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From the Desk of the CFO

Are loans based on future receivables too good to be true?


Have you received more and more emails about financing options based on your future receivables? Well, so have many of our clients.


Listen as Skip D'Orazio and Alex Allen discuss when and if these loan options make sense as well as what other options might be available.


Listen to the Audio

Alex: We are here today with Skip D'Orazio, a key member of the Benchmark Cloud Accounting team and a professional that provides Fractional CFO services for our top clients. I'm Alex Allen the VP of Client Success and I have the honor to sit down with Skip today to talk a little bit about a new service offering that we are seeing quite a bit of. Before we dive into that, Skip can you please share a little bit about yourself from the services that you provide?


Skip: Alex, thank you for the nice comments. Happy to be here to offer some of my thoughts on this subject and hope this might help some companies in the near future. I have worked in the financial arena my entire career. The first half of my career was spent with a large international, professional services, accounting, and consulting firm. The second half of my career I've spent working and consulting with privately-held, middle-market businesses ranging from pre-revenue up to hundreds of millions of dollars of revenue.

I can speak on a number of topics related to helping privately held companies grow, scale, and eventually sell if that is the goal of the organization.

Alex: Excellent, thanks Skip. So now you know a little bit more about Skip, let's talk about why we're here today. Skip joins us to talk about the rise of services like pipe.com and stripe financing. If you’re using stripe I’m sure you’ve all seen the emails, which promise to purchase your future receivables at a discounted rate to ensure that you have the cash upfront from those monthly commitments. Skip, all of a sudden I feel like my inbox is full of these offers. Can you take a few minutes and explain at a high level how they work?

Skip: You are correct, you aren’t giving up any debt, you are not sacrificing any ownership or equity in your business, but there are some things you are not getting. This solution is not the first way a growing company should go about trying to increase its working capital and cash flow. It would be, in my opinion, the last resort effort to increase cash on hand.

Alex: So what you’re saying is you have the websites are focusing on easy, no friction, no debt, no dilution, and when I read that it sounds too good to be true. What I'm hearing you confirm is, that these claims are true, but there are some terms that less than positive for your business in most situations.

Skip: Well, there are ways companies can do this and still achieve no dilution of equity, which is in most cases, first and foremost in an entrepreneur's or business owner's mind. There are some things you are giving up and you are sacrificing some of the cash you would otherwise receive. No question, it would take some time to receive that cash, the companies mentioned are guaranteeing that they will provide that cash upfront.

What they are not telling you is that you are not receiving 100% of the receivable. It may not impact your top line, but it is certainly impacting your bottom line and EBITDA and that is something that potential buyers of the businesses or investors of a business are looking at.

So you are gaining on one hand ( short term ), but you are giving up something significant in the longer term. While you may not be giving up equity, you are potentially creating a lower valuation for your company.

Alex: That makes sense. Now that you've done a little bit of research about these providers, is there any difference between the providers or are they all very similar if they’re going after this particular model?

Skip: I’m sure they use different technology platforms and such to provide the service. I’m not saying that they are bad services, what I’m saying is that there are other methods that a company can go through.

For example, a company that typically goes through ups and downs with volatility in their cash collections would in its simplest form obtain a line of credit from a reputable bank, and that line of credit is used to cover that interim period between the selling point and the collection point. There is a cost ( interest ) to this approach but it is likely a lower cost. That is one alternate method, assuming you have a viable business with reliable customers/billables. This should not be that onerous to obtain a credit line. That is the easiest way and most practical method to use without too much pain from an ownership standpoint.

Alex: Right, so that solves a lot of the focus on the easy, no friction, no dilution. Essentially that line of credit gives the early-stage entrepreneur the ability to be to have access to capital in a similar way and there is a lot more upside than selling these future receivables. Is that what I'm hearing you say?

Skip: Yes, and the other thing it does is that it establishes a relationship with a bank that could become extremely valuable to you. Debt financing does not need to be onerous, there are usually requirements associated with that, in terms of keeping certain banking ratios, etc. Any good business should be able to withstand that, so all I'm saying is, I’ll use your term, if it sounds too good to be true it may not be as good as other options.

A short-term line of credit is an option and of course, a longer-term solution is a traditional business loan that is asset-based ( account receivables or inventory ) or based on some other collateral. There is a reason why these traditional methods do hang on for a long period of time. As I said, the right banking partner, that is exactly how it should be looked at, a partner that will help you grow your business. Obviously, raising money is a whole other and different issue in terms of company financing, that is a conversation that we’re not going to dive into, but in that instance, founders give up equity and also frequently lose some control of the business through the assignment of board seats.

Alex: Right, after hearing you talk through this and talking about some of the other options, where I’m coming to is that these products exist for a reason and as as a reformed entrepreneur I do understand that going to a bank and building a relationship with the bank can be an arduous process, going and raising money can definitely pull your attention away from the core operational parts of your business and so I can definitely see how these services are being marketed, "OK don’t worry about those things this with a click of a button this will solve the pain", but that doesn’t necessarily mean that it’s going to solve long-term it might be a short term Band-Aid that creates a longer-term headache down the road like you were saying with it a potential future investment and valuations. You should be evaluating this decision just as seriously as you would any capital that you are accepting into your organization.

Skip: Very well said, very well summarized. I’m not saying it shouldn't be used. I’m saying there are better longer-term alternatives to achieve an increased cash flow, working capital, operating cash to the business, but these are one alternative way of obtaining working capital.

That is what I do, I consult with these business owners every day. The vast majority of them would rather go the traditional route because longer term it does present some significant value to the company. If there is a short-term crisis or issue, maybe this type of financing provides the appropriate solution, in my opinion, it's not the best long-term solution that a company can employ.

Alex: Thanks Skip is there anything else you want to add to this conversation?

Skip: No, we at benchmark help companies answer questions like this every day so besides myself we have a cadre of experienced CFOs in virtually every industry that can provide guidance on this or other technical help, but basically, we're here to help the owners grow and scale their business in a very efficient way, so please consider us when you have a special need or question. We're happy to jump in and provide the service, help or just an opinion if that's what you want when you need it.

Alex: Great, thanks for that skip! Thank you for joining us, we're already looking forward to having skip back next month.

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