SBA Loan Forgiveness for PPP and EIDLs through 2027

10:08 19 September in Blog

Many small and medium-sized companies took advantage of federal loan programs to help them survive the economic disruptions caused by the COVID-19 pandemic. If your company obtained a Paycheck Protection Program (PPP) loan or an Economic Injury Disaster Loan (EIDL) directly from the Small Business Administration (SBA) or a participating lender, it is important to understand: when and how to apply for loan forgiveness, forgiveness terms, costs eligible for forgiveness, and the documentation required.

A unique feature of the PPP is that loans are eligible for forgiveness under certain conditions, but unlike the PPP, EIDLs are not eligible for loan forgiveness and must be repaid in full.  

When to Apply for PPP Loan Forgiveness

Borrowers can apply for loan forgiveness up to the time that their PPP loan matures. For loans originated before June 5, 2020, borrowers have two years to apply for forgiveness or five years for loans issued after that date. Generally, it’s best to apply for forgiveness before the deferral period ends and payments begin, which is 10 months after the end of the covered period. However, borrowers must wait until they spend all of the loan proceeds that they want to be forgiven.

Loans funded before the PPP closed on May 31, 2021, are now beyond the coverage period, and borrowers can apply for loan forgiveness.

How to Apply for PPP Loan Forgiveness 

If your loan was for $150,000 or less, which was the case for over 90% of borrowers, an application for forgiveness can be made in one of two ways – through your lender or the SBA.

  • Through your lender. Your PPP lender will usually contact you with instructions on how to apply when your covered period ends. Some lenders provide filled-out forms with the necessary information, making your job easier.
  • Through the SBA. If your lender is one of over 1,400 institutions participating in the SBA’s direct forgiveness program, you can apply using the SBA’s Direct Forgiveness Portal. A list of participating lenders is available here.

Regardless of which approach you use, it is not necessary to submit any receipts, payroll records, or additional documentation. If you have a second PPP loan, you must show the required revenue loss before the loan can be forgiven.

If your loan was for more than $150,000, borrowers apply for forgiveness with their lender. Check with your lender before applying to see if they have their own application process. You’ll need documentation showing how your PPP loan proceeds were spent.

PPP Loan Forgiveness Terms

Loan forgiveness terms are the same for your first PPP loan and second loan if you have one. Full loan forgiveness requires that you maintain staffing and compensation levels during the covered period. Loan proceeds must be spent on eligible expenses during the covered period, and at least 60% of the funds need to be spent on payroll costs.

The covered period for loans funded in 2020 is 24 weeks after disbursement, but borrowers may opt for an eight-week covered period if their loan was funded before June 5, 2020. Borrowers who received a first or second loan in 2021 can choose a covered period from eight to 24 weeks.

Expenses Eligible for PPP Loan Forgiveness

The original PPP only included forgiveness for eligible payroll and operating costs. The Coronavirus Response and Relief Supplemental Appropriations Act passed in December 2020 expanded eligible expenses to include: supplier costs, expenses for health and safety improvements and certain property damage.

These are expenses that generally qualify for PPP loan forgiveness:

  • Payroll costs, including wages, tips, commissions, bonuses, and employer-paid benefits such as insurance, sick leave, and retirement contributions. Note that compensation for employees earning more than $100,000 per year isn’t eligible for forgiveness.
  • Operating costs, including mortgage payments and interest, rent, utilities, and business software such as accounting, payroll, or inventory management.
  • Supplier costs, including the cost of goods sold, essential to operating your business if the purchase order or contract was in place before the covered period. Purchase orders for perishable goods made during the covered period are also eligible.
  • Property damage, including repairs for damage or loss due to looting related to public disturbances in 2020 that were not covered by insurance.
  • Worker protection, including personal protection equipment and costs related to health and safety such as health screenings, installation of barriers or expansion of outdoor dining.

Documentation Required for PPP Loan Forgiveness

If your loan was for more than $150,000, the documentation you will need to provide for forgiveness includes:

  • Payroll costs
  • Third-party payroll reports for the covered period and payroll tax filings
  • State quarterly business and individual wage reporting
  • State unemployment insurance tax filings
  • Bank account statements
  • Payment receipts canceled checks, or account statements evidencing contribution to employer health and retirement accounts
  • Other costs
  • Lender amortization schedule or receipts showing business mortgage interest payments
  • Business rent, lease, and utility statements reflecting payments made
  • Invoices, receipts, or purchase orders showing covered operations expenditures, property damage costs, and supplier costs
  • Canceled checks or receipts for other covered expenses such as protective equipment and health and safety enhancements

COVID EIDL

COVID EIDL loans are not eligible for forgiveness and must be repaid in full, but borrowers can take advantage of a 30-month payment deferral period that begins on the loan date. This deferral period applies to loans approved in 2020, 2021, and 2022 and is an extension of the original 12-month deferral period.

Targeted EIDL Advance or Supplemental Targeted Advance funds (up to $15,000) are considered grants and do not need to be repaid.

Business Funding Available

PPP and EIDL loans were great alternatives to closing your business during the pandemic when times were less certain than the present.  However, with PPP and EIDL loan programs no longer a solution to your financing needs, business owners must consider alternative funding options.  Alternative funding companies, such as Capstone, may be able to provide the working capital you need to sustain your business and help you negotiate the long road to a full economic recovery.  Capstone can provide flexible and reliable transaction-based credit facilities, including: 

  • Factoring programs to quickly convert your accounts receivable to cash so you may buy inventory as well as pay employees and operating expenses
  • Purchase order financing programs for the purchase of pre-sold inventory, finished goods, or materials, and other resources related to specific purchase orders or contracts
  • Trade finance programs to support your international trade requirements

Capstone has the expertise to serve as your primary funding source or can work within an existing bank relationship for opportunities that banks and other lenders have declined or take too long to approve.

If your business has PPP and EIDL loans, managing your loan repayment along with implementing the proper business funding strategy will help ensure you have access to adequate working capital and will protect your financial resources.

