A fast-growing business without much credit history can still access cash and spur further growth by selling its invoices to a factoring company. It’s not a new process, but it is new territory for Herring Bank, which is starting an Invoice Purchasing Program.
Herring Bank Market President Aileen Berrios, who works out of the bank’s Colorado Springs location on North Nevada Avenue, said it’s a big step for the Amarillo, Texas-owned bank.
“For a bank our size, you don’t see it,” she said. “There aren’t many in Colorado Springs that do it. I know that it is not common for banks to have a factoring division.”
Businesses with good credit history can obtain a line of credit with a bank. That allows the company to have working capital and conduct new business, even if it is waiting on invoices to be paid by other clients.
“Invoices can be for 30 or 60 or 90 days, and a business doesn’t want to be stretched too thin, especially if they have payroll coming up,” Berrios said. “If they don’t qualify for a traditional line of credit, the Invoice Purchasing Program might be what they need.”
Herring Bank will buy those unpaid invoices from its client, initially paying about 85 percent of what the invoices are worth. The client sets up an account with Herring Bank, where its customers can pay off the invoices, and when that is done, Herring Bank will pay the remaining amount due to its client.
“So if you’re giving me a $100,000 invoice, I’m giving you $85,000 the next day and I’m going to collect the remaining $15,000 and keep whatever fees have accrued and give you the rest,” said Tia Kavas, who came to Herring Bank in June to run the Invoice Purchasing Program.
Businesses that can benefit from this program include high-growth or early-stage companies, those with insufficient credit lines and those operating in an industry undergoing rapid changes.
On the negative side, those companies will pay a price for getting cash up front, and the fees are usually determined not only by their credit rating but also that of the customer whose invoice is being purchased. Factoring companies typically charge interest on the advanced money, so a slow-paying client will cost even more. Factoring companies also typically charge between 1 and 4 percent on each invoice along with application and processing fees.
Berrios didn’t reveal exact fees, saying it will vary with each customer but that Herring Bank will be less expensive than factoring companies.
There could be a perception with clients that a company is in financial difficulty if it uses an invoice purchasing program, according to bankfinance.com, so it is important to let clients know why it’s being done.
Factoring companies often require a contract that might last a year or more, but Kavas said Herring wouldn’t do that.
“We do not charge an exit fee, and they can use it as needed,” Kavas said. “We give them the option to stay as long as it’s a value add for them.”
Kavas, who worked with Berrios when both were at Vectra Bank, has been writing the policies and procedures for the Invoice Purchasing Program and getting the system up and running.
“That is her baby and she’s starting it from the ground up,” Berrios said. “This is brand new. It’s such a good program for small and medium-sized businesses, and that’s what we’re all about. It gives those businesses the opportunity to access cash that they can’t access in a traditional line of credit. Larger companies need it if they’re growing quickly. If they’ve got high growth or went through an industry-wide downturn, through no fault of their own — like the oil and gas services business — and they can’t get a traditional line of credit, they could go into this type of product.”
Bank on lower rates
Kevin Hoskins, the founding partner of Springs-based consulting firm govIRG, said many businesses could benefit from a factoring program.
“When people think of factoring, they think of humongous rates,” Hoskins said. “Banks have been able to bring those rates down.”
Some of those alternative factoring companies still charge excessive rates, Hoskins said.
“They can be outrageously high. Some are shark-like at 35 to 40 percent,” he said. “If you can get lower double digits, that’s where you want to be.”
Berrios said she has done referrals back and forth through the years with “alternative companies.”
“There are a lot of good companies out there, but they tend to be more expensive because they take more risk,” she said. “Rates will be all over the place, but we’ll tend to be more conservative with companies we do business with, so our prices will be on the lower side.”
Kavas has 18 years of factoring experience with large international banks.
“It is a specialty and requires a special expertise,” Berrios said. “That’s why she’s here with Herring.”
Factoring is an “emerging trend” in the United States, although it’s mostly big banks and independent factoring companies that do it now, Kavas said.
“I think we’re going to see more of it from banks. It’s something I believe in,” she said. “In the United States, there’s a very liberal legal environment that allows for factoring [companies]. That’s not allowed in Europe, so the banks offer this product.”
Kavas said a basic misconception is that the program will be prohibitively expensive.
“I will say that it’s very cost effective, especially when it is offered from within a bank,” she said. “Buying bad debt is another misconception. By no means is this meant to be a collection company type thing. We wouldn’t want to be involved in any kind of potential dispute or non-payment situation.”
Hoskins said that govIRG helps small businesses with their government contracting needs, and he’s seen many companies score a major contract, but need a short-term solution until the first money comes in.
“They can’t get a traditional line of credit because they don’t have a long-term financial statement, so they borrow from themselves or their 401(k) or find a reasonable factoring company,” Hoskins said. “Banks that do this are a great alternative. A small bank like Herring doing this is great for small businesses.”
Factoring has made a huge difference for more than one business, he said.
“I was working with a $4 million company that was barely profitable due to the cost of money, [but] they were factoring with a higher cost company,” he said. “I changed them to another [less expensive] factoring company and in a year and a half they had grown to $12 million and didn’t need factoring anymore.”
Kavas envisions that kind of relationship with businesses that start with Herring Bank’s Invoice Purchasing Program, and are then able to move into a traditional line of credit.
“This is a good solution for those companies who have good receivables,” Kavas said. “We rely more heavily on the receivable itself. If they’ve rendered a service or delivered a product with documentation, we’re able to get around even a past bankruptcy or tax issues. And you very often have good business people who’ve had bad luck in the past, maybe even health issues, that are prohibiting them from accessing conventional capital.
“What we’re interested in doing is providing those companies with a flexible and scalable solution — so they can grow as fast as possible. We really don’t have a whole lot of difficulty dealing with that type of growth, even if a company is doubling in size.” n CSBJ