How does a company cross this borrowing bridge?
“If you’re trying to move from a factor relationship to traditional loan, bring your potential banker into the conversation early and share your plan with him or her,” says Craig Johnson, president and CEO of Franklin Bank, Southfield, Mich.
Here, Johnson shares strategies to get business owners on track to securing a line of credit.
What considerations are important when you consider extending a line of credit to a high-growth company that currently works with a factor?
Managers of high-growth companies need to recognize the need for cash in the business and retain earnings in the company. They need to temper what they take out of the company to make sure they provide adequately for the future. This could mean taking a look at salaries, and perhaps re-structuring end-of-year bonuses. They should sit down with their accountant and banker and set targets for how much money they expect to retain in the business so there aren’t any surprises at the end of the year.
Essentially, a banker will want to see that the company’s leverage and working capital position show continual improvement, and that the company is retaining monies the business. That way, the bank will know that even if the company is in high-growth mode, its managers are diligent about managing financial affairs.
How can companies who experienced financial trouble ease out of a factor relationship and into one with a bank?
For a company that is using a factor because of financial difficulties, we want to see that the company has made appropriate changes, trends have reversed, and a period of time has elapsed so any success is not a one-quarter aberration. We will want to review their detailed plan: What were their cost-cutting measures? How did they improve margins? Did they get new sales, and if so, who are their new customers? How do they price products? Did they move employees into new roles? Was there an event that caused them to have financial difficulty, and what have they done to change it?
We also look at the industry, and we will want to assure the changes a company makes are sustainable. The situation can vary.
This all seems quite subjective.
There are certainly some objective factors banks consider, such as financial results. And the company will likely need an accountant to provide the information for third-party verification. But many times, a decision to grant a line of credit to a company that is currently in relationship with a factor comes down to how much we believe the plan.
What should business owners include in this plan?
Document everything. If you are off-track, how will you get back on? If you increased sales, how did you do this? If you are short on payroll, why? The more information you record, the better. That way, a banker can determine if you are a safe risk. And any business that has a detailed plan is already making a wise financial decision.
Banks will want to see a rolling one-year and three-year plan that identifies 90-day increments. You should share this with your factor, your accountant, and any other financial advisers, so we can see the progress you are making toward reaching the goal of trying to get traditional bank financing.
Can banks compromise and offer products that ‘meet halfway’?
We provide lock-box arrangements whereby we act as a ‘pseudo factor.’ All receivables come into a lock box that the bank controls. We also utilize advance formulas, where a company may provide us with daily, weekly or monthly certification of receivables. We lend a certain percentage of those receivables. For example, we may lend 70 percent of accounts receivables less than 90 days, and we will get a certification of what that amount is.
Generally, these arrangements are set up for companies who need a cash management tool, or in situations where the bank needs to control funds.
Small businesses may consider the SBAExpress program.
When is it a good time to start talking to a banker about moving from a factoring relationship to a traditional bank loan?
You can share your plan with a banker before you would qualify for a loan. Let your banker know you are interested in developing a relationship and ask for their counsel. Most people I know in the industry are more than willing to help, especially if they see a future opportunity.
CRAIG JOHNSON is president and CEO of Franklin Bank. Reach him at (248) 386-9860 or firstname.lastname@example.org.