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Robert Perez and his partners at Com-Tek Communications, a
cable installation firm in Tampa, know how to make
connections.
But the 18-month-old company very nearly became a victim of
its own success when it landed a big contract and didn't have
the money to pay upfront for the material needed to get the
job done.
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"Call us today to
see if factoring could work your company. No pressure . . .
just my sincere effort to help you."
Diane Homa,CCFC
Tollfree:(800) 663-7517
Phone: (727) 573-5533
Fax:(727) 299-9034
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The company was too new to qualify for a business loan from a
bank, and neither Perez nor his partners wanted to take out a
personal loan. Instead, they solved their cash crunch by
factoring, or selling accounts receivables at a discount in
return for cash up front.
Factoring is one of several alternative funding sources for a
growing number of businesses, said Diane Homa, principal of
Fountainhead Funding in St. Petersburg.
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Fountainhead helps match businesses with funding sources
outside of the traditional bank. Factoring and asset-based
lending, or providing a loan secured by accounts receivables
or other assets, are the most popular forms of alternative
funding, but Fountainhead also offers others tailored to a
company's needs.
Bridging the gap
In addition to young companies, alternative funding is
designed for firms in hyper-growth mode.
"I signed up a client that had been in business for 16 years,
and he won two huge
awards. He had been doing about $150,000 a month in sales and
suddenly he was doing $500,000 a month," Homa said. "He
supplied labor and he would get paid (by the client) 45 or 60
days later, but he had to make payroll on a weekly or
bi-weekly basis, and there's no way to bridge that gap."
After striking a factoring deal, that client was able to
handle $700,000 a month in sales, Homa said.
She also handles troubled companies that have a chance to turn
around their finances, generally firms that have two
back-to-back years of losses and are out of compliance with
bank agreements. With an asset-based lending arrangement, a
company could secure a revolving line of credit based on a
percentage of its annual sales and inventory.
The downside of alternative funding is that it is a more
expensive form of borrowing than a bank loan. Asset-based
loans typically carry an interest rate of prime plus 6
percent, as opposed to a bank loan that might be 1 percent or
2 percent over prime.
"It's considered a little riskier, and the lenders have to
monitor and manage these
businesses," Homa said.
Consolidation
Worldwide, businesses secured $340 billion in asset-based
loans in 2003, the most recent year for which information is
available, according to the Commercial Finance Association in
New York. Factoring volume for 2003 was $96 billion, the
association says.
The industry has been consolidating with two large deals since
the beginning of the month.
On April 1, industry leader CIT Group (NYSE: CIT) purchased
all of SunTrust Bank's
(NYSE: STI) factoring assets and related asset-based loans. On
April 5, Regions Financial Corp. (NYSE: RF) said it agreed to
sell its Capital Factors Inc. of Boca Raton to Perry Capital
LLC, an $11 billion-asset New York hedge fund.
Both SunTrust and Perry Capital were among the top five
players in factoring, according to the trade journal American
Banker, but the profitability of the business likely was a
factor in the sales.
"A lot of banks find it's more difficult to make money in the
sector because it's hard to assure the quality of the goods
and the quality of the company you're making a loan to," said
Richard Bove, a St. Petersburg-based analyst with Punk Ziegel
& Co. "Companies like CIT believe they can exert pricing
advantages if they consolidate."
Bove said consolidation at the top likely wouldn't hurt the
smaller players, such as
Fountainhead, because the bigger companies won't go after
their clients.
Buzzwords
Asset-based lending: a business loan secured by assets such as
accounts receivables, inventories, machinery and equipment,
and real estate.
Factoring: the purchase of a business' accounts receivable at
a discount.
Purchase order funding: short-term funding used to finance the
purchase or manufacture of specific goods that have been
pre-sold by a business to a credit-worthy customer.
Consumer contract financing: sale of a company's installment
contracts with its customers for immediate cash.
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