Speaker 1:
As a bank that focuses on business, we work with business leaders all day, every day. We have a front row seat to what's working and what has potential. The First Business Bank Podcast is dedicated to sharing insights to help you work better, smarter, and faster to achieve your goals. Let's get into the show.

Mark Meloy:
Hello, I'm Mark Meloy, CEO of First Business Bank. Welcome to the First Business Bank Podcast. Today, we're talking about commonly misunderstood business financing strategies.

Mark Meloy:
Businesses often face working capital challenges that come in all shapes and sizes. For instance, the age of a business, its accounts receivable and inventory turns, and many other external factors can now play a part in this dilemma. Frankly, there are many scenarios where conventional banking does not fit. And the alternatives we will talk about today, factoring and asset-based lending, can provide the optimal solution.

Mark Meloy:
I'm joined by one of our experts at First Business Bank today, and he's going to offer some thoughtful insight regarding working capital solutions for business. Bill, I'll have you introduce yourself before we get our conversation started.

Bill Elliott:
Hi. I'm Bill Elliott and I am President of First Business Bank's Accounts Receivable Financing group. We offer Factoring and other Accounts Receivable Financing solutions. We're part of First Business Specialty Finance, which also offers Asset-Based Lending solutions.

Mark Meloy:
Bill, when would a company consider Factoring or Asset-Based Lending as a financing alternative?

Bill Elliott:
Most of the companies that we see are companies that don't qualify for traditional bank commercial and industrial financing. The reasons for that are either they are early stage, maybe not yet profitable, or, if they're more mature, they might be undergoing some financial problems, losses, and they might be in turnaround mode. So  it's basically companies that don't yet qualify for bank financing or are being asked to exit by their bank.

Mark Meloy:
So what types of companies make use of these kinds of credit facilities?

Bill Elliott:
All types of companies in all different sectors. Within our portfolio, we have a number of early stage companies in manufacturing, importing, wholesaling, and also a tremendous amount of service-related companies, whether they be staffing or consulting. And then also, a lot of transportation — trucking companies.

Mark Meloy:
So maybe for the audience today, we're talking about, really working capital type alternatives. Can you maybe compare and contrast Factoring with Asset-Based Lending? When one works and when the other maybe is a better alternative?

Bill Elliott:
Sure. Factoring — the requirements in Factoring are somewhat less than the requirements for an Asset-Based Lending facility. In Factoring, since we are actually purchasing the invoices of our client, and we're not lending to our client, the financial health of our client is not as important to us. So we really focus on the quality of their customers, and if their customers are strong, in most cases, we can do the transaction. We can finance the company's receivables. Companies that have most of their balance sheet concentrated in accounts receivable are very good candidates for factoring.

Bill Elliott:
With respect to Asset-Based Lending, the parameters are a little bit stricter. Because it is lending, the financial health of the company does matter somewhat, although not nearly as much as what a bank might require for their financing. So in general, we want to see that our client is cashflow positive and also that their assets are good and that we can lend against them.

Bill Elliott:
One of the things that we do at First Business Bank is, in our Asset-Based Lending facilities, we lend up and down the balance sheet. So we'll lend against not only accounts receivable, but we'll also lend against inventory, equipment, and commercial real estate. And so if we see that the value of that collateral is strong, we may very well fund a transaction where the company itself might be relatively weak, might be in a turnaround mode.

Mark Meloy:
You used the word "positive cashflow," and I've described often that traditional bank financing is really cashflow lending first and collateral next. And in your business, it's kind of the flip side of that. You really are looking at quality of assets, or collateral. Is that a fair statement?

Bill Elliott:
It is a fair statement, and, when I talk about cashflow positive, really on the Asset-Based Lending side, what we're looking for is that the company is throwing off enough cash to service whatever, structured term debt they have and that they can make all of their interest payments. They do not have to be profitable. All we want to see is that they're at a point where we feel relatively comfortable that they can service their debt.

Mark Meloy:
Bill, can you provide an example for those listening today of a typical Factoring client of First Business Bank, if there's any such thing as typical? Maybe describe a generic situation that might crystallize it for those that are listening and watching today.

Bill Elliott:
We have a company that is relatively early stage. Been in a business a few years now. and has not been profitable. They import seafood and they sell to distributors; restaurant chains here in the United States. And they get trade terms from their overseas supplier, so they have their inventory financed by their suppliers, but they came to us because they needed receivable financing on their outstanding accounts receivable. And so we looked at them, and even though they are not profitable, their customers are strong. And because of that, we were able to offer them a Factoring facility with an advance rate of 90% against their accounts receivable, and in that way, we speed up their cashflow. Allows them to pay their overseas vendors faster.

Mark Meloy:
Talk about the qualifications for Factoring versus Asset-Based Lending.

Bill Elliott:
On the Factoring side, the biggest qualification is that our clients' customers have good credit, because we're basing a lot on the customer's ability to pay. With respect to the client themselves, we do try to avoid situations where the owner of our client might have a criminal background or is on a specially designated national list. Things like that we avoid. Also, we look for other liens on the accounts receivable, other UCC filings, and since we're purchasing the invoices, we cannot have anybody else with a UCC filing on the accounts receivable. Those are the main criteria.

Bill Elliott:
While we do request financial status and things like that, we are not really basing our credit decision on that. It's much more the quality of their customers.

Mark Meloy:
Then compare that to Asset-Based Lending.

