In today’s episode of Manufacturing Success, we have a guest who is out of the norm for this show, but has equally valuable information to share! Joining us today is Stacey Huddleston— sales director of Prestige Capital in Kansas City. Stacey is responsible for overseeing the firm’s growth throughout the Midwest and Western regions of the US.
Not only does Stacey devote his time to Prestige Capital, but he is also a member of the Association for Corporate Growth and supports several non-profit events! Prior to his time in sales, Stacey served in the US Army and graduated from Illinois State University and Baker University where he earned his MBA.
We’ll chat with Stacey about what receivables financing is, how it works, as well as…
- What companies are a good fit for receivables financing
- The commitment involved in receivables financing
- What Stacey predicts in the industry over the next 18 – 24 months
- Receivables financing pre- and post-COVID
- Stipulations involved in using receivables financing
- And more
Listen now…
Mentioned in this episode:
Transcript
Mike Rogers: Welcome to another episode of Manufacturing Success. I’m Mike Rogers, your host. Today we’re going to have a different conversation that I felt might be of value to you, our audience. Normally we talk with leaders in manufacturing. But as most companies are in a shutdown phase, one of the keys when we get back to work is going to be having capital that you need to operate. And as I found from the PPP process, our banks are not as responsive as we would hope. So I wanted to bring in Stacey Huddleston with Prestige Capital to talk about receivables financing. Welcome, Stacey, to Manufacturing Success.
Stacey Huddleston: Thank you, Mike, for having me on Manufacturing Success. This is exciting.
Mike: Just to give you a little more background on Stacey, Stacey is the sales director at Prestige Capital and resides in Kansas City with his wife and Labrador Retriever. He has almost two decades worth of experience in commercial and industrial and asset-based lending within regional and community banks as well as a fintech company prior to joining Prestige. Stacey’s role is to oversee the growth of Prestige Capital throughout the Midwest and western regions of the US.
He is a member of the Association for Corporate Growth and supports several nonprofit events, including Bunker Labs, KC, National Network of Veteran Entrepreneurs, St. Michael’s Veterans Center that solves veteran homelessness in Kansas City, and Ducks Unlimited to support waterfowl conservation. Stacey is a US Army veteran and a graduate from the Illinois State University and Baker University where he earned his MBA. And Stacey, thank you for your service to our country.
Stacey: Thank you, Mike.
Mike: And just so the audience has a little more background, if you can share with us how you got started in the financial industry, I think that’d be great.
Stacey’s Background in Finance
Stacey: I appreciate it. And again, thank you for having me on Manufacturing Success. I started my finance career in the subprime industry in 2001 when I lived in Oklahoma for a period of about 15 years prior to coming to Kansas City. But at that time, I eventually made my way into commercial lending, where I focused 100% of my time on financing commercial and industrial type companies. It was there that I realized that every bank has got their own policy.
And regulators really oversee those policies to ensure that the good loans are being made and that there’s other alternative options out there for companies who just don’t quite fit that commercial banker box. And that’s what I enjoy is helping those companies that aren’t able to find traditional bank lending options.
Mike: Well, great. Can you tell us a little bit more about receivables financing and how it works and what type of companies fit that profile so they can use it to their advantage?
All About Receivables
Stacey: Certainly. You know, Mike, business companies or b2b companies usually have to wait 30 to 90 days to receive payments from their customers once, you know, their product or service in delivered and they provide an invoice. Receivables financing is a finance option for b2b companies to unlock their pent up working capital and turning their account receivables or invoices into cash by selling those invoices to a finance company called a factor.
And that’s what we do at Prestige. So these big companies that do not usually qualify for traditional bank financing, such as startups, mature companies with massive growth, or even companies that may hit a temporary setback can’t get bank financing have an option that can tap into with regards to receivables financing.
Mike: Well, so let me ask you, how flexible is this? Is this like a long term commitment? Or is it something you could do short term?
Stacey: That’s a great question, Mike. And each finance company, just like each bank, has got their own rules. So it’s gonna really be very dependent on who the company owner or CFO goes and visits. I suggest reaching out to a few of them and really understanding contract terms and length of contract. Most often, contracts will go for a year, but what you’re really looking for is an out.
So since I recently wrote a contract where the company believed that they would probably be able to return to a traditional bank within six months. So I allowed them, in the contract, I wrote into that contract that they may break free of our one year contract with no prepay if they were able to obtain traditional bank financing.
Mike: Yeah, I can see where, you know, being flexible in something like this is really important. So what trends have you seen pre-COVID-19? And do you see those continuing? And to add on to that, like what worries you about the next 18 to 24 months from your perspective?
Stacey: You know, pre-COVID is interesting because banks were very restrictive with their loan policies. And it was a trend in which you saw either you qualify for bank financing or you didn’t. And those that did qualify for bank financing saw very restrictive covenants that in some cases, kept good companies from maximizing potential growth.
