Access to capital remains a problem for most black businesses


by Kevin Michael Briscoe

In many ways, access to capital has hampered the ability of minority business owners to maintain cash flow and cover operating costs. In fact, more than half of black business owners polled in a recent national survey cite lack of access to money as the main obstacle to their ability to grow.

One potential solution is invoice factoring, in which a business “sells” its invoices to a third party for collections. Such factoring gives companies almost immediate access to cash for expenses such as ramping up contracts, staffing or paying suppliers.

“With a traditional line of credit, the bank gives you money you can draw on, and they don’t pay too much attention beyond that. There is an interest rate, and it is paid back over time, ”said Chas Justice, business development manager for altLINE, the business finance division of The Southern Bank Co. based in Birmingham, Alabama. “With factoring, clients actually submit individual invoices to us for financing. If they have an invoice for $ 1,000, they submit it to us and we typically transfer 80% to 90% of that invoice to their operating account immediately.

Advantages and disadvantages of factoring

The typical factoring client is a fast-growing, cash-strapped business facing challenges with payroll payments or other operating costs. or 60-day terms.

“For recruiting and consulting firms, our funding helps them accelerate their cash flow to meet the payroll,” Justice said. “For manufacturing and distribution companies, we help them pay their suppliers or buy more raw materials. “

Early in the growth of her Washington, DC-based social marketing business, Wendy Campbell had to demonstrate her ability to purchase $ 500,000 media as part of her application for certification for a Small Fallow Program. United States Business Administration. On the advice of a colleague, she was able to get in touch with a factoring company that provided the necessary funds to meet SBA requirements.

“If you need financing to land a contract, this is the way to do it, and if it’s government work, it’s pretty much guaranteed,” said Campbell, president of Campbell & Co. Communications. “The good news is that you can use it when you want to cover out-of-pocket expenses or if you need to hire additional consultants. “

But while invoice factoring allows businesses to get money fast, it’s not cheap, on average between 1% and 5% of the principal amount.

“The advantages of invoice factoring are that it allows businesses to qualify for a bank loan, and the application process is faster than that of an accounts receivable loan,” said Saji George, head of business development for InterNex Capital, based in Harrison, New York “The disadvantages are the higher costs of funds and the higher degree of management of the lenders. “

“It mainly works for [my] the government is contracting clients because the payment … is slow and they have to pay the employees, but I recommend clients to stay away because the interest rates are too high, ”said Sharif J. Small, Baltimore-based tax accountant and Managing Director of SJS Financial.

AltLINE justice retorts that a lack of transparency among factoring companies is at the origin of the bad public relations of the industry.

“Most of the lenders in our industry are not federally regulated banks like we are,” he said. “Basically, they do whatever they want.”

Unlike other factoring companies, Justice said that altLINE does not engage in “floating days,” a practice that has damaged the reputation of factoring.

“Let’s say we have a rate of 2% every 30 days that we fund a bill and then it goes up 1% every 15 days thereafter,” he said. “If the bill is paid on day 28, 29 or 30, we stop the interest rate clock on the day the bill is paid, and we charge the borrower the 2% for the 30 days; this is our rate.

“With the vast majority of other factoring companies, it will take them three to five days to clear the payment, so the payment on day 28 is not cleared until day 32 or 33. Now the borrower pays. 3%, and its financing costs have just increased by 50 percent. If they are told a rate and they pay a higher rate, all of a sudden they misjudged all of their customers and end up behind ball eight. [Factoring] will always be more expensive than traditional bank financing, which is good if people know what they are paying.

What to look for

There are two types of factoring: recourse and non-recourse.

In a recourse mechanism, companies are required to redeem invoices and reimburse the factoring company if its customer defaults on an invoice. In a non-recourse situation, companies are not required to repay the financing if bankruptcy is the cause of the default. However, factoring companies that offer a no-recourse arrangement are playing a game of smoke and mirrors, according to altLINE Justice.

“As a full-recourse bank, we require our customers to take out trade credit insurance, which is a policy that pays when non-payment due to financial hardship on the part of the customer,” he said. declared. “That’s really all non-recourse businesses do; they buy insurance policies. You can do the same with us, except you control the police and not the company without recourse. Thus, we will not increase the rate on your policy and hide it in our fees. It is more profitable for the long term borrower.

Surveys detail scope of funding issues

Regardless of the financing mechanism sought, two recent major surveys clearly show that access to capital remains a major problem for black entrepreneurs.

The Spotlight on Black Business Owners 2021 Bank of America’s survey reflects a general sense of optimism among its respondents, with nearly half (48%) expecting their income to increase this year. Yet nearly six in ten cited difficulty accessing capital as a barrier to growing their business.

The Small Business Credit Survey: 2021 Report on Businesses Owned by People of Color, led by the US Federal Reserve, supports this assertion. This report found that across all ethnic ownership groups, black-owned businesses that requested traditional forms of financing were the least likely to receive all the financing they sought. Hispanic-owned and Asian-owned businesses (20% and 31%, respectively) were also less likely than white-owned businesses (40%) to receive all of the funding they requested.

Even among businesses with good credit scores, black-owned businesses were half as likely as white-owned businesses to receive all the financing they were looking for (24% vs. 48%).

AltLINE Justice estimated its minority invoice factoring customer base at “around 50-60%” but, as of this publication, was unable to provide figures on the total dollar amount. provided to its minority customers.

“If you’re a start-up and you get this great deal, but they pay you in 60 days, and you have to pay your payroll on a weekly or bi-weekly basis, or you have to pay your suppliers in 30 days. , 15 days, or in cash on request, [invoice financing] gives you the ability to grow the business without having to sell stock or transfer ownership of your business.

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