When banks say no

When Banks Say “NO”When Banks Say “NO”

The Small Business GuideThe Small Business Guidetoto

FACTORINGFACTORING

““Lack of Money is the Lack of Money is the Root of All Evil”Root of All Evil”

For large and small businesses alike, For large and small businesses alike, capital, in adequately supplied capital, in adequately supplied amounts, is the key to business amounts, is the key to business

expansion and growth. expansion and growth. Large, established companies Large, established companies with favorable credit histories, with favorable credit histories,

have many options from which to have many options from which to choose when periodic injections of choose when periodic injections of

working capital are needed. working capital are needed.


Small, newly formed businesses are Small, newly formed businesses are often challenged, however, to find often challenged, however, to find adequate sources of ready cash adequate sources of ready cash

simply for daily operations much less simply for daily operations much less sources for continuous growth. sources for continuous growth.


The lack of excess working capital The lack of excess working capital often prevents small business often prevents small business

entrepreneurs from taking advantage entrepreneurs from taking advantage of those periodic “exceptional” of those periodic “exceptional”

business opportunities that present business opportunities that present themselves. In many cases, lucrative themselves. In many cases, lucrative contracts or purchase orders must be contracts or purchase orders must be

declined simply due to working declined simply due to working capital limitations.capital limitations.


One of the most common problems One of the most common problems faced by small business owners is faced by small business owners is the need for payroll capital when the need for payroll capital when

lucrative opportunities are offered by lucrative opportunities are offered by large, creditworthy customers that large, creditworthy customers that

demand payment terms for services demand payment terms for services provided of 30 days, 45 days, 60 provided of 30 days, 45 days, 60

days or even longer. days or even longer.


The necessity to make a weekly or bi-The necessity to make a weekly or bi-weekly employee payroll while weekly employee payroll while

waiting for the first checks to come waiting for the first checks to come in from new customers can mean a in from new customers can mean a

small business owner may need tens small business owner may need tens of thousands of dollars available just of thousands of dollars available just to accept the new contract. Without to accept the new contract. Without

accessible payroll capital, such accessible payroll capital, such contracts must often be declined. contracts must often be declined.


The most common and best known The most common and best known source of small business finance is, source of small business finance is,

of course, local community and of course, local community and commercial banks. Unfortunately, commercial banks. Unfortunately, however, banks must work under however, banks must work under

very stringent lending requirements very stringent lending requirements and in many instances, attempting to and in many instances, attempting to access and employ bank credit lines access and employ bank credit lines often is just a source of frustration. often is just a source of frustration.


Banks will always require a source of Banks will always require a source of collateral and a credit history...both collateral and a credit history...both

difficult to obtain for many new difficult to obtain for many new business owners in the early stages business owners in the early stages

of business growth. Without of business growth. Without collateral for lines of credit, the collateral for lines of credit, the

difficult decision to pass up “golden difficult decision to pass up “golden opportunities” for business must be opportunities” for business must be

disappointingly made over and over. disappointingly made over and over.


When banks say “NO”, small business When banks say “NO”, small business owners must turn to alternative owners must turn to alternative methods of finance for growth methods of finance for growth capital. This can often include capital. This can often include

friends and family, angel investors, friends and family, angel investors, credit cards, home equity lines of credit cards, home equity lines of credit, and on occasion, venture credit, and on occasion, venture

capital providers. capital providers.


For companies that provide For companies that provide products or services on a products or services on a business to business to

businessbusiness basis, rather than retail, basis, rather than retail, one of the most powerful forms of one of the most powerful forms of easily accessible business finance easily accessible business finance is that of invoice finance or as it is that of invoice finance or as it is universally known, accounts is universally known, accounts

receivable FACTORING. receivable FACTORING.

FACTORINGFACTORING

In its purest form, factoring refers to In its purest form, factoring refers to a well-practiced method of business a well-practiced method of business

finance in which short-term trade finance in which short-term trade debt (invoices) having terms of debt (invoices) having terms of payment other than C.O.D. are payment other than C.O.D. are purchased at a discount by a purchased at a discount by a

company (the factor) for immediate company (the factor) for immediate payment to the seller.payment to the seller.

FACTORINGFACTORING

Though certainly not a household Though certainly not a household word, factoring in the North America word, factoring in the North America is an enormous industry with current is an enormous industry with current purchase volumes in excess of 125 purchase volumes in excess of 125 billion dollars annually. Well known billion dollars annually. Well known

lending institutions such as SunTrust, lending institutions such as SunTrust, Wachovia, GMAC, General Electric Wachovia, GMAC, General Electric

Credit account for billions in factoring Credit account for billions in factoring volume each year.volume each year.

