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Factoring is the business of purchasing and collecting accounts receivables or of advancing cash on the basis of accounts receivables.  The most common reason a small business would need to use a factoring company is because they have a lack of capital due to their growing accounts receivables.  To put it simply, if the small business isn’t getting paid by their customers, they can’t pay their own debts.

Factoring is not generally a viable long term strategy for small businesses mainly because of the costs involved.  Factoring can be extremely expensive…commonly 10 to 12 percent of the amount of capital funded.  Small business sometimes raise their prices to offset the costs associated with factoring but this is usually only effective on a short-term basis.  That’s why factoring is not a long-term solution.

Anytime a business extends credit to a customer there is an element of risk.  Will the customer pay? Will the customer pay on time?  Some questions about a customers credibility can be answered early on, before the credit is extended. 

The first method for limiting risk is to pull a credit report and check references.  A credit report will show the customer’s total liabilities, whether the customer makes their payments on time, and other financial patterns of importance like increases in debt.  This information could aid in making a decision whether or not to offer this customer a line of credit.  References can also be a great tool to judge a customer’s credit worthiness.  Calling other suppliers or lenders that have already issued credit to your customer can be invaluable information.

Another method to limit risk is to not extend credit when a customer is paying slow.  Usually when someone pays slow it’s for a reason.  Most of the time their debts and monthly obligations out weigh their revenue.  This type of pattern can be cause for concern as it’s usually the beginning of a long downward spiral that will only get worse over time.

Getting collateral is another possible method to limit risk.  This is common in many industries as it motivates the customer to pay their debts and obligations in a timely manner.  Some examples of possible collateral could be a customer’s inventory, machinery, equipment, company vehicles, real property, stock, etc.

Most people in America have credit cards and the majority of them use their credit cards regularly and maintain balances.  Credit cards can be bad news for a undisciplined, spend happy person.  On the flip side, credit cards can be good news when it comes to most small businesses.  Good news in terms of receiving payments, not creating new debt.

As a small business owner, I prefer it when customers pay with a credit card.  Credit cards ensure that my business will get paid.  Sure I have to pay fees on every transaction and fees to my merchant services company but I know I’m getting paid from my customer for services rendered.  With credit card payments I don’t have to worry about bounced checks or employees skimming money from cash payments.  I love it when my customers use credit cards!

That being said, there is an element of risk involved when it comes to fraud.  Anytime an employee is unsupervised and has a customer’s credit card in their possession there’s an opportunity for fraud.  I’ve been fortunate in that I havent had any rogue employees commit any crimes on my watch but other small businesses havent been so lucky.

Authorities recently apprehended an employee at a “Famous Dave’s BBQ” in Pensacola, FL for credit card skimming.  The employee apparently stole credit and debit card numbers from 60 different customers.

Fraud has always existed in business and will continue to do so as long there’s opportunity for criminal minded persons to make money.  Fraud existed before computers, and now, with computers running nearly all facets of business there is even more opportunity for fraud to exist.

Large businesses are typically able to control fraud better than small businesses for a variety of reasons.  First of all, larger businesses can afford to implement the necessary safeguards to help mitigate risk.  Safeguards such as internal audits, expensive fraud insurance, security systems including cameras, the ability to segregate duties (i.e. purchasing agents shouldnt be in a position to approve invoices for payment), etc. 

Small business typically don’t have the funds necessary to implement any safeguards.  Accounts receivable departments have so many opportunities to commit fraud and without safeguards in place, the company will always be susceptible to fraud.  Small businesses can, however, minimize the likelihood of frauds through strengthening its internal controls. There are numerous methods to detect accounts receivable frauds so if a business finds itself a victim of a fraud, it should consult its legal counsel, accountant, and a competent fraud examiner.

In most cases large firms have a well-defined structure that usually dictates how the firms business flows internally.  These organizational structures typically have been in place for years and rarely change thus making change a challenging proposition.

