Tough Questions about Factoring
Chesapeake Bank’s Reggie Rossignol interviewed Flexent’s Kevin Wood, for the first episode of the “Flexent Forum.” Reggie spoke with Kevin on some of the tough questions folks ask when learning about factoring and alternative lending. Among the topics covered in the video (see below) are Accounts Receivable Financing and Asset-Based Lending.
Reggie Rossignol here with Chesapeake Bank, and today we are speaking with Kevin Wood, who is president of our Flexent division which offers alternative lending solutions for small businesses.
And today’s topics will be the tough questions that everyone wants to know but doesn't ask. How are you today, Kevin? Welcome!
Doing well… thank you so much.
Well, I'm just gonna jump right in here with our topic today… Why would a company use receivables financing over traditional loans?
Based on my experience, about 85% of small to medium sized businesses fit traditional lending models. But there's about 15% that really… just don't fit what bank’s have to offer generally. And they kind of don't know where to go.
So, if you’re growing fast… if you're working with slow paying customers… If your balance sheet really doesn't fit all the models receivables financing is a great tool to get your business from Point A to Point B.
Isn’t receivables financing only for companies who are having difficulties?
No. That is a traditional misconception about receivables financing. Obviously, companies that are in trouble do use receivables financing. But, a lot of companies that are newer, they are growing fast, they have new contracts, they are doing everything right … they just need more cash available to them than what they qualify for under traditional lending models.
So, again, because it’s becoming more mainstream, I think you'll see, more and more companies using it … and it’s not really just for companies that are in difficulty.
It’s actually for companies that are doing very well.
Why don't more banks offer this kind of financing?
So, there are a couple different reasons why banks don't offer this. It's considered by the bank examiners and regulators to be very risky lending. If it’s done well with good companies, it’s no more risky than anything else.
It does require a high level of expertise of the staff that is running it. And it is somewhat labor intensive. So, a lot of banks will stay away from it, or they’ll try and farm it out or refer it out to another company.
We like to partner with other companies too. That, and other banks. So we’ve been a good fit for that as well.
If it’s so good, why doesn’t everyone use it?
Well, like we talked about earlier, only about 15% of businesses do… need this. And again, there’s … There’s a couple different reasons that people don’t use it.
One, they’re just not aware that it exists. Or, if they do know that it exists, they only know some of the internet-type companies that are expensive, and somewhat lack reputability.
But… you take away the negative connotation … the 15% of the companies that really can benefit from it … It's a great tool, and of those 15%, if they can cost justify it… and that’s always my thing. Can you … whatever you pay, are you going to make more money? If you can, it is a great fit.
That makes a lot of sense. What if I don't want you to contact my customers in the verification process?
So… that’s a great question, because, almost everyone asks that. What happens is, they way we do this type of facility… is we actually do what’s called a ”purchased-sale” versus lending money.
To legally enforce our purchase sale, we have to verify the invoices. But, what you’ll find is so many larger companies these days have portals where we can go look at the information.
You can send e-mails to your customers and copy us… you can provide us with signed documents or signed verification or signed shipping documents… And we actually, rarely, contact your customers.
We never make collection calls — and that’s another misconception. We’re just verifying that the validity of the work has been done. And it’s been done to the same amount of money that you’ve invoiced.