Internationally, line of credit resources are dryer than they have been for many years, with less financing available in the form of loans and with lenders giving individual projects much closer scrutiny when applying their formulae of risk-to-return.

This is especially true for telecommunications companies, whose business models differ from that of most conventional operations. Telecoms require significant up-front infrastructure investment and then must wait anywhere between six to twelve weeks before invoiced receivables are paid by customers using the service.

Even once money does start coming in, it can take years for the up-front infrastructure investments to pay for themselves, during which time the high-tech equipment loses value as it depreciates.

Finding telecom venture capital is made even more difficult by the high-profile woes and collapses experienced by several major telcos in recent years, like WorldCom, KPNQwest, PSINet, and One.Tel, which has left lenders reluctant to finance what they see as risky enterprises.

Telecoms need to maintain near-perfect uptime to be considered reliable by customers, making them comparable only to utilities regarded as essential services such as water, gas, and electricity suppliers. Unlike these utilities, however, telecoms needn’t enter a new market as an energy-giant to survive.

Smaller ISPs can start out by supplying the dwindling, but still important dial-up market, which major broadband ISPs are increasingly disinterested in servicing at competitive prices.

As DSL and cable infrastructure becomes cheaper, smaller telecoms can also enter these markets too, in addition to providing related services like VoIP, cell phone networks, and web-hosting.

If you are involved with a smaller ISP looking to expand by securing favorable credit, independent telecom financing is available from lenders who specialize in the telecommunications industry.

Lenders with such a targeted loan base are not plentiful. However, the massive scale of the North American Internet and telecommunications market supports a select few credit providers who do business exclusively in this field by offering financing options catered to the telecom business model.

Typically, they will provide a loan against either of three possible securities, or a combination thereof. First, they can factor the money owed to you in the form of receivable invoices. This may be particularly appealing, as a loan will only be advanced against moneys that are actually owed to you. An inspection of your books can convince the independent telecom funding provider that your business is a safe risk, with regular income almost guaranteed.

Second, if your business already has significant physical assets, these can represent significant capital to borrow against in order to fund growth with the purchase of newer equipment. This is appealing because it allows you to use the very equipment you are upgrading from to fund – in part – your expansion to more up to date hardware.

The third option is one that has not been terribly important in this field in the past but is becoming increasingly so. Provided you have the staff and company who can pull it off, telecom financing can be obtained by successfully finding interested parties to put up investment capital.

If you can sell your business and plan for the future effectively to investors, you can dodge the strains of the conventional credit market altogether by securing capital directly from businesses or individuals with cash reserves that allow this kind of funding.

Telecommunications financing is increasingly difficult to secure in the wake of the US sub-prime mortgage crisis, which has had a negative effect on the supply of all potentially risky lines of credit, even from lenders not exposed to the mortgage market.

The unique nature of the telecommunications industry requires that smaller telcos looking for capital to invest in their expansion are best advised to seek lenders who specialize in telecommunications industry capital investment opportunities.

The telecommunications industry is a rapidly changing industry evolving as quickly as technology itself. The traditional operator services (1-plus and 0-plus) providers are transitioning to voice over internet protocol (VOIP) and wireless opportunities. Internet service providers, wholesale carriers and prison pay phone services are other examples of the telecommunication industry. Transmission of voice is evolving into transmission of data. The industry is changing, truly a moving target that requires flexibility and imagination in financing models.

As with any niche, it is critical to have an in-depth understanding of the opportunities and pitfalls lurking therein. It is equally important to be aware of the many aspects of the industry that are unique to factoring and other forms of asset-based lending. Thermo Credit’s far-reaching experience in the telecom industry and constant monitoring of client and industry issues have helped it to navigate the ever-churning waters of the telecom industry.

The complexities of the industry include:

Volume

A typical telecommunications company will process hundreds to hundreds of thousands of $50 to $100 invoices each. Typically this is through batch processing by the client on a weekly or cycle basis. Tracking the sheer volume of invoices can prove to be quite an operational endeavor.