For more information on PPP loan forgiveness, read our white paper: Payment Protection Program Loan Forgiveness Guide

How to Become a Factoring Broker or ISO

02:52 12 September in Blog, Broker Resources

The global factoring market is a trillion-dollar industry critical in providing businesses with alternative financial solutions.  With entrepreneurship becoming increasingly popular and people wanting to be their own boss, many professionals find the opportunity for a career and success by becoming a broker within this industry.

Whether you are a budding entrepreneur, looking for a source of residual income, or simply want the freedom of working from home, becoming a factoring broker may be a career path that complements your talents and gives you the lifestyle you prefer.

What’s a Factoring Broker or Independent Sales Organization (ISO)?

A factoring broker is an industry professional such as a commercial financial consultant or independent sales office (ISO) that acts as an intermediary “referrer” between small or medium-sized businesses needing accelerated cash flow/ working and a factoring company. Factoring companies (factors) provide alternative financial solutions to accelerate cash flow and increase working capital. 

A factoring company is not a bank or traditional institutional lender, and they do not make loans. Factors provide alternative funding solutions to a broad range of industries that are more flexible and easier to obtain than a bank loan. 

Factoring brokers are not loan brokers. Loan brokers act as an intermediary between a borrower and a bank or lender.

Alternative Financial Products and Services

The products and services factors can provide include: invoice factoring, purchase order (PO) financing, trade financing, and business services.

Invoice factoring is a form of debtor financing that businesses use to accelerate cash flow or increase working capital by selling their invoices (account receivable) to a third party known as a factoring company at discount.  Businesses receive cash immediately for their unpaid invoices instead of waiting for their customers to pay.  Factoring is easier to obtain and more flexible than a loan. Credit approval is based upon the financial strength of the client’s customer, not the credit profile of the client.

PO financing can be used along with invoice factoring and funds the purchase of pre-sold inventory, finished goods in most cases, materials, or other resources related to specific purchase orders or contracts.  When the client bills their customer, the invoice is factored to pay off the PO financing facility.

Trade financing provides funding for international imports and exports and domestic transactions.

Factors can also provide credit and collections services and other business solutions to help clients attain their objectives.

These financial products assist clients in many ways, including their needs for working capital solutions, business growth, seasonal gaps in cash flow, turnaround funding, etc.  Factoring, like many areas of finance, has its own jargon or lingo. When considering becoming a factoring broker as a career, it is helpful for the financial professional to know and understand.

Reasons to Become a Factoring Broker or ISO

There are several reasons to become a factoring broker or ISO, including:

  • Growth potential: The global factoring market is a trillion-dollar industry and is projected to grow at a CAGR of 6.1% from 2022-2027. Much of this growth will come from small and medium-sized businesses, the heaviest users of alternative funding solutions.
  • Focus on business development: ISOs refer potential clients to factors. Factors do the heavy lifting required to evaluate and approve new clients. They also work with clients to onboard them to have a smooth transition. This leaves ISOs more time to develop prospective clients and grow their business volume.
  • Unlimited income potential: factoring brokers earn commissions over the length of time the client has an active relationship with the factoring company. Commissions can grow without limit with increased volume from existing clients and the development of new clients.
  • For accountants, insurance agents, lawyers, and other professionals, commissions can add another income stream to their businesses.
  • Work from home or an office and benefit from a better work/life balance.
  • The investment and time required to get an ISO up and running is low.
  • There are no specific education requirements or formal licensing in most states. Some understanding of financing and business transactions is helpful.
  • The process to sign-up and do business with a factor is simple and requires little time.

Steps to Become a Factoring Broker

If you would like to become a factoring broker with Capstone, the first step is to contact us via phone at 347-821-3400, through a web form on the website or by sending an email to [email protected]  

The next step of the onboarding process is to sign an Originator Agreement which identifies the terms of the relationship. We will then provide you with application documents, tutorials, training materials, brochures, and other educational aides to facilitate the onboarding process. After completing these steps and digesting the onboarding materials, you should be ready to refer your first prospective client. 

Why Choose Capstone

The factoring company you choose to work with is crucial to becoming a successful factoring broker and making commissions. Capstone is easy to partner with and provides the support you will need to be successful. Some of the benefits you can expect from working with Capstone include:

  • Industry knowledge and experience. Capstone has been a leader in the factoring industry for over 30 years and has experienced staff to assist you with onboarding to make your transition to a factoring broker as smooth as possible.  This is also important when structuring transactions, developing innovative business ideas, and helping your clients avoid pitfalls.
  • Custom-tailored funding packages. We understand every customer has their own unique needs, and we will work with you and with your client to make sure we offer a package that meets those needs.
  • Easy agreements, forms, and transactions to work with so you can spend more time developing new business.
  • Training so you need never worry about any uncertainty with our financial products. We can provide you with training, exclusive educational materials, and brochures.
  • Marketing materials to support your business development efforts.
  • Fast funding and approval times for new clients, so you earn commissions sooner.
  • Local and personalized customer service regardless of where your client is located.
  • Competitive commission rates. If we are doing business with your customer, you will receive a regular commission check from us.
  • Financial resources to fund the necessary transaction size and support your customer’s growth plan.  Small or new factoring companies may lack the resources to fund transactions. 
  • A wide range of financial tools and programs to help facilitate the growth of your client.  We offer invoice factoring, purchase order (PO) financing, domestic and international trade finance, and pre-exporting financing programs. A single source for business funding can be more efficient and facilitate seamless business transactions. 

If you are looking to become a factoring broker or ISO and need a partner you can trust to help you build your business volume by assisting your clients, now is a great opportunity to partner with Capstone. The support we offer factoring brokers speaks to our commitment to your success. Get in touch today at 347-821-3400.

Economic Recession Looming? How to Prepare Your Business

15:05 29 August in Blog

Economic Recession Looming? How to Prepare Your Business

In the past two years, the U.S. has experienced upheaval from the COVID-19 pandemic, an economic recession with unemployment levels not seen since the Great Depression, massive fiscal stimulus packages, the worst inflation in four decades, a rapid increase in short-term interest rates, the war in Ukraine, and the onset of what may be another economic recession.

