Factoring Financing: The Easy Way To Finance Your Company

Waiting up to 60 days to get your invoices paid can really be a major source of stress for business owners. This can be especially painful if you have to pay rent, suppliers and meet payroll. This is even more painful when most of your money is tied up in slow paying invoices. Having money tied up in slow paying invoices can also prevent you from capitalizing on new opportunities. Why? Because few business owners can deliver large orders to new clients and then underwrite the transaction for up to 60 days.

If you cannot afford to wait to get paid by your clients there is a solution that can provide you with the necessary financing. It's called factoring financing. With factoring you can accelerate the payment for your invoices and get funding to pay rent, pay your suppliers, meet payroll and take on new projects.

As opposed to bank financing, invoice factoring is easy to qualify for. The main requirement is that you have invoices from mid size and large commercial customers. Most factoring companies are comfortable working with new companies - even if they have no hard collateral - provided that they have good invoices and a solid business plan.

Another advantage of factoring is that your financing is not fixed on any specific amount, like a loan or line of credit. You can usually factor as many invoices as you can deliver on. As a tool, factoring allows you to tap into the power of your greatest asset - your roster of credit worthy customers. It allows you to grow and capitalize on new opportunities, while circumventing the restrictions and challenges of obtaining regular bank financing.

How to Select the Best Factoring Finance Company for Your Business

What is invoice factoring?

Invoice factoring is an innovative method of business financing that allows clients to get an accelerated payment on their slow paying invoices. Traditionally, when a company offers its services to another business, they need to wait between thirty to sixty days to get paid. Although companies that have a large cash cushion in the bank can absorb the cost of waiting to be paid, small and medium sized businesses cannot. This can jeopardize a company's ability to meet existing payment obligations, or worse, prevent it from capitalizing on new opportunities.

This is where invoice factoring can be a very helpful tool. A factor can provide a company with an advance payment on its accounts receivable. The factor then waits to be paid by the clients' customers, while the client gets use of the funds immediately. The transaction is structured as the sale of a financial right, rather than as a loan. Because of this, the factor focuses more on the strength of the customer paying the receivable rather than on the financial strength of the client. This makes factoring the ideal financial tool for new, small and emerging businesses.

Keys features when looking for a factor

Selecting the right factor for your company can be a very complex task. Given the importance of the factoring relationship to your company's ability to succeed and grow, it is critical that you do the proper due diligence when selecting a factoring partner. Here is a list of some of the criteria that are important when selecting a factoring financing company:

·Factors' Comfort Zone:

Almost every factor will advertise that they can work with an account that requires as little as $10,000 per month and as high as a few million dollars per month. Although that may be true in principle, the reality is that managing a small volume account is very different from managing a multi-million dollar account. Most factors tend to develop a comfort zone or "preferred specialty" when it comes to client size. When selecting a factor, always ask about the size of their typical client. Ideally, the size of your business should not be significantly below or above that figure.

·Monthly Minimums:

Most factors will only take clients that commit to transact a minimum financing volume every month. The advantage of committing to monthly minimums is that the factor will offer your company better terms. The main disadvantage is that if your factored volume drops, your company could be liable for making up the difference in fees. When selecting a factor, be sure to select one whose minimums are well below your expected minimums, or better yet, try and find a factor with no minimums.

·Recourse vs. Non Recourse:

Recourse is a term that defines the ability of a factor to re-sell the invoices back to a client if an invoice does not get paid within a given period of time. Most factors prefer to operate in recourse mode. However, there are a number of factors who offer non-recourse agreements. Under a non-recourse agreement, the factor will absorb the losses on an invoice if the account debtor becomes financially insolvent or bankrupt. In effect, non-recourse factors offer some protection against bad debt. Although you are generally better with a non-recourse factor, most recourse agreements work well enough.

