Invoice Factoring Financing

Are You Losing Sales? How Invoice Factoring Can Help

2012-01-25T12:53:00.000-05:00

Last weekend my family decided that it wanted to have a BBQ in yard so that we could enjoy some of that fine South Florida winter weather. The consensus was that we would have grilled chicken with potatoes and corn on the cob. Armed with a short shopping list went went to the local grocery store to buy our supplies. Lo and behold, the grocery store was packed. This could be expected since it was Saturday at 5pm. The meat counter had a mob of people in front of them, each of them holding a ticket with a number. All patiently waiting. The display showed that they were serving number 45. We had number 66. Tough luck. It'd be a long wait....

About half an hour later they reached number 58. And then something interesting happened. They called 59 and nobody answered. The server then moved to 60. Same thing. 61... no one. 62.... no one. All the way to 65. A minute later, they were helping us. It seemed that in desperation, 60 through 64 had just left. I was happy to be served but wondered if the store realized that they had lost a whole bunch of sales.

By the way, the meat counter only had two people and was clearly understaffed. Adding an extra worker for 20 minutes would have helped clear through the folks and make all those sales. And this happens every weekend at my local grocery store. I wonder how many sales they have lost?

Much like my story, many companies lose sales because they lack the right business financing. For example. companies that have commercial or government sales are expected to give up to 60 days payment terms. However, few companies in this environment can afford to go without payment for such a long time. This puts them in a dire situation where they have to chose between making a sale that they can't afford - or - not making the sale at all. For many business owners, letting go of making a sale is simply unacceptable.

One way to solve this problem is to use factoring financing. Factoring is a financial transaction where a factoring company advances funds to your company using your invoices as collateral. So instead of waiting up to 60 days to get paid, your company can monetize the invoice quickly and use the funds to pay for expenses. It minimizes the effects of having to wait up to eight weeks to get paid.

Many business owners see factoring as a tool to salvage cash strapped businesses. And they are right. But what they miss is that when used properly, invoice factoring can be used to optimize your company's ability to make sales and grow.

Lender Fatigue - When a Lender Gets Tired....Of Your Company.

2012-01-16T22:22:00.000-05:00

The Miami Herald posted an interesting article today - it talked about lender fatigue. This is a little talked about but very important subject in the business financing world. If you look at a business financing relationship as being similar to a dating relationship, lender fatigue is akin to breaking up. Sort of like saying "it's not you, it's me..." to a customer.

The most common cause of lender fatigue in the factoring industry is broken promises. As a reference, and perhaps for chuckles, here is a short list of the most common broken promises:

"I'll get you a copy of the documents you asked for by tomorrow...."
"This won't happen again, I promise..."
"I did not know I was not supposed to cash that check..."
"I will send that check tomorrow, I promise..."
"I need you to make an exception for me, again...."

Much like a dating relationship - broken promises, cheating and outright lies can land you in the dog house and prompt your factoring company to ask you leave. If your company is constantly breaking promises, asking for payment extensions and always making excuses you may be at risk of alienating your financing company with lender fatigue.

Having a factoring company terminate a relationship with your business can be a very challenging situation. Most will usually give you notice (based on your contract) so that you can look for a new company. However, your new factoring company will invariably ask you to explain why you are leaving your current factoring company. They may also ask for permission to speak to them - candidly and directly - as a condition to considering your company for financing. In many cases this will not bode well for your company. It may result in higher rates, lower advances - or being flatly declined.

How do you avoid causing lender fatigue to your factoring company? Simple:

Be honest
Keep your promises
Don't take their money without asking

I though this would be a good subject for the opening article this year because many factoring companies review their portfolios at the beginning of the year, pruning invoice factoring clients that are just not worth the trouble. Believe me, it happens... and more often than you think.

Why Do Banks Decline Business Financing Prospects?

2011-12-29T12:22:00.000-05:00

It's not uncommon for us to get calls from companies that need business financing but have been declined by banks. Many of this prospects consider their experience of trying to get bank financing to be a sour experience. "They don't understand me. They have no idea how quickly my business can grow!" they complain. I am going to play devils advocate for a second and say that actually, many people don't know how banks lend. And if they understood how banks operated, most of these prospects wouldn't have even bothered approaching a bank for business financing. Maybe it's the bank's fault for not making it clear.... perhaps.

Let's start by looking at the typical factoring prospect. Many prospects have less than three years of operations, though some have more. A number of them have no hard assets such real estate or equipment either for the company or personally the owners. And finally, a number of them are in turn around mode - meaning they are turning around a troubled business.

Now, let's look at the other side of things. Banks lend either against assets you own, exceptional performance or a combination of both. Period. To meet their criteria you must have assets, performance or both. This is a slight over-simplification but it works for my example. They want to see companies and owners that have solid balance sheets with assets that can be used as collateral. Remember: no assets = no collateral. Sometimes they can make limited exceptions to the asset rule, but in that case, they want to see outstanding performance showing a long track record of success. And of course, they will usually lend on a combination of assets and performance. However, the following applies:

No assets (no shoes?)
No Performance track record (no shirt?)
No money (no service?)
No exceptions

Now, if you look at the typical factoring financing prospect I described you will see that most will not meet the criteria to get funded by a bank - regardless of how hard they try. For these companies, they better option is to consider an alternate source of funding such as invoice factoring.

An Expensive Hello Kitty (tm) Doll and Factoring Proposals

2011-12-23T11:19:00.000-05:00

The Hello Kitty(tm) doll

As I mentioned in my last post, we recently visited a carnival park with lots of rides and games. The games offered lots of chances to "win" prizes, though more often, you lost money. Somehow, I kept relating this to instances where people were fooled by factoring proposals that just looked too good to be true. However, the reality behind these proposals, usually written in the contract, tell a different story. Much like the story I am about to tell you:

The Expensive Hello Kitty(tm) Doll
While we were at the carnival park, my daughter got her heart set on a Hello Kitty doll. Like any father, I did my best to try an win one for her. This ultimately included over paying for the cheaply made doll that doesn't look real to me that I "won" from a really cleaver slick talking man at the park.

The game was simple - you had to hit a figure with a dart and get a price. The carnival slick talking man spoke fast throwing a whole bunch of words at you at the same time. He emphasized that the first two darts where on the house, so you only paid for the last dart. He kept emphasizing how almost everything was on the house. As a businessman, I know that could not be right. As a father, I wanted that darn doll for my little one and wasn;t paying too much attention to him. My mistake! Between his fast talk and my continual misses with the dart, I ended up taking lots of turn before getting the doll. However, since most of these were "on the house" I though this would not set me back much...... until I realized I had to pay $20. Would you pay $20 for this? I have included a picture of this darn doll - I'll leave it to the reader to tell me if it's real and licensed.

What does this have to do with factoring? Well, in this competitive industry it's not unusual to come by proposals that just seem to be too good to be true. Many "a prospect" has fallen for the slick looking proposal without looking at the details that are outlined in the contract. My suggestion - read the factoring contract before signing on as a customer. And be sure to understand it!

Carnival Tricks and Factoring Proposals....

2011-12-23T10:58:00.000-05:00

I recently took my family to a carnival that is quite well known in the area. They have lots of rides and games - basically lots of opportunities to separate parents from their hard earned cash. However, there are some experiences that I had at the carnival that related to certain dubious factoring proposals that I have seen through the years. So with a bit of levity, here is one sotry:

The Spider Woman with Eight Legs - She's Alive
The sign advertised that for $1, you could see the spider-woman. A lady with the body of a spider - alive - and you could talk to her! You could see her legs. Oh! but no flash photography, because the flash may reveal the mirrors hidden in plain sight.....and you may be able to see that it's just a person with a spider custom and makeup. How does this relate to the factoring industry? Some times prospect will get factoring proposals with seemingly incredible terms - really cheap money - no fees. The terms are unbelievable - amazing! And much like the spider woman, there is a whole bunch of mirrors hidden in the proposal that are unveiled in the legal language of the factoring contract. But those who are careless and sign without reading it get sucked into the illusion.

Lesson: If your factoring proposal looks too good to be true - it probably is. Read the contract before singing and be sure to understand it. If you don't understand it - get a lawyer.

Understanding Factoring Advances And Rebates

2011-12-13T18:45:00.000-05:00

Most factoring transactions are structured as the purchase of an invoice in two installments. The first installment is called the advance and the second installment is called the rebate. This article will help you understand how these work.

The Advance

The factoring is advance is the installment that your company gets once the product has been delivered or work completed. It's provided to your company once the invoice is submitted to your customer and verified by the factoring company. Advances usually range from 70% to 85% of the invoice and vary by industry. The reason why factoring companies don't advance 100% of the invoice is because invoices don't always get paid in full. Sometimes, invoices are disputed or have discrepancies. The portion that is not advanced by the factoring company is used to cover any possible discrepancy.

The Rebate

The factoring rebate is the second installment that you get, once your customer pays the invoice in full. Usually, it's the remaining 15% to 30%, less any fees or invoice underpayments. The invoice factoring rebate is usually paid twice a month. but each factoring company has their own policy.