U.S. consumer prices surged 9.1%% in June 2022, the largest yearly increase since November 1981. The energy index soared 7.5% in June and 41.6% over the last year, the largest 12-month increase since the year ended April 1980. The producer price index, a measure of the prices received for final demand products, increased 11.3% from a year ago in June. Of that gain, almost 90% came from a 10% increase in final demand energy costs as prices for oil, natural gas, and other products soared. The rapid price surge at the producer and consumer levels prompted the Federal Reserve to tighten monetary policy and aggressively raise short-term interest rates.

Persistently high inflation and higher interest rates are causing a business slowdown which may push the U.S. economy into a recession.

What’s a Recession?

GDP in the U.S. fell 0.9% annualized in the second quarter of 2022, following the 1.6% annualized decline in the first quarter. The second straight quarterly decline in GDP meets the widely accepted rule of thumb for a recession. The National Bureau of Economic Research (NBER) officially declares recessions and expansions, but it probably won’t make the call on this recession for some time.

Is an Economic Recession Looming/Are We Entering into a Recession?

The overwhelming majority of corporate executives are bracing for a recession, according to a new survey by Stifel Financial.

Nearly all 70 business leaders surveyed believe the U.S. economy is either already in a recession (18%) or will face one within the next 18 months (79%). Only 3% think that one will be avoided entirely.

The survey also found inflation and the tight labor market represent the two biggest perceived threats to running a business today.  53% of respondents believe that inflation will be an issue for the next two quarters to a year, with another 43% expecting high prices to continue even longer. 

Regardless of what the NBER ultimately decides about this economic slowdown, most businesses believe the U.S. economy is already in a recession or will face one within the next 18 months.

How to Prepare for a Recession

Small and medium-sized companies are more impacted during periods of economic downturn or recession and are typically the least prepared. They tend to have limited financial resources and usually find it more difficult to obtain working capital because banks tighten credit requirements and focus on large, well-heeled customers in a recession. High inflation and higher interest rates will make this recession more difficult to weather because almost everything is more expensive, and more working capital will be needed to finance the additional costs.

The key to surviving a recession is all about preparedness and cash flow management.  The following are some strategies businesses can use to prepare for a recession and increase their staying power.

Revise Budgets and Forecasts

If you are not already doing so, prepare a 24-month rolling budget and sales forecast to determine the staffing, programs, operations, and working capital you will need to weather the recession and maintain your core strengths and long-term growth objectives.  Regularly review and revise the projections so changes to your operations can be implemented in real-time.  Don’t delay taking steps to implement your revised plans. Delaying may jeopardize your plans and force you to take more drastic actions later.

Cut Fat, Not Bone

Avoid cutting key personnel and sales, marketing, and product programs that are your company’s future. Remember how difficult it has been to find good, qualified people when you make staffing decisions. Get your people involved in finding ways to do more with less. They can be your best source for ideas to work smarter. Your sales, marketing, and product programs are the link to customers as well as the marketplace and your source of future growth.  By resisting the urge to make cuts in these areas, you will be able to position your business to capitalize on the recession and potentially scoop up market share.

Accelerate Cash Flow

Use invoice factoring to accelerate the conversion of accounts receivable into immediate cash instead of waiting 60 days or more to be paid. Invoice factoring is easier to obtain and more flexible than a bank loan, and credit approval is based on your customer’s financial strength, not your company’s credit rating.

Manage Accounts Payable

Make sure you take full advantage of your suppliers’ payment terms. Ask suppliers for better payment terms, especially if the terms are not competitive in your industry. If necessary, stretch payments to suppliers as long as it does not affect your relationship, trigger a credit hold, or impact your credit rating.

Increase Working Capital Facilities

Having sufficient working capital and the right type of funding facilities is critical.  Take steps now to obtain the working capital your company will need. Invoice factoring and PO financing programs can increase your working capital without reducing availability on your bank credit facilities. 

Work with a Factoring Company

During economic downturns and periods of recession, traditional financial institutions, along with banks, may not be able to provide sufficient working capital due to lending limits.  You may also find you fall outside the risk threshold to access and retain lines of credit from these sources.  Factoring companies, such as Capstone, can custom-tailor invoice factoring, PO financing, and trade finance programs to dovetail with your business model. Factoring companies are more flexible and easier to work with than traditional funding sources as well as provide funding based on the financial strength of your accounts receivable instead of your business’s credit profile. Factoring companies also provide faster approvals and access to funds than other traditional funding sources.

What Some Companies Are Doing to Prepare for a Recession

A new survey released by PwC Consultancy this month showed that 50% of companies plan to reduce overall headcount.

Tesla announced plans to layoff 10% of salaried staff and freeze hiring worldwide. Elon Musk said he has a “super bad feeling” about the economy and believes the U.S. is already in a recession.

Ford plans to lay off 8,000 salaried workers. A spokesman commented that Ford is “working to reshape the company.”

Google CEO Sundar Pichai told employees that the company is “facing a challenging macro environment with more uncertainty ahead.” He added that the company needs “better results faster.”

No matter what strategies are being undertaken, business leaders can agree that robust planning and effectively utilizing business data and analytics are critical when preparing for an economic downturn. 

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Business owners can survive a recession and be in a position to take advantage of opportunities by preparing ahead and implementing the above strategies now.  You will also avail yourself of more funding options when you are not operating in crisis mode and when the financial health of your business is at its strongest.   

Whether we’re simply seeing an economic slowdown or a full-fledged recession, Capstone is here to help you stay focused on what you do best – running your company.  We have the experience and resources to custom-tailor invoice factoring and P.O. financing programs for your business.

 

2022 State of the Factoring Industry Report

17:26 22 August in Blog, Broker Resources

The factoring industry has undergone radical changes, and a growing number of concerns exist which overshadow the outlook for the factoring market in the second half of 2022 and 2023.   Despite these concerns, there are opportunities that factoring brokers and independent sales offices (ISOs) can capitalize on to grow their business pipeline and meet their client’s working capital needs.   

In the two short years since Capstone’s 2020 Global Factoring Report, the U.S. and the world have experienced upheaval from the COVID-19 pandemic, an economic recession with unemployment not seen since the Great Depression, massive fiscal stimulus packages including direct payments to individuals and loan guarantees for businesses, the worst inflation in four decades, a rapid increase in short-term interest rates, the war in Ukraine, and the onset of another economic recession.

