2011 October

Import Factoring – Funding For Foreign Clients Selling to US Customers

October 28, 2011 By Administrator

Every so often we get a factoring request from a prospect that it’s abroad. It’s usually an enticing opportunity, the prospect owns a company that is outside the US and is selling products to a well known US company. The sale is usually on terms – usually net 30 to net 60. Depending on who you talk to, these transactions are known as either import factoring or as foreign export factoring.

Generally, these transactions follow the same steps as a conventional factoring transaction. The key differences are that the factoring due diligence is different and that getting a security interest over the invoice is more difficult. Because of this, few factoring companies venture into this type of financing. And those that do (we are one of them) only work with select prospects that can meet certain criteria, such as:

Minimum of $200,000 monthly sales to the US
Solid industry track record
Based in Latin America (preferably) or Europe

Most import invoice factoring transactions follow the usual factoring model of advancing the funds in two installments. The first installment is for 70% to 80% of the invoice is given as soon as the product is delivered or work is completed. The second installment, the remaining 20% – 30% (less the fee), is provided once the customer pays for the product in full.

Import factoring can help foreign based companies that are selling in the US in two key ways. First, the import factoring company can provide your business with valuable funding. Second, the factoring company can help you determine the creditworthiness of your US clients, enabling you to offer payment terms only to those clients that have good credit.

Factoring Due Diligence

October 26, 2011 By Administrator

While getting approved for factoring financing is much easier than getting approved for other forms of business financing, it does involve doing some due diligence. During this process the factoring company will need to determine that:

Your company is properly set up
The invoices are correct
The commercial credit of your customers
Your invoices have no encumbrances (i.e. liens)
Your company is free of tax and legal problems
The owners of the company are free of legal and tax problems
Other details on a case by case basis

For many, this seems like a “long” list – however, it represents the minimum of due diligence that a factoring company must do. Some of these items are obvious. We’d like to give you a brief glimpse as to why some of the less obvious items are important to set up a factoring relationship.

Items 4 and 5: Invoices, or specifically, the financial rights to invoices can be encumbered through a lien (a type of security interest). A common example is when you buy a house using a bank loan, the bank files a lien against your house. This means that when you sell the house, the bank loan needs to get paid before the individual receives any money. It’s similar for business financing. When you get a bank loan or an invoice factoring plan, the finance company usually assets their 1st position on the invoice by filing a UCC lien. This ensures they get paid before anyone else does. Now, if a company loses a lawsuit the prevailing party can file a lien an encumber the invoice. Likewise, if a company fails to pay taxes, the taxing authorities can file a lien against the invoice. These liens can derail the factoring process. Most factoring companies will require the ability to file a 1st position UCC lien against the invoices that they are financing.

Item 5: For invoice factoring to work well, the company’s owners usually need to be free of legal and tax problems as well. This usually baffles clients who usually don’t think their personal issues are relevant. They actually are. A company is only as good as it’s owners. If an owner has legal and tax problems, it’s likely that this will negatively impact the company. Personal legal and tax problems have a nasty habit of quickly becoming corporate legal and tax problems. Factoring companies are very careful in this area and will usually check the owner’s background as well.

Disclaimer: This article is for information only and does not provide legal or financial advice. If you need advice, please consult an expert.

Filed Under: Invoice Factoring Tagged With: due diligence

Small Business Factoring – Small Ticket Factoring

October 25, 2011 By Administrator

In general, small business owners have traditionally had a hard time finding business financing. Conventional financing is usually not an option for them because most banks like to make larger loans - usually beyond the reach of the common small business owner. However, a new breed of invoice factoring program has been gaining popularity with small business owners. These new programs specifically offer small business factoring programs – also called small ticket factoring plans.

Small business factoring programs are different than conventional factoring program in one key way – they impose no factoring minimums. Most factoring companies like to work with companies that are of a certain size – $50,000 in monthly sales is a common requirement. Small ticket factoring companies are different – they work with companies that are smaller and have LESS than $25,000 in monthly sales. They specialize in working with small businesses – usually single office companies with less than 4 employees.