Bill Elliott:
On the Asset-Based Lending side, I mentioned the cashflow-positive situation before. The other thing we look at there again is the strength of the collateral, but since we're lending on different types of assets, we do additional analysis. So on the inventory, equipment, real estate, we might get appraisals on all of that, and then, as we structure the transaction, we put an advance rate there that is in line with the liquidation value of those assets.

Bill Elliott:
The more and the greater the asset quality is and the more that we might have in excess availability, it allows us to be more flexible with companies that may not be as profitable. Cashflow may not be as strong. If we know that the value of the assets is there, we can be flexible.

Mark Meloy:
So if someone is listening in today on this conversation and know little about these two alternatives, and they might be thinking, "Well, Asset-Based Lending sounds more complicated, it sounds like I have more hurdles to jump through, and Factoring seems really simple." Is that the only decision criteria they should consider?

Bill Elliott:
No. Companies should consider where they fit in the overall financing market, and the reason for that is that Factoring, in general, is a little bit more expensive than Asset-Based Lending. A regular bank facility is less expensive than Asset-Based Lending. So a company should find out where they stand in the market and what they qualify for. And at First Business Bank, what we do is if we have an inquiry where a company is looking for financing, and they contact me or my group, if we see that they better fit with our Asset-Based Lending group, then we refer the transaction over there, and back and forth. So if a company is not sure where they stand, the best thing to do would be to speak to us at First Business Bank and we can give them an honest appraisal of what they qualify for.

Mark Meloy:
So we've used the term "Factoring." Thee business unit that you're the president of is called Accounts Receivable Financing. Are there other terms that maybe describe the similar type arrangement by industries?

Bill Elliott:
There are. In the industry, terms such as, freight financing, payroll funding, ledgered line financing, they all refer back to Factoring. The thing that unites all of them is that the financing source is legally purchasing the receivables. So if a company sees that, then it's Factoring.

Mark Meloy:
So what types of businesses or industries would typically use Factoring or Accounts Receivable Financing?

Bill Elliott:
In our portfolio, we have everything from suppliers to the automotive industry. We have various types of staffing companies, IT consulting companies, food service. Basically any company that has commercial accounts receivable, which means the receivables are due from another company, we can finance. With the exception of a couple of industries that are very specific, and those industries are medical insurance receivables and construction receivables, and there are specialists out there that only do those industries because they're so specific.

Mark Meloy:
So what are some common misunderstandings about Factoring or Accounts Receivable Financing?

Bill Elliott:
There are about 700 factoring companies in the United States. Most of them are smaller, privately owned companies. The first misconception is that the companies in the industry might not be of the highest-level ethics. And over time, certain things have happened that caused that perception. What I will say is that in the industry, there are there are plenty of very ethical companies that are doing this, and in the case of First Business Bank, since we are a regulated bank, we have to adhere to the highest level of ethics.

Bill Elliott:
The second misconception is that it is tremendously expensive. Again with 700 companies out there, there are some that are very expensive. However, at First Business Bank, the rates that we offer are very competitive in the market. In most cases, lower than what our competitors might offer.

Mark Meloy:
I think it's a great point that you made, and I think it's a key to the success that we've had and the positioning in the marketplace as a subsidiary of a federally regulated, state regulated bank, there really is a tremendously high bar that we have to get to and stay at. And that has to have some competitive advantages that our prospects and our clients need to consider. Is that a fair statement?

Bill Elliott:
Yes, absolutely. We are very careful when we're issuing proposals to make sure that we're not going to have to amend them significantly at a later date. We're very careful about treating our clients the way that we would like to be treated, the way that hopefully we treat each other within the bank, and the way that our regulators expect us to treat people.

Mark Meloy:
I thought here, or the way I think about your business and Asset-Based Lending is — I often describe it as there's kind of four situations where Asset-Based Lending or Accounts Receivable Financing might be the best alternative. That's with startup companies, with companies experiencing rapid growth, companies that have been challenged by economic situations, poor financial performance, or what have you. And then the fourth is ownership change or recapitalization that occurs. Is that fair to look at it that way? Are there more even than what I've described?

Bill Elliott:
I think that is a very fair statement, and we have clients in our portfolio that fit all of those categories. One thing that we do a significant amount of actually is in the technology space. Many of them are early stage. Many of them have gone through a pre-revenue stage where they have lost a lot of money and now are starting to generate revenue, but are not quite there yet. And those are companies that we can help quite a bit, and once they hit their critical mass and now begin to become cashflow positive and have larger asset levels, they can then qualify for an Asset-Based Lending arrangement. Or, if they're within the footprint of First Business Bank, a bank facility itself.

Bill Elliott:
So, we very much like to work with these early stage companies.

Mark Meloy:
Yeah, that's a great point to make, one that I think is critical and is something that First Business Bank can offer is there really is a continuum of service that we're talking about here, right? In terms of Factoring or Accounts Receivable Financing, Asset-Based Lending, and possibly and ultimately sort of conventional bank financing. All at, as you described before, essentially lower costs of that service.

Bill Elliott:
Yes. Absolutely.

Mark Meloy:
Well, Bill, thanks for taking time to share your thoughts and experiences with our audience today. And to you, our audience, thanks for listening to the conversation. We hope you found this topic helpful and now have a better understanding of the nuances of funding your company's working capital needs. Join us next time on the First Business Bank podcast.

Speaker 1:
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