Not surprisingly, factoring and trade finance volume fell 6.5% globally and 23.0% in North America in 2020 and rebounded strongly in 2021 with increases of 12.6% globally and 45.7% in North America. The global factoring market is expected to grow further at a CAGR of 6.08% during 2022-2027, from $3,109 billion in 2021 to $4,430 billion in 2027.

Concerns Overshadowing Alternative Funding Sources

The U.S. economy is slowing and may be in a recession after two consecutive quarters of negative GDP growth. Inflation may moderate but will likely remain at persistently elevated levels for some time. Persistently elevated inflation rates will give the Federal Reserve reason to continue raising short-term interest rates until the Fed’s inflation target is reached.

The war in Ukraine and growing friction with China may develop into wider conflicts that could disrupt economic growth further.

Overreaching state and federal regulations and disclosure requirements pushed upon alternative funding sources may create a credit crisis with businesses having fewer financing options as more alternative funding sources consolidate or go out of business. As of 2020, more than 90% of all domestic invoice factoring was done by small and medium-sized businesses. These business owners often struggle with cash flow, and as a consequence, they have the greatest difficulty in obtaining traditional financing.

The difficulties many businesses have encountered obtaining traditional financing have increased the number of prospective clients with SBAs, senior liens, and MCAs, making it more difficult to approve new clients if Subordination Agreements or Inter-creditor Agreements cannot be obtained.  

Despite these concerns, there are opportunities factoring brokers and ISOs can capitalize on to benefit both themselves and the prospective client.

Trends that Factoring Brokers and ISOs Can Capitalize on:

Stretched payments – During an economic slowdown, businesses “stretch” their accounts payments on their accounts receivable. This creates a cash flow problem for many businesses and an opportunity for factoring brokers and ISOs to work with alternative funding sources, such as Capstone. The key to surviving an economic slowdown is cash flow management.  Businesses caught in a cash flow “squeeze” are more receptive to using invoice factoring as a cash flow management strategy to accelerate their cash flow.  When the economy is in a decline, businesses have used invoice factoring to help them survive.

Tighter lending standards – Small and medium-sized businesses may find it harder to obtain loans from traditional financial institutions as banks tighten their lending standards, raise their risk thresholds, and focus on their larger, well-heeled customers. This increases the number of potential clients that will need alternative financial products.  Capstone offers custom-tailored alternative funding solutions, including invoice factoring, purchase order (PO) financing, domestic and international trade finance, and pre-exporting financing programs, which can be integrated into any business model.  

Underserved businesses and industries – In Capstone’s experience, businesses in the following industries, as well as MWDBEs, are underserved by traditional funding sources, including:

  • Construction – General Contractors and Subcontractors
  • Manufacturing
  • Coal Mining
  • Oil and Natural Gas
  • Suppliers/ Distributors
  • Renewal Energy and Environmental

These types of businesses and industries have a significant number of potential clients for including invoice factoring and PO financing.  Capstone understands the unique challenges faced by these businesses and has the experience necessary to structure a successful funding strategy to support their working capital needs.

Prior SBA loans, senior liens, and MCAs – Many prospective clients may have prior SBA loans, senior liens, and merchant cash advances (MCAs).  It is important when working with these clients to also work with the right alternative funding source.  Negotiating a Subordination Agreement or Inter-creditor Agreement with senior lenders requires experience and skill.  Fortunately, Capstone has a track record of successfully negotiating the proper agreements for their clients.  As the economy weakens, there will be more businesses in this situation that may benefit from invoice factoring.

Decline of government-backed loans and relief programs – When looking back to 2021, the biggest competitor for the factoring industry was the U.S. government with economic injury disaster loans (EIDL), Paycheck Protection Program loan forgiveness, and other government stimulus programs. When the businesses that took advantage of these programs burn through the liquidity they received, traditional lenders will start weeding out the companies that don’t meet their more rigorous credit criteria. This will be an additional opportunity to develop these businesses as prospective clients for a funding solution through Capstone. 

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The United States continues to be one of the largest markets in the world for invoice factoring.  While the outlook for the remainder of 2022 and 2023 is uncertain, there are several variables in play that can both positively and negatively impact the economy and the volume of invoice factoring over the near term – recession, inflation, rising interest rates, government regulations and disclosure requirements required of alternative funding sources, and geopolitical events.

At the same time, these macro-level factors will create a business environment where small and medium-sized businesses will need invoice factoring and PO financing more than ever to provide the working capital financing to survive a recession and the impacts of inflation and higher short-term interest rates.  Capitalizing on the above trends will help you increase your business pipeline and meet your client’s working capital needs.

Infrastructure Investment and Jobs Act Funding Distribution Delays

14:56 22 July in Blog, Business Funding

2021 Infrastructure Investment and Jobs Act Funding Distribution Delays

The Infrastructure Investment and Jobs Act (IIJA) was signed by President Biden on November 15, 2021. It was intended to provide funding for projects to repair, improve and create new infrastructure across a broad swathe of the economy. The IIJA includes spending for traditional infrastructure projects (roads and bridges) and new categories in technology and environmental infrastructure.

The approximate $1.2 trillion legislation is intended to address the woeful condition of existing infrastructure and provide funding for new infrastructure. It appropriates $550 billion for new spending over five years to modernize roads, bridges, ports, airports, and mass transit; increase high-speed internet access; modernize the electric grid, and expand renewable energy installations and the nation’s network of electric-vehicle charging stations among other objectives.

Despite the importance of this legislation and its favorable reception, the distribution of funds for IIJA projects has been inexplicably slow. 

Contractors Hurt by Slow Funding Distribution

Delays in funding IIJA projects have hurt many contractors. Projects scheduled to start in 2022 have been delayed, and plans for projects to start in 2023 have been put on hold. Contractors that staffed up in anticipation of the additional work and ordered materials, supplies, and equipment so they could hit the ground running when funding was received have been left holding the bag. They now have to manage their businesses to cope with delays impacting on their businesses and working capital.

What Caused the Delays in Funding?

Funding delays have been caused by: the complex and archaic methodology used to distribute funding from the Federal Government to infrastructure projects, funding legislation issues at the Federal level, and a lack of coordination and direction at the state and local levels.