One thing to bear in mind is that small business factoring programs are more expensive than conventional factoring programs. There are two reasons for this – volume and work. Small companies generate small volumes but also more work for the factoring company, which is why their fees tend to be higher.

However, qualifying for small ticket factoring is relatively easy. You need to work with solid customers – because their invoices will be the collateral. Aside from that your company needs to be free of legal and tax problems.

Filed Under: Factoring

Financing A Cell Tower Construction Company

October 24, 2011 By Administrator

Running a company that builds cellular phone towers can be both very profitable and very demanding. One advantage of working for wireless carriers or tower leasing companies is that they tend to be solid payers. However, they also tend to be slow payers – taking 30 to 60 days to pay an invoice. This can be a challenge for tower construction companies that need to pay for staff and supplies as the expenses become due. This creates a situation where you have fast expenses coupled with slow income which can lead to problems.

There are three ways to cope with this problem. One, you can juggle supplier payments until your customers pay. Two, you can dip into your cash reserves (if you have them) to handle any payments. Or three, you can use a form of financing like construction factoring to help fix your cash flow problem.

Factoring solves this problem using a simple solution – a factoring company advances cash for your slow paying invoices and then settles the transaction once your end customer pays. This provides your company with the predictable cash flow it needs to operate and grow. Most factoring transactions are structured as two advances against your invoice. The first advance averages 70% to 80% of the invoice and is provided as soon as the work (or phase) is completed. The second advance, which is remaining 20% to 30% (less fees), is funded once the end customer pays the invoice in full.

One of the advantages of invoice factoring is that it’s easier to get than conventional financing. Since factoring companies consider your invoices to be very important collateral – it’s important that you work with credit worthy companies (which most wireless carriers and tower leasing companies are). Also, it’s important that your company be free of legal or tax problems.

Another advantage of invoice factoring is it’s flexibility. The factoring line is usually coupled to your sales. This means that if managed correctly, it can increase as your sales increase. This makes factoring an ideal solution for small companies that have substantial growth potential but are hampered by tight cash flow.

Filed Under: Utilities

The Importance Of Building a Cash Reserve For Your Business

October 21, 2011 By Administrator

For small business owners – cash is usually tight. There are expenses that have to be met quickly and customers that pay slowly. This combination makes it hard for business owners to build a reserve – even if it’s a small one. However, having a cash reserve is critical if your business is going to survive and grow. Without a cash reserve, your business runs the risk of becoming a casualty if there is an unexpected bump in your cash flow.

Many business owners pride themselves of running a tight ship by carefully managing their income and their expenses. The problem is that sometimes things are run so tight that a small unpredictable ripple – say a few late payments by customers – can send the whole business into a tail spin. This can quickly spiral out of control – especially if you miss payroll or key supplier payments. One way to address this problem is to have a cash reserve that can be used for emergencies.

The size of the cash reserve is a matter of much debate by experts. Some recommend a few months worth of business expenses – while others suggest you should have 6 months or more. In reality – you and your advisers will need to pick the number that is right for your company. Additionally, you have to take into consideration that cash that is sitting in the emergency fund is not producing returns for your company since you are not investing it in the business. Regardless, it’s usually a good idea to build a reserve, even if it’s done slowly and have to build it little by little. In this case something is better than nothing.

One approach to managing this problem is to combine a smaller cash reserve with a business financing product – such as a business loan or invoice factoring. This enables you to free some funds from the reserve and use them to grow the company and the added financing increases your ability to weather problems. This strategy of using business financing as part of your reserves can be useful if your cash flow problems are caused by slow paying customers. It will not necessarily be very useful if your cash flow problems are caused by slowing sales. This last point is very important.

Factoring is one tool that enables you to handle cash flow problems that are created by slow paying customers. It accelerates your revenues, providing predictable cash flow and minimizing problems from slow paying customers. When used in combination with a proper cash reserve, it can be a great tool to help you weather cash flow shortages.

Disclaimer: This article does not provide financial advice. If you need advice, please consult an expert.

