Keep Your $516K Of Incremental Profits With You, Not Your Early-Stage Lender Of Last Resort

Hustling to build your business from zero to $50 million within a few short years has a way of blinding you to some of the nitty gritty financial details. Who can keep their eyes on every single expense while growing revenues at such a rapid pace?

A new client of mine had, years before, hire a tax-first CPA to meet their startup company’s needs. The firm provided basic tax services effectively enough. But within a few years, they’d outgrown those offerings.

In its early years the company had struggled to obtain traditional financing. This is common as lenders often prefer to wait until a startup has at least one year of financial history before taking on lending risk.

As a result, the new business turned to everyone’s favorite early-stage lender of last resort: a factoring company. The business equivalent of taking out a payday loan. A necessary first step in their case, but not a long-term solution. The arrangement persisted far too long.

Factors are willing to buy your accounts receivable for a fee of 1% to 4% of the invoice value. Even at the more modest 1-2% rate, the effective annualized cost of 12-24% far exceeds the 5-7% prevailing business lending rates that were then in effect at that time.

To complicate matters further, the company’s CPA netted the factoring fees against the company’s revenue (resulting in lower reported revenue) rather than recording them as an explicit expense line item. And thereby hiding the leakage of those financing cost from the company’s leadership team.

The upshot: $693K of factoring fees went largely unnoticed as fees crept higher each year.

Upon onboarding them as a new client, our team dug into the company’s internal data, factoring reports, and other resources. Within a couple weeks, we’d delivered fully transparent financials showing accurate gross revenue along with transparent presentation of the factoring fees and related costs.

We introduced them to a lender who was eager to offer them a line of credit at standard business rates. The following two years: Interest expenses of $151K and $177K replaced the far higher $693K factoring fees as the company transitioned to a sustainable business and financing model. That’s $516K of incremental profits retained by the business per year.

And with transparent financials, accurate accounting processes, and expert financial professionals underwriting the information relied on by the lender, they were eager to find a new creditworthy borrower.

Are you losing tens or hundreds of thousands to unchallenged legacy financial processes or lending relationships? We will find better outcomes for you.

Not sure and want a second set of eyes to give it a free review? Yes, we can assist with that, too. Contact us today and let’s talk about how we can help optimize your financial strategy.