Tweet

The (R)evolution of Factoring

Guest post by: Tracy Eden

Article Overview: Factoring was a hot topic at the Association of Financial Professionals (AFP) Annual Conference this past November in San Antonio, Texas. Sarsha Adrian, a senior consultant with Graber Associates, led a lively discussion on what she calls “the (r)evolution of factoring” over the past couple of years. “Factoring has evolved considerably, especially over the last 18 months or so, and there are many nuances you need to understand,” notes Adrian. “Factoring today is far more than just selling invoices at a discount.”

The (R)evolution of Factoring

Factoring was a hot topic at the Association of Financial Professionals (AFP) Annual Conferencethis past November in San Antonio, Texas. Sarsha Adrian, a senior consultant with Graber Associates, led a lively discussion on what she calls “the (r)evolution of factoring” over the past couple of years.

“Factoring has evolved considerably, especially over the last 18 months or so, and there are many nuances you need to understand,” notes Adrian. “Factoring today is far more than just selling invoices at a discount.”

Adrian says she wasn’t sure what kind of crowd would attend her presentation. “But the room filled up and it was a very active audience. We received many varied questions after the formal presentation, ranging from basic inquiries about factoring to complicated queries involving comparisons and hypothetical situations.”

Most of the questions concerned factoring's overall costs and benefits, procedural issues, and online capabilities. The main things attendees wanted to know about were:

What is the Cost-Benefit Equation?

This is by far the biggest misunderstanding most business owners and even finance professionals have about factoring. The problem is that they often try to translate the cost of factoring into an APR. But this results in an “apples-to-oranges’ comparison, Adrian pointed out.

Instead, the cost of factoring needs to be viewed as a percentage of sales, because the factor provides many more services than just financing. A factor essentially takes over all of the company’s accounts receivable operations, including credit checks, posting and ledgering of payments, and professional A/R management.

“You can’t view factoring like you would bank financing,” Adrian says, “because you’re integrating the factor’s A/R services into your business operations to reduce these costs and increase efficiency. I could see a lot of heads nodding and people saying ‘a-ha’ once they realized this.”

What Kinds of Paperwork and Documentation are Required?

When compared to traditional bank financing, there’s really no comparison. “Banks require a lot of paperwork and documentation in order to analyze a loan request, and they often take their time in making a decision,” says Adrian. “The main thing a factor wants to see is your customer invoices. Factors have sophisticated systems that gauge the credit quality of these invoices—they are laser focused on what they’re looking for.”

How Does the Process Work?

In most factoring arrangements, a business’ customers will begin mailing payments directly to the factor, rather than to the business. Adrian notes that some companies are a little uncomfortable with this at first, but once they understand the process, they usually see why it is the most efficient process. “Also, payments can be sent to a post office box or lockbox so that it’s not apparent they’re not going directly to the business.”

Some factors also offer what’s known as non-notification factoring, in which invoices are not ledgered with the factor’s remittance advice and the only change customers may notice is a new lockbox address. It is usually best for companies that maintain a stable balance sheet and are in an industry that does not traditionally utilize non-traditional financing. All of the services available in a full-notification factoring facility are also provided with non-notification.

How Do You Find a Factor?

According to Adrian, most factors specialize in certain types and sizes of businesses, “so companies should try to find a factor that’s best suited to meet their needs.”

A factor will become an integral part of your business team, so it’s important to perform careful due diligence when selecting a factor and investigate potential candidates thoroughly. For example, how long have they been in business? How well capitalized they are they? How many local businesses have used the factor? Professional experience and adequate capitalization are especially important.

Adrian noted that banks often refer their clients to factors when they aren’t able to meet the client’s financing need. “Many banks today are building relationships with factors so they can refer clients to them and help make sure their financing needs are met, even if it’s not the bank that’s meeting the need directly. Most banks would rather offer a solution than have to turn a customer down.

“Factoring is much more appealing now than it used to be for a sizable segment of the financial world,” Adrian adds. “I believe that factoring has become more mainstream and acceptable to an increased number of business owners and treasury professionals.”

