It wasn't for lack of customers, nor was it poor money management. The problem, Williams said, was that by the late 1990s his outstanding account receivables continued to grow, but money was not coming in fast enough for him to keep up with his expenses.
"Eighty percent of people paid their bills right on time, but the remaining 20 percent were 30, 60, 90 and in some cases up to 150 days late. It's really difficult when you're waiting on money that long," Williams said.
Williams said he needed the money to pay his employees, as well as to purchase inventory and advertising. On top of that, he was wasting time tracking invoices and trying to collect payments.
Williams knew he needed to do something, but he wasn't sure what.
About the same time, he was approached by First National Bank Alaska about its business manager cash management tool. A method of short-term financing, business manager is designed to be a self-liquidating line of credit, according to Louise Bourcier, vice president of First National's commercial lending division.
"It's designed for clients who need a lot of cash up front," she said.
The bank reviews the client's accounts receivable customer list, and if approved, the borrower actually sells his invoices to the bank. The day after the invoice is sold, the bank's client can collect his money. The bank then assumes responsibility for processing payments, mailing statements and receiving incoming payments.
"The program has changed the perception that a customer is not paying me, they're paying the bank," Williams said. "That generally means they pay quicker because they're worried about their credit rating. It's freed up my cash flow, so now I'm able to pay my bills on time. How can you get ahead if you keep getting behind every single year?"
Williams said he still averages about $10,000 in lost revenue from clients not paying their bills, "but that's inevitable," he said. "You're never going to get 100 percent, but you do what you can."
The bank, in turn, collects a fee for every purchase of invoices sold. There are no annual or renewal fees. The bank also keeps a loan allowance for reserve accounts. On a monthly basis, the bank evaluates the outstanding accounts and the customer gets the excess back.
First National's business manager tool is just one method of short-term financing that financial institutions offer.
Short-term financing is becoming increasingly popular for small businesses that are just starting out and/or experiencing rapid growth. Generally, the loan or line or credit is for up to one year, "but we tailor the term of the loan for each customer," said Jay Page, vice president of First National's corporate lending division.
The interim funding arrangement means businesses can increase their sales and maintain a steady source of capital while they secure more permanent financing.
Borrowers interested in short-term financing will need to provide their prior year's tax return, a current balance sheet, an income statement and an accounts receivable list prior to being approved.
A bank will also evaluate what Page calls "the five Cs" of credit analysis to determine if a customer is a desirable borrower: Character (the general impression you make on the potential lender based on your educational background and experience in business and in your industry), capacity (how you intend to repay the loan), collateral (additional forms of security you can provide the lender, such as your home), conditions (the local economic climate) and capital (the money you have personally invested in the business).
But short-term financing isn't for everyone, Page cautioned.
"Business owners can get in trouble if they keep their receivables and don't pay their line of credit down," he said. With the business manager program, the bank pays the client up front.
"We get paid because the invoice comes to the lockbox," a cash flow improvement technique in which the payments made by customers are directed to a special post office box rather than to the company, Bourcier said. "If the customer keeps the money that's supposed to repay the loan, he's been paid twice. They're supposed to pay it from their receivables. When you do that, you're robbing Peter to pay Paul."
Carly Horton can be reached at firstname.lastname@example.org.