Summary

So if a factoring transaction has an 80% advance, your company will get 80% as soon as it invoices and the remaining 20% (less fees and underpayments) as soon as the customer pays. One important thing to note is that the advance percentage can be used as a risk mitigation tool by factoring companies. For example, if your customer have slightly below average credit, the factoring company may decide to give you a lower advance on those as a way to cut risk.

How To Avoid Customers That Don't Pay Their Invoices

2011-12-02T16:07:00.001-05:00

The short answer: do your homework before you make the sale. Although the economy is improving, things are still difficult for many small and medium sized companies. For many owners, sales are still slow, so whenever they get a sales opportunity they jump on it. They extend payment terms, if the customer demands it, to help ensure they don't lose the sale. So just taking any sale for the sake of it is a risky strategy. In our view, a sale is not a sale until you get paid. And if you don't get paid, you end up being worse off.

So, how do you make sure that you only work with customers that pay their invoices? There are a couple things that you can do to improve your chances of getting paid on time:

Check commercial credit reports: This is a very important and simple thing you can do to improve you chances of getting paid on time - or at all. Get a commercial credit report on your customer's business (through Dun & Bradstreet or Experian) and look at their buying and payment habits. The report will also flag other potential issues like liens and lawsuits. Remember that as opposed to consumer credit reports, anyone can buy a commercial credit report

Get good contracts: Work with an attorney to craft a solid contract for your services. Be sure to use that contract in your sales

Use an acceptance sheet: Work with an attorney to develop a product/service acceptance sheet. This sheet should outline the product/service, the acceptance criteria and be signed by an appropriate customer representative when the work is complete (or product delivered). In our view, this is one of the most important and overlooked documents. It can be used to defuse disputes and misunderstandings.

What if a customer pays - but pays slowly? Not everyone can afford to wait 30 to 60 days to get paid. Then, you should consider a business financing solution like factoring. Factoring accelerates your revenues from customers that are credit worthy but pay slowly. It enables you to offer payment terms while minimizing the cash flow problems created by slow paying customers.

One of the advantages of invoice factoring is that it's easier to obtain than a conventional business loan. The biggest requirement to qualify is to have customers with good commercial credit. It's OK if they pay slowly, provided that they pay. Another advantage of invoice factoring is that the factoring company can act as your credit department - you can use their resources to determine the credit worthiness of your customers.

Factoring Due Diligence - Bouncing Payment Checks

2011-11-28T10:04:00.001-05:00

An industry friend of mine recently told me the story of a prospect of hers that needed factoring rather quickly. The company had some financial problems but also had good potential. My friend and the prospect had also developed a good rapport so she thought there were a good match - she wanted to move forward. Like many factoring financing companies, my friend's company charges a due diligence fee to the customers. This is used to defer the expenses of going through all the reviews, searches and filings that are required before funding an account. The fee is just a couple hundred dollars and most prospects pay it by check.

In this case - the prospect's check bounced.

What do you think happened next? When confronted by this, the prospect presented a number of excuses and explanations. I am sure they were all valid. However, my friend decided that her trust in her prospect had been compromised and decided not to move forward. Her logic was simple, would you invest money in the business of someone who bounced a check to you? Most likely you would not. She wouldn't either...

What is sad is that it didn't have to be this way. If the prospect would have been completely upfront about her financial situation, there was a good chance that my friend would have offered to take the due diligence fees out of first funding. Basically, from the first factoring financing transaction. My friends company (and many factoring companies) will provide this type of an accommodation to select prospects. All that the prospect needed to do was to be upfront about their situation and as for it.

I understand that for a prospect, being upfront about every detail of their business can be difficult because they risk rejection - and many really need the funds and don't want to run that risk. But consider the alternative, if you omit something that the factoring company then finds out - you may lose your opportunity to get business financing from them - forever.

Using Factoring To Finance Growth

2011-11-16T12:49:00.001-05:00

Most people that come to us looking for factoring do so because they have cash flow problems and need funds to cover operations. However, factoring can also be used as a tool for growth. And as a tool for growth, factoring offers a number of benefits. Let's look at an example.

Let's say a business services company is using factoring to handle it's operational costs. A new prospect appears and offers them a contract for consulting services. It's a large and lucrative contract - but invoices will be paid in 60 days. Unfortunately, the company does not have enough of its own funds to cover this contract. This is a common situation.

If structured correctly, the company can take on the contract, invoice for the work before payroll is due and then factor the invoice to cover payroll expenses. This enables the company to take on new business leveraging the factoring company's capital. However - and this is important - the transaction would need to be structured correctly to ensure payroll is met. The company would need to have factorable invoices before payroll is due.

Learn more about us - we offer factoring in every state.

Factoring and Payroll Funding

2011-11-16T12:19:00.001-05:00

Many companies that use factoring tend to be very payroll intensive, which make sense. These companies need to make regular payments to their employees on a weekly basis, but their commercial customers usually pay in 30 to 60 days. So it's common to see factoring in staffing agencies and also in security agencies. The main objective in this case is to help the company meet it's payroll responsibilities. However, factoring can also be used to grow the business.

Here is how factoring in a security agency can be used for both operations and growth. Let's assume that the company is operating at it's maximum capacity and has no additional capital. It has enough to meet payroll - provided client pay on time. Obviously, factoring could be used to speed up revenues to help ensure there are always funds to meet payroll. But let's look at a different situation. Let's say that this same security company is approached by a new customer that needs it's services but will pay in net 45 days. Since the security company doesn't have any additional resources, it won't be able to hire the new guards and pay them for 45 days until they get paid - unless they use factoring. With factoring, this security guard company could secure the contract and factor the invoices - which would provide the needed funds to meet payroll. The key here would be to structure the transaction correctly so that you have factorable invoices before payroll is due.

This is just one simple example of how to use factoring to grow your business.

Learn more about invoice factoring group.

Factoring For the Medical Industry

2011-11-16T08:44:00.001-05:00

One of the biggest challenges for providers in the medical industry is waiting to get paid by 3rd party medical insurance companies (or government insurance companies). This creates can flow problems which affect small and medium size medical providers, nursing homes, DME's that can't afford to wait because they have limited resources.

One way to solve this problem is to use medical factoring. Medical factoring accelerates your revenues due from insurance claims, providing the cash flow you need to meet your operational expenses and grow the business. And as opposed to conventional business financing solution which are difficult to qualify for - factoring is relatively easy to obtain. The biggest requirements are that:

Your company needs to work with credit worthy insurance carriers (or Medicare/Medicaid)
Your company needs to be free of legal and tax problems
Your company needs to have solid billing practices

One advantage of medical factoring is that it's very flexible - the financing line grows with your business. This makes it an ideal solution for medical providers whose growth is being constrained by cash flow problems.

Financing For Freight Brokers

2011-11-15T10:28:00.001-05:00

Finding a factoring financing solution for a trucking company is relatively easy. Just search the web and you will see there are a number of companies that offer freight bill factoring. On the other hand, finding financing for a freight broker is more difficult. Few factoring companies offer financing for freight brokers. One of the reasons for this, is that it's harder for a factoring company to secure the freight bills collateral. This increases the risk of the transaction.

Most of the companies that do offer factoring to freight brokers will insist on paying the carriers themselves. This means that the factoring company pays your carrier on your behalf (from your advance) and then advances the remaining funds to your company. This ensures their collateral is protected and enables them to provide you with financing.

There are a few companies that will offer financing to freight brokers and allow them to pay the carriers directly. This gives the freight broker greater control over their cash flow. However, these companies will only work with freight brokers that have :

Proven track record
Impeccable credit
Impeccable background
Good reporting and payment systems

Invoices are taking longer to pay

2011-11-14T16:46:00.001-05:00

The WSJ had an interesting article (the big number) that mentioned how working capital was increasing at companies. Working capital is usually defined as: WC = Current Assets - Current Liabilities. The article defines WC as Accounts Receivable + Inventory - Accounts Payable. Having an increase in WC can sometimes indicate that a company is having a tough time converting invoices into cash.

From a factoring company perspective - this is exactly the type of problem that factoring solves. It converts A/R into cash.

By the way WC is just an indicator - and like many it's not all inclusive. For example, an increase in sales (which is good) would also increase Accounts Receivable, which in turn would increase Working Capital.

Unrealistic Expectations - Factoring Application

2011-11-07T12:17:00.000-05:00

A couple of months ago, an industry colleague of mine told me a story about a prospect that had submitted a factoring application and needed funding in five days. In many cases, this is do-able if the application is complete, if there are not hiccups, and if everyone cooperates. However, this prospective company had:

Multiple judgement liens
Multiple tax liens - for federal taxes
Substantial unpaid payroll liabilities

My colleague tried to explain to this prospect that these liens had their invoices as collateral and that they would not be able to finance them until they were able to get a lien subordination from all parties. By the way - most subordination discussions take more than five days. To add to this, the prospect had not disclosed these issues even though the application asked about them and my colleague was left wondering about any other hidden problems. Needless to say, they were not able to get the factoring line in five days.