Complex and Archaic Funding Methodology

The Congressional Research Service’s report dated April 26, 2022, provides an informative overview of funding methodology in Figure 1. Examples of Federal Spending Streams. Funding may go through four or more levels of distribution before a contract is finally awarded.

The Federal Government usually funds major surface infrastructure legislation through the Transportation Department, which issues grants to states. In many states, transportation officials or state legislatures issue a list of their top projects to be funded and then work their way down as funds become available. They don’t typically disclose in detail the criteria used to rank projects. This “opaque” process requires local officials, community groups, and businesses to closely follow the ranking to see which projects have been approved.

Federal Funding Legislation Issues

Congress has often had delays in passing appropriation bills, as it did earlier this year. When delays occur, Congress uses a Continuing Resolution (CR) that temporarily maintains funding based on the previous year’s funding while it works to authorize new spending. Operating under a CR, which generally does not authorize new spending, hindered the ability of the Department of Transportation to release IIJA funds for highways and other infrastructure projects. The IIJA was not fully funded until President Biden signed the Consolidated Appropriations Act, 2022 on March 15, 2022, four months after the IIJA was signed into law.

State and Local Delays

Further delays occur at the state and local levels because there is often a lack of clearly defined criteria and methodology to allocate funds to projects. The consulting firm McKinsey pointed out several other reasons why delays will occur:

  • Unprecedented levels of funding: Some programs will receive more funding in the next five years than in the previous 25 years combined.
  • New energy technology requirements.
  • Many stakeholders to coordinate.
  • For many programs, states are required to match 10%-40% of the total award.
  • High labor and supply chain costs.

In January 2022, Mitch Landrieu, President Biden’s infrastructure czar, sent letters to all 50 governors asking them to name dedicated task forces that would include a chief point person. As of April, only Delaware, Arkansas, and New Mexico have done anything of this sort.

What Actions Can Contractors Take?

Contractors can do a number of things to help accelerate the distribution of IIJA funds, track distribution of funds, and protect their businesses against the impact of further delays.

  • Contact state legislators and governors

Contact state legislators and governor to express concerns regarding delays in IIJA and the negative impact they are having on your community, jobs and business. Request that they take action to name a dedicated task force that would include a chief point person to expedite distribution of funds from the Federal Government. The contact information for legislators including links to message or email them is available on the following websites for New York Senators & Committees | NY State Senate (nysenate.gov) and New Jersey New Jersey Legislative Roster of Members | NJ Legislature (state.nj.us).

Contractors outside of New York and New Jersey can find the contact information for their state senators using the following U.S. Senate: Contacting U.S. Senators.

  • Contact all your local governments, agencies, non-profits and general contractors that manage contracts for infrastructure projects, and ask them what you can do to help expedite distribution of funds.
  • Make sure your company is an approved bidder for all the organizations that let infrastructure projects.
  • Closely monitor the distribution of infrastructure funds in your area through all the sources of information available to you. Two sites that may be helpful in your monitoring efforts include A Guidebook To The Bipartisan Infrastructure Law For State, Local, Tribal, And Territorial Governments, And Other Partners BUILDING-A-BETTER-AMERICA-V2.pdf (whitehouse.gov) and Government Spending Open Data | USAspending.
  • Obtain the working capital financing your company will need to finance infrastructure contracts and provide the resources to handle delays in funding.  While you wait for your infrastructure project to start you may find that you do not have adequate working capital to sustain operations or to take advantage of growth opportunities through other construction projects.  Having adequate working capital and the right type of funding facilities is critical for any type of contractor.  Project delays not only increase the amount of working capital needed to fund a project, due to things like inflation as well as mobilizing and demobilizing on a job site, but also negatively impacts your cash flow.  You may have capital tied up with the additional staff you hired in anticipation for the infrastructure work or with materials, supplies and equipment purchased for the project.  Capital that could have been used more strategically elsewhere but is now tied up indefinitely with the delayed infrastructure project.   

Project Funding Through Capstone

Construction and infrastructure initiatives demand time and money.  Capstone understands the financial components associated with project financing and is focused on providing capital to support our clients’ goals. Invoice factoring through Capstone is an excellent cash flow management strategy for contractors looking to combat the negative effects of project delays.  

Contractors can obtain the additional working capital needed to finance projects as well as the cash flow for operations. Factoring can be provided for a single invoice/ payment application, or as a program for all of your accounts receivable.  Approval for funding is based on the financial strength of your client, instead of your credit profile.  Invoice factoring can also be a more convenient alternative to other types of third-party funding sources and traditional loans for contractors requiring faster approvals and access to funds.

If you are a contractor experiencing project start delays with an infrastructure project and potentially need additional working capital, you should apply now with Capstone.  Contractors will avail themselves to more funding options when they are not operating in crisis mode and when the financial health of their business is at its strongest.   

Business Funding Available to Companies with Current SBA Loans

10:43 12 July in Blog, Broker Resources

Factor brokers and independent sales organizations (ISOs), did you know your clients with outstanding Small Business Administration (SBA) loans can still qualify for funding with a factoring company? Don’t let a SBA loan prevent you from pursuing invoice factoring and PO financing opportunities with clients that need to increase their working capital funding.

In this article we’ll discuss SBA loans, and how factoring companies (factors) work with SBA lenders that have first (senior) lien positions on assets, to qualify your clients for working capital funding. 

What Is an SBA Loan?

With the arrival of stimulus programs including CARES Act and the Paycheck Protection Program (PPP), government-backed loans have become extremely popular for businesses over the past couple years.  These loans are commonly known as “SBA loans” and are business loans guaranteed in part by the Small Business Administration, an agency of the Federal Government. SBA loans are designed to help small businesses obtain the financing they need to weather adverse business events, such as the pandemic, as well as for growth as their business expands. Since the onset of the pandemic, the volume of SBA 7 (a) loans, the most commonly used SBA loan, has risen dramatically from $22.5 billion issued in the fiscal year ended July 31, 2021, to $36.5 billion in the fiscal year 2022.

