Funding's Little Secret with Big Consequences!

By: Ken Walsleben
Date: 11/1/2006

All staffing and recruiting firms have a built-in cash flow problem. Worse yet, the bigger and faster you grow, the more acute it becomes! This is because the vast bulk of your recurring expenses (your labor costs) must be paid each week. Typically, employee payday follows the respective work week by just a few critical days, while you won't receive payment from your clients for weeks on end.

So, who do you turn to for financial assistance? It's likely a bank, a factor, or an equity partner. As a financier myself, I can confirm that the first question typically asked of me is: "So, what's your rate?" Let me tell you my little secret...This is exactly the wrong question to ask me up front! Sure, rate is important, but it's decidedly not your biggest concern. I humbly suggest that your first question should be: "So, how much money can you help me make?"

Let's be honest. Bank money is the cheapest money on the face of the earth; then, typically in order of cost, comes Asset Based Lenders (Factors), and finally, equity partners (Venture Capitalists). After years in the business, let me assure you that any of us can make the cost of our money appear very cheap. So, how can you make an informed choice?

Ask me instead how I can help you make more money than any of the other alternatives available to you!!! After all, isn't that the bottom line? Everything else pales by comparison.

Let's examine three brief unassailable truths. In no particular order, they are:

• You want to protect your gross profit margins.

• The best way to make more money is to grow your business.

• You want a flexible funding source, who understands your industry, and when the going gets tough (and it may), you want them to dig in with you, rather than hide behind the legalese of their funding docs.

Your job, as a consumer of funding services, is to remember these truths and to become as informed as possible of your many options. Do not, however, make the mistake of thinking that rate is your primary determinant amongst options. Let me explain...

As already mentioned, bank capital is always "cheapest." However, bank money may be the exact wrong decision for you. Bank loans are normally secured with all of your corporate assets (and oftentimes your personal ones too). This realistically eliminates other forms of funding available to you. Bank money requires your personal guaranty, and relationships will be limited in size, by a line- or loan-cap. That line-cap can be a real killer. Once you get to that limit, you no longer have a funder, you have a new partner! Worse yet, your ability to grow is no longer in your hands. It's your lender's choice. Clearly this is a situation to be avoided, but if your only initial concern was "rate" then, you lost. In this case, you'd no doubt agree that the "costs" - of deferring new business opportunities, tying up all of your collateral, producing ever more financial reports, and searching for a new lender (if possible) - more than offset the initial appearance of cheap money. So, how many of those truthful bullet points listed above did you violate in your search for cheap money?

As a former banker, let me assure you that I am not trying to pick on banks per se. Rather, I want to point out that your first question about rates is normally badly timed. In certain cases, a bank loan might be the proper choice, but inordinate focus on "rate" is often done at your peril. Whenever investigating any financial alternative, "rate" may be in the top-ten of important concerns, but number one? No way! Instead, consider these questions first:

• How can your firm make me more money?

• Do you require my personal guaranty?

• What collateral do you require?

• How long have you served our industry?

• Do you have line-caps or limitations?

• What financial reporting obligations do you require?

• How can I limit my use of your funding?

• Who specifically will handle my relationship?

• Aside from rate, what other costs must I endure?

Only after fully understanding issues like the above, can the "Rate Question" reasonably make any sense.

Should you wish to determine whether factoring can make sense for your business, I invite you to visit our company's website. On our website, we provide a free factoring calculator that helps determine the bottom-line cash benefits of factoring. Further, if you request, we will gladly forward you, at no obligation, a free copy of Hamilton's Guide to Factoring. This publication is an indispensable tool to help any prospective consumer of factoring services better understand their choices. Simply visit www.hamiltongroup.net to get started.

Ken Walsleben is the Principal and Co-Owner of The Hamilton Group. He can be contacted at 800.351.3066, or by email at ken@hamiltongroup.net.