Factoring Case Study

A New England company had successfully exhibited at a large trade show and was overwhelmed with orders they could not fill. After spending three months turning away customers while they tried unsuccessfully to get a credit line, they were referred to Financial Manager’s Resources by their accountant.
Despite these repeated rejections by banks, this company refused to finance its receivables.  This would have immediately stopped their having to reject orders, create the cash flow they needed and thereby stop losing profits. This company had been in business over two years and was just approaching a break-even point, so financing receivables was basically its only alternative. What was really sad was that after seven additional months of failed financing attempts, the company finally accepted the offer of an investor who snapped up a 30% ownership position in the company.

How much did their decision cost them?

During the ten-month period that the company searched for money, it disappointed and even lost many customers as they turned away $800,000 in sales. If the company had worked with Financial Manager’s Resources to manage the cash flow while improving its chances with a bank, it wouldn’t have needed the loan and wouldn’t have given away one-third of the company!
When Ernie asked the CFO how many hours he had put into applying for loans, the CEO had no idea. If you presume that the CFO spent at least 4 hours per week over forty weeks @ $75 per hour, this company spent over $12,000 just applying for loans. Had this company financed its receivables, it would have had close to $380,000 in retained earnings and wouldn’t have lost a string of customers. In fact, the company wouldn’t have needed a loan and wouldn’t have had to give away 30% of its business!
The real cost? On $10,000,000 in annual sales that equity position pays that investor $1,200,000 annually – not a bad return … for the investor!