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.

Factoring Financing For Government Contractors

Government contractors that fear not having enough money to actually fulfill their contracts will be relieved to know that there is a way for them to get the money they need without borrowing it.

Many government contractors, both large and small, depend on bank financing in order to raise the capital they need to pay for personnel and whatever materials are required to complete the contracts they have won from the government.  Going after these contracts is hard work and requires that the company best some stiff competition.  Completing this process only to face the prospect of not being able to fulfill it due to a lack of funds can be disheartening and frightening.  Factoring financing can be excellent solution.

Factoring financing is a way to raise capital really quickly, in fact within seven days in most cases. A company will then be given a substantial percentage of their outstanding invoices by a factor that purchases them at a discounted rate.  For those unfamiliar with factoring financing, this article will provide a brief education of sorts.

A factoring company purchases a company's invoices at a discounted rate. These invoices will often be for goods or services that a company has already completed or have a contract to complete.  For example, in the case of the government contractor, a business may have a contract with the government to provide $50,000 worth of goods in which they will be paid 30 days after delivery.  A factor would purchase that invoice from the company for between 70% and 90% of full value of the invoice.  That would be for between $35,000 and the $45,000, which will be paid to the contractor. This money might go towards hiring employees or to pay for materials prior to starting the job.  Making it so, the company does not have to wait until the job is completed.  This can take a huge load off of a business.

Having to cover the costs associated with a job before getting paid by the client can result in a company becoming cash poor.  This can prevent them from completing the job or taking on other jobs.  In some cases, it can even force them to go out of business, all terrible scenarios.

After the factor purchases the invoice they will then collect on it.  This money will then go the  company that originally owned the invoices.  The factor does not keep these monies but instead is paid a fee that is agreed upon  early in the process and prior to signing the contract.  The fee will be dependent on a number of things, including but not limited to,  the invoice holders credit history and age of the invoice. For example, a factor will generally be willing to pay more for an invoice that will be due in 30 days then one that will be due in 60 days.

A factoring company will only be willing to work with a business if their clients have good credit.  This is because the only way they get repaid is if there are able to successfully collect on those invoices.  A company that has customers with bad credit is too risky for a factor to take on.

Top Tips For Gaining Construction Factoring Finance

How Construction Factoring Finance Works

Construction Factoring Finance operates in a similar manor to a normal invoice finance facility. However, the invoice finance company will often involve a quantity surveyor who has the expertise to value complicated and often contractual construction related deals. This is normally outside of the expertise of a conventional invoice finance company.

Using Construction Finance, the invoice finance company can typically fund up to 70% of the value of invoices, as they are raised, with the balance being paid to you once the customer pays (less charges). This can release a significant amount of cash for any use within your business and as you raise more invoices, more cash is released so you no longer have to wait to be paid.

There are a number of product options that are available including credit control - the collection of the outstanding invoices and bad debt protection (non recourse) if required. The credit control collection of outstanding sales invoices can be handled on a completely confidential basis so that your customers are not aware that you are using a construction finance facility i.e. the factoring company undertakes the credit control function in the name of your business so your customers are unaware.

Which Types Of Businesses are Eligible for Construction Finance Funding?

There are a number of different sectors and trading methods that may qualify for Construction Factoring Finance but would not qualify for conventional normal forms of invoice finance. The following situations are suited to Construction Factoring Finance:

* If you have a CIS UTR number for your business.

* If you raise applications for payment - these can be considered for funding even if they uncertified applications for payment.

* Invoices raised on a stage payment basis - invoices that are raised in stages during the course of a contract that has not been fully completed may be eligible for funding.

The following sectors may also be eligible for funding:

* Construction contractors
* Construction sub contractors
* Construction of partitions
* Plastering
* Diamond drilling
* Tiling
* Dry lining
* Demolition
* Shop fitting
* Supply and installation of bathrooms
* Supply and installation of kitchens
* Supply and fit of double glazing
* Joinery
* Traffic management
* Flooring
* Scaffolding
* Landscaping
* Decorating
* Fabrication of steelworks
* Earthworks
* Interiors
* Property refurbishment
* Painting
* Electrical contracting
* Ceilings

Summary

To summarise, the development of Construction Factoring Finance by a few invoice finance companies has enabled construction sector businesses, that would not normally be considered for conventional invoice finance, to access funding of up to 70% of the value of their outstanding sales invoices. In addition, the invoice finance may be able to assist with collections in your name and provide bad debt protection.