There are two points I'd like to make with this post. My first point, one has to have realistic expectations when submitting a business financing application. It's unrealistic to expect quick financing for a company that has various legal and tax problems without addressing them. Clearly the owner knew (or had to know) his company was in trouble and getting funding would not be easy.

And my second point, not disclosing these problems will usually hurt (rather than help) your application. Most factoring companies will perform due diligence before funding a client and will easily discover public record information such as tax liens and judgements. But by not disclosing this your erode some of the trust from your factoring company who will now spend extra time looking for other issues that were potentially not disclosed.

Note: Some aspects of this story have been fictionalized and changed

Do you Really Want To Be a Landlord? Really?!?

2011-10-28T15:09:00.003-04:00

This will just be a short off subject post. One item that has been in the news a lot (at least in Miami) is that a lot of investors are "snapping up" cheap homes and condos, thanks to the depressed markets, and then turning around and renting them "for a profit". The articles usually go on to say how these units are rented quickly "in days", providing a nice return on investment.

Well, true.... but. This turns many of these investors into landlords since owning rental property is an "active investment". And any landlord can tell you is that it's usually a thankless job. No offense to landlords, but I am sure most of them would agree that being a landlord is not easy and certainly not for the fain of heart. Nor is it a decision that is taken up lightly.

I also wonder what will happen to these investors when the real estate market changes - as it will eventually. Being a landlord may sound fun when there is high demand for rentals. It's less fun when things change and get tougher for the rental market.

I am only writing this because all these newspaper articles seem to endorse the practice by writing glowing reviews about these investments but not painting the whole picture. I would wonder what would happen if they interviewed those same investors after three years of being a landlord. Will they print the horror stories about trashed homes, maintenance costs and other expenses that creep up?

Anyways - just a quick personal observation. I promise to get back to the subject of factoring.

Import Factoring (a.k.a. Foreign Exporter Factoring)

2011-10-28T14:50:00.000-04:00

Every so often we get a call from a foreign prospect who is doing business with a US company, wondering if they can factor their invoices. Their usual argument is that the invoices are to strong US customers, so just because they are in a foreign country is should not matter. For many factoring companies, it does matter quite a bit since due diligence is tougher, as is getting a security interest in the invoice. But there are a few companies that offer that service, it's called import factoring - also known as foreign exporter factoring.

Import factoring transactions are much like conventional factoring transactions. Usually, the invoice is financed through two installments - the advance and the rebate. The advance is giving as soon as the client is invoices (for completed work or delivered product) and goes from 70% to 80% of the invoice. The rebate is provided once the customer pays the invoice in full and is usually the remaining 20% to 30%, less the factoring fee.

There are a couple reasons why some foreign companies look for import factoring. It provides them with access to US funding at rates that are similar (though higher) than in the US. This type of financing solution also provides them with credit knowledge - since the factoring company can help them determine which customers can be offered 30 to 60 day terms.

However, import factoring is not for everyone. The few companies that offer this type of financing usually require clients that:

Sell more than $200,000 per month to US customers
Work with credit worthy US customers
Have a solid track record in their countries

Full Voice Mail Box = No Business Financing

2011-10-18T11:20:00.000-04:00

Here is an interesting trend we have been noticing - the number of callers who call us and then leave a callback number that is hard to reach is increasing. Usually, it's because we reach a mailbox that is full and that doesn't accept new messages. What is more interesting is that repeated attempts to call back get the same response. These are individuals that keep a full mailbox for days - or weeks. Believe it or not, this trivial little thing is actually a big problem.

Now here is my question - how can they reasonably expect to get business financing if we can't get in touch with them? An even more important detail considering we get calls from owners and executives - how can their customers reach them if their voice mail box is full all the time? And if their customers can't reach them - how can their business grow?

The fact is that how you handle your business is a very important part of the due diligence of a factoring company. And they will take this into consideration when deciding whether to offer a factoring line or not. It may seem like a trivial detail but it's actually an important one. It's common for factoring companies and their clients to be in regular contact - to communicate about advances, rebates and any issues that may crop up. Most will perceive that if you are hard to reach - you are hard to do business with.

So, want a piece of advice to improve your chances of getting invoice factoring? Be sure that your factoring company always has a way to reach you.

Factoring and Costco Suppliers

2011-09-09T17:26:00.001-04:00

I was pleasantly surprised when I read an article about factoring in the Costco Connection. It was an article on how to deal with slow paying customers. The fact that this article was published is clearly a sign that factoring is slowly but surely becoming a main stream form of financing. In part this is due to the recent recession and credit crunch where business financing was very scarce and companies where moving towards alternative sources of financing.

It's well known in the factoring industry that a number of Walmart an Costco suppliers use factoring as a source of business financing. And needless to say, factoring companies love working with these clients because both Costco and Walmart are superb companies and have impeccable business credit. And this is where invoice factoring is different than other business financing solutions. To qualify for factoring, the most important requirement is that your customers should have good business credit - which both Costco and Walmart have. The only other qualification requirements are that your company needs to be free of legal and tax problems.

This will be a short post - I just wanted to share this article with you.

Manufacturing Growing For 25 Straight Months

2011-09-01T11:35:00.002-04:00

Manufacturing

Here is one piece of good news. According to the ISM index, manufacturing has been growing for 25 consecutive months. Although experts consider manufacturing to still be weak, at least it is in positive territory. Manufacturing is a critical industry for the country so it's definitely good that it's growing, albeit slowly.

Coincidentally (perhaps?) we have seen a small increase in the number of small manufacturers that are looking for business financing. Many of these are looking for business loans or lines of credit to be able to operate their businesses. Some, need the funds to pay suppliers in order to handle a large PO. Their challenge is that few institutions are issuing business loans. For the meantime, they are bridging their financial needs using factoring.

Factoring helps manufacturing companies by providing an upfront payment for their slow paying invoices. Instead of waiting up to 45 days to get paid, they get a payment from the factoring company and get immediate use of those funds. The transaction is settled once the customer pays in full.

The big advantage of invoice factoring in this case is that it's easier to obtain than a conventional business loan. This helps the company bridge their cash flow gap and improve their financial stability. Ideally, this will help them qualify for a business loan later on.

A Scary Statistic - Decreasing Number of Entrepreneurs

2011-08-12T11:30:00.002-04:00

One scary statistic that appear in the WSJ today - the number of entrepreneurs has gone down. This is scary because small businesses are one of the engines of an economy recovery and of an employment recovery. Makes sense - small growing businesses need to add more employees proportionally than larger more established companies. This is a critical area of the economy and the government would be wise to ensure that entrepreneurs have the opportunity to succeed.

One thing that many entrepreneurs need is business financing. They need access to reasonably priced (risk adjusted - of course) funding to enable them to succeed and grow. The current economy is not providing that. You can read my posts on small businesses lack sales and small business funding for more information on this..

As a factoring company owner - we see a large number of small businesses and entrepreneurs that need business financing. And one thing that we have noticed since the start of the credit crunch is that for the most part - prospect credit quality has increased. In principle one would think this is great (and up to a point it is!), but with this increase in prospect credit quality we have noticed that prospects that would have previously qualified for a business loan at a bank are unable to do so..... and using invoice factoring as their back up plan. In my view, some of these customers would be better served by cheaper bank financing.... if it was available. But it's not, and therein lies the problem.

Business Financing For Self Employed People

2011-08-08T15:32:00.001-04:00

Bloomberg published an interesting article about boosting the economy by helping the self employed. Many of these are laid off workes that have reinvented themselves as small businesses. They face the same challenges than most larger business owners. Actually, they face worse challenges because many don't have substantial capital and end up living paycheck to paycheck - or more specifically - customer payment to customer payment. One way to break this cycle and to help the small business grow is to use a business financing solution such as factoring.

There is a growing field of companies that offer small business factoring specifically to self employed individuals. As opposed to most factoring companies which only work with businesses that invoice more than $50,000, these small business factoring specialists work small businesses only - those that invoice *less* than $20,000. Also, the qualification requirements are easier than those of conventional factoring.

Lastly, another option that is available to small business owners is the SBA microloan program (not to be confused with the SBA 7(a) Business Loan programs). This little known program is a gem for self employed individuals. Their maximum loan amount is $50,000, but their average loan is for $13,000 - just right for most self employed folks.

Small Businesses Say They Lack Sales (Not Funding)

2011-08-05T12:19:00.000-04:00

A recent article from the WSJ says that small businesses lack sales - not credit. I find this interesting because a common complaint from businesses is that they lack credit. On the other hand, some banks are complaining that they lack qualified customers. It's a nice catch 22. I wrote about this here.

This point of view - lack of demand - makes sense to me. Although most agree that the USA is not in a technical recession - it sure feels like one. Also, and from my perspective, I am hearing this indirectly from prospects. A few years ago, companies called requesting factoring because they needed the business financing to grow the company. Now, a large proportion of prospects get financing to help ensure that they companies work smoothly... in preparation for "future" growth.

