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FINANCE: Finance Method Provides Fast Cash For Growth

Article-FINANCE: Finance Method Provides Fast Cash For Growth

As a small waste business grows, so too does its need for readily available cash.

For example, a small hauler was awarded a waste collection contract for a city's facilities and schools. However, when the hauler applied for capital to fund the additional equipment and payroll costs, local banks and financing sources re-fused. Why?

As a relatively new company, the hauler had no collateral or hard assets, its profit and loss statements showed little or no profit and cash flow was sporadic. However, to its credit, the company had solid commercial accounts but payment for collection service took 30 to 60 days.

After pursuing the more traditional funding routes, the hauler choose an alternative method known as "factoring." The company qualified based on its credit-worthy commercial accounts.

A "factor" is a financing source or private investor who pays immediate cash for a company's invoices and accounts receivable. Fact-oring involves selling these items to a factor at a discounted rate.

The process is similar to using a charge card. For example, when a retailer accepts a credit card as payment, it receives 96 percent or 97 percent of the total. This provides the retailer with immediate capital; the discount typically is justified by the retailer's need for a continuous cash flow.

By submitting to a factor one to two pages of preliminary information, a waste company can receive a proposal within 24 hours. Ac-cepting the factor's terms typically involves a closing package stating the discount rate, due diligence fees ranging from $100 to $300 and submitting the company's new invoices (in some cases, older invoices are purchased). The process takes three to 10 days.

After receiving the invoices, the factor verifies with the waste firm's customers that the invoiced product or service was received. Using a check or wire transfer, the factor then sends 70 percent to 80 percent of the invoice amount to the company. At the same time, the in-voices are sent to the customers, marked payable to the factor.

As payments are received, the factor will subtract its discount and send the hauler the remainder. While the factor may keep 4 percent to 5 percent, the hauler has immediate cash from its invoices - instead of waiting 30 to 60 days for the extra few percent (see chart).

Factor financing may be a one-time transaction or an ongoing process. Using this method, waste companies have:

* no additional debt, loan payments or equity loss;

* more time for a company to market and grow;

* possible discounts for volume purchasing or early payment;

* outsourcing of invoice processing, credit screening and monitoring; and

* greater leverage using customers' credit.

Aside from purchasing invoices, factors also may buy accounts re-ceivable and purchase orders.

Use of these methods is growing, with more than $85 billion factored in 1995 compared to only $34 billion in 1984. Certified Factoring Specialists (CFS) are available for advice on funding types, services provided, invoice size and industries factored.

For more information, contact: Joseph LaPaglia, Cash Flow & Funding of Virginia (CFFV), P.O. Box 36189, Richmond, Va. 23235. Phone and Fax: (800) 875-3290.