One of our Solutions Forum clients just got a working capital loan from the US Small Business Administration, which is rather unique, for a variety of reasons:
1. The loan was tied to his receivables, but not in a formal way, as in factoring. Factoring doesn’t work for him, because the high interest rates and the long pay nature of his receivables (60 days is normal), the finance charges would roughly halve his profits. However, on the plus side, the preponderance of his receivables are from large companies, which is probably in his favor
2. The liability side of his balance sheet is a mess, with lots of high interest credit card debt related to both the economic downturn in 2008-10 and the upturn in 2011. In the former case, he couldn’t shed costs fast enough, and then when business started to improve (he did a number of positive things to help it improve) he had trouble financing his receivables. The banks weren’t sympathetic to his plight, either, in giving him a credit line that could be expanded to cover growth.
3. He has excellent margins, but in the last year, his growth rate was higher than his margins, which leads to cash flow deficits. It’s a good problem to have (trust me on the math on this, or go look at the cash flow statement of a rapidly growing business).
4. In the past, the SBA has asked borrowers to pledge other collateral, such as one’s building or personal residence. They didn’t ask for supplemental collateral in his case. This is good.
5. We’ll have to find out who the originating bank on this SBA loan was, since the banks haven’t had the desire to lend at all to small business. Their version of small business is under 50 employees and $10 million in revenues. The originating bank is typically responsible for 10% of the loan value, if it has to be written off.
Overall, this is a positive development.