Account Receivable Factoring Companies

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Finally It's Time to Take a  New Look at  Accounts Receivable Financing

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There are  a lot of misperceptions  amongst CFOs and finance executives when it comes to asset-based lending. The  greatest is that asset-based lending is a financing option of last resort - one that only " hopeless" companies that can't  get a traditional bank loan or line of credit would  look at.


With the economic  decline and resulting credit crunch of the past few years, though, many companies that might have qualified for more traditional  kinds of bank financing  before have instead  relied on asset-based lending. And to their  shock, many have found asset-based lending to be a  versatile and cost-effective financing tool.


What Asset-Based Lending Looks Like


A  conventional asset-based lending  situation  frequently looks something like this: A business has  stayed alive the recession and financial crisis by aggressively managing receivables and inventory and  putting off replacement  capital investment.  Since the economy is in recovery (albeit a weak one), it needs to  build up working capital  to fund new receivables and inventory and fill new orders.


 However, the business no longer qualifies for traditional bank loans or lines of credit due to high leverage,  weakening collateral and/or  extreme losses. From the bank's  standpoint, the business is no longer creditworthy.


Even businesses with strong bank relationships can run afoul of loan covenants if they  experience short-term losses,  at times  requiring banks to  rescind on credit lines or  drop credit line increases. A couple of bad quarters doesn't  always indicate that a business  finds themselves in trouble, but  occasionally bankers' hands are tied and they're forced to make financing  moves they might not have a few years ago, before the credit crunch  switched the rules.

In  situations like this, asset-based lending can  offer  the needed  funds to  really help businesses  get through the storm. Companies with strong accounts receivable and a  strong base of creditworthy customers  often tend to be  the most ideal candidates for  accounts receivable financing  advances.


With  conventional bank loans, the banker is  mainly  worried about the borrower's projected cash flow, which will  supply the funds to repay the loan.  For this reason, bankers pay especially close attention to the borrower's balance sheet and income statement  so as to gauge future cash flow. Asset-based lenders,  however, are  mainly  worried about the performance of the assets being pledged as collateral, be they machinery, inventory or accounts receivable.


So before lending, asset-based lenders will  typically have machinery or equipment independently valued by an appraiser. For inventory-backed loans, they  commonly  demand regular reports on inventory levels,  together with liquidation valuations of the raw and finished inventory. And for loans backed by accounts receivable, they  generally perform  in-depth analyses of the eligibility of the collateral based on past due, concentrations and quality of the debtor base. But  compared with banks, they  typically do not place tenuous financial covenants on loans (e.g., a maximum debt-to-EBITDA ratio).


Asset-Based Lending: The Nuts and Bolts


Asset-based lending is  effectively an umbrella term that  includes several different  varieties of loans that are secured by the assets of the borrower. The two  main types of asset-based loans are factoring and accounts receivable (A/R) financing.


 Receivable Factoring is the outright purchase of a business' outstanding accounts receivable by a commercial finance company (or factor).  Normally, the factor will advance the business between 70 and 90 percent of the value of the receivable  at the moment of purchase; the balance, less the factoring fee, is released when the invoice is collected. The  invoice discounting fee typically ranges from 1.5-3 .0 percent, depending on such  things as the collection risk and how many days the funds are in use.


Under a  contract, the business can usually  decide on which invoices to sell to the  invoice factoring company.  As soon as it purchases an invoice, the  factoring company  deals with the receivable until it is paid. The  invoice factoring company will essentially become the business' defacto credit manager and A/R department, " completing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.".


A/R financing,  on the other hand, is more like a  typical bank loan,   with some  chief differences.  Even though bank loans may be secured by  several kinds of collateral including equipment, real estate and/or the personal assets of the business owner, A/R financing is backed strictly by a pledge of the business' outstanding accounts receivable.


Under an A/R financing arrangement, a borrowing base is established at each draw, against which the business can borrow. A collateral management fee is charged against the outstanding amount, and when funds are advanced, interest is assessed only on the amount of money actually borrowed.

An invoice typically must be  under 90 days old in order to count toward the borrowing base. There are  usually other eligibility covenants  like cross-aged, concentration limits on any one customer, and government or international customers, depending on the lender. In some cases, the underlying business (i.e., the end customer) must be  viewed as creditworthy by the finance company if this customer  constitutes a majority of the collateral


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  Compared with a bank loan, the factor  validation process can take  short of a week. The  secret to a  quick approval process is a  comprehensive and  precise  customer  history. You can  spare the factor hours, even days, when you are  forthright and hones about the  relevant information  asked for. You should give  specifics about your  customers and the age of their accounts.  Apart from a client profile, you may  have to  supply specifics  regarding your  business  for example, a  record of the  clients,  duration of time in business, monthly sales volume, and a  depiction of your operation.


 When  accepted, you can expect to negotiate terms and conditions with the factor. The  arrangement process takes  a variety of  parts of the  agreement into  things to consider.  Say, if you  wish to factor $10,000, you  just cannot  count on as  great a deal as a  business who  wants to factor $500,000.