Filed Under: Factoring Tagged With: cash reserve, factoring

How To Use Factoring To Grow Your Business

October 20, 2011 By Administrator

Ever since the financial crisis of 2008 payment terms have been getting longer. Customers that used to pay in 30 days are now demanding 45 days to pay. Those that used to pay in 45 days are now demanding 60 – some even go as far as demanding 70 or 80 days to pay. This presents a big problem for many small businesses because many cannot afford to wait that long to get paid. Because of this, many small businesses are forced to turn away those opportunities. For many, this makes a bad situation worse.

One possible solution to this problem is to use invoice factoring. Invoice factoring accelerates your revenues through a factoring company and eliminates having to wait up to 90 days to get paid by customers. The factoring company advances revenues due to you from your invoices for a small fee. The transaction is settled once your customer pays the invoice in full by your customer.

To work effectively, you would clear the transaction with the factoring company ahead of time, and then make the sale (or provide the service) to the customer. Once you complete the work, you can invoice the customer and sell the invoice to the factoring company. This would provide you with the immediate advance while the factoring company holds the invoice until payment. Ideally by using this process repeatedly you could grow your company by taking on clients that you could have not afforded in the past.

Qualifying for factoring is relatively easy – at least when compared to other types of business financing products. You need to invoice solid clients – because factoring companies only finance invoices that are payable by companies with good commercial credit. Also, your company needs to be free of legal and tax problems.

Disclaimer: This article doe not provide financial advise. Please consult an expert if you need legal or financial advice.

Filed Under: Factoring

What is Spot Factoring?

October 19, 2011 By Administrator

Spot factoring is a type of factoring where your company gets to factor a single invoice. From a factoring company perspective, this type of invoice factoring is riskier so only a few companies offer it. And those that do, charge higher rates to compensate them from the risk. Most clients that use this type of factoring do so because they had a single event – such as a big contract or a big sale – that threw their finances into a tail spin. Spot factoring gives them the opportunity to keep operating smoothly.

Why is spot factoring costlier and riskier than conventional invoice factoring? To understand this, you need to put yourself in the shoes of a factoring company. First, spot factoring is costlier than conventional factoring simply because the factoring company has a single invoice to make their revenue from, rather than a stream of invoices. Second, the cost of setting up and operating the account has to be built into a single invoice – rather than spread through a stream of invoices. Those two points account for a large part of the price difference.

Lastly, spot factoring is riskier simply because if something goes wrong with the invoice – such as an issue with the service to product – the factoring company won’t be able to fall back on other invoices to recoup their loss. They only have this single invoice as collateral. The industry perceives this as substantial risk, which contributes to a higher price.

Filed Under: Factoring Tagged With: spot factoring

Recourse Factoring vs. Non Recourse Factoring

October 18, 2011 By Administrator

We have recently written articles about non recourse factoring and about recourse factoring and wanted to opportunity to make a side by side comparison of the products. This should better help you decide which one is better for you. We’ll start by saying that the subject of recourse and non recourse factoring is one of the most misunderstood of the industry. We think it’s a combination of the fact that the term non-recourse is used in other financial products and has a very different definition. We hope that this short article clears this up and help you in deciding which product is best for your company.

Non-Recourse Factoring

A commonly accepted definition of non recourse financing is “a loan that is secured by collateral – where the lender can only pursue the collateral - and not the borrower – in case of default.” Most people read this or something similar and assume that it applies to factoring in the same way. They believe that in non-recourse factoring, if the customer does not pay the invoice for whatever reason, they will be protected against the loss because the factoring company will absorb it. For the most part – this is a wrong assumption.

In most cases of non recourse factoring, an invoice is factored with the expectation that the customer will pay the invoice in 90 days. If the customer does not pay the invoice within 90 days, the client has to pay the factoring company back unless the end customer declares insolvency within those 90 days. This is a very important detail: the non recourse invoice factoring program only protects you if the invoice is not paid due to a customer insolvency and only if the insolvency happens within the 90 day period. For example, if a customer does not pay the invoice because they have a dispute or are simply low on funds – you will most likely still be liable to the factoring company after 90 days. Note that the implementation of non recourse factoring varies by factoring company – but most use a version of the model described in this article.

