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As a factoring company Fostrian's mission is 100% centered on fostering our clients' growth and overall emergence to success. We want our clients to strengthen their financial position and graduate to bank financing.
Invoice Factoring Case #3 Rhom Machining, Inc.
The Chicago Area Company's Situation
Rhom Machining is a machine shop that manufactures specialty machine parts for a select group of customers. They design the parts they manufacture and thus are able to earn better margins than if they were just an outsource outfit. Rhom has been in business for 95 years and has a stellar reputation in its industry. The company has stayed small by design, and has earned a healthy annual profit almost since its inception….. until recently.
During the recent "Great Recession" of 2008 Rhom lost 30% of its business as its customers cut back on orders. Rhom had been doing $10,000,000 in sales annually but by 2009 annual sales were down to $7,000,000. Where the company had been profitable throughout its history, it lost money in 2008 and 2009 and its balance sheet suffered accordingly.
But in the latter half of 2009 things were looking up. Rhom had cut some fat out of its expenses and its regular customers' orders started to increase again. AND Rhom had executed a coup by winning over a new large customer from one of its competitors. Rhom had turned the corner and was on the path to recovery. One problem – it needed to finance this increase in sales.
The company had a strong borrowing and deposit relationship with a local bank. All loans taken together, Rhom owed the bank $1,500,000, all of which had been re-structured into term loans where monthly payments were now required to be made. The relationship with the bank was longstanding and a good one. Through Rhom's recent troubles, the bank had been patient and worked with the company as well as a bank can be expected to. The bank had done its job.
But the company's financial position (though it had turned the corner with its increase in sales in late 2009 and was on the road to recovery)…. had deteriorated to a point where the bank needed to reduce its exposure. The bank had no choice.
The bank thus had a conundrum, a catch-22 situation. It needed to reduce its exposure (have its loans paid down) but also, to ensure its balance was paid back in the long-run, the bank needed to help Rhom obtain the extra financing it needed to realize the new sales in its pipeline. If the bank lent more money, its exposure would increase which was the opposite of what it needed to happen. If it did not lend more money and pushed Rhom to pay down its loans, Rhom would not be able to finance its new sales, and the bank's loan would be in jeopardy.
What to do?
The Factoring Solution
The commercial lender handling Rhom's account was creative and knowledgeable and was in touch with the asset based lending/factoring industry. He knew an invoice factoring line of credit could very well be the answer. The banker also had a relationship with us and believed in our integrity and know-how in regards to providing factoring lines of credit. So he called us toward the end of 2009 to see if we could structure something that made sense for both the bank and the bank's client.
The objective was two-fold:
After some due diligence work and discussions between the bank, ourselves and Rhom, a solution was arrived at that all three parties were on board with. We would provide Rhom with a factoring line of credit. The deal closed at the end of 2009.
Here are the nuts & bolts of the deal: We provided a factoring line of credit against Rhom's accounts receivable which at the time stood at $900,000. The bank subordinated to us on the company's accounts receivable with the bank staying in first position on all other of the company's assets. The factoring line of credit we provided was 85% of these accounts receivable. The proceeds of our loan was thus $765,000, of which $500,000 went to pay down the bank and $265,000 went into Rhom's bank account as an infusion of much needed cash.
Everybody won here!
1. My company was able to provide a factoring line of credit and bring on a high-quality client.
2. Rhom received a much needed infusion of $265,000, but even more importantly, it took on a factoring line of credit from us that was a percentage (85%) of its accounts receivable and thus necessarily would increase proportionately with Rhom's increase in sales. In short, our factoring credit line would finance Rhom's new sales and put Rhom in a position to get back to profitability.
3. And lastly, the bank won too. It reduced its exposure from $1,500,000 to $1,000,000, and more importantly, brought in a factoring partner for its client who would be able to finance its client's growth. Because Rhom now had the financing to grow its sales and become profitable again, the bank's $1,000,000 remaining balance was more secure and had a much better chance of being paid back over the long-term.
The factoring credit line we provided did enable Rhom to realize a substantial increase in sales since late 2009. Rhom has made every payment to the bank on time since then and as of today (October 2011), has reduced its balance owed the bank to $750,000. Rhom made money in 2010 and will make money in 2011. Its balance sheet is rapidly moving back to the healthy position it was in just a few years back.
In fact the bank is so happy with Rhom's progress that it is planning to pay-off my company's factoring credit line in early 2012 and take back the full lending relationship with Rhom.
This is a text book example of how a factoring credit line can be instrumental in the comeback of financially stressed/emerging businesses.
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