Related Articles
  Cash Flow Solution – Factoring
  Recourse and Non-Recourse Nurse Staffing Accounts Receivable Factoring: What’s the Difference?
  Factoring – Financing Canadian Receivables
  Working Capital Factoring – A business ‘ Dear John’ letter to my customer!
  Factoring: an alternative way to finance your business
  How Medical Supplies Firms Can Benefit from Factoring
  Is Capitalism, as Seen by Enterpreneuers now, Good or Bad?
  PRN Funding Introduces Real-Time Web Communication
  What to Tell Your Customers about Nurse Staffing Account Receivables Factoring
  Working Capital Financing - 10 Reasons Not to Factor Receivables in Canada
  Real World Advice on Cost of factoring of receivables in Toronto – Board the Receivable factoring Bus!
  Factoring in Canada – Receivables Financing
  Myth Buster: Factoring Is Too Expensive?
  Working Capital Factoring - Working Capital Factoring – A Dear John Letter in Canada
  Busting Healthcare Staffing Factoring Myths
  How To Get The Best Factoring Financing From Your Receivable Investment And How Factoring Firms Differ in Canada
  The Only Disadvantage Of Factoring Receivables And Why Confidential Accounts Receivable Finance Works!
  Factoring In Canada – What is the best rate?
  Receivable Factoring – Three Things You Didn’t Know About Factoring Services
  What NOT to Do When Picking a Healthcare Staffing Payroll Factor

Article Tags: AFP conference, factoring, selling invoices
Referred by: http://donsadlerwriter.com



