Author: Pat True, RTrue@profitstars.com
For the past twenty years, I have had the privilege of working with financial professionals in all fifty states through training events and seminars, exploring key issues associated with short term working capital financing. During these sessions, three common questions emerge:
- What are the key benefits of asset based lending to the financial institution?
- What are the key benefits of such financing to the business clients?
- What can the financial institution do to encourage business retention for services such as this?
After seeing more than 35,000 businesses use accounts receivable funding, I can offer the following answers to these questions.
Why do financial institutions offer accounts receivable financing?
Financial institutions offer A/R programs to make money for their stockholders and to meet the needs of their surrounding business community. It is no surprise that small business is one of the most profitable sectors for financial institutions. After all, statistics show that the small business sector is the keystone of the U.S. economy. Based on the latest data from the SBA, there are roughly 28 million small businesses in the U.S that account for 55% of all domestic sales. These businesses provide 55% of all jobs and have accounted for 66% of net new jobs since the 1970’s.
By offering an A/R financing program, a financial institution can attract new customers, retain them, and generate revenue – not to mention fostering the growth and stability of a companies they serve. When executed properly, they can do all of these things while preserving and improving asset quality. As each business client grows, that growth leads to a full scope financial relationship through equipment and real estate financing, cash management services and services for employees of the business.
Why do businesses use A/R financing programs?
Commercial customers start using accounts receivable financing programs for a variety of reasons. For some, it represents an opportunity to increase gross sales. For others, it allows them to significantly reduce supplier cost through negotiated discounts. For all, it delivers a peace of mind that comes from having predictable cash flowing into their business.
For most business owners, cash flow is not about how much money they will eventually receive for a sale; it’s about when they will receive the cash needed to run their business. It’s a matter of timing.
There’s no doubt that owning a small business is stressful. One of the top reasons businesses start A/R financing programs is to decrease worry about money coming in from receivables. Just ask a business owner to quantify the amount of time they dedicate to A/R related issues.
Several years ago, a lender and a sales representatives were positioning an A/R financing solution with a prospect in Alabama. At one point during the conversation, the business owner was asked how he would use the money from the initial funds transferred on his receivables. In this case, the business owner had approximately $75,000 in current eligible accounts. After paying off his existing line, the business owner was to net about $25,000 in the initial funding of his accounts. When asked how he would use the money, he mentioned that he intended to go out and buy at least two new pairs of shoes. The business development manager and the accompanying lender laughed and asked – “Why new shoes?” At that point, the business owner invited them to look out the window to the front of the building, where there was a mailbox. The business owner said: “I hustle out to that mailbox at least six or seven times a day – looking for my paycheck. My paycheck is not like yours, which comes every two weeks. Mine is from my customer, and I don’t know when it’s coming. It may be this week; it may be three weeks from now. I have burned out at least two pairs of shoes looking for my paychecks. So that is the first thing I would do.” Needless to say, that business owner did enjoy the benefits of the program – for more than four years. This is not to say that it didn’t have to make business sense as well, but peace of mind was part of that sale.
What are the keys to business retention?
Whether the customer enters an A/R financing relationship after conducting exhaustive analytical research or simply through intuitive reasoning, they continue using this vehicle for two primary reasons:
- The product continues to meet a financial need.
- The service features of A/R financing keep their company running smoothly.
To retain clients, the financial institution must work to confirm that both elements of retention are present. The only way to accomplish this is to stay in front of the customer, to make sure that they are using such a program to their benefit.
In the end, retention is about two things, need and service. If both are present, your client is likely to stay. Most small business owners will seek some method of retrieving cash from their A/R during their life cycle. Whether they are offering discounts to their customers for prompt pay, accepting credit card or electronic payments, financing their accounts, or selling their accounts, they are trying to unlock an asset that is more or less frozen within the balance sheet. Many have decided that, as far as A/R financing goes, the buck starts here, where receivable means next day cash.