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Some Capital ideas for small businesses

Credit union's loss was Capital's gain

Hard times for the now-defunct Ashland Credit Union provided fertile soil for the seeds of Capital Associates more than two decades ago.

The National Credit Union Association was looking for people to buy guaranteed loans when it closed the Ashland office.

Roger Hull, a former junior college executive in Southern California, his brother-in-law Chuck Butler, a local auto dealer, and former LTM Inc. chief Jim Wright formed a factoring company that quickly grew as they bought loans nationwide.

Between 1980 and 1984, Capital Associates bought more than &

36;50 million worth of notes from 268 credit unions. Under government pressure in the mid-1980s, credit unions began merging. Once centered around a specific clientele such as teachers, wood products workers or trade union members, credit unions by then became just another form of bank without the tax consequences.

Soon that source dried up, and the firm began buying private receivables.

We had just gone through deregulation of the transportation industry in 1980, when they went from 5,000 to 7,000 licensed carriers to 45,000, says Hull.

The number of licensed freight brokers shot to 10,000 almost overnight from fewer than 400.

It was a fertile market for companies that could come in and help with cash flow, says Hull, whose company is one of about eight such serving the transportation industry nationwide.

The principals own Larson Creek Professional Center on Barnett Road in Medford and the partners also own neighboring Commercial Property Management. — — — Capital Associates of Medford offers smooth sailing over the waters of cash flow for new and expanding Rogue Valley businesses

The first time Matt Guinn met the folks from Capital Associates, he politely told them, Thanks, but no thanks.

Two weeks later, the White City metal fabricator found himself faced with financial reality and decided to put the alternative finance company to the test. Now, Guinn's Two Dogs Fabricating LLC is perhaps on its strongest footing ever.

Capital Associates of Medford has positioned itself to do what banks couldn't or wouldn't.

We consider ourselves like a farm club for the banks, says Roger Hull, co-founder and chief executive officer of the financial firm established in 1981. We help grow businesses to the point where the banks can take over.

But small-business owners aren't necessarily excited about another set of eyes peering over their shoulders.

I was kind of hesitant letting them in on my business at first, says Guinn, who set up shop on G Street five years ago after selling a similar operation in Alaska. It's hard to give away your receivables, let alone part of it, because you work so hard to get it. I let it shine.

An officer at Umpqua Bank referred Guinn to Capital Associates, but he hadn't given the 20-year-old Medford company's offer much consideration before representatives Jim Botsford and Mark Olfson fortuitously showed up at his door.

That was a week when I was hit by payroll, payroll taxes and rent all due on Friday, Guinn recalls. When they walked in, I was already grumpy. This was like Wednesday. I said if they can make it happen and get a check in my hand by Friday, I'll go for it.

Guinn got his check and his cash flow has continually improved.

When you're a small business, getting money from anybody means you have to show your whole life story, Guinn says. In that time frame, it's too late. You don't need money in three months, you need it next week.

Guinn isn't alone in the cash flow crunch, a common affliction among small businesses. To that end, Capital Associates sees a niche market.

In essence, the firm offers three credit programs: purchasing accounts receivable (commonly known as factoring); financing purchase orders; and financing inventory.

Capital Associates turns over &

36;5 million to &

36;6 million monthly, a gain of 25 percent in the past two years.

The company recently signed its 287th client, of which 60 to 70 are active.

Capital Associates operates in the 48 contiguous states (there's not much truck traffic to Hawaii, and Alaska's trucking season is too short), and 15 percent of its business is in Jackson County.

One Medford transportation brokerage assisted by Capital Associates in its early days now conducts business throughout North America.

From 1992 to 1996, All-Ways Trucking relied on Capital Associates for good will as well as cash, says vice president and co-owner Mark Pedersen.

At the point we entered the market, the trucking industry was up in arms, Pedersen recalls. Attaway Transportation had gone bankrupt and no one trusted anybody when it came to paying freight bills. Our relationship with Capital Associates was critical from our inception.

When the brokerage outgrew Capital Associates, it was generating &

36;6 million to &

36;7 million annually. Today it exceeds &

36;10 million.

Trucking accounts for 75 to 80 percent of Capital Associates' business, although it is aggressively pursuing manufacturing purchase orders throughout the northwest. When receivables are converted into cash, companies are able to bid on larger contracts.

In the months since Two Dogs improved its cash flow, Guinn's horizons have changed. Jobs that take three months are now plausible.

I'm now bidding on &

36;250,000 jobs, and before, &

36;30,000 to &

36;40,000 jobs would scare me to death, Guinn says. I have the confidence and backing to do bigger jobs. It's taken a load and a half off my mind.

From the time you're awarded a contract until you deliver a finished product can be two or three months. That's a lot of time to be paying employees, rent and so on. Most jobs, you try to get half (payment) down. Municipalities don't do that. If it's a &

36;20,000 job, you buy the stuff, paint, labor and hydraulics. Then when they're satisfied 100 percent, you can wait 30 days and then get a paycheck.

For many years, Capital Associates' primary thrust was the trucking industry. One of the biggest troubles for small manufacturers or trucking firms is not being able to collect on a delivery; Capital Associates' background checks on customers' clients have cut down on losses.

If they lose one load in the transportation industry or one job in manufacturing, it can be 50 percent of their receivables, says Botsford, vice president of development. In transportation it might take 20 loads to make up for the losses on one load doing business with someone that's not credible.

Start-up companies hungry for revenue extend credit without checking credit worthiness.

It isn't revenue until you collect it, Hull says.

Capital Associates provides a billing follow-up, contacting clients' customers 15 to 20 days after delivery and verifying that goods have been delivered and that there aren't documentation problems.

We started identifying early on problems that a carrier could resolve, Hull says. Early identification results in early resolution and getting that money back into cash flow.

The industry average for paying bills is 38 days, says Botsford, while Capital Associates collects within 29 days.

A lot of small companies don't realize what the big guys are doing when they don't pay within terms, that they're getting an interest-free loan, Hull says. If you take a big company that pays in 45 days instead of 30, they've had 15 days of that money that really should be yours. That's significant.

Capital Associates prefers taking on clients with &

36;500,000 in annual revenues that would allow Capital to handle &

36;25,000 in monthly sales volume, but it has worked with smaller businesses showing growth potential. On the other end of the scale, Capital has collected for companies with monthly sales of &

36;1.5 million. But there is no requirement for a company to sell all of its receipts.

We can't solve their profitability, that's management, Hull tells potential customers. We may be a solution for profitability if the only reason (they) can't make a profit is that they can't grow.

Every business has a break-even point and that's where profits pay fixed expenses. ... Once you get past the break-even point, then every dollar that comes in you've already covered the fixed costs and the profit margin gets bigger.

Capital Associates can advance up to 90 percent of production costs and a maximum of 60 percent of sales value, whichever is less.

Two Dogs owner Guinn's previous way of collecting up front was a credit card option, which cost 2 percent.

If you have receivables to make cash flow, it's crazy not to use those and have cash in hand, he says.

Hull says Capital's services cost more than a term loan or line of credit, but it has had clients able to cash in on early-payment discounts for their materials that more than made up for the costs.

We'll find some people that we don't have a product for, Botsford says. But no one in my recollection has been beyond help. We're pretty adaptive and that makes us able to come up with some solution.


Matt Guinn of Two Dogs Fabricating LLC says Capital Associates provided the cash flow he needed to bid on longer-range projects. Click the photo to see a larger (38k) version. Mail Tribune / Jim Craven - Mail Tribune Jim Craven