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Security firm found a way to lock in cash flow

Interforce International is a Toronto-based security guard services company.

Interforce International

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Things were looking good for Kien Hoang. Just two years after he launched his security guard services company, Toronto-based Interforce International, the business had grown from a one-person operation to one with about 40 employees and numerous clients across the city.

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But when a client who had hired Interforce for two sites offered a contract for a third location, Mr. Hoang was forced to do something he didn't want to do.

"I had to turn that down because I didn't have the cash flow to support another contract," says Mr. Hoang, who was employed as a security guard before striking out on his own in 2010. "That was tough to do, but I just didn't have the money to cover additional salaries, uniforms, equipment and other operational costs."

Kien Hoang, right, founded Toronto-based security guard services company Interforce International, which has grown from a one-person operation to one with about 40 employees in 2015. Interforce International Interforce International

Kien Hoang, right, founded Toronto-based security guard services company Interforce International, which has grown from a one-person operation to one with about 40 employees in 2015. (Interforce International)

It wasn't for lack of trying. Knowing he needed cash to finance his company's growth, Mr. Hoang had applied, and was denied, for a bank loan or line of credit. So he decided to try his luck with a factoring company, which agreed to buy his accounts receivable and give him the equivalent of what his clients owed, less a fee.

With this cash in hand, Mr. Hoang went back to the client he had just turned down and accepted the contract. When more jobs came in, Mr. Hoang had no problem taking them on.

"After I secured financing, that's when the business really took off," says Mr. Hoang, who says his company boasts a technology competitive edge, with gadgets such as infrared sensors to detect intruders and GPS fobs that pinpoint the exact location of his security guards.

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"Within the first year after I started using the factoring company, we had a revenue growth surge of 300 per cent," he adds.

Access to financing has improved in the past several years for most small to mid-sized businesses, with an almost 90-per-cent approval rate among those who apply for a bank loan, according to the Canadian Bankers Association. But for startups such as Interforce, borrowing money is often tough, even when business is good.

Toronto-based security guard services company Interforce International boasts a technology competitive edge, with gadgets such as infrared sensors to detect intruders and GPS fobs that pinpoint the exact location of his security guards. Interforce International Interforce International

Toronto-based security guard services company Interforce International boasts a technology competitive edge, with gadgets such as infrared sensors to detect intruders and GPS fobs that pinpoint the exact location of his security guards. (Interforce International)

Using non-traditional funding sources such as factoring – also known as accounts receivable financing – can help cash-strapped businesses finance their growth or simply meet day-to-day expenses while waiting for clients to pay, says Allan Madan, a chartered accountant in Mississauga.

"The length of time it takes to collect receivables can really put a small business in a bind," Mr. Madan says. "While it's great that they've made a sale, sometimes it takes 120 days or even longer before a client pays and, in the meantime, the small business has had to cover the cost of providing their product or service."

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With factoring, small businesses are using their biggest asset – their accounts receivable – to keep the company going and growing, says Steven Uster, chief executive officer and co-founder of FundThrough Inc., a Toronto-based company that provides factoring.

"Most small businesses don't realize that when they sell something, they create an asset on their balance sheet against which they can get funding," he says. "They can sell their products and services and then twiddle their thumbs until they get paid, or they can use their accounts receivable assets to reinvest in their company and grow the business."

Unlike bank loans or lines of credit, which are based on the income and creditworthiness of the company or entrepreneur applying for credit, factoring is approved based on the quality of clients in accounts receivable. Businesses with outstanding invoices issued to large and stable companies generally have a better chance of getting accounts receivable financing, Mr. Uster says.

"And the key thing to keep in mind is that, unlike traditional financing, factoring is not debt at all," he says. "All you're doing is getting your invoices paid earlier."

Even small, one-person companies can get approved for factoring if they have good clients and are incorporated, Mr. Uster says. Factoring fees are generally based on a percentage of the accounts receivable cash being advanced to the business. Mr. Hoang, for instance, says he pays just less than 2 per cent, providing his clients pay him within 30 days. The longer invoices go unpaid, the higher the cost of factoring.

Businesses considering a factoring arrangement should crunch the numbers to see if the potential financial gain from getting accounts receivable cash sooner is worth the cost of factoring, Mr. Madan suggests. For example, if the money is intended to finance new projects, will the return from these projects offset or even exceed the financing cost?

In figuring out this rate of return, businesses should include other possible benefits, such as being able to take advantage of discounts by paying suppliers early, he says.

Interforce International is a Toronto-based security guard services company. Interforce International Interforce International

Like many startups, Mr. Hoang had been denied a bank loan or line of credit early on. So he turned to a factoring company, which agreed to buy his accounts receivable and give him the equivalent of what his clients owed, less a fee. (Interforce International)

"A common mistake for business owners is that they don't realize their margins will be negatively affected by the cost of factoring," he says. "They should prepare a financial forecast to take into account the cost of factoring to see if the numbers make sense."

While any incorporated business, regardless of size, can qualify for factoring if it has good customers, it is not a good idea in cases where a sale is not a done deal or if there is a chance of a reverse transaction, Mr. Uster says.

"If it's a consignment sale or if there may be chargeback or warranty issues, factoring may not be a great option," he says.

At Interforce, the days of factoring may soon come to an end. Mr. Hoang says in about six months the business will have enough of a cash base that it will no longer need to depend on accounts receivable financing. He is now in talks with a venture capital firm for financing to take Interforce to the next stage of growth.

"We are in negotiations right now," he says. "I don't think we would be where we are today without factoring – it gave me the courage to take on new contracts and grow my business."

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