Billing Methods

Telecom companies typically bill through one of two ways, although ACH and credit card processes are becoming more prevalent. The first method is through a “direct bill”—the telecom provider sends their bill directly to the consumer who then pays directly to the provider. The second method is through the local exchange carriers (“LEC”), known as LEC billing. In a LEC billing process, there is a billing intermediary that processes a batch of billings that are ultimately reflected on the consumer’s telephone bill.

Collection Rates and Timing

The type of telecom product and billing method have an impact on the billing process. A straightforward long distance service that is direct-billed would typically collect at 95-98% in 35 days; a VOIP service or ISP service that is LEC billed may collect at 60% and settle at 90 days.

Telecommunications is a constantly evolving and expanding industry. But with over 30 years in both the financial and telecommunications industries, Thermo Credit is able to apply specialized knowledge to help bring your business to the next level. Whether offering our asset based solutions or partnering to provide you with a more comprehensive financial package, Thermo Credit will offer the best solution to help you achieve your objectives.

If you are a large multi-national telecom company, funding sources abound for you simply because of the huge amount of revenue your business generates month after month. However, if you are a small telecom business, obtaining that line of credit can be much more difficult. When you approach a traditional lender for funding, you will likely find that they do not understand your business model and telecommunications financing in general. It is not in the traditional banker’s interest to work with telecommunications businesses with receivables that are all small amounts. Generally, your receivables take 45 or more days to collect after delivery of services. Because these billing issues are unique to the telecom industry, traditional lenders do not fully comprehend the fine details and tend to choose to deal with businesses in more traditional roles.

Once your small telecommunications business is on solid ground, and you are looking to expand your market base, there are three options available to you for financing: factoring, asset based solutions, and investment capital. Let’s take a quick look at each of these options:

Factoring:

Factoring is a financing process which allows your company to obtain money against its receivables. This can be much easier to obtain if you can find a specialized financing company with telecommunications experience.

Asset Based Solutions:

Asset based funding solutions involve using your existing contracts, equipment, and other assets as the collateral for your funding. This can be a good option to consider if you have a lot of assets or large contracts to leverage. However, if you own a small local telecom company, your company may not have the assets or contracts to make this form of funding feasible.

Investment Capital:

If your business is open to the idea of investment capital versus a traditional line of credit, investment capital can be a win-win situation for everyone.

While finding small business financing can be challenging in the telecommunications industry, it is not impossible. When it is time for your telecom company to expand you should consider factoring, asset based solutions, and investment capital as possible options. Whatever you may choose, your decision must fit within your long term business plans.

In light of regulatory changes over the last few years it is very clear that UNE-P is dead. The landscape for Competitive Local Exchange Carriers (CLEC’s) has changed forever. There has been considerable consolidation in the industry and some major fallout as well.

It is now time to assess the opportunities.

One that is getting considerable attention is IP Telephony. CLEC’s can take advantage of their existing customer base and convert them. A provider can offer companies an IP based phone system with all of the bells and whistles and a broadband internet connection all from one company. The benefits include superior customer service and customizable billing and programming.

The bells and whistles of an offering can include:

1. find me/follow me service
2. remote office
3. click to call
4. Outlook integration
5. unified voice mail
6. conference calling

Other benefits include:

1. Decreased telecom costs. VoIP service providers can charge significantly less (up to 50% less) for phone connectivity service
2. Telecommuting phone costs are decreased. No major set-up fees. Voice communication takes place over broadband connection.
3. Moves, Adds and Changes cost less. New technology means the ability to move your own phone to a new workstation.
4. The phones can be taken out of the office and plugged in to any broadband connection. From that point, incoming calls will be delivered to the handset and outbound calls will show up as if they were made from the office. This is extremely beneficial when a company has to evacuate in light of an emergency such as a hurricane.

A CLEC can either resell another provider’s service or set up their own network.

Setting up a network offers a CLEC complete control over the product offering. Assuming the back office services are already in place, the new product should pose only minor challenges to implement.

If the CLEC chooses to resell a service, they have many companies from which to choose. Most of these companies will private label and provide all back end services.

The CLEC has the benefit of knowing how to market this product which should be identical to marketing traditional phone service.