I don't think there is a single culprit for in the "sales vs. financing" dilemma. Rather, it's a combination of things. Basically we have four factor in play:

Some companies are not seeing demand for their products/services
Companies that ARE seeing demand, are having a tough time getting financing to meet the demand
Companies are in such tough shape that few banks are willing to offer them financing
Banks are in tough shape and can't offer financing

This creates a nasty viscous cycle. To complicate matters, it's difficult for a company to determine which lending institution is in good shape and which one is not. And you can bet your banker won't tell you! This makes finding a financing source very difficult. The mismatch between companies that need credit and banks that can offer it is one of the drivers that is sending companies to alternative sources (such as invoice factoring).

So..... now what? Well, something has to give to break this cycle. In my view, it will have to be credit availability for the simple reason that it's easier to control than consumer demand. What does this mean for factoring companies? If the economy continues its recovery, I think we will see some robust demand as the industry can act as an alternative source of financing for some businesses.

Small Business Financing is Still Tough to Get

2011-08-05T11:08:00.001-04:00

The WSJ had an interesting article today about franchise financing. In summary, a few years ago, most franchise systems were not involved in helping their franchisees find financing. They usually could find it themselves. Now, things are different. The current credit crunch is affecting them, so they have started helping their franchisees find business financing.

Depending on who you ask and whose numbers your believe - the problem is either lack of demand (by qualified applicants), lack of supply - or probably both. I think it's no secret that banks are being substantially more cautious on their lending activity. This has driven customers to alternatives sources of financing such as invoice factoring. But there is a catch, although factoring is easier to obtain that most conventional financing options, it's also more expensive. This is not good.

In my (biased) view of the world, the cost that a business owner pays for obtaining financing should be commensurable to the risk that the lending institution is taking. I don't think this is happening right now. So now, this begs the question - why aren't factoring companies charging lower rates?

The simple answer is because the cost of funds for factoring companies is substantially higher than the cost of funds for banks. Banks usually get their funding by offering checking accounts, saving accounts and CD's. They pay very little money for these funds (here are the latest bank rates). Therefore they can lend money inexpensively. On the other hand, factoring companies get their financing from the following sources:

Other factoring companies
Bank lines of credit
Investors
Shareholder capital and funding

All these sources demand high rates of return - much higher than what a bank pays for its funding. If the factoring company is going to make a profit, they need to charge higher rates than what they are paying for their funding - which is common sense. There are no two ways about it, factoring will always be more expensive than conventional bank financing.

Banks and Small Business Loans

2011-07-05T12:56:00.000-04:00

Here is an interesting article on the WSJ - basically, banks are still not lending much to small businesses. Many will agree that this is a problem for the economic recovery. I have heard bankers use two arguments to justify what is happening. They basically cover two sides of the same coin - demand and supply:

Demand: They say that they have fewer inquiries from "qualified" small businesses
Supply: They say their tighter restrictions make it harder for small businesses to qualify

I can see how demand for small business loans may be lower due to the current economy. But in reality, I suspect the issue involves both supply and demand. The thing that catches my attention is that many demand side proponents, use the term "qualified small businesses". I suspect that their qualification requirements have become more stringent - making it more of a supply side issue. However, I understand their position too. Many small businesses have been battered by the economy making them less attractive business loan candidates.

On the other hand, non institutional providers of business financing, such as factoring companies, are seeing an increase in the demand of their services. The reason is fairly obvious - it's easier to qualify for factoring than a business loan.

Ultimately, to have a healthy economy, you need to provide small businesses with access to affordable (on a risk adjusted basis, of course) financing. Until this happens, the so called "recovery" will move slowly.

Construction Factoring - And Calculated Risk's Distressing Gap

2011-06-23T13:54:00.000-04:00

I like to read Bill McBride's Calculated Risk blog. In his blog, he talks about a concept called the Home Sales Distressing Gap. You can read about it here, and look at the graph here. Basically, the graph compares the sales of new homes versus the sale of existing homes. Until recently, both graphs had a similar shape (but different magnitudes). Then the real estate bubble popped. Now, new home sales are very low because the market is still trying to clear excess inventory.

With fewer new home sales, there is a lot of competition for the few new projects that are cropping up. Clearly, tough times for many in the construction industry - especially those who focus on new home construction. And we are seeing that in our business as well. Although demand for conventional factoring is increasing, demand for construction factoring has been stagnating.

But hopefully it's not all doom and gloom. Sooner or later, the inventory will clear our and builders will start to build. And with that, demand for construction invoice factoring will increase. Actually - here is some good news about a new mega project that is being discussed in Miami.

Banks Approving More Business Loans

2011-06-16T12:18:00.000-04:00

Here is an interesting piece of news. According to an article on Bloomberg Business Week - banks are approving more loans. But there are two important facts: Most business loans are still being rejected (about 60 %). And, "Most business loans were rejected because of concerns about borrowers’ earnings, cash flow, or collateral". Said differently - it's still pretty difficult to get business financing for the same reasons it has been difficult for the past few years. I don't think this will change in the foreseeable future.

This puts a lot of small and new companies in a bind. They need business financing but can't get it. For most, the only option is to consider alternative financing, like factoring or purchase order financing. Both these options are good, if the type of problem you have fits their model. For example, invoice factoring will help companies that have cash flow problems due to slow paying clients. And purchase order funding will help re-sellers that have pre-sold purchase orders. But what if you need to buy inventory or equipment? Sure, there are other alternatives but a line of credit (or business loan) can be the most flexible at times.

It's good news that business lending is increasing. However, to have an economy that is firing on all cylinders, business lending needs to increase. But - it has to be responsible business lending.

Accounts Receivable Aging Report and Factoring

2011-05-25T18:36:00.000-04:00

The accounts receivable aging report is one of the most important documents that a factoring company will ask you for. Well run companies use this report to see which invoices are open and to identify invoices that are beyond terms. It helps them with their collection efforts allowing them to keep on top of slow paying customers. So, why is this report so important for factoring? For two reasons:

1. Factoring companies use this report to get an idea of your receivable volume and to determine which receivables will qualify for funding.

2. Factoring companies assume that a company that uses this report and can provide it quickly is likely to manage their receivables well and will likely make a good factoring client.

Point #2 is actually quite important since it's one way to make a good first impression with a factoring company. Before looking for a factoring company, be sure to have this report handy. By the way, the opposite is also true, factoring companies will become hesitant if you can't provide this information and still want an accounts receivable factoring proposal.

Is Poor Cash Flow Stopping your Trucking Company?

2011-05-22T16:11:00.000-04:00

The economy appears to be picking up. And with it, we can expect that the transportation industry will see a corresponding increase in activity. Transportation is one of the backbones of the economy (fortunately, our economy has a few backbones :-).

However, business financing conditions are still very tough. Although more bank loans are being made now, qualifying for conventional bank financing still remains challenging. Few small or mid sized transportation companies actually qualify for business loans due to limited collateral assets or loan availability.

One alternative for transportation companies that have cash flow problems is factoring freight bills. This solution solves a common problem for transportation companies - cash flow problems due to slow paying customers. Freight factoring solves this problem by providing an advance against slow paying freight bills. This provides the trucking company or freight broker with the needed cash to meet obligations while waiting to get paid.

Business Loan Volume is Coming Back Up - SBA

2011-05-22T15:57:00.000-04:00

There is an interesting article in the Miami Herald about how business loan volume is back up to 2008 levels. The point of the article hit on something that I have noticed recently - we have more competition from banks. We actually lost a couple of opportunities to banks in the past weeks. And these are not banks that are offering factoring like we do - but rather offering conventional business financing.

Although I don't like loosing customers - I think it is good that we are losing them to conventional business financing sources. It tells me that the economy is improving and more companies that qualify for conventional financing are finding it. To me, this is good news.

I'll finish this short post with an anecdote. The customers that we lost this month to conventional banks were NOT lost to big banks. Rather, it was to small and mid-size local/regional banks. My guess is that these institutions did not bulk up in sub prime real estate loans during the latest boom/bust and now have money to lend. And by the looks of it, it is smart money.

Factoring Applications - How Many Factoring Companies Should You Apply With?

2011-05-03T12:15:00.000-04:00

It's not unusual for prospects to tell the salesperson that they are working with that they have "submitted a whole bunch of applications to factoring companies and will go with whoever provides the best rate". Obviously, most salespeople hate to hear that. For a couple reasons. Obviously, they hate competition. But more importantly, they know that few people have the resources to manage such a large number of applications and details properly. It's not unusual to see prospects that use this approach get confused about terms, names and other details. Personally, I don't think it's a good approach.

By the way, I am not suggesting that you should not evaluate a number of invoice factoring companies to find the most competitive ones. I think that you should! However, submitting a whole bunch of applications before doing a proper evaluation can be time consuming for you and the factoring companies. And more importantly, it does not always get the results you want.

In my opinion, a better strategy is to hold initial conversations with a few factoring companies and evaluate them by phone. You can learn a lot just by talking to them on the phone and asking the right questions. Here is a list of 7 questions you should ask your factoring company. This is just a start, of course. You should also come up with your own questions and make sure that all of them are answered.