FACTORINGFACTORING

For many start up and “first stage” For many start up and “first stage” businesses with little or no access to businesses with little or no access to

traditional bank lines of credit, traditional bank lines of credit, factoring has no equal in its capacity factoring has no equal in its capacity to provide working capital and deal to provide working capital and deal

with the funding problems associated with the funding problems associated with growth and business expansion.with growth and business expansion.

FACTORINGFACTORING

One of factoring’s strongest One of factoring’s strongest attributes is its simplicity. Factoring attributes is its simplicity. Factoring

is nothing more than a method of is nothing more than a method of commercial finance that relates to commercial finance that relates to

the accounts receivable (invoices) of the accounts receivable (invoices) of a business. Factoring is never a a business. Factoring is never a

working capital loan. It simply does working capital loan. It simply does one or two things......one or two things......

FACTORINGFACTORING

Factoring....Factoring.... allows businesses that are currently allows businesses that are currently

operating on a cash basis with their operating on a cash basis with their customers to begin offering terms of customers to begin offering terms of payment of 30, 45, or even 60 days. payment of 30, 45, or even 60 days. In virtually all cases when terms of In virtually all cases when terms of payment are offered, customers will payment are offered, customers will tend to buy more and more often tend to buy more and more often thus increasing business.thus increasing business.

FACTORINGFACTORING

Factoring....Factoring.... allows businesses that are already allows businesses that are already

offering payment terms and which offering payment terms and which may have tens of thousands of may have tens of thousands of dollars “trapped” in accounts dollars “trapped” in accounts receivable to free up that cash by receivable to free up that cash by selling the accounts to a factor for selling the accounts to a factor for immediate payment.immediate payment.

FACTORINGFACTORING

In many ways, factoring is like a In many ways, factoring is like a mirror image of bank lending. While mirror image of bank lending. While bankers focus entirely on a business bankers focus entirely on a business owner’s credit score and ability to owner’s credit score and ability to repay the loan, factors primarily repay the loan, factors primarily

focus on the creditworthiness of a focus on the creditworthiness of a business owner’s customers since it business owner’s customers since it is they who will be making payment is they who will be making payment

upon the invoice.upon the invoice.

FACTORINGFACTORING

In most cases, factors care little if a In most cases, factors care little if a business owner has tarnished credit business owner has tarnished credit

or if the business itself is new with no or if the business itself is new with no credit history. A factoring credit history. A factoring

arrangement will generally be arrangement will generally be approved so long as the customers of approved so long as the customers of the business are creditworthy. Even the business are creditworthy. Even

large, slow paying customers are large, slow paying customers are generally acceptable.generally acceptable.

THE FACTORING PROCESSTHE FACTORING PROCESS

One of the most powerful attributes One of the most powerful attributes of accounts receivable factoring is of accounts receivable factoring is its simplicity. As opposed to bank its simplicity. As opposed to bank lending with lengthy application lending with lengthy application

times and “approval by committee”, times and “approval by committee”, factoring arrangements can factoring arrangements can

generally be put in place in a matter generally be put in place in a matter of two or three days.of two or three days.

THE FACTORING PROCESSTHE FACTORING PROCESS

Once accepted, the process of Once accepted, the process of receiving working capital through receiving working capital through weekly advances is relatively simple.weekly advances is relatively simple.

Your invoices generated for weekly Your invoices generated for weekly services or goods delivered to services or goods delivered to customers are batched and sent to customers are batched and sent to the factor via overnight courier.the factor via overnight courier.

THE FACTORING PROCESSTHE FACTORING PROCESS The factor’s operations department The factor’s operations department

will process the invoices and create will process the invoices and create an advance schedule listing each an advance schedule listing each invoice to be purchased.invoice to be purchased.

Once created, the advance schedule Once created, the advance schedule will be faxed to the client (seller of will be faxed to the client (seller of the invoices) for review and the invoices) for review and signature.signature.

THE FACTORING PROCESSTHE FACTORING PROCESS After review and signature, the client After review and signature, the client

will return the advance schedule via will return the advance schedule via fax. Based on the rate of advance fax. Based on the rate of advance (typically 75%), the funds for (typically 75%), the funds for purchase will be wire transferred purchase will be wire transferred directly into the client’s business directly into the client’s business bank account.bank account.

