In search of money - business capital

Black Enterprise, April, 1992 by Shelly Branch

Twenty years in the Air Force didn't prepare Stephen McKinney for the crash landing he'd face in 1991. It was April of last year when the president of SIMTEC Inc. was expecting to renew his $900,000 line of credit. A Manassas, Va.-based maker of flight simulators and other military training systems, SIMTEC had grown from a $200,000 company in 1984 to a well-oiled, $5 million machine. So a few signatures, thought McKinney, was all it would take to re-up his hard-earned line of credit.

But when his banker finally called, it wasn't to firm up the deal: To his dismay, McKinney learned that the bank went under, thus shutting his only source of credit. "From that day, we were unable to buy parts and had to turn down some lucrative opportunities," recalls McKinney, who watched five months slip by without a cash infusion. "We worked hard to conserve our resources to complete the jobs in progress."

Shrewd management, loyal employees and a nontraditional lender helped keep SIMTEC afloat. Still, says McKinney, it cost the company $300,000 to endure the bank going out of business. "Next time," he vows, "we'll spend as much time checking out the bank as they spend investigating us."

Black Business And The Credit Crunch

It's no secret that small business--specially black-owned companies--are starved for cash. Industry observers, however, doubt that access to commercial bank credit--down last year by as much as 43% in some states--will improve anytime soon. And after two years of record bank failures, the Federal Deposit Insurance Corp. (FDIC) is again bracing for more than 200 fold-ups in 1992.

For black-owned businesses in particular, a severed bank relationship spells trouble. A report issued last year by the U.S. Commission on Minority Business Development shows that minority-owned firms typically rely on a single institution and just one type of loan for credit.

"Lack of access to capital is one of the factors that has historically led to the high failure rate of black businesses," says David Swinton, dean of the School of Business at Jackson (Miss.) State University and a member of the BLACK ENTERPRISE Board of Economists. "Any tightening of credit signals a low point for our business community."

However, all is not gloom and doom for business owners needing cash. Even in this troubled capital market, experts agree that capital relief does exist. The current trend has small business owners hunting for as many alternate sources of financing as possible. "It's a matter of Knowing where and how to look," says Bruce Blechman, a San Francisco-based small business finance consultant and coauthor of Guerrilla Financing (Houghton Mifflin Co., New York; $19.95). "And since most businesses can't rely on any single source of cash, it's important to investigate every option."

Perhaps you're not angling for funds today, but what are your balance sheets telling you about the state of your business a year from now? The increased competition for funds demands that you take a long-range approach. Here's brief guide.

Factoring/Receivables Financing

When your banker balks at your next request for a business loan, chances are he won't send you away empty-handed. He'll probably slip you the name of a commercial finance company.

Known interchangeably as "factors" or "receivables lenders," these companies pay cash upfront for a company's accounts receivables. So, who are their customers? Companies strapped for funds who simply can't wait 30 days or more for accounts to settle up. Because of their exorbitant fees, factors use to suffer from a serious image problem. In fact, the method they used was often perceived as legalized loan sharking in many entrepreneurial circles. Not so anymore.

"Unregulated sources such as factors are among the most aggressive players in financing today," says A. David Silver, president of ADS Cos. in Santa Fe, N.M., and author of Up Front Financing: The Entrepreneur's Guide.

Indeed, companies such as Allstate Financial Corp. in Arlington, Va., and Commerce Funding in Tysons Corner, Va., say they financed as much as 45% more deals in 1991 than in the previous year.

Here's how factoring works: Say you have receivables worth $100,000. After approving your customer through credit checks, a factor will hand over about 80% ($80,000 in this case) of their face value. Your customers are then notified to pay the factor directly. Once these accounts settle on time, the factor will pay you the difference ($20,000), minus his fee or "discount." Your final check, then, might be for about $15,000, since factors pocket anywhere from 5% and up for their services. That rate shoots up for every day your customers are late paying. If they're seriously delinquent, you may be obligated to buy back the receivables.

Because a factor cares more about your customers' ability to pay up than your own, they are a viable source for companies with spotty credit histories. The hitch? Factors usually will require you to hand over a percentage of your receivables over a yearlong period. That gives them plenty of time to tack up the big fees they crave: Factoring $100,000 worth of receivables each month, for example, could cost $60,000--or triple the amount of interest you'd likely pay for an equal line of credit.