How to Finance Your Small Business

How to Finance Your Small Business

If banks turn down your request for funding, consider a factoring company

Most business owners would agree that finding funding to start and run a company is one of the most difficult tasks an entrepreneur faces. Darnell Lee, CEO of Camp Springs, Maryland-based W&T Travel Services L.L.C. is no exception. Although his company projects revenues of more than $7 million for 2010 and has multiple multimillion-dollar contracts with the government and the private sector, plus a 90% loan guarantee from the Small Business Administration, his full-service ground transportation business has found funding almost impossible to come by.

More than 15 banks have declined funding requests from W&T, which put a strain on the company’s multimillion-dollar contracts. In addition to cutting back costs and reinvesting surplus funds into the business, W&T turned to a factoring company, or a factor, to temporarily help it meet its obligations. “Because I had this large $35 million contract, I needed capital right then and there,” says Lee.

According to Fairbanx, a factoring company is a funding source that purchases invoices from the client. Lee says working with a factoring company helped his business stay afloat and allowed W&T to grow while searching for other means of funding. But before jumping into an agreement with a factor, Lee says business owners should consider the following advice:

Exercise discretion
Don’t be so eager to jump into an agreement with a factoring company that you neglect to research the company. Lee says you should check the company’s background and history, ask if it will negotiate terms, and double-check that there are no penalties for leaving the company without 30 days notice.

Make reasonable sacrifices
Because factoring companies satisfy an immediate business need, they can charge high interest rates, meaning you might have to make sacrifices in other areas of your business. “With the [17% to 18%] interest fees we are paying the factoring company, we could hire two additional employees to work on the contract(s),” says Averta Lopez, president of W&T Travel Services and fiancée to Lee. “But you’ve got to sacrifice the little to gain the much,” says Lee.

Maintain low overhead
Think about your cost savings. If you decide to work with a factoring company, maintaining a low overhead will help balance the effects of high interest rates. It will also allow wiggle room for financing your own invoices, and eventually you should graduate from the factoring company. You might even be less dependent on a loan from the bank. “Use factoring companies to your advantage,” says Lee. “If I didn’t use this option, I wouldn’t be
where I am today.”