Article Number : 5305 |
|
Article Detail |
|
 | |
| Date | 2/22/2010 8:32:45 AM |
| Written By | LGM & Associates Technical Flooring Services |
| View this article at: | //floorbiz.com/BizResources/NPViewArticle.asp?ArticleID=5305 |
| Abstract | By Louis Iannaco According to a recent report by Anne Field on Openforum.com, in the current environment of tight credit, even successful small businesses are finding it difficult, if not impossible, to get a bank loan, and that underscores the need to... |
| Article | By Louis Iannaco According to a recent report by Anne Field on Openforum.com, in the current environment of tight credit, even successful small businesses are finding it difficult, if not impossible, to get a bank loan, and that underscores the need to look for alternative sources of capital. She suggests six possibilities to consider: Peer-to-peer lending. Online sites such as Prosper.com and LendingClub.com match small business owners with potential lenders. Basically, businesses post a profile with background information and why they need the money. Potential lenders scour the profiles for possible investments. With the Securities and Exchange Commission (SEC) approving most of their loans as securities, the industry could grow from about $500 million in annual loans to more than $100 billion in 2012, according to market research firm Forrester Research. Micro-lending. These mostly non-profit organizations provide loans of up to $150,000 to small businesses. Probably the best known is ACCION, but there are many others across the U.S. The good part is their flexibility. Micro-lenders usually look for a good credit score, industry experience and collateral. Factoring. Otherwise known as receivables financing, a factor advances businesses 70% to 90% of the value of their receivables and then assumes responsibility for collecting the money. There are definite plusses and minuses to this approach. For example, factors get a fee—up to 15% of the invoice. On the other hand, you can often get your money in 24 to 48 hours. Purchase order/merchant cash advance financing. With this, companies advance cash before a sale has happened, generally for a signed purchase order for goods or services. Or they provide cash upfront in exchange for collecting part of a merchant’s future credit card receivables. Credit cards. They’re the first source of funding for many small businesses, and an easy way to fund operations. While many companies have been tightening the amount of credit they allow, successful businesses can still negotiate expanded lines. There are other benefits as well. For example, most credit card companies give checks that can be used as cash equivalents. And some, like American Express Plum, will let you defer your payments for limited periods of time. Supplier credit. This involves negotiating payment terms that, in effect, provide you with more money. To negotiate such terms, you usually need long-standing relationships with a supplier. Flooring methods In what ways do such alternatives pertain to the flooring retailers, if at all? Aaron Pirner, principal of CAP Carpet in Wichita, Kan., believes when it comes to cash from operations, many businesses do not have the proper systems to manage their finances. “Many can eliminate some or all of their external lending sources simply by operating their business to optimize available cash. The most common areas to generate cash are customer deposits, accounts receivable, order backlog and eliminating inventory that is open to sell.” He suggests retailers “set up systems to measure and manage these parts of their company. Common measurements are: What percent of your current order backlog is a customer deposit? What is your DSO of accounts receivable? And, how many days are sales in your order backlog relative to sales?” Paul Johnson, owner of Interiors One/Carpet One Floor & Home in Tulsa, Okla., said, “I believe in keeping your friends close and your bankers closer. I’ve worked hard the past 12 years to develop a strong relationship with my bankers as well as the credit managers of our suppliers.” The alternatives Field listed have merit for some, he explained. “I’ve used a couple of them. No matter which source you use, the first thing any retailer has to invest in is good financial reporting. Bankers and other credit managers want to extend credit so give them a good reason to do so.” Allen Anderson, owner of Anderson Carpet One Floor & Home in Hattiesburg, Miss., said the thing about financing is, “Size really does matter. There are small dealers who need micro loans or the like, but in reality, banks are usually the answer for most of us. One alternative [I like] is the peer-to-peer idea. Sadly, most in the industry hardly know what a ‘tweet’ is much less an alternative financing program.” According to Anderson, a wise owner is always making relationships with multiple banks and making sure there are numerous options to go to. “Running your business to put cash flow at the top of the list of everyday priorities is the way to have banks courting you and not you having you beg them.” While he has never used any of the alternative options and has never had debt in his business for over 20 years, Sam Roberts, president of Roberts Carpet & Fine Floors in Houston, believes if a business has need of capital, it is highly likely that factoring and other relatively expensive “cost of money” options are not good ideas. “It is a reasonable option for relatively high risk, high margin, and the additional cost is added into the price of product and services. In a highly competitive environment, this is very hard to do. “Establishing a long-term line of credit that connects to a ‘sweep’ account is a very good way to handle short-term swings involving cash flow and receivables,” he explained. “The cost is relatively very low. It would be wise for some to consider the sensibility of throwing good money after bad. Borrowing into a bad market can be a good idea, but it can also be a very bad one—especially when personal liability is involved and life savings are at stake.” Chris Davis, president and CEO of the World Floor Covering Association, said conventional or virtually nonexistent financing “has the greatest appeal to me and I’m certain to flooring dealers, if only someone would offer it. Solutions are wherever you find them.” He added many retailers use American Express to pay invoices, “particularly if they are in the membership rewards program since they can acquire all kinds of goodies, from vacations to hard goods, just for paying bills they are supposed to pay anyway.” Supplier credit is also a plus—“if you can find one to do it,” Davis noted. “It usually requires being a long-standing customer with an excellent track record.” The key to making any loan program work, he concluded, “is to pay what and when you are supposed to and have some money left over to keep playing the game. As long as you’re able to do that, it really doesn’t matter what alternative you use as long as it works to your maximum advantage.” |