Factoring Cash Flow Assets: A Strategy to Augment Working Capital for Micro, Small & Medium Size Hospitality Industry Businesses

Everyday new tactics and strategies in business development for micro, small, medium and large companies evolve and change; and some even get real world validation by being put into practice. As they change and evolve, we become flooded by numerous abbreviations that come to embody the meaning and concept for purposes of quick communication in daily business administration and operations. By example, it’s been less than ten years and terminology related to computer software and hardware technology for your business has evolved from MIS (Management Information Systems) or IT/IS in the mid 1990’s to just IT (Information Technology) and ERP (Enterprise Resource Planning) today. Today, it’s no different regarding financial resources and your business, with new concepts being adopted by banks and financial services companies linked to capital availability and new financial products or services for your business. Is “cash flow factoring” or CFF the next new acronym on the horizon as a form of asset based financial solutions? Cash flow factoring has been around for almost a decade, but is not widely known as a hidden resource to augment working capital. It’s important to understand what is evolving outside of bank loans and how you can position your company to develop a portfolio of available financial resources hidden in your ‘current, fixed and other assets’ as categorized on your balance sheet.

For this discussion it will be helpful to understand and define new and ever evolving terminology related to the acronym SMB (Small Medium sized Business) or SME (Small Medium sized Enterprise/Entity). Whether you are an independent, chain, group, subsidiary, holding company or global corporation these emerging guidelines can clarify how financial services and the hospitality industry will fit together in the future. Additionally, augmenting working capital through factoring as related to the assets on your corporate balance sheet can help determine business growth strategy by filling gaps where traditional lending falls short.

The term SMB or Small and Medium size Business is the term increasingly being used in the United States to describe a any industries business based upon three factors: the number of employees, gross revenue/sales and the balance sheet tangible and intangible assets. A SME is the European term for Small and Medium size (or Entity) Enterprise with values based on the Euro and “turnover”. The European Commission and Department for Trade and Industry, along with business leaders, have been trying to form a consensus on the exact business size definition since about 2003. As usual, not everyone agrees, so here are the broad parameters under continued consideration here from the informal American business perspective. Keep in mind that the SMB (American) standard is in an informal developmental stage, while the SME (European) guidelines are in final stages of consideration for standardization as of 1 January 2005. Below are the guidelines for the American SMB categories:

Now you can see where your company might fall, but keep in mind these are not written in stone, especially in the United States. They are important though, because financial institutions are developing, marketing and promoting new financing programs to make access to capital easier and have more capital available. The majority of businesses that fall into SMB categories are the drivers of the domestic United States economy and the economies of many countries get the “outward ripple” in tangible financial benefit. So, now this leads one to look at your business balance sheet for your SMB and leads us into discussion on financial strategies from each independent location and its external linkage to the local economy. The tactical resources you have are the ‘fixed, other and current assets’ on your balance sheet and the cash flow statement (with a positive net) for each property. You’ll want to continue to read, research and pay attention to what new “hybrid” financial products and services appear in the future for your consideration with your business.

The foundation for creative finance for any business project is all in the balance sheet and cash flow statement. For our purposes the asset side of the balance sheet is divided into three asset categories just mentioned: current assets, fixed assets and other assets. Unlike large corporations that use consolidated financial statements, you should, periodically, use a non-consolidated (rolled up line items) statement for detailed analysis of revenue streams. Occasional “micro management” at this detailed level provides an insightful and creative perspective to know exactly what product and service categories (or types) are strong and weak and which ones correlate together to reflect optimal customer purchase patterns. The method of payment by customers for products and services such as cash, check, wire transfer, e-commerce and debit/credit card is important for tracking cash (current) assets and what percentage reflects customer preferences or greatest loss (bad check, charge backs etc.) and need for better controls. Traditionally, loans are provided on the businesses portfolio of fixed assets (land, buildings, equipment) and provided by banks on a very conservative LTV (Loan to Value) margin. Riskier and higher percentage LTV’s have higher interest rates, may require a (personal) bank guarantee, and are provided in financial pools where lending institutions share the risk and diversify the loan portfolio to manage risk or reduce the percentage of bad loans. More large banks and prime lending institutions are now combining “other assets” (intellectual property, trade marks, licenses, service marks, branding, patents, know-how, goodwill) with fixed assets to provide broader qualifying and larger amounts of capital specifically to large corporations. If you are an emerging micro or small hotel group and have established your trademark (branding), this will be good news in terms of having capital for future acquisitions. In the last decade many large banks have come to accept that “other assets” do have value especially if the Federal Government “accepts” the depreciation and amortization schemes in tax filings today; and that Intellectual Property line items are no longer reflected as a $1.