·Contract Duration:

Typically, factoring contracts require a minimum term of one year or more. Whereas longer-term contracts enable a factor to offer you better pricing, they can also lock your company into a factoring arrangement that outlives its usefulness. Your best bet is to try and find a factor that will allow you to easily terminate a contract (giving reasonable notice) once the service has outlived its usefulness.

·Fee Structure:

Factoring fees vary significantly across the industry and are usually dependent on

a) the financial strength of your customers

b) your monthly volumes

c) the duration of your contract and

d) the payment cycle of your receivables.

The fee (also known as "discount") can be as high as 7% per month for small ticket deals (less than $30K per month) to as low as a couple of points for companies that wish to factor several hundred thousand of dollars. Also, be sure to understand your factors fee structure thoroughly before signing the agreement as some factors have complex fee structures.

·Level of Service:

A very important criterion when selecting a factoring company is choosing a company that will give you the appropriate level of service. The industry is very diverse, and there are many factors that charge very low fees and provide a very impersonal "mass approach" to service. Conversely, there are factors that provide a "high touch" level of service, for slightly higher rates. Most companies tend to choose the factor with the lowest rates (and usually lowest level of service) thinking that they will save money. In the long run, they end up regretting the decision. You are usually better off looking for a factor that offers a better service, even if it comes at a slight premium.

Should you work with a factoring broker/consultant?

One way to simplify the process of selecting a factor is to work with a factoring broker. A good broker will help you determine if factoring is the best solution for your company and will help you find the factor that is best suited to serve you. The broker will also help you position your company to a factor in the best possible way, maximizing the chances of getting the funding your company needs with the best possible terms. One of the most significant advantages of working with a factoring broker is that they will help you save time. The process of evaluating a factoring company can be both tedious and time consuming. A broker can help you sidestep the issue since they will do all the work of finding the best factor for you. Lastly, most factoring brokers are compensated through a finders fee by the factoring company, so you will not have to pay them any fees for their service.

Factoring Financing: How to Grow Your Business Without Debt or Loans

What is invoice factoring?

Accounts receivable financing, also known as invoice factoring, is a powerful financial tool that has fueled the growth and success of a number of companies. Factoring enables companies to capitalize on their unpaid receivables by selling them to a factoring company for immediate payment. With factoring, companies immediately get paid for their invoiced work from the factoring finance company, while the factoring company waits to be paid by the customers. Factoring strengthens a business' cash position by shortening the time to get invoices paid to 48 hours and providing the needed funds to meet current expenses and target new opportunities.

Invoice Factoring Benefits

As opposed to loans and lines of credit that require that the client have tangible assets and strong financials, factoring relies more heavily on the financial strength of the clients' customer. This is a critical feature, since many new and small businesses do not meet the financial criteria of traditional lending institutions. However, many small businesses have a roster of financially strong customers that can be leveraged. Factoring empowers businesses to capitalize on their customer list, and provides them with a tool to transform outstanding receivables into immediate cash, without generating debt. Since Factoring is not a loan, it is an ideal financial product for the following:

o New and emerging businesses including small and home businesses, consultants and solo-preneurs.

o Businesses with financially strong customers

o Businesses that are preparing to grow significantly

o Business with intangible assets (e.g. consultants)

o Businesses that do not want to take a loan

An additional benefit of factoring is that the factor usually assumes part of the clients' credit risk for the customer. This means that if the customer becomes financially insolvent due to bankruptcy and does not pay the invoice, the factor will assume the loss. This is a critical service for small companies who may not be able to afford the bankruptcy of a customer.

Costs

The costs of a factoring transaction - also known as the discount - vary based on a number of variables such as the financial strength of the customer and the amount being factored. Generally, the discount is a percentage of the invoice's face value that increases with time until the invoice gets paid. Small businesses, those that have between $20,000 and $300,000 in yearly revenues, can expect to pay a discount rate of about 2% for every ten (10) days that the invoice remains unpaid. Businesses with factorable revenues in excess of $300,000 can expect lower discount rates.

