1. Can You Tell Us a Bit More About Your Business?
Originally, as you said, I’m a lawyer. I decided to start this company to address a need within the small business community. My company, Onirade, is a factoring business with a mission to help small businesses in Quebec with their cash flow. I also wish to position myself as an ally for SMEs. So, I like to help entrepreneurs as much as I can through advice, connecting people, providing resources, et cetera, in addition to factoring.
2. So What Exactly Is Factoring?
Factoring isn’t really well-known in Canada although it’s a growing sector. Factoring is a short-term financing method which is an alternative to lines of credit of banks. Basically, you sell your account receivables to a specialized financial institution called a factor. I find the best way to really convey this idea is to give a quick example.
Let’s say you have this idea for a great new product – whatever it might be – and you decide to start a business to put it on the market. You put all your savings into this startup. Your friends and family also contributes some love money. The bank doesn’t really want to loan you much because you don’t have a track record just yet and you may not have any collateral to offer.
But you’re a savvy entrepreneur and your product is really great. Before long, you sign a contract with, say, Walmart. Walmart is going to buy your product and sell it. Naturally, you’re very excited. On paper, you may very well already be profitable, but the tricky part is a company like Walmart typically will not pay you right away. It will impose terms of payment of 30, 45, 60, 90 days, and that’s normal. That’s because they want to sell your product, give themselves time to sell your product, and pay you with that money.
So, you’re facing this uncomfortable position in which you know that you have cash coming in – in a month or two or three – but, while you wait to get paid, you still have to face your current expenses. You may have a rent to pay, bills, payrolls, supplies – you know, you need money to build your inventory for the next order but you’re stuck. You have to pay before you are paid yourself and you’ve already used all your available capital – all your savings, all your love money – and you don’t have access to credit. That’s where the factor comes in.
What Onirade will do is buy your claim against Walmart. You know, the right to be paid in 30 or 60 days by Walmart? That’s good. That’s property. You can sell and buy it like anything else. So, I’ll buy it with a small discount so you don’t have to wait to get access to the money that’s owed to you. You’ll have cash in your pocket right away so you can take advantage of your growth to grow even more and faster. In some cases, it can even save your company from going bankrupt because of a short-term want of cash.
3. Which Companies Use Factoring? Isn’t That Only for Businesses in Difficulty?
As I said, factoring is not very well-known in Canada to begin with. The vast majority of people I talked to had never heard about it before. It’s only about 13 percent of Canadian SMEs that currently use factoring while, in the US, it’s 50 percent. In Europe, it’s as much as 75 percent. In Europe, when you start a business, you find an accountant, you find a banker, and you find a factorer that’s just part of it.
60 active companies currently doing factoring in Canada, but the vast majority of them only deal in huge amounts. You know, factoring has until recently only been accessible to well-established businesses with sales volumes of over $300,000 a year. Now, with smaller institutions such as Onirade, targeting to fill that gap in the market, factoring is becoming more accessible to startups and SMEs in general.
To come back to your question, factoring is useful for businesses in need of cash and which also happen to have good accounts receivable. This type of financing is particularly advantageous for certain businesses – for startups, for businesses which are growing or which have seasonal means or undergoing restructuration, for instance.
You also asked, “Is factoring only used for businesses that are in difficulty?” Quite the contrary, actually. While it’s true that this financing method can sometimes save a company, in general, businesses that take advantage of factoring are doing quite well for themselves. Most are actually facing strong growth which they simply cannot fund on their own properly – for instance, because they have a new client and a bigger client that’s imposing terms of 30, 60, 90 days. I’d say, when your growth and your company reaches about 15 percent, that’s where it becomes really hard to fund this growth properly without additional cash coming in.
For example, I was discussing with a general contractor the other day and he was telling me about these tenders from insurance companies to fix houses after some incident or natural disaster occurred. It’s very interesting for a contractor – except the insurance company imposes a fixed payment term of 30 days. So, the contractor has this beautiful opportunity but he has to front the cash for the materials, for the labour, just to get the contract. That limits how many contracts he can do in the 30 days. By using factoring, he could get access right away to this money and use it to take home more contracts in that same month and grow his business this way.
Factoring just pays for itself really.
4. So Factoring Is There to Help Businesses with Cashflow Issues; But How Critical is That Problem, and What Other Advice Could You Give Us to Stay Clear of Trouble When It Comes to Cashflow?
Cash flow issues are actually the number one reason why businesses fail.
More than eight out of ten business failures are due to cash flow mismanagement. So, yes, it is critical. You can follow the advice of all the other growth hacking geniuses you’ve interviewed so far, Matt – you know, they have the best strategies, the best marketing, selling a gazillion products. If you can’t manage your cash flow properly, you’re going to hit a wall sooner or later.
Yes, I do have some advice to stay clear of cash flow problems.