Then, based on your phone interviews, select the top two or three companies and submit your applications to those. Three is probably the largest number of applications one can probably manage. If you want to use competition to your advantage, there is nothing wrong in telling the sales person that you have interviewed a number of factoring companies but only applied with the top two (or three) to see who gives you the most competitive proposal. This will show that you have carefully evaluated companies and selected the top contenders. This shows that you are a sophisticated buyer and will probably get you better proposals than just sending an application to anyone and everyone you meet.

Manufacturing Remains Strong

2011-05-02T14:37:00.000-04:00

It finally appears that the recovery may be gaining some traction. As I mentioned in my previous post, construction was up in march. Today, The Institute for Supply Management stated that the PMI remains over 60 for the fourth consecutive month. This is good. The manufacturing industry is a critical component of the US economy, who is still the biggest manufacturer in the world.

To make things even more attractive, there is probably also a spillover effect to other industries. This is because manufacturing companies themselves need the services and products of other companies - and so on. Ultimately, this means an increase in demand for business financing products because growing companies usually need money. The catch is that although financial institutions are lending more - they are not lending a lot and they are very careful about who they lend to. This will create an opportunity for companies that offer alternative financing, such as invoice factoring.

Usually, factoring and purchase order financing are used by emerging companies that don't qualify for conventional business financing. One can assume that financing activity in the industry will increase, at least for the short term.

Construction Spending is Up in March

2011-05-02T12:19:00.000-04:00

According to a report from the Census Bureau, construction spending increased in march. This is certainly very good news for an industry that has been battered by the economy. I don't need to remind readers that the infamous real estate bust started about 5 years ago (depending how you measure the start).

This is also very good news for the economy, for construction companies and - for us - since we are one of the few companies that provides construction factoring financing in the USA. We have actually noticed an increase in the number of construction factoring prospects since the start of the year, which would be explained by the data from the Census Bureau. Finance companies that specialize in construction factoring should have a better year this year.

By the way, that does not mean that it's easy to finance construction opportunities. By all means, it's not. Financing a construction subcontractor opportunity is still very difficult and challenging as corporate credits are not what they used to be. However, most conventional business financing avenues are still not available to construction companies due to the perceived risk, which would suggest that we will have increased demand and not a lot of competition from conventional financial institutions.

We'l see. Regardless, this is good news for the construction industry and we hope it keeps up. Here is a copy of the press release.

Changing Factoring Companies - Keep This In Mind

2011-04-21T11:49:00.001-04:00

Every week we get calls from prospects that are looking to change their factoring companies. Changing factoring companies is similar to changing horses in the middle of a stream - it can be done but it's tricky and it's best to have a good reason.

One common reason companies look to change factors is the search for better pricing or better terms. While the factoring industry is competitive and prices/terms vary, you should also take "intangibles" into account. By intangibles I mean:

Responsiveness - how quickly do they respond to your requests
Quality of service - are they handling your financing details properly
Flexibility - can they adapt to changing conditions

Changing a factoring company for a lower price only to find out that their service levels do not meet your expectations can have a negative effect on your company. Also, evaluating items #1 - #3 directly can be very difficult and it's probably best if you ask the new factoring company to provide references - and check those thoroughly!

One thing you should keep in mind is that changing factoring companies will also impact your customers. They will need to receive and sign new notices of assignment and will also need to direct their payments to a new address. Lastly, their point of contact and workflow will change since you will now working with a new factoring company. You will need to evaluate whether the customer impact (if any) will justify changing factoring companies.

I am no trying to steer you into staying, or leaving for that matter, your factoring company. However you should balance the benefits and the challenges in order to make a balanced decision.

What Determines the Factoring Advance?

2011-04-12T14:48:00.000-04:00

Quick summary: when a factoring company buys an invoice from you, they do so in two installments. The first payment installment is called the advance and is given to you as soon as you factor the invoice. The second installment is called the rebate and is given to you as soon as your customer pays the invoice. It's a fairly simple business financing tool.

Factoring advances can range from 70% to 95%. That's a fairly substantial range, which leads to the question: what determines the factoring advance? The short answer is risk. The longer answer is:

Industry
Volume
Customer risk (customer is the company that pays the invoices)
Client risk (the factoring client)
Client needs

The average factoring advance range is from 70% to 80%. The following industries tend to have different advance rates:

Transportation (carrier): 90% - 95%
Transportation (broker): 90%
Staffing Agency: 90%
Medical: 60% - 80%
Construction: 60% - 75%

One of the biggest risks for a factoring company is that an invoice won't be paid. This can happen for many reasons with the most common being invoice underpayment due to charge backs and disputes. The advance takes this into consideration. The higher the risk of a charge back (or even non payment), the lower the advance. Transportation and staffing agency invoices tend to be easy to verify, which REDUCES the chance of a charge back or dispute. On the other hand, medical factoring and construction factoring invoices tend to be difficult to verify accurately, which INCREASES the chance of a charge back or dispute.

The next variable is factoring volume. Companies that factor a diversified number of invoices with a reasonable volume pose less of a risk to a factoring company and thus can get higher advances. The opposite is also true. Concentrated portfolios have lower advances.

In the accounts receivable factoring world, the term customer refers to your customer: the company that pays the invoices. Their creditworthiness is critical in determining the factoring advance. If your customers have moderate credit ratings, your advance will be on the lower side. If they have good ratings, your advance will be on the higher side.

Lastly, there are client variables. Clients that are high risk (i.e. bankruptcy risk) will get lower advances than clients that have stable financial statements. Also, clients do have a say on the advance and can sometimes ask for higher advances. Remember though that factoring companies look at their revenues per dollar factored so there is a trade off. So higher advances usually mean higher rates. You can find more information here on how factoring companies structure costs.

The factoring company will review this information and make a determination of what advance to offer. Like everything, this can sometimes be negotiated.

By the way, here is more information on the factoring reserve and how it works.

What are Factoring Minimums?

2011-04-11T11:55:00.002-04:00

In most industries, a client gets a discounted price if they buy a certain volume of product. The invoice factoring industry is no different - just remember that their product is money. Generally speaking, the more money you use (or "buy") the lower your cost. The analogy may not be perfect, but you get the gist.

Most accounts receivable factoring companies work with minimums. What is a factoring minimum? It's basically the lowest amount of invoices you are supposed to factor on any period of time. For example, some factoring companies require that you factor $50,000 every month or perhaps $500,000 every quarter. Minimums can usually be tailored to fit your needs. If you agree to a minimum, the factoring company agrees to give you a special price. If you don't meet the minimum, you pay the full fees (without a pricing discount). However, some factoring companies have absolute minimums. That means that they will not take an account that needs less than a certain amount of funding.

Why would a factoring company have an absolute minimum? Aren't they turning their back on business opportunities? Yes, but...

Setting up and managing a factoring client is labor intensive. The paper work and operations costs are similar for for both $30,000/month and a $500,000/month. However, the $500,000 month client brings in more revenues. Furthermore, a $500,000/month client will usually have diversified invoices, making them less risky. Does that mean that small factoring clients are out of luck? No!

One area of factoring that has been growing quite a bit is the small business factoring industry. Most small business factoring companies have adapted their operations and rates to accommodate smaller customers. And few - if any - small business specialists have minimums - and those that have them are very low (i.e. $1000/month). Generally new and small companies stay with these specialist factors until they company grows and they can qualify for a larger factor (with better pricing terms).

Using Freight Factoring For Your Trucking Company

2011-04-11T11:05:00.002-04:00

Although the business financing environment has improved a bit, finding financing for a transportation company remains very challenging. Although some of the larger brokers and carriers have been able to obtain conventional financing, most small and mid sized carriers are still only able to find financing through alternative sources. One solution that has been gaining traction over the years is freight factoring.

Freight factoring solves one of the most common cash flow issues that transportation carriers find - slow paying shippers. Although some shippers offer quick pays, most shippers pay their freight bills in 30 to 60 days. Carriers have to worry about paying all their expenses while waiting for the shipper to pay. Eventually they run into problems because funds get low or run out. Freight factoring solves this problem by advancing funds against freight bills while waiting for the payment to come.

One of the advantages of freight factoring over other types of factoring is that freight factoring transactions require a smaller reserve. Advances usually start at 90% and can go as high as 95%, depending on a number of variables. We will cover the subject of a factoring reserves in a different post.

Small Business Hiring is Up - A Little Bit

2011-03-30T11:44:00.000-04:00

I just read a small article in the Miami Herald. Small business hiring is up. It's often quoted that the majority of people work for a small business, so obviously, you can't have a recovery unless small businesses start to hire. This, combined with the fact that small business lending is also increasing, is good news.

Let me add something extra to this. We are seeing more competition from banks. I have actually lost a couple of factoring opportunities to banks that persuaded the prospect to accept a line of credit. What I am about to say may sound crazy - but this is good. Good for the economy and in the long term, good for the factoring industry. As I have said before, each type of funding solution has it's place in the economy. The recession caused an environment where companies that would have normally qualified for bank financing had to resort to accounts receivable factoring simply because bank financing was not available. The problem with this is that factoring costs more than conventional bank financing, therefore the cost of money increased to many companies.