Features of SBA Loans

The SBA does not make loans directly. Instead, it works with lenders that process loan applications and issue loans. The SBA guarantees 50-85% of the loan amount.

The SBA sets the maximum interest that may be charged on an SBA loan. The rate charged by lenders is lower than it would otherwise be for a similar loan because of the SBA guarantee. SBA loans are easier to obtain than regular business loans due to the government guarantee.

SBA loans offer longer repayment terms than regular business loans, which makes it easier for small businesses to manage the cash flow needed to make loan payments.

SBA lenders must take a first lien position on the assets financed with loan proceeds, and typically a lien on all other assets of the company including but not limited to inventory, accounts receivable, equipment, general intangibles, real estate, etc.

Types of SBA Loans

There are a number of SBA loan options to fit a wide range of business needs ranging from export and disaster loans to loans for working capital, furniture, equipment, real estate, and business expansion.

The most commonly used loan is the SBA 7 (a) Loan. The proceeds can be used for just about any business need – working capital, furniture, equipment, and business expansion. The maximum loan amount is $5.0 million with repayment terms up to 25 years depending on the use of the proceeds. Standard 7 (a) loans can take a number of weeks to process.

For faster processing, there are SBA Express Loans with a maximum loan amount of $500,000 and 7 (a) Small Loans with limits up to $350,000.

How Factoring Companies Work with Lenders that Have First Lien Positions

SBA loans can be a good source of capital, but like any loans they don’t always provide all the working capital a company needs to grow. Invoice factoring and purchase order (PO) financing can provide the working capital financing clients need for growth. Experienced factors can help clients with SBA loans by working with their lenders to obtain the first lien positions needed to approve working capital financing programs.

How a Subordination Agreement Is Used to Obtain the Lien Position a Factor Needs

When a client has an SBA loan, the lender will usually have a first lien position on accounts receivable, inventory, and all other assets. This can be problematic because a factoring company needs to have a first lien position on general intangibles, accounts receivable and inventory to approve a prospective client. In order to resolve this situation, a factor must negotiate a subordination agreement with the SBA lender. 

A Subordination Agreement is handled with an Intercreditor Agreement between the SBA lender and a factoring company. The SBA lender agrees that the factor can have a first lien position in certain assets. The SBA lender subordinates its lien position to the factor and takes a secondary lien position. Subordination gives the factoring company the security it needs to fund a client’s accounts receivable and possibly finance its purchase orders. 

The challenge for the client is to convince the SBA lender to give up its first lien position. The factoring company, who is working with the prospective client, needs to convince the lender that subordinating its first lien position to the factor can provide the necessary working capital which will benefit the client, and make the SBA lender’s position on the other assets more secure.

In some cases, a factor may need to agree to limit the subordination of an accounts receivable lien to a maximum dollar amount or to certain accounts. This makes the SBA lender’s security interest subordinate to the factor’s security interest, but only up to the amount of the cap or in specific named accounts receivable.

SBA lenders may also not be willing to give up their first lien position in the client’s inventory. In some cases, the factor may need to negotiate a lien position that is limited to returned inventory related to factored accounts receivable only.

A Factor Company’s Experience in Negotiating with SBA Lenders Matters

Negotiating with SBA lenders requires experience and skill. It is important to work with a factor that has a track record of successfully negotiating with SBA lenders to obtain the proper Subordination Agreements needed for their clients.

When you have a client with a current SBA loan that needs additional working capital to grow their company, work with a factor that has the skills and experience needed to successfully negotiate a Subordination Agreement, so your client can obtain access to much-needed working capital.

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Capstone Capital Group, LLC specializes in providing working capital programs that can be custom-tailored to support a client’s business model. Capstone has a proven track record of working successfully with SBA lenders to obtain the Subordination Agreements needed to fund invoice factoring and PO financing programs for clients. 

Contract Cost Analysis – How Much More Expensive Labor and Materials Impact Your Bottom Line

08:48 06 July in Blog

The surge in inflation we are currently experiencing occurred because of a number of disruptive events coming together to form a perfect storm of too much demand and not enough supply. The rate of inflation is the highest in over four decades. Contractors will need to take action to protect their bottom line and cash flow, and secure additional working capital to finance the higher cost of materials and supplies, payroll, and other operating expenses.

What Caused the Surge in Inflation?

The disruptive economic events began with the onset of COVID-19. Pandemic restrictions around the world resulted in record unemployment, the shutdown of non-essential manufacturing and production, and severe disruption of all forms of transportation. As a result, the U.S. and other major countries had economic contractions not seen since the Great Depression.

Several countries reacted with unprecedented fiscal stimulus programs and more accommodative monetary initiatives to provide liquidity and facilitate an economic recovery. The fiscal stimulus programs in the U.S. resulted in a record level of “excess savings” which helped fuel the imbalance in demand and supply when the economy began to open up.

After vaccines were rolled out, pandemic restrictions were eased, setting the stage for a tsunami of consumer spending in the U.S. and other advanced countries. The nascent recovery, however, was very uneven around the world. Major manufacturing and transportation centers could not ramp up to meet the surge in demand because of labor and materials shortages and transportation equipment that was not in position around the world. These events snarled supply chains globally.

Fuel costs, which had been already on the rise, were added to the fire with the war in Ukraine, further disrupting supplies of energy, commodities, and metals, causing prices to spike.

Is the Surge in Inflation Temporary or Will It Last for a While?

The wave of inflation we are experiencing has become pervasive, affecting consumers, manufacturers, transportation, distributors, service providers, and construction contractors. The prices of goods and services from gasoline, groceries, and airplane tickets to labor, No. 2 Diesel Fuel, copper tubing, and cement have increased significantly.

The disruptive events created shortages in key raw materials, commodities, metals, and labor, and bottlenecks in shipping and transportation, which drove up the costs for these goods and services. Producers, manufacturers, and transportation providers passed these additional costs along by raising prices to wholesalers, retailers, and contractors. Retailers in turn raised prices for the final consumer.

Inflation can be temporary when it doesn’t permeate the entire economy, and prices fall as demand drops and shortages ease. Take lumber for example. Prices rise and fall with demand from the construction industry. The price of lumber does not directly affect the entire economy and becomes embedded in the cost of many end products.

