www.emkf.org, as well as your local small business development center.
ACCOUNTS RECEIVABLE FINANCING
“About 75% of our customers come to us from a bank referral,” says Jerry Pavlas, CEO and chairman of Presidential Financial Corp. which is located in Tucker, Georgia. “They don’t qualify for bank loans, perhaps because they lack collateral or have a short operating history.”
Pavlas says his firm will go over a would-be borrower’s books and records to see if there are any red flags, such as an IRS lien. “If there are no problems, we will lend money against all the accounts receivable or against selected receivables. Generally, we lend around 80%.” That is, a company using $50,000 worth of receivables as collateral would get $40,000 in cash right away.
“Our P.O. Box number goes on those receivables, so the borrower’s customers send their payments to us. In addition, the borrowers continue to generate new receivables while receivables that pass the 90-day mark are usually considered ineligible. We net out all of those events and tell borrowers how much credit they have available each day.”
Pavlas says that borrowers use his company’s services for an average of 30 months. “Most of them have built up their finances and their operations so they qualify for traditional bank financing by then.” However, not all users of accounts receivable financing are in for the short-term.
“We’ve been working with Presidential Financial since 1997 and we continue to do so,” says George Lloyd, 48, who runs G.D.L. International, a telecommunications company in College Park, Georgia, that does construction and installation, mainly for cable TV. “Even though we’ve grown to the point where we can get bank loans for equipment purchases, we still borrow against our accounts receivable for cash flow.”
According to Lloyd, this relationship began when he was a subcontractor offered a general contract for the first time. “I received $50,000 in cash that I needed to proceed with the contract,” he says. “Such loans have helped my company grow to become a multistate operation, with 20 employees.” G.D.L. International works with about 60 subcontractors now, so its business has become more complex.
“To our customers, it looks like the payments are going to us,” says Lloyd, “yet we’re relieved of having to handle collections. Not only do we get the fast turnaround and the liquidity we need for payrolls, insurance, and so on, we also get accounting support. A quarterly audit, for example, makes sure that we’ve paid our payroll taxes. Altogether, considering the services we receive, we have found that borrowing against our accounts receivable costs less than borrowing from a bank in the short-term.”
Technically, there is a difference between accounts receivable financing, where you get a loan that’s secured by paper you’re holding, and “factoring,” in which you sell your receivables at a discount. Either way, you get faster cash flow from work your company already has performed. And in both cases, you’ll pay a price. Such expenses may be worth incurring if you have few other financing options.
“In a pinch, you