Factoring—Meet Two Real-World Small Business Examples

Factoring companies provide financing through the purchase of a business’s accounts receivable. Today I want to tell two stories of how businesses I have worked with have used factoring.

Years ago, factoring had a reputation for being used only by companies that were hanging on by a shoestring, but in the years since, it has become an accepted mainstream way of financing rapid growth, and big opportunities for small and mid-sized companies.

According to the Commercial Finance Association (CFA), a large trade association of factors and asset based lenders, total volume of factoring transactions in the United States for 2006 was nearly $128 billion, up 12.5% from 2005. The CFA estimates that there are over 1,000 factoring organizations in the U.S. including banks with factoring programs and non-bank factors.

Here are two factoring success stories. Names have been changed to protect the privacy of the companies involved.

Factoring: small business success story #1

Back in 1997, James Stevens was a successful sales manager for a large roofing supply company in Texas. At age 51, he had topped out in his career and was earning a good salary with benefits. Then he had a heart attack. His doctor told him he needed to reduce some of the stress in his life.

James had always been something of an inventor, and while he was recovering in the hospital, he could see part of the hospital’s roof outside his window. One day while in the hospital, he watched some workers install a cellular antenna on the roof of the hospital building. He noticed that they drilled holes into the roof to attach the equipment, a big “no-no” in his mind because the roof warranty would be voided.

Suddenly he thought of a better way to mount equipment and antennas on the roofs of commercial buildings so it wouldn’t be necessary to penetrate the roof and thus maintain the roof’s warranty.

James got out of the hospital, and while completing his recovery at home, designed several different kind of equipment supports that could be used for cellular towers and other equipment mounted on roofs of buildings without roof penetration.

After obtaining several patents he decided it was time to quit his day job and start selling his support systems. James went to a local bank that happened to have a factoring program. The bank loaned him a small amount of money to get his business started and set him up on their factoring program. James’ business was off to the races with little of his personal savings at risk.

He had his supports manufactured by a contract manufacturer and began selling them to AT&T, Sprint, and other cellular companies that were doing massive nationwide build-outs of their cell systems. Many of their antennas were placed on roof tops. Not only were his mount designs “roof friendly” but they also allowed a larger amount of weight to be placed on the roof because of weight distribution characteristics.

Factoring allowed James’ company to carry the large amount of accounts receivable for 45 to 60 days that it took for the large cell phone companies to pay him.

His company was profitable within several quarters of starting but continued to grow very rapidly. As the cellular tower build-out boom slowed, Jim invented other types of supports that could be used for other equipment and diversified his industry and customer base. His company is now 11 years old and he has used factoring the entire time as his primary financing method. He considers it has been cheap money when compared to what he would have given up in ownership of his company to raise equity.

Today, Jim’s company has revenues of over $20 million and EBITA of nearly 17%. Jim would not trade in his factoring relationship for anything, even though he could qualify for more traditional types of credit.

More articles from AllBusiness.com:

• The Difference Between Factoring and Accounts Receivable Financing
• How the Transportation Industry Uses Invoice Factoring
• Steps to Take When Your Credit Line Is Pulled
• How to Evaluate and Choose the Right Invoice Factoring Company for Your Small Business

Factoring: small business success story #2

The second example is a precision machine shop that is based in a small Gulf Coast town between the panhandle of Florida and New Orleans. The company, owned by Bill Gowan and his wife have been in business for over 20 years. Their business repairs and manufactures custom parts for small- and medium-sized oceangoing vessels. They are one of the only shops on the coast that can manufacture a new propeller shaft for a 110-foot oil rig crew boat.

They have had their near misses with hurricanes in the 20 years in business, but were hit two years out of three by small but damaging storms in about 2001 and 2003. After each of those hurricanes, the company used their retained earnings to rebuild their business with the aid of a disaster loan from the SBA.

Before the two hurricanes, this company had been extremely profitable and had a large backlog of work. After the second hurricane, the company had spent nearly all of its surplus cash taking care of workers and rebuilding its operation after the two storms.

While the SBA loan helped with the long term assets that had to be rebuilt or replaced, the company exhausted the cash it normally would have used to finance its accounts receivable. The company turned to factoring since the work it performed was for the Lockheed Martin and large offshore oil field supply companies.

Having factoring available allowed the company to start taking on jobs once it was up and running and carrying the accounts receivable for the 60 days it took on average to collect. This company established operating profits fairly quickly and built its cash reserves back over the next several years.

By 2006, the company had substantially increased its cash reserves and was able to reduce its need to sell invoices to a factoring company. Today, this business factors once or twice a year when it needs extra cash for a very large project or because of seasonal slowdown of A/R collection. The factoring credit facility is now primarily a safety net, instead of a primary method for financing working capital.

Factoring can help a small business grow

Both of these two example companies were able to grow profitably and rapidly as a result of factoring and the instant access to cash. Neither one of them was a “wounded duck” company as a result of poor management or operations. Both of them found very strategic ways to use factoring to grow their business.

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