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Small Business Finds Factors a Good Way of Financing

Small Business Finds Factors a Good Way of Financing

Service Helps Firms That Can’t Get a Bank Loan





BY MIKE ALLEN

Senior Staff Writer

When Cecilia Ochoa started her security service seven years ago with less than $10,000, she realized getting a bank loan was more than a long shot.

Besides the lack of any track record for the business, she had limited assets. Banks wouldn’t even talk to her.

But Ochoa still needed operating capital to pay her employees and all the other expenses that go with running A-1 Security Services, located in the College Area.

“I was providing security service to just a couple of construction sites at the time,” Ochoa said. “But there is a lag time in getting paid by the contractor, which could be 60 days or more. We provide the service for at least 30 days, and then they could take up to another 30 days before they pay us.”

To keep the business going while she waited for customers to pay, Ochoa turned to Pat Burns, whose company, Primary Funding Corp., is what’s known as a factor.

Factors, which have been around for centuries, are simply buyers of accounts receivables, or the sales invoices of a client needing the funding. The factor pays a percentage on the invoice and collects full payment from the client’s customer.

In Ochoa’s case, Burns purchased the invoices for security services provided to the construction companies for a percentage of the total invoice amount and advanced the money to Ochoa soon after completing research on the debtor.

Burns then collected the full payment directly from the builders when they paid their bills.

The big difference in getting money from a factor vs. a bank is the factor scrutinizes the debtor of the client to ensure they get repaid.

– Difficulty In Obtaining An Asset-Based Loan

For a traditional bank loan, a lender is focused on the borrower and the business for its ability to repay the debt. Also, the borrower always pledges assets or collateral in case the debt isn’t repaid, Burns said.

For most new small businesses, the chances of obtaining a traditional asset-backed loan are slim, said Burns, who has been in the factoring industry since 1974, and has run her own factoring business since 1994.

Even for many businesses that have a reliable track record, a loan can be a daunting prospect. The due diligence process can take months, and long-term obligations in repaying the debt are things many smaller businesses prefer to avoid, she said.

Getting funding from a factor can happen in a matter of a few days. The downside is the price for the funding is usually higher than what a bank charges.

Burns says the fees charged by factors can range from 2 to 5 percent of the total invoice and are usually 4 to 5 percent.

Industries that have relied heavily on factoring to provide the financing for doing business are retailing and small manufacturing, but increasingly, services and contract labor firms such as Ochoa’s are big users of Burns’ service.

“Some of the biggest users of factors recently have been temporary employment services and distributors,” she said.

– Flexible Services

Paul McBride’s Coastal Concepts, a licensed manufacturer of branded apparel based in Vista, fits more of the traditional type of business that uses factors.

McBride used Primary Funding several years ago when the company needed funds for some of its larger contracts with retailers.

By using a factor, McBride was able to obtain funds for the bulk of his receivables to pay his operating costs, and used Burns’ firm to provide the collection support services that would have been a burden for his small company.

“Primary let us pick and choose which receivables we wanted to sell to them, so they really fit our needs,” McBride said.

In recent years, Coastal Concepts has picked up some even bigger contracts from national retail chains, including JC Penney and Sears, so McBride switched to a bigger factor.

“It has nothing to do with the services I received from Pat. She was excellent,” McBride said. “It’s that now we’re doing four times the volume than when we were getting our factoring from Primary Funding.”

Burns said while a few of her clients have annual sales ranging as high as $7 million, many are below $500,000.

“Most of our clients are doing between $1 million to $2 million in annual sales,” she said.

Most of her clients are also relatively young, less than 3 years old. Nevertheless, a big chunk of her clients , 23 percent , have been using Burns’ firm for five to seven years, and 12 percent of her clients have been getting funding from her for more than seven years.

Many of her longer-term clients can now qualify for a business loan from a bank, but prefer to stay with Primary Funding because factoring better fits their needs.

“The business may qualify for a $100,000 loan but they’ve got receivables for $250,000. It just doesn’t do them any good. They need a bigger loan, but they may not qualify for that bigger loan.”

– Hesitant To Switch

Ochoa continues to obtain her financing from Primary Funding because she likes the ability to tap into funds that can be transferred to her business’ bank account in less than a day.

“I was one of Pat’s first customers, and we have a good business relationship,” Ochoa said.

While she’s been thinking of applying for a bank loan, she’s also aware taking on long-term debt is not something she necessarily wants at this time.

A-1 Security has come a long way from its beginnings when it had a few clients and 15 employees. Today it counts about 100 employees and 20 clients, including security for Lindbergh Field’s parking lots and medical facilities of the Veterans Administration in Northern California.

Burns said particularly for small startups, it’s not unusual for these enterprises to either have a very vague collection process on their sales, or have no system in place at all. Primary Funding not only provides such support services as part of the deal, it can help the client understand how to improve their operations to avoid possible pitfalls, and spur faster growth, Burns said.

“We are really an incubation center for them,” she said. “Factoring for a small business is really one of the first disciplines they may have.”


Entrepreneur Takes Gamble That Pays Off

Like many of her clients, Pat Burns launched her own business with a lot more moxy than money.

After learning the ropes of factoring while working for about nine years at Riviera Finance, a Los Angeles-based factor with a single office in San Diego, Burns formed San Diego Commercial Finance with an Orange County partner in 1983.

The business prospered, but Burns was determined to go it alone, and negotiated taking away her minority interest in the form of clients selected at random out of a hat.

Her partner agreed that if she could get the clients to go with her by the end of the month, he’d go along with it.

In an era before computers, Burns spent all her waking hours convincing the clients to go with her, and at the same time, persuading her banker to provide an unsecured line of credit to launch her own business.

“I think I managed three hours of sleep a night during that month with my 2-year-old daughter, but I did it,” said the former single mother.

Today, Burns has about 60 clients and should purchase accounts this year totaling between $25 million to $30 million.

In the late 1990s, the IPO frenzy and the surfeit of cash being tossed around by venture capital firms cut into her business, but that’s all gone now.

Burns opened an office in Phoenix and recently expanded her service to offer asset-based loans.

She still gets enormous satisfaction for the job she does.

“There’s so many small businesses (using factoring to obtain funds) that are no more than a blip on the radar screen and they may employ no more than three to four people, but these jobs are important, and this is what San Diego is all about. It’s extremely important.”

, Mike Allen

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