It seems that things are returning to a normal environment, albeit slowly. Factoring is regaining it's proper position in the business financing pecking order.

Trend: Higher Factoring Minimums

2011-03-28T15:26:00.000-04:00

Many (but not all) factoring companies have minimum volume requirements. This means that the client must agree to factor a specific dollar amount for every period (i.e. month, quarter), or pay an extra fee. Factoring companies usually set minimums because they only want to focus on clients of a specific size. Additionally, they want to ensure that the client generates enough factoring revenues to cover the costs of servicing.

One trend that I have noticed is that factoring minimums are on the raise. Companies that didn't have minimums are now implementing them. Those that had them in the past are raising them.

Why is this happening? I am not 100% sure, but I think it has to do with client quality. And by quality, I mean the company's financial shape and the quality of it's management team. Before the crisis, the overall quality of a company doing $50,000 was higher than one doing $50,000 in 2011. Sounds counter intuitive, but many companies are seeing this. As a rule of thumb, the larger the company the higher it's quality. There is a higher chance it will meet the necessary requirements to qualify for factoring and be able to provide sufficient revenue to the factoring company. So by raising the bar, they improve their chances of working with quality companies.

However, there is also value in the opposite strategy. A few companies have capitalized on this trend and are offering the opposite: small business factoring plans with NO minimums. Obviously they are hoping to catch clients that aren't able - or willing - to commit to minimums.

When I started in the factoring business (way back when :-), we specialized in small ticket factoring. It's a market that is dear to me because it taught me what I know. Needless to say, we plan to remain a source for companies looking for factoring plans with no minimums.

The Fear of Municipal and State Defaults

2011-03-09T10:04:00.000-05:00

There is a trend that has been developing in the factoring industry for the past few months. It's the fear of factoring invoices due from a city, a county or a state. In the past, factoring companies used to consider these invoices as ultra-safe. Not any more. Most people I know consider them to be risky. I know a number of factoring companies that are not buying any invoices whatsoever from state, county or city debtors. Those that do - only do so for certain states - those that have the lowest risk.

I can certainly understand why factoring companies are doing this. Specially with all the commentary on municipal defaults (here is an example) out there. However, this is a worrying trend since factoring companies tend to be in the (b)leading edge of credit. This of course, has a trickle down effect. State and municipal vendors will find it harder to obtain financing, in turn, they will find it harder to deliver services and so on...

This reminds me of the state of the industry some years ago. Two years before the bankruptcy of General Motors, there was chatter in the factoring industry about the risk of factoring those invoices. Actually, at the time of their bankruptcy, few factoring companies that I know of where factoring invoices from GM.

We live in interesting times... but I sure hope that this chatter about municipal defaults does not become a self fulfilling prophecy.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Construction - Pay If/When Paid?

2011-02-28T11:02:00.000-05:00

Aside form invoice quality, the number one killer of construction factoring deals is the dreaded "pay when paid" clause. Many general contractors usually place that clause in their contracts. It basically states that the GC will pay the subcontractor when (and if) they get paid by their end client.

This little clause will make all invoices with that GC impossible to factor. Why? Let's look at this from the point of view of the factoring company. The factoring company is interested in financing an invoice that will be paid in 90 days or less. To evaluate this, they look at the business credit and payment track record of the GC. However, the "pay when paid clause" introduces an additional risk - the GC's client. What happens if they don't pay? The transaction collapses.

If a factoring company finances this transaction, they are in effect financing the GC's end client. It gets more complicated than that though. GC's usually get paid in stages of project completion. Each stage usually invoices the work of a number of subs. This could lead to a situation where our subcontractor client does their work correctly - but the stage fails because a different subcontractor did not do their work properly - leading to a non payment from the client to the GC and down the chain.

In summary many factoring companies feel that this clause exposes the invoice to a variety of non payment situations that have nothing to do with the performance of the client. The only way to use factoring in this type of scenario is to get the GC to waive the "pay when paid" clause... which is usually tough. Or to find a company willing to take the risk.

Disclaimer: This article should not be viewed as legal advice. I am NOT an attorney. Please consult one if you need a legal opinion.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Small Business Lending Is Improving - A Little Bit.

2011-02-22T11:27:00.000-05:00

I read an interesting article in the Miami Herald yesterday - business lending is improving - at least a little bit. This is good news. Also, I have been hearing through the grapevine that a factoring companies are starting to lose deals to banks. Although not necessarily good for me, this is good for the economy.

In the ideal world, companies should be able to get business financing at a rate that is representative of their risk of default. If you own a company that has a good track record and solid customers, you should be able to access funding at a cheaper rate than a business owner with a shorter or no track record. The recession affected lending institutions to such an extent that they were not lending money to companies - even good ones. This forced these "good" companies to go to alternative sources of financing - which are more expensive. Although this is/was good for those of us in factoring, it was not ideal for clients.

It would appear that things are coming back to normal, albeit very slowly. One thing that the article in the herald mentioned is that banks are still cautious - they still want to see at least two years of financial statements, good credit from the owners and so on.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Being Professional - Yes, it's Important.

2011-02-09T12:05:00.000-05:00

Not too long a go - a prospect called us looking for factoring. The first thing I noticed was that the prospect had the TV on in the background - it was loud. Having a prospect explain his business while listening to a loud TV program in the background is very difficult. Now, I know many people work from home to take care of their kids. I wanted to be sensitive to this possibility so I asked if we could reschedule the call at a more quiet time or when he was in his office.

His answer "No can do - I work from my "crib" (yes, he said crib). "I don't have an office phone - just a cell phone".

Now - let me turn the table around. Let's say you were a customer looking to do business with this prospect. You know, buy his product or service. Would you feel comfortable buying from a company where you can hear a TV in the background? Probably not. Would you consider them a professional and reliable business? Probably not. This is just common sense - you'd take your business somewhere else.

Now, if this prospect came to you asking for money, would you finance them.....?

Just in case, I decided to ask the prospect if he had any financial statements that could back up the information he had shared with me over the phone. He said he was too busy to create financial statements - he had a company to run! Ok.... well, that explains the television on the background :-)

As a factoring company, we see a lot of small businesses and understand that small business owners value their freedom and their independence I do to. They don't always operate like one expects. But being professional is still very important - especially in these tough economic times. Reviewing "client professionalism" is something that many financial companies do - directly or indirectly. It falls under "Character" in the 5 C's of lending. In my book it falls under "Common sense". An unprofessional business will have a lower chance of success than a professional one - and as a factoring company - we want to put our money where it has the highest chance of success.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

ATA Truck Tonnage Increases in December

2011-01-29T16:11:00.001-05:00

Here is a very interesting article that was published in Calculated Risk. According to the American Truckers Association, the for hire truck tonnage index increased by 2.2% in December 2010. Carriers are reporting a see-saw volume pattern. In other words, volume is choppy - down one week and up the other - but with an upward trend. Obviously, this also explains why many factoring companies that specialize in freight factoring are also seeing that pattern in their revenues :-)

The good news is that the expectation is that volume will increase. This will bode well for the transportation industry which was deeply affected by the recession. Needless to say, factoring companies that specialize in transpiration will also see an increase in volume - albeit choppy.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Lending Activity Increases

2011-01-11T16:46:00.000-05:00

So, it appears that 2010 ended on a better note than 2009 as the WSJ reports that lending activity will increase in 2011. Most economic experts say that an increase in business lending is a necessary component of any recovery. And as I have mentioned in this blog several times - I agree. Business lending is crucial.

When the credit crunch first started, banks and institutions started to restrict their lending. Clients who still needed financing went to alternative sources like factoring companies. At the same time, factoring companies saw their business increase because they were still willing to underwrite riskier (from a banks point of view - not mine :-) clients. Now the tide is turning again and banks are starting to lend more. Does this mean factoring companies will see less business?

No, this is not bad for the factoring industry. Just because banks are starting to lend, it does not mean they will lend willy nilly like if it was 2005. They are likely to go into it gradually, taking more risk as times goes by - and only if things get better. This will help the economy as a whole, since bank financing is one of the key components of a healthy economy. And this will help our industry in general. Factoring companies tend to benefit greatly from recoveries.

What will 2011 bring for the factoring industry? Who knows..... I am awful at making good predictions. But I think things will be better than 2010. 2011 will probably see a gradual improvement on economic conditions and on the financing industry.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

What to do if your Customer doesn't Want to Work with your Factoring Company

2010-12-27T18:48:00.003-05:00

After research and negotiation you finally sign on with a factoring company. You are almost ready to get funded. Usually, the last step in the process is for your customers to sign a Notice of Assignment (also known as a NOA), which then allows you to factor the invoices for that customer. The catch - sometimes clients refuse to accept or acknowledge the notice of assignment. This can be a problem because most factoring companies will not factor your invoices until your client signs/acknowledges the factoring notice of assignment. Started simply: your company's cash flow could be affected if an important customer refuses to acknowledge the NOA.

