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You Have Factoring Questions – Tips on Best Factoring Program and Factoring explained

Guest post by: Stan Prokop

Article Overview: Why Receivable Financing must just be your final cash flow solution. Information on factoring questions raised by Canadian business . How does a factoring program work, what does it costs . Factoring explained from the terms of benefits and daily processes .

You Have Factoring Questions – Tips on Best Factoring Program and Factoring explained

We forgive you, and we are sure everyone else does also... for what...? Simply because you keep asking about the best factoring program out there and quite frankly you have factoring questions on this ‘relatively’ newer form of business financing. So, factoring explained. Let's cover off some key basics and arm you with data to make an informed decision as to whether his type of Canadian business finance works for you. Step 1 - understanding what we are talking about. It couldn’t be more simple. As you generate sales and receivables you enter into a ' program' to sell those receivables to a third party. As can be imagined, you receive a discounted price for your receivables , because you are getting cash today for something that would normally be collected 1, 2, and three months out . The cost of factoring is always a key discussion point with our clients. The industry refers to this as a ' discount fee', and in Canada that fee is quite frankly all over the place. We can make a general statement thought that typically the fee is in the 1- 3% range. We can hear our clients already. ‘We’ll take the 1% please!". The reality is that you do have some control over the pricing in your factoring program, because the key drivers of the pricing are quite simple - the size of you A/R portfolio, the number of customers, where they are located, and their overall credit quality. While customers tend to always focus on price in this discussion we frankly tell clients that the factoring questions they should be focusing on are more important - how does the program work on a day to day basis and how does it affect my clients and my business processes. On a day to day basis you are advanced, as you generate invoices, approximately 90% of the invoice value - generally the same day you cut the invoice. Why only 90%. Simply because the finance firm holds back that 10 % as a reserve or buffer and it also covers off the financing cost. Let’s demonstrate a clear example. If you generated an invoice today for $100.00 you would receive via wire transfer 90$ into your bank account today. If you customer paid in 30 days ( you wish!) and the factor firm priced your program at 2% then when your customer paid the invoice you would receive your other 8 dollars back, the 2$ being the finance charge . It's as simple as that. Its not hard for our clients to see some of the immediate benefits - all of a sudden ' factoring explained ' requests become quite clear - it frees up cash flow instantly for general working capital purposes, suppliers can be paid on time, and you can purchase additional products and services that you need to grow your business on a daily basis . Factoring , aka ' receivable discounting' is different from banking - it comes at a higher cost , and works on a day to day basis significantly differently than if you were able to facilitate a bank line of operating credit . The harsh reality is that while many banks are pushing back on receivable and inventory facilities for small and medium business the factoring industry has kicked into hyper growth mode, seizing the opportunity to finance the liquidity gap in Canadian business. Speak to a trusted, credible and experienced Canadian business financing advisor who will guide you through the process for success in Canada's newest mainstream business financing strategy. on factoring questions raised by Canadian business . How does a factoring program work, what does it costs . Factoring explained from the terms of benefits and daily processes .

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Article Tags: factoring explained, factoring program, factoring questions



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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
Business Tips - How about: Tips for managers to handle employees more effectively? Tips on how to deal with difficult customers? Tips on how to deal more effectively with suppliers? The only three I have in mind right now, but will try to come up with something else. Chris
Re: How to develop sales contacts? - Everyone has the right idea here. Depending on your business, there are different techniques that you could use. For consultants and sales heavy businesses, there are three tactics that I have found especially useful in my business: 1. Attend Networking Events 2. Cold Calling 3. Referral Program 4. Affiliate Program (most successful) The affiliate program was successful for me, as I hooked up with a franchise consultant, and he gave multiple unit businesses that needed my credit card processing services. I highly suggest you hook up with a sales partner, and give him a cut of the monthly revenue.
Think like an Association - Hey Sebastian, Maybe you could try thinking like an Association... I would study the structure or formats used by other Associations. What are they doing to add value for their members? The BBB plays a monitoring role for consumers by gathering data about business' that are behaving badly. And they're pretty successful at it too. Maybe you can offer a 'Platinum Program' that franchisors buy into. Accredited members only. Criteria could be strict: 1. Age (stability): 10+ years 2. Satisfied franchisees: 85% + satisfaction 3. Size (stability again): 250 units 4. Strong profits 5. Great management -Maybe a 'Gold Program' for those Franchisors that aren't quite at that level, but can strive to reach it... -Top 100, 500, 1000 Listing for qualified members... maybe a slap at Entrepreneur.com and their biased top 10 lists... -Maybe act as a monitor like BBB? -Maybe team up with FranSurvey OR do something similar for each member (not sure about Fransurvey's rep, but I like the concept) There's so much discontent within the franchising arena that I think if you were part of the solution, then you could create a win/win with your Association. The only downside is that this power can get abused if there aren't good checks and balances within the association.


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