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He turned to Diane Homa, principal of Fountainhead Funding
LLC, St. Petersburg. She helped Gloer obtain an asset-based
revolving credit line from a finance company that allows the
business to borrow on its accounts receivable. As Gloer’s business
grows, so does his access to cash to bridge the gap between his
expenses and his customers' payments.
His firm is not a rarity. It’s among a growing number of companies
that use asset-based lending to ease the cash crunch. In 2005, the
industry grew 16% to a record level of $420 billion, according to a
report released July 27 by the Commercial Finance Association. In
1976, the first year the trade organization tracked the data,
asset-based loans totaled $11.9 billion.
Gloer uses a type of asset-based lending, called factoring. The
finance company loans his company about 80% of the value of his
accounts receivables, while the customers then send payments
directly to his finance company, called the factor.
“I could have had the growth without the factoring,” Gloer says.
“But it would have meant that I had to pull in outside investors. I
didn’t want to do that. You can get rid of a factor anytime you
want.”
Asset-based loans typically charge 12% to 14% interest, which is
about 5% more than banks, Homa says.
Factoring costs more than other asset-based loans because the
finance company must pay an employee to verify all invoices
submitted by a company to ensure they're legitimate, or not cooked
up, prior to loaning money on them. The finance company then
collects all payments from the customers to repay the loan and cover
the fees.
In regular asset-based lending, which can also include loans on
inventory or other fixed assets, the finance company also accepts
payments directly from the borrower's customers. But the finance
company doesn’t verify every invoice because the borrower isn’t
considered as high risk as those who turn to factoring.
Asset-based lending is a temporary fix for companies until they’re
big enough or
profitable enough to qualify for a bank credit line.
“They’ll want to get with a bank as soon as they can,” she says,
adding that most clients stay with her about 18 months to two years.
She declined to release Fountainhead’s revenue or growth, but she
says she has obtained asset-based financing for 39 companies in her
four years in business. And she’s a sole proprietor by design.
Bridging the gap
Homa's clients usually fall into three categories: Startups,
hyper-growth companies and businesses trying to engineer a
turnaround.
There’s a plethora of requirements to obtain a bank loan, she says.
To start, a business usually has to show a three-year financial
history to qualify.
“A lot of these companies, particularly like staffing companies or
IT outsourcing companies, they’ve got payroll to meet every week,”
she adds. “And they might be billing a big company, like Jabil
Circuit or another one like that, but they don’t get paid for 45
days. It helps bridge that gap.”
At hyper-growth companies, sales grow faster than the company’s line
of credit. “Banks look at historical data, while asset-based lending
is looking forward based on your sales,” Homa says.
“They can go out and sell a million-dollar contract and they know
they’ll be able to
make payroll, buy materials, whatever it is they need to do,” she
adds. “As soon as
they make the sale, they’re going to be paid now, even though it may
take 45 days
before the invoice is paid.”
In their shoes
Homa, a certified cash flow consultant who graduated from the
University of Florida in
1977, knows first-hand what the companies go through, especially
when they’re feeling
growing pains. She has started two companies, Audio Visual
Innovations in 1979 and
Advantage Indoor Advertising in 1996.
She says she has walked a mile in her clients’ shoes.
“Some are in the desperate mode,” Homa says. “When I had my audio
visual
company, we landed this huge state of Florida contract and we only
had a certain credit
line. We were always coming up against our line of credit and
couldn’t ship the
equipment. We didn’t have the money. That was stressful. You’d have
all these
customers calling you, asking where’s my VCR, where’s my monitor?”
She sold her interest in the AV company in 1995 to partner and
co-founder Martin
Schaffel, she says. At the time, the Tampa business had about $10
million in annual
sales. It now does about $200 million annually.
Hyper-growth companies have trouble getting bank financing even
after they outgrow
their status as a startup.
“They might be growing, but they’re not showing enough profit,” she
says. “When
you’re building infrastructure, pouring all your money back into the
business, you’re
still highly leveraged with a lot of debt.”
The Commercial Finance Association’s most recent report states that
the growth in
asset-based lending can be attributed to the nation’s economic
expansion, as well as
greater acceptance of the factoring product.
In recent years, the industry has become highly competitive as hedge
funds and equity
funds compete with finance companies to offer asset-based loans, she
says. The return
for the lenders is often greater than they’d get elsewhere.
“They’re doing crazy things to get deals,” Homa says.
She predicts a fall out from the shaky deals followed by a
tightening up of
requirements.
“It’s like real the estate bubble popping,” Homa says. “We knew it
was coming, we
didn’t know when.”
Gulf Coast Business Review: www.Review.Net
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