Factoring at Work: Business Services and Products, Inc. Case Study

Business Services and Products, Inc. (BSP, Inc.) is a small fictional company, which provides business consulting and equipment to local companies. It has $300,000 of annual revenues and during the past year BSP Inc. has enjoyed significant sales growth. Although most business owners would be very happy to manage such a company, Jane Sullivan, BSP Inc's president, is very worried about her company's financial position.

Most of BSP Inc.'s customers are large companies with a good reputation for always paying their invoices. However they always take between 30 to 45 days to pay them. BSP Inc., however, needs to pay their employees every two weeks and their vendors every four weeks. This discrepancy between the time that customers pay their bills and the time BSP Inc. needs to pay their employees and vendors has created cash flow problems in the past.

Furthermore, these cash flow problems have already caused Jane to delay payroll twice this year and have placed her trade (vendor) credit in jeopardy multiple times. This has also caused her to pass on a number of significant business opportunities because she was unsure of the company's financial ability to hire and pay for additional staffers. Unfortunately, BSP Inc. did not have a large enough financial cushion in the bank to afford paying employees while waiting for 45 days new clients to pay their invoices.

The following table provides an overview of BSP, Inc's current financial position.

Business Services and Products, Inc (without financing)

Yearly sales:................................$300,000

Lost new sales opportunities:..........Unknown

Total Sales:.................................$300,000

Variable Costs(60% of Sales):.........$180,000

Fixed Costs(Rent, phones, etc):........$20,000

Total Costs:.................................$200,000

Profit (Sales - Costs):....................$100,000

Although the company's prospects appear great, Jane may have to stall her company's growth until she builds a large enough cash cushion at the bank to finance her company's growth.

After careful consideration, Jane decided that a factoring line of working capital could help strengthen her company's financial position. Furthermore, factoring her invoices would enable BSP Inc. to take on new customers and continue growing, knowing that she could capitalize on her slow paying customers. BSP Inc.'s financing agreement will provide the company with an advance of 70% of her invoiced services. This means that the company can get 70% of the face value of the factored invoices within 24 to 48 hours of submitting them to the factor. The remaining 30% of the funds, less the factoring fees, will be quickly rebated as soon as the customer pays their invoice.

This line of working capital strengthened the company's financial position and bank account, enabling Jane to pay for new employees to service new contracts. Jane also decided to use the extra capital to pay her vendors early, obtaining quick payment discounts and helping to reduce the cost of factoring.

BSP Inc. customers pay their invoices within 30 days of receipt. The discount (factoring fee) for these invoices is 6%. Every time an invoice is paid, the factor rebates BSP Inc. the remaining 30% that was not advanced less the factoring fee. This means that once the transaction is completed, the factor rebates 24% (30% - 6%) to BSP Inc.

Thanks to the factoring line of working capital, Jane was also to secure an additional $120,000 worth of business, bringing her annual revenues to $420,000. The following table shows BSP Inc.'s financial position a year after using factoring.

Business Services and Products (with factoring)

Existing Sales:...................................$300,000

New Sales:.......................................$120,000 (factored)

Total Sales:......................................$420,000

Variable Costs (60% of Sales):.............$252,000

Fixed Costs (Rent, phones, etc.):...........$20,000

Cost of Factoring (6% of $120,000):.........$7,200

Total Costs:......................................$279,200

Net Profit (Sales - Costs):...................$140,800

As can be seen from the above table, factoring helped BSP Inc. increase profits substantially from $100,000 to $140,800 - a 40% increase. It placed BSP Inc. on a more stable financial footing, priming it for growth. Furthermore, the cost impact of factoring on the bottom line was minimal, as it was easily absorbed by the additional business, showing that factoring was paid for directly by the growth.

Construction Factoring - Financing For SubContractors

One of the biggest challenges for construction subcontractors is meeting payroll. Paying employees and suppliers is often hard because get paid 30 to 60 days after they submit their invoices.