So these might be really strict debt coverage ratios, fixed charge capital ratios. And in some cases, you know, a company may have a great interest rate at a bank, but may not allow to make distributions if they had a great year. And so, for those companies that didn’t want to, you know, give to the regulations and the tough covenant restrictions, quite often sought out or gave up equity and sought out capital companies that were able to invest and inject some capital into the company by giving up equity.
So we saw this a lot, you know, pre COVID and I would say currently, the COVID trend right now is just full of uncertainty. And, you know, the word uncertainty is probably the worst thing that could happen in any type of financial environment with regards to, you know, businesses and their ability to either withstand the COVID crisis right now, or, you know, in some cases, not be able to make it.
Mike: And I think uncertainty is probably going to be with us for a while anyway.
Stacey: Yeah, it really is. And, you know, I think, currently, and, you know, you hear the news, doesn’t matter what channel that you’re on, that really talks about this being a day by day, a crisis. And when you look at it on the financial industry side of COVID, it truly is a day by day.
Two weeks ago, many companies were waiting to see what happens with regards to government funding programs as the SBA, EIDL program and the PPP program dried up, at least on this round of funding, companies were able to see that they just can’t, you know, wait around and see what happens next and quickly realize it on a day by day basis that they weren’t able to get the funding, wasn’t large enough to support their company needs.
Mike: Yeah, well, this could truly be a way too, to be, you know, a little more proactive than being reactive and waiting. Because, you know, even I think I’ve read reports where we saw a lot of banks, you know, went to long term existing larger customers to get those loans out. And I don’t know, what, do you feel like even the second round of funding they’re talking about is going to be enough to go out there and help?
Stacey: Not at all, not at all. You know, a lot of numbers would be thrown around. And, you know, we’re talking about hundreds of billions of dollars. This is not an overnight approval. This is gonna have to go through congress and will take a little bit of time. So I don’t know how much and I don’t know when the funding will be available, but I’m certain of two things.
I’m certain that it’s not going to be enough to support the small businesses that really need access to capital right now. And it’s not going to happen in a timely manner for customers or companies to be able to access that. You know, as you know, it’s one thing to be approved, and we’ve heard stories of companies getting an approval notice, but it’s another thing to have to wait two weeks or three weeks or however long it takes to receive those funds.
Mike: Obviously, too, you know, we know the SBA programs, I mean, the interest rates are extremely, extremely low. How does factoring compare to normal business lines that you get today from the bank? Or, you know, credit you get from the banks?
The Wide Variations of Financing Options
Stacey: Yeah, that’s a great question, Mike. And I will say that every, you know, receivables financing company or factoring company is going to be different with regards to rates because they’re going to be structured very differently from one company to the next. And that’s what’s important for business owners to really get out and truly understand the options that are out there, whether you’re looking at a really low fee upfront, but five or six other types of fees that could actually run the cost of capital through the roof, or, you know, some companies out there like ours that’s very simple and very flexible and charge just one fee.
So it really just depends. And that’s a very large spectrum of capital. But no matter who it is, it’s going to be more expensive than a bank. So, you know, if you’re able to get a bank line of credit and the bank is able to, you know, keep up with your growth need, then there’s no reason to look at an alternative financing option.
You know, your bank is going to be your cheapest option. However, I think there are going to be times when companies go back to the bank to get an increase in the credit line, they’re going to be denied, or they’ll come up for renewal and may not get renewed. Or a situation where, you know, the bank may cut back the size of the credit line so that the trade is much smaller and limiting a business owner’s ability to get working capital. And I think that’s when it’s a good time to look at alternative options.
Mike: So are there any stipulations to using receivables financing? Is it kind of like a last resort option, or?
Stacey: You know, it’s interesting because I think that that might be a perception that some folks have that it’s a last resort option. But I would say it’s a great option as a backup plan to bank financing. Bank financing is going to be by far your cheapest option no matter what list of options you might have. And so as far as stipulations, again, each finance company is going to have different stipulations and very different underwriting standards.
And so, you know, it’s important to understand that those stipulations, you know, are incredibly easy to find. And you simply just asked what those areas you’re talking with, you know, alternative finance options and folks in this industry prior to completing an application. It’s not a last resort. It is an option for those that just cannot get financing from a bank. You know, those that can’t get an increase to the bank line of credit.
Maybe the bank isn’t moving fast enough through the underwriting process and the company needs access to working capital much faster than maybe the bank can underwrite. Or quite possibly, the company just doesn’t have a good banking relationship. A banker, sometimes asks the company to exit the bank. But either way, receivables financing has historically been a great resource to access pent up working capital to support cash trades.
And I think it’s important for bankers to know this as well, that there’s an option there for those prospects that, you know, they brought on board and got the green light to take the application. And throughout the underwriting process, they found they’re not able to fulfill that credit line, that instead of saying no, alternative financing is a great alternative or resource that might be just a temporary solution or a band-aid to kind of help a company along until the banker can get that company stabilized enough to get approved and bring into the bank.
So, you know, for us a lot of our referrals are from actual commercial lenders who just want to keep the company from going to another bank and use us as a resource to, you know, help get the company stabilized to the point where six months or a year from then, the company is able to work out whatever issues they’re having and can get a traditional bank line.
