Accounts Receivable Funding Versus Line of Credit

Dec. 20, 2010 - PRLog -- A Typical Small Business Scenario

> A business experiences growth…
> Cash flow becomes tight as working capital gets tied up in inventory and receivables…
> The business gets a bank line of credit…
> The business continues to grow with increased dollars tied up in inventory and receivables. Cash flow again be-comes a problem…
> The business cannot pay down the line as required by the bank…
> Line of credit is converted into a term loan…
> The term loan payments make cash flow worse…
> Ongoing cash flow problems cause the business to miss supplier discounts and other opportunities to grow and increase profitability…
> Profitability and growth slows down or declines. The business still has cash flow problems…
> The business borrows more money. The cycle repeats…
> The business never gets out of debt…

Have you seen this happen to customers in your bank? Have you turned down new customers in this situation?

There is a solution!

RMP Capital Corp, headquartered on Long Island, NY, provides a hybrid turn-key Accounts Receivable Funding Program for banks to offer their customers and prospects at no risk or cost! Accounts Receivable Funding is an alternative to traditional bank financing, specifically to increase cash flow and fund growth.

So, why would a company ever decide to use Accounts Receivable Funding as opposed to a Line of Credit? The short answer is, their bank or any bank is not willing to give the business the amount of money on the line that they are requesting. The bank may even prefer to terminate the relationship. This could be due to credit, nature of business industry, loan size, concentration issues, etc. Accounts Receivable Funding is about opportunity! If a business has the opportunity to grow at a rate of 20% - 30%, but doesn’t have the capital to fund the growth… What would you do?

Take for example a business currently doing $1,200,000 in sales with a 10% growth rate. They have a $100,000 bank line of credit at 5% APR that is all de-ployed and their bank is not willing to increase the line amount. The bank is actually asking the business to rest the line for 30 days. The business has the opportunity to grow at an additional rate of 20%, but does not have the capital to achieve it. Gross profit is 25% and they have the opportunity to negotiate 2% Net 10 day discount terms with their biggest supplier for an annual savings of $4,800. But, with receivables turning on average at 50 days and no more availability on their line, they are cur-rently unable to take advantage of any early pay dis-counts. What would you do?

Option 1: Stay with the current financing arrangement:

   Current growth of 10% x $1,200,000 = $120,000 x 25% gross profit = $30,000
   Less LOC costs 5% x $100,000 = ($5,000)
   Bottom line gross profit = $25,000.

Option 2: Use Accounts Receivable Funding offered by your bank:

   Current growth of 10% x $1,200,000 = $120,000 x 25% gross profit = $30,000
   Growth opportunity: additional 20% = $240,000 x 25% gross profit = $60,000
   Pay 2% net 10 discount opportunity ($20,000/month x 12 = $240,000 x 2%) = $4,800
   Less discount fee costs for first 30 days (2% x $1,500,000) = ($30,000)
   Less per diem costs (.0005%/day at 50 days average receivables turn) = ($12,000)
   $100,000 LOC paid off out of first 30 days net cash received, $249,900,
   leaving $149,900 available to fund growth
   Bottom line gross profit = $52,800

Yes, Accounts Receivable Funding is more expensive than traditional bank financing. But, it allows a business to take advantage of opportunities otherwise unachievable. Net to the bottom line in this example is an addi-tional $27,800 in gross profit.

Now the business owner has peace of mind, knowing they will always have the capital available to fund the growth of the business. And, the business is out of debt! Funding accounts receivables, usually a dead asset, increases cash flow, just like a credit card program with similar costs.

Visit RMP Capital’s Community Bank Program for more information: http://www.rmpcapital.com/bankprogram.html

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We are a national provider of factoring solutions for small to medium sized businesses, portfolio management services, and rediscounting lines of credit to independent factoring companies.