Financing a Small Business:
Bibby Financial Services Evaluates Financing Options for Changing Business Needs

CHICAGO--(BUSINESS WIRE)--Small business owners seeking financing are finding limited options in today’s difficult economic environment. Bank lending remains very tight and credit cards can carry high interest rates and burdensome finance charges when balances aren’t paid in full.

“These are complex decisions for small businesses, both new and mature companies,” explains Bibby Financial Services CEO Stewart Chesters. “Business owners need to ask hard questions and look critically at their potential to determine how best to arrange for financing. Most importantly, small business owners shouldn’t be afraid to adjust their financing plans to meet the changing needs of their business,” Chesters adds.

The following analysis offers three financing options for a small business -- credit cards, bank line of credit, and account receivables financing or factoring -- and scenarios that show when each choice is optimal.

The Convenience of Credit Cards

ABC is a new company that is manufacturing widgets. It needs a cash influx of $25,000 to get started. The business owner likes the convenience of the credit card. And because customers pay when the goods are delivered, cash flow is predictable and credit card balances will be paid in full each month. Time rolls by and increased demand for its widgets requires ABC to have a rolling cash influx of $25,000 each month to maintain production. Customers pay promptly, no balances are carried and the owner’s cash position is solid. Credit card financing remains a smart choice for ABC.

THE AFFORDABILITY OF A BANK LOAN

ABC is growing. Now it needs $25,000 each month to cover payroll, bills and some debt. But customers are stretching payments to 60 days, which would lead to expensive credit card balances. ABC qualifies for a bank line of credit for $50,000 with the plan to pay it back after two months. At a minimum annual interest rate of 7 percent, ABC would pay $580 to borrow $50,000 from the bank for two months, or at a higher rate of 11 percent, it would cost about $900 over the two months. With predictable customer payment, ABC is able to pay off the entire loan at the end of two months; the company likes this option.

FLEXIBILITY IN FACTORING

ABC has hit a rough patch; customers are taking longer to pay. Cash flow is threatened. It needs a rolling cash influx of $25,000 each month to cover payroll and bills. The bank is tightening up on credit, and now a three-month $75,000 line of credit at an 11 percent interest rate would cost $2,002.50 for three months. Factoring is more flexible and affordable and addresses the cash gap directly. With $94,000 in outstanding receivables, ABC is advanced $75,000 (80% advanced against the receivables) and charged 1 to 2 percent of the total amount of receivables, which is between $750.00 and $1,500. Once the receivables are collected, the remainder—about $19,000, less fees mentioned above -- is sent to ABC.

The economy recovers and ABC is projecting exponential growth in widgets. Cash flow fluctuates, but the company doesn’t want to lose this opportunity for growth. Factoring is the most flexible financing option available to meet ABC’s current situation.

Of course, each option presents pros and cons:

• Small business credit cards are easy to get and convenient and used by nearly half of small business owners according to the National Small Business Association (NSBA). But 71 percent of small business owners carry balances leading to high finance charges and sometimes an impaired credit score.
• Bank lines are traditionally larger in size and borrowing rates are fixed. But, qualifying can be difficult and generally collateral is required to guarantee the loan. Banks can be notoriously slow in responding to changes in terms and requests for increased credit lines, and quick to reduce lines if there are bumps in the business’s performance.
• Factoring is based on the value of the receivables and not the customers’ credit score, so it can be an especially important form of financing for new companies or growing ones that need cash flow. Factors can also take responsibility for collections and other nuisance administrative chores. Pricing can get expensive if the small business owner has customers that fail to pay their bills.

“Cash flow can be the thorn in the side of many small businesses as they seek payment on outstanding receivables,” Chesters explains. “The critical piece is for small business owners to be vigilant in selecting the right financing choice at every stage of their business cycle. Businesses will help themselves immeasurably if they remember that the financing option they pick when they start their business may not be the right choice as they grow.”

Bibby Financial Services is a worldwide market leading specialist of business cash flow solutions to small and medium-sized enterprises. Its product portfolio includes receivable finance, factoring, export finance, purchase order finance and specialist solutions for staffing and trucking sectors. Its North American offices are located in Atlanta, Chicago, Dallas, Houston, Los Angeles, Nashville, Phoenix, Sacramento, Toronto, and West Palm Beach, as well as 27 other countries around the world. Bibby Financial Services is a subsidiary of The Bibby Line Group, a 200 year-old privately held company based in the United Kingdom, that provides business-to business services to a variety of industries including shipping, distribution, offshore oil field services, financial services, retail and employment law.

For more information, visit: www.bibbyusa.com www.bibbycanada.ca www.bibbyfinancialservices.com

For more information on The Bibby Line Group of Companies, visit: www.bibbygroup.co.uk