provide you working capital.
Thank You to Sean Lelchuk of Far West for his time and insight while interviewing with me.