The start up costs is relatively small and there should be adequate funding available. Asset based facilities can work in this scenario using the on-site equipment.

Resources

Thermo Credit, LLC
639 Loyola Avenue, Suite 2565
New Orleans, LA 70113
Phone: 504-620-3100
Fax: 504-620-3103

Seth Block, EVP
Direct Phone: 504-620-3101
E-mail: seth@thermocredit.com

Jack Eumont, EVP
Direct Phone: 504-620-3102
E-mail: jack@thermocredit.com

About Thermo Credit, LLC

Thermo Credit, LLC is a financial services company focused exclusively on the telecommunications industry. Thermo Credit serves established, well-run companies that need capital to expand or improve their operations. We provide asset based solutions and work with partner companies to offer loans, lines of credit and capital investment programs. Thermo Credit is rich in telecom funding experience, which allows us to offer our clients insight beyond strictly business financing resources.

Thermo Credit, LLC has a program that will allow a billing house the opportunity to present an advance funding program to its clients. This is very similar to what LEC billers have been offering for years.

Why

Companies that bill customers directly typically wait 35-45 days on average to collect their money. Unfortunately, their vendors generally are not willing to wait that long to get paid. The billing company has to be very cautious to avoid a cash shortage, which could short-circuit its operations or stymie its ability to increase sales.

Benefit to you

As a biller, your revenue is directly affected by your client’s growth. The more revenue your client generates, the more they use your services. Therefore, more sales for them means more revenue for you. But wait – it gets better: If your client is getting his cash faster, he can pay you faster.

How it works

Your client sends the data to you for billing. You prepare the billing and mail it. Simultaneously, you send Thermo Credit a file detailing all the invoices. We advance an agreed upon amount to the client. As collections come in, we retain the amount advanced and then remit the excess to the client. That cycle repeats itself each week. 

Why Your Client Wants Advance Funding 

Advance funding, if done right, can be the least expensive money available to a company. In many instances, they should be able to obtain funds for the company without the hassles of keeping up with financial ratio requirements, signing personal guarantees, or selling up equity in their company.

These funds can be used to:

1. Increase sales and marketing efforts
2. Purchase needed equipment
3. Hire quality personnel
4. Create better credit terms by paying vendors quicker
5. Help meet payroll and tax obligations
6. Offer customers better credit terms

In today’s economic environment, a company will encounter many challenges in raising cash to build the business. All companies need working capital to grow. However, after the initial capital raise has been exhausted, many companies find themselves in the unenviable position of having to raise cash to take the business to the next level. Missteps at this stage can be disastrous. Management has a responsibility to understand the risks and full costs of the financing agreements they enter.

The following are the top three means of funding for growth companies: Banks, Venture Capital Firms, and Factoring Companies.

BANKS

On almost every corner there is a bank, large nationals and smaller locals, each with their own lending criteria. If you qualify, Banks can offer one competitive advantage-the interest rates they charge are relatively low. However, the prerequisites can be daunting and the consequences of an “event” can be debilitating. Banks typically require a lengthy track record and a strong financial position before extending credit. When securing Bank financing, it is important to consider the following:

1. What is the true interest rate? Make sure you understand how the interest is calculated and charged, including fees to have the facility in place and attended to by third-party professionals. Be aware of anything that might trigger an unexpected increase in the rate.
2. What is the collateral? Most Banks will require a company to put up collateral that equals between two and three times the amount of money borrowed.
3. What UCC’s (liens) will be filed? A UCC on all of your assets can make it extremely difficult to raise additional funding in the future.
4. What guarantees are required? Be cognizant of corporate guarantees, cross-collateralization, and personal guarantees.
5. What can trigger a default and what are the consequences? Many financing agreements will include certain performance requirements, such as working capital ratios. Most companies cannot react quickly enough if a Bank calls the loan for non-compliance or terminates distributions of cash.

VENTURE CAPITAL FIRMS

Venture Capital Firms typically provide capital and become partners (sometimes controlling) in the companies in which they invest. They offer very low interest rates or no interest charge at all. However, the fact that you always give up equity, usually more than half the value of the company, to a Venture Capital Firm makes this very expensive money.