Whether we like it or not, this is the way things are done in the construction industry. And, unless the subcontractor has a large cash reserve, waiting 60 days can be close to impossible. Especially with the never ending payroll responsibilities.

Going to the bank to get a business loan or line of credit won't help much. Banks are notorious for not lending money to subcontractors. Furthermore, banks usually require at least 2 years worth of audited financial statements showing a profit, and their loans can take weeks or months to get setup.

There is an alternative. This alternative can eliminate the payment wait and get invoices paid in a little as 2 days. Getting paid quickly allows subcontractors to easily pay employees and suppliers on time, enabling them to grow their businesses. The name of this financing tool is construction factoring, a special type of invoice factoring. Factoring receivables is an easy way to finance and grow your construction business.

Construction factoring works as follows:

1. You send a bill to the GC or client for a progress segment or completed job.

2. The factoring company advances you up to 75% of the submitted invoice. You get immediate use of the money. The remaining 25% is kept as a reserve.

3. Once your client pays the invoice, the 25% reserve is rebated to you, less a small fee .

The biggest requirement to qualify for construction factoring financing is to do business with reputable GC's or commercial clients and to have a well-run business. Generally, a factoring financing line can be set up in as little as 5 days.

As you can see, accounts receivable factoring provides you with a great tool to finance your growing construction business.

How to Reduce Capital Rationing With Factoring Financing

Capital rationing is an all too common problem in the current economic environment. Simply stated capital rationing occurs when you have more profitable projects than funds to implement them. Because of this, firms must ration (or limit) their expenditures and only do the most profitable ones - those that have the best internal rate of return or highest net present value. However, capital rationing may also prevent you from launching profitable projects, limiting the scope of your business.

At a much simpler level, it means that you are not making as many sales as you could. Let's say that you have $50,000 and have two sales opportunities. Each sale opportunity requires a $50,000 investment to buy supplies and deliver the service. Sale opportunity #1 has a return of 15%. Sale opportunity #2 has a return of 20%. Logically, you choose sale #2. But what if sale #1 is still profitable for you? Wouldn't it be great if you could also pursue that project? Well, you can't because you lack funds. You have to ration your capital and can only pursue one opportunity. This can be painful for business owners that are forced to turn sales away.

One obvious solution to the capital rationing problem is to get business financing. That is easier said than done, especially in the current economic environment. Both business loans and lines of credit can be used to deal with capital rationing but can be difficult to obtain, especially for small and midsized companies. Qualifying for a business loan usually complicated and requires that a company be profitable for a number of years. Usually, most banks and institutions will also require substantial collateral before providing a business loan.

One alternative is to use factoring financing. Most companies have to wait 30 to 60 days before their invoices are paid by commercial clients. This has a negative effect on cash flow and many times affects a company's ability to take on new projects. Invoice factoring provides an advance on your slow paying invoices, eliminating the payment wait. This accelerated payment enhances cash flow, providing funds that can be deployed to start new projects.

Whether factoring can help with your capital rationing problem is a complex question that varies based on each opportunity. However for many companies, especially those that are payroll intensive (e.g. staffing companies), factoring financing can provide to be the right solution to finance growth.

Factoring - Financing Canadian Receivables With Proper Rates and Structures

Factoring - Canadian receivable financing continues to gain momentum as a financing alternative of choice for Canadian business owners and financial managers. It simply is a case of a common sense approach to improving cash flow and working capital without taking on any debt and at the same time allowing your firm to grow without traditional type financing that might be difficult, or in some cases, impossible to achieve.

In the past many businesses viewed factoring as a high cost financing solution - the reality is that due to a combination of increased popularity and industry competitiveness that rates have improved a great deal.

Canadian business owners considering factoring should also be aware that that they can influence and negotiate rates to a certain degree. One method is to consider your willingness to lock into a one year contract, which in many cases will allow you to lock into a fixed rate that might be, in our experience, 4-6% lower than might be achieved through an open ended term.