In other cases, inflation can last for a while when the supply of a number of key inputs is affected, and demand and shortages remain at elevated levels. Price increases permeate the entire economy and become embedded in the cost of many products and services.

Examples of this situation are No. 2 Diesel Fuel and labor. No. 2 Diesel Fuel is used extensively in transportation and construction equipment. It impacts the cost of many products and services. Its cost may remain elevated for some time due to geopolitical events and the transition to renewable energy. The cost of labor impacts the cost of all products and services. It may stay elevated for some time due to shortages caused by the pandemic and reduced labor force participation.

In addition, a paradigm shift in supply chains to avoid exposure to geopolitical risks, increase sources of supply, and shorten replenishment times may continue to increase costs for the foreseeable future.  

How Cost Increases Impact Contractors

Inflation will reduce your gross profit on contracts and increase the cost of overhead resulting in a smaller profit or even a loss. Additional working capital will then be needed to finance your business operations. 

Gross profit is eroded by higher costs for labor and material inputs. The following are examples of cost increases for construction material and labor reported by the Bureau of Labor Statistics.

Construction Material Inputs

May 2022 YTD 2021 AVG
Non-residential 12.5% 18.5%
Residential 15.5 18.3
No. 2 Diesel Fuel 70.2 79.8
Aluminum Shapes 17.4 25.0
Lumber/Plywood 15.4 41.1

Average Hourly Earnings All Construction Employees

Average Hourly Earnings % Change from Prior Year
May 2022 $34.56 5.8%
May 2021 $32.65 4.1%
May 2020 $31.27

 

Overhead costs are also increasing as inflations permeate the cost of goods and services throughout the economy. Salaries, benefit programs, insurance travel, utilities, and many other business goods and services are increasing. Unlike some construction material costs, which fluctuate with changes in demand and supply, overhead costs tend to become embedded in a company’s cost structure and are more challenging to reduce.

In addition, supply-chain issues may result in the need to carry more materials and supplies, further increasing the working capital needed to fund projects.

In an inflationary environment, you will need more working capital to fund purchases of materials and supplies and pay salaries wages, and operating expenses. In other words, you would need more money in the next 12 months to finance the projects you worked on in the last 12 months. 

Tips on Mitigating the Effects of Inflation on Gross Profit and Overhead Costs

Contractors can take a number of steps to mitigate cost increases with changes to contract language and operations, including:

  • Contract Language Changes
    • Mobilization clause – Negotiating this clause into the contract will demonstrate good planning and transparent communication that prompts customers to agree to advance a mobilization fee or deposit. This helps minimize timing issues created by mobilization costs. 
  • Price escalation clause – Add language to allow price increases under certain criteria such as increases in a construction cost index, or increases exceeding a cap or price range.
  • Uncontrollable events – Add language to allow changes in price due to uncontrollable events including changes in tariffs, duties or trade policies, epidemics, wars, and market conditions.
  • Force Majeure clause – Add language to protect against events or effects that cannot be reasonably anticipated or controlled.
  • Operational changes
  • Pre-order material and stock up on inventory.
  • Hedge forward purchases of commodity items.
  • Postpone or delay projects.
  • Fix costs as soon as possible.  Ensure the risk of price increases from subcontractors is mitigated by promptly binding subcontractors. 
  • Adopt new construction techniques that reduce labor and/or material content.
  • Automate business processes to reduce overhead costs.
  • Use technology tools to facilitate project management.
  • Adopt best practices such as Target Value Delivery to manage projects to bid targets.

How Invoice Factoring Can Help Contractors Manage in an Inflationary Environment

In an inflationary environment, the faster you convert accounts receivable to cash to purchase tangible assets such as materials and supplies, the easier it is to stay ahead of inflationary price increases.

Invoice factoring can help to accelerate the conversion of accounts receivable to cash. With invoice factoring, you can convert your outstanding accounts receivable to immediate cash instead of waiting 60 days or more for your customers to pay. The cash can then be used to accelerate your purchases of materials and supplies and help avoid price increases. 

Inflation will likely impact our economy for some time due to the perfect storm of disruptive events coming together to create shortages and increase demand. You can prepare your company by acting now to secure the additional working capital you will need with an invoice factoring program.

Vehicle Exporter Purchase Order Financing Case Study

03:11 05 July in Blog, Case Studies

Headquartered in Westchester, New York, this Client is a unique specialty export financing business involved with the sale of new and used vehicles such as BMW, Mercedes Benz, Audi, Porsche, and Range Rover. They finance the purchase of luxury automobiles and sports car in North America and Europe for export to independent car dealers and traders in China, Vietnam and other Asian countries.

Background

  • The Client purchases luxury automobiles and sports car in North America as well as Europe for export to independent car dealers and traders in China, Vietnam and other Asian countries.
  • Payment for the vehicles is made via Irrevocable Documentary Letters of Credit with the Client as the beneficiary of the export letters of credit.

Company Challenges

  • The Client lacked the liquidity to purchase the vehicles required to fulfill the documentary requirements of the export letters of credit.

Capstone’s Solution

  • Established a pre-export PO Financing Facility based on the value of the letter of credit and the cost of the vehicle to be exported.
  • Capstone makes cash advances to the car dealer to purchase the vehicles which are then drop-shipped to the port for export to Asia.
  • The proceeds of the letter of credit are paid into a blocked account that Capstone has dominion and control over. Upon receipt of funds following the presentation of documents to the LC (letter of credit) issuing bank, Capstone recovers the advance and any accrued fees sending the net proceeds (Client’s profit) to the Client.

Progress and Future Outlook

  • Since 2019, Capstone has funded 282 vehicle exports transactions averaging $10MM in exports per year. 
  • The Biden administration has reduced U.S. sanctions on China opening up the export market more than during the previous Trump administration.
  • In early 2022, the Client renewed the Purchase Order Financing facility with Capstone for an additional two years.   

 

 

Wholesaler Master Factoring Facility & Purchase Order Financing Case Study

14:04 21 June in Blog, Case Studies

Wholesaler Master Factoring Facility & Purchase Order Financing Case Study

Based in New Orleans, Louisiana, this Client is a wood and construction products wholesaler. Formed in 2009, the Client was originally a wood products wholesaler however they built a disaster relief segment a few years ago in response to hurricanes and flooding in Louisiana, Texas, the Virgin Islands and Puerto Rico.

