Looking Beyond The Bank Line of Credit

Looking Beyond The Bank Line of Credit

Looking Beyond The Bank Line of Credit:

The Truth About Asset Based Lending For Growing Staffing Companies

 
Economists have declared the recession over.
 
Tell that to small business owners throughout the country still struggling to receive the credit they need to grow their businesses.
 
A recent article in Crain’s New York Business entitled “Why can’t these companies get a bank loan?” revealed that access to capital is the number one business issue for half of the private companies nationwide. They found that banks are still being extremely cautious with their credit for small businesses, approving only 20 to 30 percent of small business credit applications.
 
For example, at Wells Fargo, loan decisions are generally based on cash flow plus collateral. Most small businesses’ cash flow has declined, and real estate values have dropped significantly.
 

Many small businesses are turning to credit cards to make up the difference. However, credit cards are becoming a less reliable and costlier source of start up and operating capital. Small businesses were not covered in the recent financial reform bill that tightened restrictions on the fees and interest credit card companies could charge consumers.
 
The Crain’s article indicated that among companies with fewer than 500 employees, 34 percent carried more than a quarter of the company’s overall debt load on a credit card, oftentimes paying interest in excess of 10 percent.
 
As a staffing company owner, the silver lining in all of this is that you have options when it comes to credit in the form of asset based lending.
 
For the longest time, there was a stigma attached to asset based lending and those companies that used it. It was for companies with bad credit, strapped for cash, and unable to get funding from traditional sources such as banks.
 
Not anymore.
 
More and more staffing companies are using asset based lending not because they have to, but because it offers the flexibility and competitive pricing they’re looking for to help their businesses grow. Plus, when you pick the right asset based lender, you may also acquire expert industry resources for your business as well.
 

Flexibility

Flexibility is the biggest difference between asset based lending and traditional bank lines of credit.
 
Staffing is usually one of the first industries to feel changes in the economy. While banks are still operating under their current tight credit restrictions of the recession, staffing companies are looking to grow. They need financial partners that can support and enable — not inhibit — that growth.
 
Asset based lending is a revolving line of credit that fluctuates based on your accounts receivable balance. It easily allows for larger credit limits in times when your A/R balance necessitates increases. An asset based business line of credit is usually designed for the same purpose as a normal business line of credit — to allow the company to bridge itself between the timing of cash flow of payments it receives and expenses.
 
Asset based lenders are NOT factors. Factors actually purchase your accounts receivables. This is not a loan, but a purchase of the financial asset. With factoring, the factor will try to alleviate its risk by controlling with whom the company does business to make sure those customers can actually pay. They’ll also take an active, intrusive role in collections from customers. A factor will typically fund based on each customer’s risk, not on the total portfolio risk.
 
With asset based lending, you still own your accounts receivables, and those assets are used as collateral against the funds you borrow.
 
In staffing, one big contract can mean an immediate need for more financing, which traditional bank lines of credit are not set up to accommodate. To increase your bank line of credit, you may need to wait as many as 30-60 days for a review, as well as pay additional fees to have your line increased.
 
Asset based lenders who specialize in the staffing industry understand that staffing company needs change quickly. They can often increase your credit line within a few days, if not automatically. This can mean the difference between landing that big new contract, and having to let the opportunity pass you by.
 

Overall Cost

Another common misconception about asset based lending is that rates are higher than traditional bank lines of credit. Competition within the industry has brought asset based lending rates down. However, another important aspect to consider with any financial decision is any additional fees associated with your lending contract.
 
With both asset based lenders and traditional banks, you have your basic cost of funding: as with any credit contract, the better your credit, the better rates for which you are eligible. Your rates can be calculated in many ways based on how quickly you pay. Be realistic when calculating how long you need to repay your line of credit and then determine your true cost from there.
 
But that isn’t where your expenses end.
 
Bank lines of credit often include a host of fees and expenses that can significantly increase your overall cost. These expenses need to be considered when comparing financing options, and can include line usage fees, loan fees, line of credit increase fees, lock box fees, and initial application costs.
 
Banks may also impose strict guidelines on your staffing business, including business covenants that restrict how much executives can earn in a year, ROI requirements, capital expenditures, and limits on business growth.
 
A word of caution here: some asset based lenders offer what appear to be extremely low rates. However, these contracts may include incremental fees that can greatly inflate your true costs. Additional costs that can quickly add up include items such as clearance delays, fund transfer fees, overnight fees, credit reporting fees, UCC fees, document fees and administrative fees.
 
With ANY financial contract, make sure you have a true, full picture of your costs before you sign on the dotted line to avoid any unpleasant, unexpected hidden expenses.
 

Expert Resources

Unfortunately, to many banks you’re just another loan on the books. A good partner often has expert resources to help your business make sound, strategic financial decisions.
 
When you partner with a financial lender who specializes in the staffing industry, they often have resources beyond what traditional bank lenders offer. Oftentimes they’ll offer professional collections assistance, access to payroll processing services, online, real-time aging reports, and credit summaries to help you determine the credit-worthiness of new customers. They can also help you understand any tax implications of your business decisions such as entering new markets. The good asset based lenders take a vested interest in the success of your business and will look out for your best interests.
 
That’s when it becomes more than just a vendor relationship, but a true partnership that allows you to focus on your core strength: sales.
 
Asset based lending isn’t a shady, expensive, lending of last resort option for companies with bad credit. More and more staffing company owners are realizing that their needs don’t fit the traditional bank line of credit mold. They are turning to asset based lending — not because they have to — but because it makes good business sense and fits their needs. Asset based lending is a solid, flexible financial option for staffing companies eager to grow their business.
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