Now, what about the current assets at the top of the balance sheet? Smaller community banks and financial services companies are now providing products to SMB’s that tap into the current assets through the business operating account by utilizing automated debiting technology to “secure” their risk when proving a loan against cash flow or current assets. The target business segment is the micro and small business (independent, B&B and small chain) owner in the banks local community. An increasingly popular tactic is providing factoring against future bankcard transactions as a source of working capital to augment the loans secured with fixed assets, which is the niche market of AMI. The cash flow that accumulates in the operating bank account is typically calculate daily for B/E (break even) metric or even a hourly basis (micro financial controls) and is available today through IT and Enterprise solutions or accounting software packages. Revenue streams from check, cash, bankcard, e-commerce and wire transfer transactions are tracked along with product and service “cash cows” and services “dogs” that just didn’t take off when marketed. Add to the individual complexity of the SMB’s multiple locations, chain store structure, multi-use properties (salons, bar, restaurant, recreation, business center, concierge services etc) and each location can be tracked as a profit center and a significant cash line of working capital can be accessed for each independent or group of locations. Thus, a very potent source of capital is accessible and surprisingly not tapped into for augmenting traditional financial resources. Cash flow factoring (CFF?) companies today provide $5,000 to upwards of $500,000 for single independent locations, micro businesses and geographically grouped chain locations with multiple groups in multiple regions having the hidden potential for millions of dollars in investment and working capital. Add to this the factoring cycles range from just 5-9 months on average and several cycles of capital can be accessed annually for all properties in the business portfolio versus loans that span 5-15 year terms. Day by week by month these cash flow (current asset) levels flex up and down seasonally and are an asset that is recently being tapped into for additional working capital in “on demand” contract structures. This “on demand” capability is enabled by the newer merchant banking technology and programming that facilitates payments from a bankcard transaction be aggregated from the POS transactions and then divided into automated payment transactions directly to each beneficiary. This is similar to your commercial bank that provides a business cash reserve line of credit only in the cash flow factoring scenario it’s on the merchant bankcard account. In other words, and in traditional factoring terms, your bankcard cash flow is treated like accounts receivables financing and a line of capital is linked to your merchant card transactions through programming the POS terminal.

Strategically, micro, small and medium sized companies now have an advantage that large corporations are not taking advantage of at this time. This provides a competitive edge. As a hospitality industry SMB you can now think of your merchant card account just the same as you would your cash reserves on your business operating account that your bank provides. A line of capital can be set up against your future bankcard cash flow and used “on demand” with 24-48 hours notice to the factoring company. There are no fixed loan payments and factoring contract payments flex up or down contingent upon bankcard cash flow. Once a factoring contract is completed, a new cycle of funding can be accessed again for working capital needs by logging into your company account on-line and making a new request. This provides you with multiple financial resource options to tap you’re your various lines of credit offered traditionally by your bank; and now CFF to augment available working capital. SMB’s are known to be agile, flexible and responsive in the market place and by adopting the tactics for utilization of “all cash assets” you’ll be optimizing your business plans and projects to better compete in each market geographically and with your larger competitors.

In the second part of this article we’ll present some business development strategies using example business scenarios to demonstrate the factoring of cash flows to augment traditional lending gaps and enable various business projects or expansion.

© Clayton Gilman 2005

Clayton Gilman is a National Sales Executive for several organizations and has been in small business development, venture capital and finance for 17 years. He offers factoring (AdvanceMe,Inc) and other financial solutions to his clients in the hospitality, retail distribution and leisure industries. He can be reached at: 918.398.0968 / [email protected]