There are some approaches that can help minimize the chance of this problem. The one I prefer is being straigh forward about the value factoring brings to your customer. Basically, why should your customer sign the NOA? What is in it for them? Why would they care if you get factoring? The only answer that I have been able to come up with is that by having an invoice factoring line, you will be able to offer them flexible payment terms. You also won't (or shouldn't) be calling them asking for quick payments. So, you are offering them financing in the form for flexible payment terms in exchange for their cooperation with your factoring company.

It's good to remember that customers love to get net 30 to net 60 payment terms. It's free financing an it allows them to better manage their own cash flow, usually at your expense. So in my view, the argument that factoring allows you to offer them good payment terms is a solid one.

No approach is guaranteed to work - but showing a customer how something benefits them (rather than how it benefits you) is a good place to start.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Loans to Small Businesses Dropping

2010-12-14T14:16:00.000-05:00

One of the more challenging aspects of the current co-called recovery is that loans to small businesses are still dropping. This is a problem for many reasons, but mostly, small businesses have been job creators in past recoveries. And to flourish, small businesses need access to business financing. On the bright side, the report indicated that sales outlooks by small firms turned positive for the first time in months. This offers a small glimmer of hope that things may get better.

The reality is that access to business loans will remain challenging for the foreseeable future. We need a business financing marketplace where a qualifying business can get a business loan or line of credit if it needs to. The reality is that most businesses have to go to alternatives like invoice factoring because they have no other options. They go for factoring even though they'd qualify for a loan (which generally is cheaper) if it were available. But it's not.

Obviously I am a big fan of invoice factoring since it's the product we offer. But as a business person I recognize that factoring has a proper position in the market place. Invoice factoring is not the cheapest option and it usually helps with a narrow focus of problems - companies that can't afford to wait for their clients to pay their invoices in 30 to 60 days. To get out of this economic jam, we need to have business loans that are available at reasonable prices to companies that qualify for them.

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Learn about invoice funding.

Why Factoring and Business Loans Usually don't Work Together

2010-12-06T17:15:00.000-05:00

It's not uncommon to have prospects who have maxed up their lines or credit - or used all their business loan funds - try to apply for a factoring line to try and improve their financial situation. They soon find that they cannot qualify for factoring. This is because most lines of credit and business loans are secured with a UCC lien that covers all assets - including invoices. This is important because invoice factoring companies need to have a 1st position UCC security interest in the invoices they finance.

To obtain factoring in the above scenario, the bank must be paid off, or be willing to subordinate their position on the invoices. Both options are tough. Usually the company requesting factoring has cash flow problems, so paying the bank off is out of the question. And, few banks will feel comfortable subordinating a lien for a client with financial problems. Hence the catch 22.

One long shot way of avoiding this - when negotiating your initial loan, try to ask that the receivables be excluded from the UCC security filing. The bank may be open to this if you have other collateral like real estate or equipment.

--- Interested in business financing? Read the invoice factoring blog to learn more.

Understanding the Factoring Advance

2010-11-09T11:34:00.001-05:00

In my last post, I covered how to understand the cost of factoring financing. In this post, we are going to learn about the factoring advance.

Factoring transactions are structured as the purchase of an invoice. The factoring company pays for the invoice in two installments. The first installment is called the advance - which is usually anywhere between 70% to 90% of the invoice. The second installment, paid when the invoice is paid by the customer, is called the rebate and covers the remaining 10% to 30% of the invoice (less fees).

One question that always comes up is - why can't I get 100% of the invoice? Why is the advance 70%, or 80%?

The answer is simple - the factoring company wants to protect themselves if an invoice is not paid in full. Imagine if you have a $100 invoice that had a $80 advance. What happen if the customer only pays $82 of that $100 invoice? Of course, factoring clients always swear that their invoices will be paid in full :-). But the reality is that invoices don't always get paid in full. Some of the reasons include:

1. Credit issues - customer can't afford full payment
2. Disputes
3. Wrong/inaccurate.incomplete invoice paperwork
4. Personality - my personal favorite - customer is happy with product and can afford it, but just does not want to pay

This problems happen (unfortunately) relatively often. So to protect themselves, factoring companies only advance a part of the invoice.

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Read the invoice factoring blog to learn more or learn factoring here.

Understanding the Cost of Factoring Financing

2010-11-07T13:02:00.001-05:00

Comparing factoring quotes can be a little challenging for some. This is in part because of how factoring quotes and transactions are structured. Most factoring quotes are structured as follows (simplified version):

1. Advance rate = what % of the invoice you get upfront
2. Factoring rate = Cost as a % of the invoice for period of time. The factoring rate is usually based on the face amount of the invoice - not on the advanced dollars.

With this in mind - tell me which on of these is a better deal on a "cost per dollar" basis? Factoring company A offers you an 80% advance rate at a cost of 2.25% per month. Factoring company B offers an advance of 85% for 2.391% per month. Surprisingly, many people thing the offer from company A is better, cost wise. In reality, they are the same. Don't take my word for it - do the math. This is because the factoring rate and the actual cost per dollar factored are two different numbers. The example I just gave quotes different rates but has the same cost per dollar factored.

Here is a chart that shows the cost of an advanced dollar at a factoring rate of 2.25% for every 30 days at different advance levels. The blue circles show the actual cost per advanced dollar, while the brown line shows the nominal factoring rate (2.25%).

Click on the chart to enlarge it.

This will help you understand how to cost per advanced dollar varies based on the advance. I like this method when comparing factoring offers - it helps you compare apples to apples. That catch is that this can be challenging for some complex offers.

Disclaimer- this post is not intended to be financial or legal advice. It's for educational efforts only. It's not guaranteed to be accurate or correct.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Combining products - Factoring and PO Financing

2010-11-05T12:21:00.000-04:00

One of the sacred mantras of the industry is that one should always close a purchase order financing transaction with a factoring line. I am not sure that mantra is always correct. I wrote a post at my other blog about combining factoring and po financing. Check it out.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

How to Finance my Small Business

2010-11-01T12:22:00.000-04:00

Financing a business has become an interesting challenge and a part of a catch 22. Business owners complain that there are few business financing alternatives available to them. Banks complain that their is little demand from qualified businesses for their services. (By the way, "little demand from qualified businesses" in bank-speak means that they are only being approached by companies who have little change of qualifying for funding).

So, what do you do if you need to finance your small business and the bank won't help? Here are some suggestions:

1. Ask your vendors for financing. Many vendors are willing to offer net 30 to net 45 payment terms to their clients. This is vendor credit is equivalent to vendor financing. This lets you use your own funds more effectively.

2. Use invoice factoring. If your clients ask YOU for vendor financing, and you can't afford to provide it, you can always use invoice factoring. This eliminates the payment wait and puts you on the diver's seat of your cash flow. (Go here to learn how to get factoring).

3. The 3 Fs'. This stands for Friends, Fools and Family.This is an option that many people use, and that is why I posted it. I will almost never recommend it, though. Involving friends and family as financiers into a business venture should be very carefully considered - especially if something goes wrong.

4. Look into the SBA. Few people know that the SBA has a micro-loan program which can be a good source of funding for small companies.

5. Make sure you are getting paid for your work and collecting what's owed to you on your invoices.

Good luck finding funding!

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

What to Do if a Client does NOT pay their Invoices

2010-10-22T11:06:00.000-04:00

It's not unusual for me to get calls from clients wondering what to do if a client refuses to pay an invoice. They have completed the work. The client has accepted the work as complete - but they just wont pay. Either they can't or they won't.

I am a big advocate of prevention. So before I go into how to handle this problem, I'd like to discuss how to prevent it, or at least, minimize the chances of this happening to you. Basically you do this by doing some due diligence on your client before offering them net 30 or net 60 day terms (be careful when offering net 90 terms). A few weeks ago I wrote an article on how to check the commercial credit of a construction company. Although the article is industry specific - it can be applied to most industries. Be sure to read it.

Ok - so you did your homework. checked your customer's credit and still ran into problems. Now what?

1. If you haven't yet - try calling them on the phone to discuss this: Sometimes a phone call is all it takes. Maybe they lost the paperwork (it happens), a signature is missing or there was a misunderstanding. In my experience, most of these problems can be fixed with a simple phone call. When you call - remember to be professional and polite - even if you don't like the answers they are giving you. Never ever be rude!

2. Ok, so they have a cash flow problem. Maybe you can work out a payment schedule: Companies have cash flow problems all the time. Hey, that's why many get factoring in the first place. Many times you can work out a payment schedule. If you do this, I'd be advisable that you have an attorney draw up some simple paperwork to protect your interests. This is not the time to skimp on attorneys fees!

3. You tried working it out and they don't want to: This is the time to call an attorney or a collections agency. Bear in mind that at this point you will have lost the client relationship.... but if the client is not paying, well who wants to keep them?

