FACTORING EXPLAINED

8/7/2019 FACTORING EXPLAINED

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Presented to:

Engr. Eleonor F. Dilidili

Presented by:

Lenidee F. San Jose


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Say youre a startup -- growing

fast, but with little-to-zeropositive cash flow and yourestraining to reach the next level or

just to get through the end of themonth. The bank financingdrought is showing no sign ofletting up, and of course creditlines are reeled in tight.


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Whats the answer? For a growing

number of startups, it is factoring.The practice involves a financingcompany, or factor, advancing you

money based on its buying yourreceivables at a discount; yourcustomers pay the factor the full

value l

ater, when the

bill is due.Factoring gets you cash in hand

immediately but at a steep price.


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Factoring fess are much higherthan interest rates charged by a

commercia

lba

nk. Feesa

requoted by the month, so atypical 3-percent fee is actually

the equivalent of a 36-percentannual interest rate.


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The reason more startups are turning to this

more expensive, risky alternative is simple: It isoften the only way to get cash. And if it is theroute you decide to pursue, due diligence is thesingle most important step. Investigate how

long the factor has been in business, where itsoffices and headquarters are and thebackground of its management team. Ask forreferrals from current clients, and research

complaints or lawsuits usingWeb searches,and government offices. Also, trust your gut: Ifyou feel you cant build trust with the factor,dont pursue the loan.


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The shorter the better ideally,month to month. You want to switchto less expensive financing as soonas possible.


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Some factors allow contractnegotiations while others offer onlytake-it-or-leave-it documents.


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This allows the factor to go after youand your assets to be repaid. Somefactors will lend without a personal

guarantee or a non-recourse basis.


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Probably not, which means youll need tocollect on your own. Be prepared: Ifreceivables are uncollected, youll need to

repay the factors advance or you may losefinancing altogether.


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Ideally, the factor will create a lockboxto accept payments in care of yourcompany. You maintain day-to-daycontact with your clients so thateverything appears seamless and theyare not aware of your financialsituation.


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Cash flow and collections patternsfluctuate, and some weeks you must notneed financing. If your factor require youto finance all receivables, you will paydearly for financing even when you dontneed it. Single-invoice or spot factoringallows you to opt out.


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Some factors require a certain salesvolume. If you are not within the

limits, you ma

y lose your fina

ncing-so the fewer restrictions, the better.


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Documents

FACTORING EXPLAINED