Clients ask us what risk or cost is involved in locking into a one year contract - the reality is that most firms considering factoring (also known as receivable financing, receivables discounting) actually do stay with this type of facility for at least a year. Firms that factor their accounts receivable usually have two options at the end of a one year fixed term - either move to a competitive factor facility, or in some cases migrate back to or achieve traditional Canadian chartered bank line of credit financing. While bank financing always has the lower rate the reality is that it in many cases does not provide you with the amount of working capital you need if you are in high growth mode. Alternatively you may also have trouble meeting some of the bank ratio and covenant guidelines that come with those very respectable bank facilities.

We point out always to customers that the largest corporations in Canada and the U.S. in some cases also use factoring type facilities - it simply gives your firm, as well as the large firms, maximum leverage on working capital without taking on debt.

Qualifying for invoice factoring or determining what amount of type of facility you engage is in general a relatively simple process. If clients advise us they have $ 200,000.00 a month in receivable we have found by experience that it is good to build in a growth buffer and set up a 250k - 300k facility, this simply allows for growth.

The amount of your factoring facility and the rate it commands is dependent on three issues -

- the general overall risk profile of your firm - re growth, profitability, type of industry etc

- the size of your total receivables

- the overall customer quality or credit worthiness of your customer base

In some cases concentration also plays a part in your rate and facility structure. Concentration is a double edged sword - you might have a great customer, perhaps a major corporation who in fact is say, 60% of all your business. It's great to have a credit worthy and prompt paying customer, it is not so great to carry the on going risk of at some point in time losing your one large customer.

If you are having financial or growth challenges it is generally not recommended by finance people that you take on more debt - factoring solves this problem nicely - you are simply liquidating your receivables faster without borrowing.

Seek a trusted, experienced and credible advisor in this niche area of Canadian business financing and assess your factoring options relative to type of facility that meets your growth needs. A factor facility with rates, terms and structures that suit your business model and provide you with all the working capital and cash flow you need is a competitive advantage.

The Truth About Factoring Finance

One of the most crucial things to appreciate about owning a business is that a single decision can ultimately have very far reaching consequences indeed. For example, a supplier of raw materials to manufacturing companies decides to increase the price it charges for its products. This then means that the companies that purchase such materials will then suffer diminished profits. They may be required by necessity, to downsize the business, thereby cutting their workforce by a certain amount.

In much the same way, when the commercial lenders finally decided that the boom days were gone and that they were going to be far more cautious about who and what they loaned money to, this meant that the options open to business owners for financing their business was reduced significantly. Worse yet, not only was the quantity of options available reduced, but so was the quality, and so business owners had to contend with the sale of equity in the business or other draconian terms.

As a direct consequences of both the highly uncompetitive nature of the terms dictated by the commercial lender, as well as the concerns raised by the business owners themselves, factoring finance companies began to spring up overnight and quickly established themselves as the new power players. Ultimately, their success was absolute, and within a short space of time indeed, they had managed to give the banks and other commercial lenders a serious run for their money.

However, cynics who have expressed concern that factoring finance companies are merely popular because of the woefully inadequate nature of the alternative options have been proven dead wrong. In short, the reason that these companies have managed to thrive in such hostile and demanding market conditions is due to the fact that they provide the customers what they need, and what they want.

What do business owners want? They want to be able to acquire large sums of capital, in a short space of time with a minimum of red tape and paperwork that is going to delay when they actually gain access to the money loaned out. With factoring agencies, this is exactly what the business owner will be able to get.

Factoring agencies are wholly unconcerned with the credit rating of the business, and will only be concerned with the net value of the invoices, and so as a direct consequence of this then, the client company will be able to gain access to the cash within a matter of a few business days.

Another chief concern of business owners is that they were frustrated by the fact that oftentimes, they found that the financial support they received from commercial lenders was extremely short-lived indeed. This was usually as a consequence of the bank being unhappy and unwilling to provide additional loans by virtue of the fact that the majority of the assets of the company have already been secured as collateral for outstanding loans.