Background

  • The Client primarily provides product procurement and related logistical assistance required for a particular disaster area. 
  • They are recognized as a high value-added niche player within the disaster relief industry, as they are able to handle all logistical matters in addition to sourcing and procuring the associated product required under very tight deadlines.

Company Challenges

  • The Governor’s Office for the State of Louisiana issued a disaster relief purchase order to the Client for the delivery of 250 recreational vehicles (RVs) to be given to residents displaced by Hurricane Irma.  
  • The RVs had to be sourced from 50 different vendors throughout the United States and needed to be delivered within five days of receipt of the $11MM purchase order.

Capstone’s Solution

  • Provided an $11MM Master Factoring Facility. 
  • Opened an $8MM PO Financing Facility to facilitate the purchase of the RVs.

Progress and Future Outlook

  • The Governor’s Office of the State of Louisiana was so impressed with their performance they are issuing the Client another purchase order for 500 RVs.

 

 

Tools to Increase Productivity and Profits for Factor Consultants and ISOs

18:15 14 June in Blog, Broker Resources

Do you feel like you’re working as hard as ever but not accomplishing what needs to be done to be successful as a factor consultant or independent sales organization (“ISO”)? 

Take a minute to do a quick assessment of how your business is doing.

  • Is your client list growing?
  • Is your volume increasing?
  • Are you contacting enough potential clients to keep your pipeline full?
  • Is your percentage of conversion of prospects into clients improving?

If the results of your assessment are not in the affirmative, then you need to take steps to increase productivity, business volume, and profits.

There are three actions you can take to improve your results.

  • Avoid distractions
  • Focus on value-added activities
  • Use technology tools to eliminate manual activities and improve productivity

Avoid Distractions

Email, text messaging, smartphones, and social media can be powerful tools for communication, but they can also become a source of distraction and reduce your productivity. It’s very easy to let yourself become a slave to answering emails and text messages, and fall into the habit of reading and responding to social media postings and surfing the internet. 

A simple internet search will provide a plethora of tips on how to use these communication tools without becoming addicted to habits that can sap your productivity. These tools should work for you, not vice versa.

Focus on Value-Added Activities

Value-added activities such as prospecting for clients, making presentations to prospects, onboarding new clients, and building volume with existing clients help to increase your business volume and profits. When you are distracted or your day is filled with busy work, you will not have enough time to devote to value-added activities. Planning is the best tool to use to focus on activities that will grow your business volume and increase profits.

An annual plan can help guide you to the areas you need to focus on to achieve your objectives. A weekly/monthly plan laying out what you need to do to keep on track can help to synthesize your annual plan objectives into the value-added activities you need to focus on in the near term. And of course, a daily To-Do list is always a helpful tool to use to maximize your focus on the value-added activities you need to work on.

When you develop plans, short-term or long-term, be realistic. Don’t try to do everything. Planning too many activities will reduce your productivity and you won’t do the activities as well as you should. Focus on value-added activities and work toward your plan goals.

Use Technology Tools to Eliminate Manual Activities and Improve Productivity

Time is a limited resource. You need to conserve time for value-added activities. Manual activities waste the limited time you have available. Technology tools can help you to minimize the amount of time you spend on manual activities.

Here are some technology tools that can help you be more productive.

Automate Business Processes

If you still have manual business processes, it is essential to automate them ASAP for two reasons. 

  • Your clients and business partners, e.g. factors, probably have fully automated business processes. It will be difficult for you to continue to do business with them if you don’t automate. And, they may not want to continue to do business with you if you don’t automate.
  • Manual business processes can consume a huge amount of your time that could otherwise be spent on value-added activities. List your manual business processes and estimate the amount of time you spend on them weekly/monthly. You’ll probably be very surprised at how much time you could save by automating your business processes.

Time Management

When you own a small business of any kind, including a consulting firm or ISO, the boundaries between your personal time and business time can be opaque, which makes time management critical to your success.

  • If you aren’t using a calendar software application such as Google Calendar or Apple Calendar which are free, or Microsoft Calendar for Microsoft users, you will probably do a better job managing your time by planning your week/month and benefit from the automated reminders they provide.
  • Use online retailers, consumer apps such as grocery shopping and delivery, and restaurant meal delivery to free up time to spend on your business. 

Marketing and Communications

The value-added activities you want to focus on revolve around identifying, attracting, contacting, and communicating with prospects and clients. Following are some tools that can help you be more productive in these areas.

  • Customer Relationship Management (CRM) software can increase your productivity by streamlining customer interaction. CRM organizes client profiles, history, and conversations in one location. It gives you a concise overview of your client interactions with dashboards that provide the information you need at a glance and also allows you to schedule and automate communication.  It is not uncommon for consultants to have several thousand client prospects and networking contacts so therefore you cannot effectively build relationships without this tool.
  • Email Management Software (EMS) applications can help you to manage large volumes of inbound emails. EMS helps you to track and respond to priority messages and quickly archive and retrieve emails.
  • Social Media Management (SMM) tools can help you engage with prospects and clients. SMM enables automated and real-time posting to multiple channels. It gives you the ability to monitor social media and learn about client preferences. SMM allows you to post to multiple platforms at once and can be used to consolidate a number of networks with just a few clicks.
  • File sharing tools can help with document management and the deal submission process.  It enables you to securely distribute, collect, and organize documents more conveniently with clients and other third parties.  This tool can be particularly useful in efficiently working with large clients or with complex transactions.  It also will expedite the underwriting process once the deal is submitted to the factor company. 

Technology tools, focusing on value-added activities, and avoiding distractions can improve your productivity and profits.  This will help you work efficiently and effectively with clients and will greatly improve the probability of approval by the factor company during the underwriting process.  Your business volume will grow and so will your profits.

Capstone works with factor consultants and ISOs to help them be successful. Capstone has the resources and experience to help you increase your business volume and profits. For additional information on resources to assist you, please read: consultant Resources – Capstone Capital Group (capstonetrade.com)

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