Let’s consider the internal structure of large company’s sales division.  Let’s refer to this company as Company X.  Let’s assume a stellar salesperson, we’ll refer to this person as Bob, wants to change a process internally.  Let’s also assume this process has been in place forever.  Bob would have to discuss the change with his boss, the local sales manager.  The local sales manager would have to discuss the change with his boss, the branch manager or regional sales manager, or both.  The branch manager, regional sales manager, or both would then have to discuss the request for change with their boss, the national sales manager.  The national sales manager would then have to discuss the request for change with their boss, the VP of sales who would then, most likely, discuss the change with the President or CEO. 

The above example is purely hypothetical but very common when referring to large firms.  This example is also about the sales division.  Large firms have many divisions such as human resources, management, and accounting, just to name a few.  Each of these divisions within these large firms struggle to change largely because of their internal structures. 

Structure isn’t the only reason change is so difficult within large firms.  Accountability and job security also play a major role, at least in my experiences.  What I mean by accountability is: who is going to okay the proposed change?  Is it the local sales manager, the regional sales manager, the VP of sales?  Whoever decides to implement the change will have to be accountable for that change.  I’ve found that this is easier said than done.  The ultimate “job security” in the minds of corporate personnel is to never rock the boat… or make big changes

There are many pros and cons of doing business entirely online.  There are so many variables involved such as the type of business, does the business have inventory, is the businesses target market local or universal?  These are just some of the variables involved when looking at the possible opportunities an online business can offer.

An obvious “pro” of doing business completely online is the limited overhead costs.  Fixed costs such as rent, utilities, phone and internet, water, and trash are virtually eliminated.  This is, of course, assuming the business is run out your home.  Obviously you would still pay these bills but only for your home and not a storefront or office elsewhere.  Another very important pro is the tax benefits involved with working out your home.  Home bases businesses can offer huge tax benefits.  The IRS will allow for a portion of the rent or mortgage to be deductible,  as well as the utilities, internet and phone, and the water and trash bills.  These deductions can really make a difference when it comes to lowering your tax liability and keeping your money in your pockets.

Running a business entirely online without a physical storefront or presence may not be possible for some businesses.  Lets consider a business with inventory.  Nearly all retail businesses need a storefront with the exception of online businesses.  But where do these businesses keep their inventory?  Some businesses are able to sell their products on the internet and actually have the product drop shipped from the manufacturer’s warehouse thus eliminating the need for storage….all other businesses need to inventory their merchandise.  Depending on the size of your home, there may be no other choice but to rent commercial space.

Buying a Venture

Discuss the advantages and disadvantages of buying a business as opposed to starting one from scratch.  What two ways can one buy a business and which is preferable?

Buying an established business versus starting a business from scratch has both advantages and disadvantages. 

When you buy a pre-existing business you’ve basically eliminated the start-up costs such as site selection, build out, heavy marketing, etc as well as the time and effort associated with starting a new business.  An attractive pre-existing business should already be established to some extent.  Of course, if the business you are buying is well established and successful, you’ll most likely have to pay a premium for that business.  On the flip side, if the business is struggling you may be able to purchase it for pennies on the dollar and have a real opportunity to turn it around.

Starting a business from scratch offers many challenges.  First and foremost, the time and effort involved to get the business up and running can be extremely costly as well as physically and mentally exhausting.  You also have to consider the timeframe it takes to actually show a profit and earn a living.  Typically this can take 1-3 years.  This is something you’ll have to be prepared for financially and mentally. 

Typically when you buy a business you put a percentage down as a down payment and finance the remainder.  Frequently the seller of the business will offer financing with the business as collateral.  If the seller wont offer financing you’ll most likely have to get a small business loan from a bank or find private investors.  Frequently when the seller offers financing, they’ll stay and work with the new owner to “show them the ropes” thus decreasing the chances of failure. 

Is there such a concept as ‘good will” in reality and is it transferable?  Why or shy not?

“Good will” is a real concept that has an intangible but quantifiable prudent value of a business beyond its current assets.  Some examples of “good will” are the value of the businesses brand, the customer base, reputation, image, and other positive aspects of the business. 

“Good will” is transferable because it has a commercial value.  A common example of transferable “good will” is a businesses management team and customer base.  A few years ago I sold one of my small businesses and in the sales contract we had “all employees” and “customers” as transferable intangible assets.