THE FACTORING PROCESSTHE FACTORING PROCESS The purchased invoices will be The purchased invoices will be

“noticed” with the factors legend, “noticed” with the factors legend, directing the customer to remit directing the customer to remit payment (under normal terms) to the payment (under normal terms) to the factor’s address or lockbox. factor’s address or lockbox.

The invoices are mailed to the The invoices are mailed to the customers of the client, usually customers of the client, usually within 24 hours of processing.within 24 hours of processing.

THE FACTORING PROCESSTHE FACTORING PROCESS Each week as payments upon the Each week as payments upon the

purchased accounts are received, the purchased accounts are received, the client will receive a collection report client will receive a collection report which documents the payment, the which documents the payment, the account for which it was paid, and account for which it was paid, and the check number. Overdue the check number. Overdue customers are contacted by the customers are contacted by the factor’s collection department. factor’s collection department.

THE FACTORING PROCESSTHE FACTORING PROCESS Periodically (usually twice each Periodically (usually twice each

month), the factor will release month), the factor will release reserve (the 20% not initially reserve (the 20% not initially advanced) which will be wired advanced) which will be wired directly into the client’s business directly into the client’s business checking account. Prior to its checking account. Prior to its release, the factor will deduct its release, the factor will deduct its service charge or factoring fee.service charge or factoring fee.

THE FACTORING PROCESSTHE FACTORING PROCESS Chargebacks, those invoices not paid Chargebacks, those invoices not paid

within a specific time (usually 90 within a specific time (usually 90 days), are also deducted from days), are also deducted from reserve distributions. reserve distributions.

The process of weekly advances, The process of weekly advances, collections, and reserve distributions collections, and reserve distributions continues indefinitely providing a continues indefinitely providing a never ending supply of working never ending supply of working capital to the client.capital to the client.

OPENING A FACTORING OPENING A FACTORING ACCOUNTACCOUNT

Establishing a factoring account is a Establishing a factoring account is a relatively simple process when relatively simple process when compared to applying for a bank compared to applying for a bank loan. In general, it includes...loan. In general, it includes...

Completing a Completing a company profile company profile providing a “snapshot” of your providing a “snapshot” of your company, its business, and how you company, its business, and how you operate.operate.


Providing a current accounts Providing a current accounts receivable aging report and customer receivable aging report and customer list.list.

Receipt of a Receipt of a Terms and ConditionsTerms and Conditions Letter Letter provided by your factor provided by your factor outlining the proposed factoring outlining the proposed factoring relationship, factoring fees to be relationship, factoring fees to be charged, and other important charged, and other important features.features.


Receipt of the Factoring Agreement Receipt of the Factoring Agreement or or Master Purchase and Sales Master Purchase and Sales AgreementAgreement which is the contracts which is the contracts and documents necessary to begin and documents necessary to begin the factoring relationship.the factoring relationship.

A PPSA or UCC Search and Filing A PPSA or UCC Search and Filing which will perfect the factor’s which will perfect the factor’s security interest in your accounts security interest in your accounts receivable as collateral. receivable as collateral.


Notification of customers regarding Notification of customers regarding the assignment and rights to the assignment and rights to payment upon all accounts payment upon all accounts receivable. This is generally done receivable. This is generally done through an introductory letter signed through an introductory letter signed by the factor and the client.by the factor and the client.


Collateral Note: Collateral Note: Unlike banks which require an Unlike banks which require an

abundance of collateral and abundance of collateral and blanket blanket liensliens for even small lines of credit, for even small lines of credit, factors only require a lien on factors only require a lien on accounts. This means other accounts. This means other collateral such as equipment, real collateral such as equipment, real estate, etc. are free to pledge for estate, etc. are free to pledge for other forms of business finance.other forms of business finance.

SPECIALIZED FACTORING SPECIALIZED FACTORING TRANSACTIONSTRANSACTIONS

While the vast majority of factoring While the vast majority of factoring transaction focus on the everyday transaction focus on the everyday

working capital needs of the average working capital needs of the average small business owner, there are small business owner, there are

other transactions that address the other transactions that address the special requirements of certain non-special requirements of certain non-

typical businesses or special typical businesses or special situations. These include... situations. These include...


International Factoring: Which offers International Factoring: Which offers a complete financial package of a complete financial package of working capital solutions, credit risk working capital solutions, credit risk protection, accounts receivable protection, accounts receivable bookkeeping, and professional bookkeeping, and professional collections on an international basis. collections on an international basis. International factoring provides non-International factoring provides non-recourse payment guarantees to the recourse payment guarantees to the exporter without letters of credit.exporter without letters of credit.