Recourse Factoring

This type of factoring is a lot simpler. In recourse factoring, an invoice is factored with the expectation that the customer will pay the invoice in 90 days. If the customer does not pay the invoice within 90 days, the client has to pay back the factoring company.

Which is better – Recourse or Non Recourse Factoring?

This is difficult to answer since it depends on what you are looking for. But keep this in mind, regardless of which factoring plan you get, all factoring companies check the credit of your invoices thoroughly before advancing any funds. This provides your company (and the factoring company) with a level of credit protection since it will likely root out any problem invoices. However, a non recourse factoring program will also protect you against an unexpected customer default. Although rare, these do happen and non recourse factoring offers some protection against it. Ultimately, your best bet is to review your factoring options with a competent CPA or attorney who can advise you specifically as to which plan is best for you.

Disclaimer: Each factoring company offers their own version of recourse or non recourse factoring and you should seek professional help when evaluating factoring opportunities. This article is not intended as legal or financial advise.

Filed Under: Factoring Tagged With: non-recourse factoring, recourse factoring

Is Invoice Factoring Right For Your Company?

October 6, 2011 By Administrator

In this article we will help answer a common question we get from prospects – is invoice factoring right for my company? We’d like to start by saying that each situation is different and that this article does not intend to give legal or financial advice. If you need business financing, you should consult a professional to help you determine what is the right solution for you.

Invoice factoring solves one simple problem – cash flow shortages created by slow paying customers. Let’s say your company works with credit worthy commercial clients – and as it’s common – these clients pay their invoices in 30 to 60 days. For many large companies this is not a problem because they have substantial cash reserves that can be used to cover expenses. On the other hand, this can be a big problem for small companies that don’t have cash reserves. Why? Because many small companies have a number of immediate expenses that have to be paid – rent, suppliers and payroll – for example. Missing one of these payments can get the company in serious problems. This is where factoring comes in. Factoring can finance your slow paying invoices, providing the funds you need to meet expenses without having to worry about slow paying customers. In a nutshell, factoring works best for companies that can’t afford to wait up to 60 days to get paid by their customers.

On variable that you should definitely take into account when deciding about factoring is the issue of cost. Factoring is more expensive than most other financial solutions, which is why it is best if it’s used with transactions that have high profit margins. Generally, factoring will be right for your company if you can answer ‘yes’ to the following questions:

Would your company be better off if your customers paid quickly?
Have you turned away good prospects just because they paid in 60 days?
Do you have high profit margins?
Is your company profitable?

Filed Under: Factoring Tagged With: factoring, invoice factoring

Invoice Factoring For Transportation Companies

October 5, 2011 By Administrator

Managing the cash flow of a transportation company can be very challenging. You have a number of expenses which have to be paid quickly – fuel, drivers, repairs, etc. On the other hand your income from freight bills is slow to come by since shippers can take up to 60 days to pay their invoices. This can create a cash flow imbalance since expenses are going out faster than income is coming in. Larger companies can deal with this problem by either dipping into cash reserves or by getting a bank line of credit. Unfortunately, most small transportation companies don’t have cash reserves and can’t qualify for conventional bank financing. There is an option however. There is a source of financing that has been gaining popularity in the transportation industry as a flexible solution to deal with cash flow problems – it’s called freight factoring.

Freight factoring solves this specific cash flow problem by accelerating your revenues due from slow paying clients. It works by teaming up with a factoring company that provides an advance for your slow paying invoices from credit worthy shippers. Your company gets the advance that allows it to meet expenses while the factoring company holds the invoice as collateral. The transaction closes once the shipper pays the freight bill in full.

One of the advantages of factoring freight bills is that it is easier to get than conventional financing. To qualify for factoring you need to have shippers that have good commercial credit and a good payment track record. It’s OK if they take up to 70 days to pay, provided that they pay reliably. Aside from having solid shippers, your company needs to be clear of legal and tax problems.

One reason that invoice factoring has been gaining popularity is that it’s directly tied to your revenues. It increases as your sales increase – provided that your sales are to credit worthy commercial customers. This makes factoring an ideal too for small and mid-size transportation companies that are growing.

Filed Under: Transportation and Freight Tagged With: freight bill factoring, freight factoring

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