Mike: So do you think too that, you know, coming out of this whole shutdown, and obviously business is going to be disrupted a lot, do you think banks are going to be more hesitant to even give credit out if it’s not through an SBA loan or something like that? Not knowing if people are going to have that business that they had pre-COVID?
Stacey: Yeah, it’s a great question. And you know what, Mike, we’re already seeing that happen now. So with a lot of the large banks, they have been given directive down to their commercial lenders, kind of the big banks, not all of them, but a lot of the large banks have given directive down to the commercial lenders that they’re no longer taking applications for new clients or stop soliciting new client business for now.
And they’ve put a temporary hold on bringing on brand new clients so that they can focus on their existing portfolio of customers. And probably what I suspect is happening is that they’re dissecting that those relationships, looking at other financials, to determine whether they want to keep that client or not and move them on to a workout or workout division of some sort.
And that’s just what I suspect. I’ve, again, been in commercial lending for quite some time and know that this is a time where a lot of banks are more than likely reviewing their existing portfolio and determining what needs to move into their workout or special asset group. And so we’re seeing a lot of banks not going out and taking new applications. And I think once this, you know, SBA, PPP and EIDL programs are finished, I think that’s when banks will start making decisions as to what they will begin lending out, and to whom.
Mike: So, you know, I know from my experience there’s a lot of myths out there about factoring. I know a long time ago when I started a trucking company, I started out factoring and, you know, I had a pretty good experience and was able to wean myself off of it after a couple of years. What do you think are some negative connotations of factoring that aren’t true out there in the marketplace, misconceptions people might have?
Myths and Misconceptions in Factoring and Receivables
Stacey: Certainly. Yeah, I think the biggest myth I hear from companies and sometimes bankers is that factoring or receivables financing is bad. They don’t know why and they don’t know the reasons why it might be bad, but it’s bad. And so a lot of bankers are hesitant to refer companies to a receivables financing arm, but Oh, Mike, did you know that receivables financing or factoring has existed for hundreds of years and was quite common and the US during the 1800s?
Mike: Oh, really?
Stacey: Yeah, most people don’t know that. And the reason is that the late 1800s is about the time when New York City was having the apparel and textile boom. And that lasted into about 1940. At that time, that’s when banks began factoring. Most banks actually factored back in the 1940s and finance receivables of companies that were doing some sort of trade from one company to the next. And to today, if you look at many large banks and you and I, Mike, have talked about some large banks, still, you know, they continue to have a finance, a receivables financing or factoring division in most of these large banks, quite robust today.
And so, every, you know, in a lot of banks got out of it during the SNL bust in the 80s and allowed several independent finance companies like Prestige to come in and provide receivables financing, which is why many, I would say, you know, factoring or receivables finance companies are very different from each other. Prestige Capital, we pride ourselves on just being flexible and simple with our financing terms compared to others in the industry.
But like I said, I think it’s a great option. It’s not bad, it’s just different. You know, if you had the very best credit and you had an unlimited amount of cash flow coming in and you needed bank financing versus alternative financing, you would go to bank financing because it would be cheaper. But for others that don’t qualify for banks, for bank loans and traditional bank financing, receivables financing is a great way to turn that current asset, which is the account receivables, into cash.
Mike: So as we wrap this up, this kind of leads into the next level, what advice would you have for companies that are struggling? And also for ones that may be doing well during the crisis?
Now is the Time to Inquire About Your Loan
Stacey: Yeah. So no matter what, the biggest advice I can say right now for every company is to go see your banker. Right now is the best time to call your commercial lender and ask them about your loan. Discuss your 2019 financials and put a game plan together with your banker right now so that you get through this COVID time and, you know, some banks are even offering to defer customer payments one to three months, whether, you know, some of the banks are providing that. And ask if you qualify.
And then if for some reason, you get a sense that the banker isn’t going to approve your line of credit or is going to ask you to exit the bank, that’s when you start looking at other options. And I will say that most banks have very similar loan policies so it will be difficult to move from one lender to another if you don’t meet current loan policies because they’re all very similar. So there’s very, there’s a lot of options out there with regards to receivables financing, even inventory financing that will sometimes provide higher advance rates than most banks. It allows the company to have more access to working capital.
Mike: And so if someone had wanted to learn more and see if this would be a good option, what’s the best way to get ahold of you?
Stacey: Well, of course, they can always contact you, Mike, and have a discussion and you can introduce them to me. It’s always nice to see folks in the same industry talking with each other and looking at options. But if you wanted to reach out, you can email me directly at SHuddleston, HUDDLESTON at Prestige Capital dot com. You can go on over website, prestigecapital.com and look at more information and. I have a pretty robust LinkedIn page. So you can search my name there. And on Twitter is @ Stac Huddleston, STAC HUDDLESTON where I provide quite a bit of resources and content for folks to really review and look at.
Mike: Stacey, I’d like to thank you for being on Manufacturing Success and sharing information about receivables financing. And I think everybody will find this useful, and hopefully an alternative that they might not have thought about before. Thank you again, and have a great day.