First, of course, is to spend wisely, especially at the beginning. You have to distinguish the truly urgent and necessary expenses from those that can wait or that you could even do without entirely. I mean, for sure, being driven and cultivating a “think big” mentality is important, but you should really take one step at a time and not overspend. What’s most important is to remain rational and to think each purchase in terms of custom benefits. Just make a sensible budget and stick to it.
Second is be realistic about your future sales volume. You know, entrepreneurs are usually big optimists. Of course, that’s a nice quality to have. It’s important when you start a business to be optimistic because there are just so many challenges you’re going to face.
But where it can become tricky is if you’re overconfident about your future sales volume. If your spending is based on assumptions that never materialize, you’re in for a rude awakening. You know, you often hear those wannabe entrepreneurs who say, “Oh, this is a billion-dollar-market and if I could only get one percent of one percent of this market, that’s a $100,000,000.” Well, good luck getting that one percent of one percent
in your first two or three years. It’s probably not going to happen. It’s going to take you longer to get there so it’s much better to be cautious and conservative in your predictions. You can refer to past year’s sales – either your own or that of your competitors – to make objective predictions. If you like the experience or intuition, don’t hesitate to ask a mentor for help.
The third advice would be to budget your cash flow. Make a cash flow statement that anticipates your revenues and expenses for a specific period of time. This way, you will know when the cash is coming in and when it’s going out and you can better prepare yourself for those moments when the cash is short.
For instance, the holidays is a period when your sales will increase normally, but this means that you have to get ready in advance for this by growing your inventory many weeks ahead. This is a big seasonal expense which can be profitable. But, if you must pay your suppliers before you get paid by your client, you’ll find yourself in a serious predicament so you need to plan ahead for that.
Another advice is to be proactive in your debt collection. If you’re doing business-to-business sales in particular, remember you’re dealing with other companies and that means your clients are just as vulnerable as you are to cash flow issues. So, if you stay passive when account receivables are not paid to you on time, your own cash flow will become unbalanced.
Even if your clients are much larger businesses than yours – I’m thinking, you know, Walmart, Canadian Tires, Best Buy, name it – do not be intimidated; otherwise, you’ll be taken advantage of. If you’re not insistent enough when the time comes to get paid, you will be paid last or even not at all.
For instance, don’t be afraid to set up a late payments penalty as part of your contract with them – a certain percentage for each day that the account is past due. This way, you protect yourself. Internally, give yourself a collection […] which will set out in advance the steps to take in case of late payment – you know, when to send your invoice, when to send your client a written reminder that the amount is past due, or when to make the phone calls, et cetera, all the way to taking them to court if it comes to that which, obviously, I wish you never have to do.
Of course, that’s another benefit of factoring naturally because, once you sell your accounts receivables to Onirade, for instance, that’s not your problem anymore. You know, that’s mine. The factorer will be monitoring the due dates and making phone calls to get paid because the money is now owed to them and not to you. That’s another big advantage.
Another advice: Keep cash on hands. Even if you follow all my tips, you will still face unexpected expenses. That’s just part of life when you start a business. But, without a financial cushion, any mishaps can truly become catastrophic. Don’t let those surprises that come your way be more catastrophic than they have to be.
In general, it is recommended to have a cash reserve that corresponds to about two months of operations. Now, I do realize this is often easier said than done, especially when you’re just starting out. But keep in mind that, without enough liquid assets, you’re facing a very real risk of insolvency and we all know where that can lead you.
Finally, one last advice is be sure to have access to additional funding. You know, the main reason why startups have cash flow issues is because they have insufficient capitalization to begin with. You know, you started a company without putting enough capital in it. So, before you start a business, be sure that you have enough capital because it’s always possible to solicit investors along the way, but there’s no guarantee that you’ll be able to raise enough money and, even if you do succeed, you will have to give away a chunk of your business and, the earlier you do that, you know, the bigger chunk you will have to leave.
One solution, naturally, is to open a credit margin at the bank. But, of course, as I said earlier, banks have very strict ratios when loaning money so you need to have a good track record and/or collateral to offer the bank. Of course, now you know that you also have access to factoring. Sure, it’s a little more expensive than a credit margin, but it can really help you survive, thrive, and get you to that point where your concept is proven, you’ve done well for yourself, and you qualify for a regular loan at the bank.
And I would consider it a personal success if I can help you grow your business to the point where you don’t need me anymore.
5. What Are Some Resources You Encourage People to Explore?
Let me indulge in some unapologetic self-promotion here, if you’ll allow me.
As I stated earlier, I want to position Onirade as an ally for small businesses even if you don’t need factoring right now. If you go on my website – Onirade.com – you’ll see that I’ve listed quite a few resources that are useful for entrepreneurs. I’m talking government websites, non-profit organizations that provide support for startups. If you’re looking for guides, tools, templates, if you need help with marketing, legal affairs, market studies, go take a look.
I also publish regularly some tips for entrepreneurs like those I’ve just given to you today. So, check it out. You can like Onirade’s page on Facebook and on LinkedIn to be sure you don’t miss any because there’s a lot more coming. So, please do so and stay tuned for more!