When working with a Venture Capital Firm, make sure you understand the following:

1. Is there an interest charge or deal fee on top of the equity being provided? Many deals will include interest and equity. These may come in the form of preferred shares which can include dividends, another cost of funds.
2. What control are you giving up? Will this arrangement move the current shareholders to a minority position? A majority position will allow the Venture Capital Firm to control the company.
3. How many board seats will the Venture Capital Firm have? Almost all Venture Capital Firms will require board seats as part of the arrangement.
4. Who has anti-dilutive rights? Venture Capital Firms typically put a clause in the agreement that does not allow them to be diluted. This means that any equity given up in the future will come exclusively from current shareholders, which is particularly onerous if current shareholders are in a minority position.
5. Are there any other restrictions? Be aware of things such as UCC filings, default clauses, etc.
6. Venture Capital Firms typically have a short-term exit strategy. Ensure that your business plan mirrors the Venture Capital Firm’s exit strategy.

FACTORING COMPANIES

Factoring is the process of accelerating the collections on your receivables. A Factoring Company advances funds against the receivable that you would typically collect over the next 30, 60, or 90 days.

Factoring, when done properly, can be the least expensive money available. There are many things to consider here as well:

1. What is the discount rate? Discount rates vary from 1.5 – 6% on a 30-day invoice.
2. Are there “hidden” fees? Understand the rationale and implications of all fees being charged. Please see Costs of Factoring (pg. 3) for further detail.
3. Is the agreement Recourse or Non-Recourse? Is your company ultimately responsible if the accounts are not collected?
4. Are there any guarantees in the agreement? Just like Banks, some Factoring Companies will ask for corporate or personal guarantees.
5. What UCC’s (liens) are being filed? A Factoring Company should only take a UCC on the receivables being purchased.

Different Types of Factoring Companies

There are two different types of Factoring Companies: Non-Recourse and Recourse.

Under a Non-Recourse Factoring Arrangement, the Factoring Company purchases all receivables and reserves the right to offset one batch against another. At the end of the day, if there is a collection shortfall on the receivables, the company generally will not be required to write a check to fund such shortfall. Another benefit of a Non-Recourse Factoring Company is in the way a company’s arrangement is reflected in their financial statements. In a Non-Recourse arrangement, a company is not required to show the advances as a loan, as it is a true purchase and sale transaction. As the table below demonstrates, this has the effect of improving your working capital ratio. A strong working capital ratio makes it easier to raise additional funds in the future.

A Recourse Factoring Company will require a company to satisfy any shortfalls on a batch of receivables. A shortfall occurs when the collections on a batch are less than the amount advanced. Be aware of any guarantees you give, especially personal, in case you do have a shortfall. The last thing you want to do is write a personal check to make up the difference!

Costs of Factoring

Fee structures for factoring can be structured in variety of forms. The three most typical fees you will see are:

• Discount Fees -
  Although these can vary, they are typically a fixed percentage of the re-ceivables purchased and are generally assessed at the time of the purchase. Discount fees can be charged as a one time fee or on a monthly basis.
• Origination Fees -
  These are usually charged to cover the cost of due diligence and legal fees associated with originating and closing the transaction. This is usually due at the time the term sheet is signed.
• Commitment Fees -
  This is the cost of having funds set aside for your company. These are usually assessed on your first purchase or on an annual basis. You will want to have a commitment amount in your agreement to allow for growth in your company.

Some Factors will forgo the origination fee and/or the commitment fee and offer a higher discount fee. Be wary of any agreement that lets you get in relatively cheap on the front end. As this table demonstrates, the long-term cost differential can be substantial.

Why Consider Factoring?

Factoring, if done right, can be the least expensive money available to you. In many instances, you should be able to obtain funds for your company without the hassles of keeping up with financial ratio requirements, signing personal guarantees, or selling equity in your company.

These funds can be used to:

• Increase sales and marketing efforts
• Purchase needed equipment
• Hire quality personnel
• Create better credit terms by paying vendors quicker
• Help you meet payroll and tax obligations
• Offer customers better credit terms
• Provide funds for acquisitions