When dealt a royal opportunity, Andy Silberman used to fold.
It’s not that the CEO of Suburban Mechanical Inc. lacked the ambition or savvy to cast his reel when the big fish began to bite; instead, he lacked the bait to catch them in the first place.
As an installer of heating and air systems, Suburban could grow only as fast as its oft-delayed and unpredictable cash flow would allow. While Silberman’s billings were on the rise, he couldn’t collect on invoices fast enough to take on that next large project or contract.
“I’m dealing with my 30-day accounts on the payable side, and I’m unfortunately dealing with builders who, through no fault of their own, are not often paying in 30 days and are taking longer,” he says. “It’s not them. It’s the bank draw; it’s their customer, etc.”
Silberman wasn’t willing to point fingers, but he also wasn’t content to leave his company’s fate to chance. Instead, he approached his conventional banker and began to take out traditional loans.
“I applied for a loan and the credit was fine and everything was good,” he says. “We got what we needed. But I also voiced concern about borrowing more than I needed ... to seize an opportunity as it came up from a customer. While I thought that was possible, we’d have interest payments and we’d have a liability that I was hoping there was an alternative to.”
That’s when his banker suggested a process called factoring.
Factoring is a way for a business to speed up its cash flow.
Instead of waiting for a customer to pay an invoice, a business sells its accounts receivable in return for an immediate cash advance based on a percentage of that invoice. The factor then collects on the invoice on behalf of the client and makes an additional payment to the business.
Though the process is a legitimate alternative to traditional lending, it can carry a stigma that is often associated with third-party collection services. Silberman says you can allay any concerns from vendors or customers by simply educating them about the process.
“It’s giving a little more detail to them about the workings of my business,” he says. “It brought about questions from my builder: ‘Is your company healthy? Is there something we need to know about?’ Then I would say, ‘No, absolutely not. This is an option that was presented to me. I had an opportunity to partner with (a factoring company) to take care of some cash flow issues,’ while I elbowed the guy I’m talking to and say, ‘You can relate to that, can’t you?’
“It’s no secret that however healthy, however large or small the company is, cash flow is always a concern. Your profit is one thing, but your cash flow is what you pay the bills with.”
After such conversations, Silberman says his customers left not only reassured but also with an itch to investigate the process for their own companies. At the same time, he was able to sit back and reap the unanticipated benefits of the collection aspect of the service.
“When you enter into a factoring program, you’re not only getting your cash flow boosted, you’re also utilizing the service of a professional on the collection side,” he says. “When you enter into an agreement with a customer you don’t know, it’s very beneficial to have the factoring company on your side because then they actually help with your customers’ credit investigation and the end collection, as well.”
If nothing else, factoring will finally give you the bait to catch those big fish, he says.
“It gives you the opportunity to, without going through the traditional loan process, to seize an opportunity that you might otherwise think you need a loan for,” Silberman says.
HOW TO REACH: Suburban Mechanical Inc., (800) 840-0402
Do you factor into factoring?
When Andy Silberman, CEO of Suburban Mechanical Inc., decided on factoring as an alternative to traditional loans, his banker pointed him in the direction of John Doucette, president of Liquid Capital of Northeast Ohio. He’s been providing the service to Cleveland- and Akron-area businesses for years, and he’s identified the following questions every executive should ask before seeking factoring.
Are you eligible for other financing? “This is intended as sort of a transitional financing solution,” Doucette says. “Obviously, you would have wanted to have looked at other alternatives first. Our typical customers or clients are businesses that don’t qualify for bank financing. That’s usually because they’re too new.
“The company hasn’t been in business for three years or they’ve got credit challenges of the business or of the owners of the business. That’s becoming more an issue in the recent months for obvious reasons.”
Do you need extra capital to grow your business? “Once you say, ‘I need capital to grow my business to cover operating costs, but I’m not getting paid quickly enough by my customers,’ then you can look at factoring as a way of accelerating that cash flow.”
Does your business model fit the service? “The question then gets down to, do you have a business model that fits that? Are you invoicing other businesses? Are you constrained by waiting to get paid? Do you have enough of a margin in those transactions for this to make sense?”
HOW TO REACH: Liquid Capital of Northeast Ohio, (440) 734-3321 or www.lcneo.com