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 Through the negotiation process, you will become well aware of  precisely what it costs to factor your accounts receivable. Depending on the discount schedule you negotiate, a factor may  hold on to between 2-10 percent of the invoice's  stated value as a  charge. But, when weighed against the cost of lost business or  giving up you business  completely, the  value of the  cost associated with factoring diminishes  greatly.


After you  get an agreement with the receivable factoring company, the  finance  tires begin to  spin. The receivable factoring company  performs due diligence by  analyzing your customers' credit and any liens placed against your company. The factoring company also  validates the  authenticity of your invoice  right before  purchasing your receivables and advancing  funds to you.





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I've owned 11 businesses and still own four of them and  in the event that you 'd like to  find out one of them has an Letter Of Intent to Buy in hand and  reached profitability  taking advantage of  INVOICE DISCOUNTING ONLY and is  completely - as in  completely - debt free.  Precisely why? They never  needed to borrow.


 Concerning having used or not used factoring: With three of them and soon  to become a fourth I have used  invoice discounting.  Just why? You can capitalize the business without borrowing because  receivables factoring is not borrowing. FYI: One of those businesses fulfilled orders it could only have  hoped for  carrying out had it not used  invoice factoring. It's the one with the LOI in hand in fact.



 Invoice factoring, like it or not, is  really a front end transaction that capitalizes a company without their having to borrow. It's not complicated and only dates back to the Eqyptians ... and still  gets the job done. As to it not opening the flood gates? If you have a million dollars in invoices and can not borrow against them nor convert them to cash your business (my businesses were any way until I factored) are dead in the water until you get in some cash. If you have some alternative to that then God Bless you . An invoice is a non-performing asset  until you can  convert it into cash but I am sure that I'll stand corrected.


QUESTION: If you as a business owner could  employ a sales person and they would help you access sales you  typically could not BUT you had to pay them a 2 % - 3 % - 5 % commission BUT they would increase your business 10 or 20 or 30 % would you hire that person? If you say yes to this then you are endorsing  invoice discounting. It's not different than a credit card transaction. The business owner is selling the transaction to a third party to  get the payment so how is  receivable factoring different from cc transactions?


As to the cost of  invoice factoring? It  seems that  forfeiting 2 % on the front end of a credit card transaction is  fine (on a daily basis and using your  method in your reply by the way that  computes annually to 760 %  incidentally but we both  recognize that this isn't true now don't we?). Why should a retailer accept cc processing? More business maybe? Larger sales? And what are doing? They are selling the transaction to the credit card company. Yes? No? FYI: I offer that service too ... not  rocket technology.


Factoring  can be be used by a company that is turning away sales and can not grow otherwise and note: The only time that they factor is when they need working capital to  satisfy an order that they would  normally lose. It's like the sales commission: The only time you pay the salesman is when he sells i.e. it's a sale you either didn't have with the salesman or it's a sale you can't fulfill because your money if  locked up in your invoices and you can't get it out.


That said it's pretty simple equation when you can not access liquidity:.

1.)  Use invoice factoring and  surrender 3 % of the sale OR  dismisses the sale and disappoint the customer and lose my profit margin ... 10 %? 20 %? 30 %?


2.)  Use invoice factoring  and give up 3 % of the sale OR  dismiss the sale and disappoint the customer and lose my profit margin ... 10 %? 20 %? 30 %?


3.)  Use invoice factoring  and  surrender 3 % OR kiss off the sale and disappoint the customer and lose my profit margin ... 10 %? 20 %? 30 %?


What part of being in business to maximize a profit am I  overlooking?


As to the 24 % annually(or as above it would be 36 %) let's  always remember that the owner of the business above got to complete transactions that he or she otherwise wouldn't have  had the ability to. Not a lot different than the retailer that get's to close a sale with a customer comes in with their cc is it?


Also please explain this: A bank loans someone money ($100,000) at 9 % annually. A  factoring firm delivers $100,000 a month at a 2 % discount and does this 12 times over the course of a year. Hmmmmnnn ... the bank  provided $100K for 9 % BUT the  factoring company actually delivered $1,200,000 for 24 % so which is the  far better  offer? The bank? It owns you: Invoices, inventory, equipment, your house and your signature ... the  factoring company has a right to your invoices: End. Which is better?


 Additionally:  Precisely what happens with the bank when you need $200,000 and you are only approved for $100K? If you have invoices the  invoice factoring company funds you and you make the sales and  get the profit ... the bank  informs you, "Let's see how you do over the next year and come back" or the  well known reply, "We don't like your collateral and your credit is weak" and the bottom line is that they don't have ability to take the risk or perform the work that a factor does.


 ALWAYS REMEMBER: MONEY IS NOT LOANED IN A FACTORING TRANSACTION. If you can not accept or understand that then there is no sense in conversing  anymore on this ...


In closing: To  connect to the last statement that  invoice factoring at 2 % monthly in discounted interest costs 24 % in interest margins annually then I'll  accept that but only if it can be  acknowledged that a company that sells product with a 30 % monthly margin  herewith makes a 360 % annual profit to which you will  yell back "They're not the  identical" and to that you 'd be right: Factoring and borrowing money from a bank ...  Are definitely not the same.