Factoring Financing - Three Things You Need to Know About Receivable Financing in Canada

You have made the decision to consider factoring financing as an overall business financing strategy. In some cases you may be factoring and receivable financing currently, but are not happy with a number of key issues that weren't discussed when you set up your facility. Let's explore the three things you need to know around factoring financing in Canada, and debunk some of the myths and mis information that is out there on this subject.

These are:

1. All factoring Companies are the same

2. Factoring is expensive

3. Factoring is intrusive to my customers and suppliers, but my firm has to live with that

The reality in Canada is that as a country we came late to the factoring party. Factoring started in the U.S. and Europe, and has been established for hundreds of years. As a result the factoring that tends to dominate Canadian business financing, both in business model and pricing is heavily influenced by a small number of foreign firms.

We should probably do a very short 'primer' on factoring to ensure we've got the basics in place. Factoring, or receivable financing is the sale of your invoices or accounts receivable to a third party. It is very dominant in certain industries, i.e. trucking and transportation, staffing, etc, but quite frankly is now prevalent throughout Canada in many industries. What differentiates factoring is really the three points we'll discuss - who is offering it to you, what it costs, and how does it work.

We recommend to clients that they deal with Canadian firms when considering a factoring option. Because this business financing is somewhat unique, and mis understood we strongly recommend you work with a trusted, credible, and experienced advisor in this area who can guide you through what many consider the factoring maze.

So let's get back to our three key areas: First factoring firms vary in Canada by size, geography, and financial capability. You need to align yourself with a party that is most suited to your type of business, the size of your receivables portfolio, and the ability to deal on a one on one basis on any issues that come up.As we stated, it seems common sense that your best partner will be a Canadian firm who as direct representation in your geographical area.

Lets move on to point # 2 - Is factoring expensive? We always hate saying this, but the answer is that it depends. Receivable financing certainly has the aura of being expensive, and unfortunately most clients we meet are always focus on rate. A few key points need to be made, so let's be clear on this issue. First of all factoring in Canada has a discount rate of between 1-3% per month. We use the term discount rate because the industry itself doesn't view the rate as an interest rate; it views it as essentially a reduction in your overall gross margin. Let's use a quick, clear example. Let's say you have an invoice for $ 100,000.00. Factoring allows you to get approx 90% of the funds on that invoice the day you generate the invoice. (The balance, 10%, is paid to you when your customer pays,) and out of that holdback comes, say a 2% discount fee to the factor firm) the factor industry view that 2% as a commission for financing your invoice. If your customer pays in 30 days Canadian business can be forgiven by saying - I paid 2% per month, that's 24% per annum that is expensive.

One of the main points we can make when advising clients on a proper factor financing facility is that the funds you get on immediate cash conversion can be used to purchase inventory at a better price for cash, or alternatively, you can take the many 2% net ten day discounts many suppliers offer. If that was the case on all your business we can make the statement that you are recovering 100% of your financing costs via this strategy, plus you have unlimited working capital.That's financial power.

For our third and final point we address the issue of customer intrusiveness. We alluded the U.S. and U.K. firms who follow a very clear process on the receivable financing for your firm - they send your invoice to your customer on your behalf, they corresponded with the customer, and they call your customer for money.But, and this is a large ' but' did you know that with proper negotiations and the use of a proper advisor you can negotiate and implement a facility that allows you to bill and collect your own receivables, while at the same time getting all the benefits of factoring - i.e. immediate working capital and cash flow?

In summary, factoring can be easily mis understood.

Assess what you think is wrong or might not work with this method of financing, and develop a receivables financing strategy with the knowledge that you will not be making the mistakes of others who are less and ill informed.

The Future of AllThingsFinancial - Part II

Well, I finally bit the bullet and set up an account with DreamHost to host AllThingsFinancial. I'm excited and nervous at the same time. I appreciate all the supportive comments from my first "Future of..." post. They (the comments) were very helpful and aided me in my decision-making. I'm very fortunate to be able to count most of my readers as friends. -JLP