Related Forum Posts
Re: What would you do with your last $1000? - I would put into my business certainly. If money sleeps then you will lose it. Nearly the eaxct situation happened with me. I had my last 750$ in my pocket to make money online. If I spent it in a wrong way, I would have to lose my chance to own business on the Internet. But I used it wisely and bought D. Gerl's Insider Secrets to Internet Marketing. Then put the rest of the money into Google Adwords and could save my business. But now..... I would continue my monthly membership on SubmitYourArticles Article Submission Service (37$), buy Revolution Wordpress Theme, maintain monthly membership on J. Humpereys ASC membership program and the rest of money put into Google Adwords and Yahoo Ads. Orxan
Why should I hire a virtual assistant for SEO purposes? - Do you find it hard to find time for rest because of promoting your business or your website all by yourself? Well, perhaps it is the right time for you to hire the services of an SEO virtual assistant. Virtual assistants for SEO services will help you on the process of improving your rankings within search engine results to achieve an increase in natural traffic. The higher your site in the search engine results page, the more traffic and sales conversions you will obtain. Using the services of virtual assistants (VAs) certainly is the best method to move in order immediate results and in reduced operational charges. This provides a great answer especially for a small business owner whoever company is actually considerably expanding, and the jobs have normally doubled. Here are some of the services that a virtual assistant can do for you: • Traffic Geyser • Main Street Marketing • Data Entry • Web Research • Market Samurai • Managing Facebook • Managing Twitter • SEO • Local Business Listing Robot • Traffic Revolution • Infusionsoft • Senuke • Angela’s Banklink • Linkjuicer • Blogging • SMM • Virtual Assistant • Personal Assistant • Article Writing • Spinning Article • Press release • Email Response Handling • Online Order Processing • Word Processing • Forum/Comment Posting • Social Bookmarking • Video Editor • Internet Marketing • Email Marketing • Link Building • Powerpoint Presentations • Web Development • Other Administrative Support
Different Types of Funding - Finance for business can be obtained through a number of different sources. Let's review some of those channels to help you decide what's right for your business needs: Grants There are over 930 different EU and UK grants and loans available from over 100 issuing bodies. This is the cheapest form of finance and an important part of the funding package that companies and individuals need. We can help you find your way through this maze. Technology Micro Projects: 50% of eligible costs up to £20,000 Research project: For a technical and feasibility study of an innovative idea for new technology 60% of costs up to a grant of £75,000. Development project: For development up to pre production 35% of costs up to a grant of £200,000 Developing an innovative idea: valuable for small companies and individuals at the start of a technical project: 75% of costs of hiring a mentor and consultants. Export To start exporting or moving into new markets grants of 50% of costs up to £20,000 each. Training and Education Knowledge Transfer Partnerships, Achieving Best Practice in Your Business, Investors in People Modern Apprenticeships New Deal for various grants. Environment BOC Foundation for the Environment: 25% to 50% of Project cost, typically £20,000 to £100,000 Clean up Fund: Emission reducing equipment up to 75% of cost Community Chest Fund: Up to £25,000 for projects near active SITA sites High Impact Fund: £150,000+ for larger projects near SITA sites Assisted Areas Regional assistance grants of between 10 and 35% for capital expenditure in less favoured areas of the UK. Loans Loans are an excellent source of finance if you have suitable security to borrow against or a reliable earnings stream. This needs to be planned and presented well to obtain funds. Credit cards Provides up to 56 days free credit if you play the game! Overdraft Banks are surprisingly supportive when presented with a well thought through plan and competent management. Bank Loans Lenders tend to look for a good business plan and security. Typically the loan is approved by a centralised back office function rather than the person you meet. Terms and rates depend upon the risk. Repayments can be very flexible to meet your specific needs. Mortgages These can include flexible repayment terms to meet your business needs. This can even be incorporated into your overdraft finance so that you have one flexible account for both personal/ business mortgages and overdraft Small Firms Loan Guarantee Scheme Up to two years trading: Up to £100,000 Over two years trading: Up to £250,000 However these are difficult to obtain and are a loan of last resort. Export Guarantee Scheme This is government backed insurance against appropriate export documentation. Mezzanine This is a halfway house between loan and equity. It can be an innovative way of raising funds for the more established business. Mostly for expansion capital. Equity This is not as easy as the papers would have you know. Only 1% of business plans received by Venture Capital Funds are successful. However, a good business proposition consisting of a strong demand for the product or service, management track record and a sound financial plan will enhance the chance of success. Business Angels These are high net worth individuals who are successful businessmen looking for investment opportunities. They can provide both time expertise and money. Typical investment size is £25,000 to £250,000 but can go as high as £2m for the right opportunity. Exit within 3-5 years. Venture Capital These are investment funds seeking high rates of return. However typically investments are over a million pounds. Some funds are targeted at lower amounts depending upon the sector and region. These funds are looking for exponential capital growth over 3-5 years. Asset backed finance This can cover machinery, sales invoices even sales orders. It can be a very flexible source of finance to the growing business Leasing This will cover your capital expenditure and spread the cost over a three to five year period. It is particularly useful if you do not have taxable profits to maximise your capital allowances. Sale and leaseback of a property you own is another good source of funds. Factoring Factoring offers a sales ledger administration and debt collection service. Up to 95% of an approved sales invoice is paid within 48 hours, quicker if required. Credit protection is also available to protect against a bad debt. The Factor will own and place a first charge over the book debts and they might also take other charges, depending upon the strength of the financial information. Invoice discounting Invoice Discounting can be Confidential or Disclosed; it depends upon the strength of the financial information. The service is the same as Factoring, except that the sales ledger administration and the debt collection is the responsibility of the client and not the Factor. Pre payment of the approved sales invoice is still up to 95% and the factor will still have a first charge on the book debt and therefore own the debt. This service can also have credit protection cover. All sales invoices need to be for a business to business debt, and some proof of delivery is generally required. Trade Finance This is funding provided against stock purchases, signed contracts and orders whereby the funder will prepay a certain percentage of the value Pension fund It may be possible to use your pension funds for a loan back to the business What do u think about it?
Re: Using factoring companies - [quote="BigJim22":3e4n6n63]I haven't used it myself but can see how it would be valuable for some entrepreneurs. It's hard when you get an order but don't get paid until 30, 60, or 90 days later. But it's also hard to give up $ to the factoring companies![/quote:3e4n6n63] ..."But it's also hard to give up $ to the factoring companies!" Great comment, Jim! However, it's not as hard as it may appear from the outside. Unfortunately, there is no free meal ticket with any financing option (other than gov. grants). The real question regarding the financial viability of factoring is this: I have 2 checks for you; one is for $100 and you can have that one in a month; the other one pays you $80 now plus another $15 in a month. Yes, you net 5 cents less on the dollar with option 2, but if you can take the first $80 now and turn them into $90 or $100 (e.g. more sales!) in a month, then you've not only off-set the loss but actually grown your top and bottom line. Factoring is really much more like running a price promotion. Just look at all the sales events that are happening daily. Companies discount their goods by 10% - 75% only to sell more volume. What are the costs of these programs? Another good example are credit cards! If you as a merchant accept credit card payments from your customer, you're already paying 2% - 5% of each sale to the credit card company. That's the same principle as factoring! Or how many businesses offer a 2% net 10 days discount to their customers, only for them to pay within 10 days? By the way, I can beat those 2% net 10 hands down with our factoring rate! And then there are traditional loans.... you always have to pay back the principal AND interest periodically, no mattter how the business is doing. With our factoring programs there is no principal or interest to be paid back, and the "cost of factoring" is tied to sales and cash flow (i.e., when an invoice actually gets paid and after you have already received the money). The objective truth is that factoring is not the right solution for everybody. Used wrongly or irresponsibly, it can do a lot of damage to a company. But used for the right reason and under the right circumstances, a good factor and factoring program will do miracles for a company's growth (or survival). And in these situations, the $ that go to the factoring company become totally moot. It will truly be the famous win-win. Best, Ralf


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Emotional Intelligence in Business

Why Small Businesses Don't Survive

Starting a Business with Bad Personal Credit

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.