Medical Receivables Factoring: Medical Receivables Factoring: Providing working capital to Providing working capital to physicians, surgeons, ambulance physicians, surgeons, ambulance services and other medical services and other medical practitioners which are billing practitioners which are billing insurance companies for medical insurance companies for medical services performed and waiting 90 services performed and waiting 90 days or longer to receive payment. days or longer to receive payment.


Construction Factoring: Which Construction Factoring: Which provides advance payment to sub-provides advance payment to sub-contractors which are forced to wait contractors which are forced to wait extended periods to receive payment extended periods to receive payment from slow paying but creditworthy from slow paying but creditworthy general contractors or progress general contractors or progress billings due from lending institutions. billings due from lending institutions.


Factoring Clients in Bankruptcy: Factoring Clients in Bankruptcy: Factors are one of the few financing Factors are one of the few financing institutions which are able to provide institutions which are able to provide financing to companies operating financing to companies operating under a Chapter 11 Bankruptcy under a Chapter 11 Bankruptcy Petition. This is primarily due to the Petition. This is primarily due to the “purchase” nature of factoring as “purchase” nature of factoring as opposed to lending. opposed to lending.


Purchase Order Finance: Although Purchase Order Finance: Although not true factoring, purchase order not true factoring, purchase order finance goes hand-in-hand and finance goes hand-in-hand and addresses the need for the working addresses the need for the working capital required to actually build capital required to actually build products prior delivery. Once built products prior delivery. Once built and delivered, they are invoiced and and delivered, they are invoiced and factored under normal terms. factored under normal terms.

QUESTIONS AND ANSWERSQUESTIONS AND ANSWERS

Q. My company is less than a year old Q. My company is less than a year old and my personal credit is tarnished. and my personal credit is tarnished. Will I still be able to secure a Will I still be able to secure a factoring facility for my company?factoring facility for my company?

A. Yes, in almost all cases. Factoring is A. Yes, in almost all cases. Factoring is ideal for new startups and factors ideal for new startups and factors will care little about the owner’s will care little about the owner’s credit history.credit history.


Q. How long does it take to establish a Q. How long does it take to establish a factoring arrangement? factoring arrangement?

A. Factoring arrangements can be set A. Factoring arrangements can be set up must faster than a typical bank up must faster than a typical bank loan. Factors have no credit loan. Factors have no credit committees. Your account is committees. Your account is generally set up in 2-3 days.generally set up in 2-3 days.


Q. I was approached by a broker which Q. I was approached by a broker which introduced me to a factor. Will I be introduced me to a factor. Will I be charged for his services? charged for his services?

A. Generally not although some A. Generally not although some consultants do charge a small initial consultants do charge a small initial consultation fee. Other that that, consultation fee. Other that that, brokers will be paid by the factor.brokers will be paid by the factor.


Q. I already give my customers a 2% Q. I already give my customers a 2% discount for payment within 10 discount for payment within 10 days. Should I continue this when days. Should I continue this when factoring?factoring?

A. Absolutely not. Your factoring fee A. Absolutely not. Your factoring fee will generally be less than half that will generally be less than half that amount for 10 days. amount for 10 days.


Q. What other services are provided by Q. What other services are provided by my factor?my factor?

A. In addition to finance, your factor A. In addition to finance, your factor will provide collections, statements will provide collections, statements and bookkeeping, and accurate and bookkeeping, and accurate records for income tax preparation. records for income tax preparation.


Q. What is the most common reason a Q. What is the most common reason a company would utilize factoring?company would utilize factoring?

A. Although there are many reasons, A. Although there are many reasons, the most common is to smooth out the most common is to smooth out the payroll cycle when providing the payroll cycle when providing terms of payment to large, terms of payment to large, creditworthy customers.creditworthy customers.


Q. If I establish a factoring Q. If I establish a factoring arrangement, will I be required to arrangement, will I be required to factor 100% of my invoices?factor 100% of my invoices?

A. Generally not. Factors will want a A. Generally not. Factors will want a good mix of customers to spread good mix of customers to spread their risk but C.O.D. customers and their risk but C.O.D. customers and those that pay quickly can be those that pay quickly can be excluded.excluded.

Thank You for your time.

Ken McLean604-800-5181 | Toll Free: 1-888-651-0004

Economy & Finance

When banks say no