Please note that what can be done and not done to collect a payment is determined by law. Many companies, unbeknown to them, can be at risk of breaking the law if they pursue aggressive collection tactics. Because of this, you should consider working with a reputable collection agency or attorney.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

How to Get Factoring Financing

2010-10-20T12:01:00.001-04:00

Today is a back to the basics post. Let's say that you own a company and you are looking for factoring financing. How would you approach looking for a factoring company?

In my opinion, they first thing to do before calling financing companies is to research factoring on the internet, to determine if it's the right solution for you. One good place, aside from this blog, is the site factoring articles. The internet is full of information And, if factoring ends up being the right solution, you should try and determine if your company will qualify for it. Here are some criteria:

1. Do you work with credit worthy commercial or government clients?
2. Do your clients pay your invoices in less than 70 days
3. Are you and your company free of liens and judgments?
4. Can you provide recent financial or tax statements?
5. Is your company profitable - or do you have a viable plan for profitability?
6. Are your taxes - including your payroll taxes - up to date?

If you answered yes to these 6 questions, your company has a good (but not guaranteed!) chance of qualifying for an invoice factoring plan. If you answered no to any of these questions, your chances are lower... but not impossible.

Your next step should be to start calling factoring companies and interviewing them to determine which one is the best fit for your business. If you can, you should ask them for an estimated factoring quote. There is no hard and fast rule for this one - you need to do your due diligence.

One suggestion that I always make to companies that are applying for financing - be open about your situation, especially if your business has problems. You can bet that the funding company will find about them during their due diligence, so you are better off being upfront about them. And remember, many factoring companies can work through challenges, if they know them ahead of time.

Read the sister article - how to get purchase order financing.
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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Benefits and Disadvantages of Invoice Factoring

2010-10-19T17:25:00.000-04:00

Examining the advantages (or disadvantages) of any type of business financing solution is often complex and depends very much on your individual situation. In this post, I'd like to tackle this subject for invoice factoring, which is my area of expertise.

Let's start with the basics. Skip this part if you are familiar with factoring.

What is invoice factoring? It's a funding tool that provides you an advance on your net 30 to net 60 invoices. Rather than waiting that long to get paid by your client, you get a financing advance by the factoring company.

What is factoring financing good for? Factoring works well for companies that have a lot of money tied up in invoices and have cash flow constraints. Factoring can help the company cover operating expenses and can be used to maintain the existing business or to promote growth.

What is invoice factoring financing NOT good for? Factoring does not help much, if at all, if a company needs funding to buy large equipment or real estate. There are other products that are better suited for these purchases.

Now that we have some basic definitions in place, let's start the discussion advantages and disadvantages. I'll keep this in bullet form.

Factoring Benefits / Advantages

It's easier to obtain than other business financing solutions
It uses a simplified application process
Your business does not need to have assets other than receivables to qualify
It can be set up quickly - usually in a week or two
It has flexible limits and can usually be increased when your sales increase

Factoring Disadvantages

It's more expensive than other financing products. It works best for companies that have at least 15% gross margins
It can only help a narrow group of companies - those that can't afford to wait 30 to 60 days to get paid by clients
It's not completely transparent to your customers and their cooperation is required (they must be willing to verify invoices)

Although this list is not complete, it gives you a good glimpse of the advantages and disadvantages of factoring. Given that each situation is unique, your should give your funding needs careful thought and consult a financial expert if you need help. And as you know - I don't give financial or legal advice, so this article cannot be considered as such.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Want Business Financing? Then Get Real!

2010-10-14T11:57:00.000-04:00

This is a tale from the trenches. A friend of mine who also runs a factoring company was commenting that he has seen a marked increase in the number of factoring prospects. But he has also seen a substantial increase in the number of prospects that have unrealistic expectations. Some of the attitudes, he said, seemed reminiscent of the credit bubble.

Here are some of his stories and findings:

1. A prospect required a $300,000/monthly factoring line but was unwilling to provide any personal information whatsoever.

2. A large percentage of his prospects are submitting incomplete applications

3. Many prospects are negotiating on price like it's 1999.

I'll start with #3. I have no problem with this. I think that every manager should negotiate as far as they can to get the best deal for their company. Factoring companies hate it. Just like everyone else :-)

#1 and #2 are worthy of more discussion though.

On item #1, I can understand the reluctance of anyone to provide personal information. But on the other hand, what are they expecting? Funding companies are not going to hand over a $300,000 to a company whose owners have not been vetted. This is probably a case of incorrect expectations. Many factoring companies advertise that getting factoring is easy. It is true, comparatively speaking, it's a lot (a lot!) easier than getting a bank loan or other forms of business financing. But that does not mean that they don't due ANY due diligence. Of course they do. And many will check the owners to make sure that they are good to work with. This includes doing criminal back ground checks and things like that.

The subject of incomplete applications (item #2) has been a recurring theme on this blog. Most factoring underwriters look at an incomplete application and usually think one of two things. Either the prospect is sloppy or they are trying to hide something. A sloppy application won't get you funding - it will get you a declined application. Remember that factoring underwriters are cranky curmudgeons, very different from the optimistic happy faced sales folks you d Your best bet is to double check your application to make sure it's complete.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

I am Back. Employment, The Economy and Factoring

2010-10-14T11:18:00.001-04:00

I am back, after a few weeks of hiatus. Being the perma-bear (anti-optimist?) that I am, I am not surprised to see things get worse, rather than better, than when I last posted.

On the positive side of things, employment of part timers and temp workers is up. This is usually a good thing since common wisdom says that temp hiring precedes permanent hiring. I have drank that cool aid, but I am starting to wonder if this will happen this time. I have been talking about temp worker hiring being up for a long time now....... yet I don't see improvements in the permanent employment sector. From a factoring side - this is not entirely bad. Factoring companies love to work with temp agencies, which are usually hungry for factoring services. I have seen the effects of this in my own company.

On the negative side of things - housing is a big mess. It has been a mess for a long time and will likely remain a mess - especially now that we have the current foreclosure problems. This will affect consumers and lending institutions, who are trying to clean their balance sheets and get on with their lives. Consumers, who are already strained, will see their foreclosures drag much longer. Ditto with banks. Although everyone detests foreclosures (and I hate for people to lose their homes!), but they are a mechanism that allows consumers to dispose of property they can't afford while allowing banks to resell them to try and recoup some capital. Having banks and consumers continuously tied in this mess is detrimental to all.

By the way, I do believe that we will get out of this, but this road has sure been mighty bumpy.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Factoring and Staffing - It's a Recovery

2010-09-23T17:42:00.000-04:00

It's a common belief that a recovery of the temporary staffing market would come before a recovery of the permanent hiring market (articles here and here). Well, Adecco (a large temporary staffing firm) has reported that they are doing pretty well and don't see things slowing down.

Companies are still taking 30 to 60 days (if not longer) to pay invoices so most staffing agencies need some sort of financing to cover the gap. Many of them will resort to factoring because it provides the equivalent of a quick pay - and eliminates the payment wait.

We all want an economic recover that has substantial increases in permanent hiring, and this is a good step in the right direction.

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Go here for factoring quotes?

Benefits of Non Recourse Factoring

2010-09-22T11:32:00.001-04:00

In my previous post, I wrote about the differences between recourse factoring and non recourse factoring. So, someone asked me - is non recourse factoring really worth it?

I thought it was a very good question. Only you can make that decision, but I will give you some of my views:

First, you need to understand what non recourse factoring buys you and what it doesn't buy you. In most cases it buys you protection if your customer declares insolvency during the 90 day invoice factoring period. This is important to many people since so called "surprise" bankruptcies (Enron anyone?) do happen.

Second, factoring companies check customer credits using a number of credit bureaus (one example here) and the likelihood that they will buy an invoice from a customer that will go bankrupt is low. But it happens.

Based on this, the chances that a factoring company will buy an invoice from a customer that could go bankrupt is low anyways, recourse or non recourse, especially since factoring companies tend to only buy invoices that are backed by good credits. So, what does this protection really buy you if the factoring company is only buying invoices from presumed good credits?

Ultimately, you will need to read your contract in detail, determine what specific protections it offers, an then figure out if it is right for you.

Note: This post covers legal/financial matters but are not intended as legal/financial advice. I am not a lawyer/CPA - please use on if you are dealing with legal or financial questions. This are just my personal opinions.

Recourse and Non Recourse Factoring. What's the Difference?

2010-09-22T10:36:00.003-04:00

One of the most misunderstood areas of the factoring industry has to do with the difference between recourse factoring and non recourse factoring. This is complicated by the fact that many companies that offer non recourse factoring do so in a slightly different way.

I'll start with the conventional explanation:

Recourse factoring: In this type of factoring agreement, the factoring company purchases your invoices but has the option to resell them to you if they are not paid (for whatever reason) within 90 days. So, if the invoice is not paid in 90 days because your client can't afford it, doesn't want to pay or goes bankrupt - you are on the hook for the invoice advance and accrued fees.

Non recourse factoring: In this type of factoring agreement, the factoring company purchases your invoices and does NOT have the option to sell them back to you if they are not paid within 90 days - provided the reason for non payment is that your customer was declared insolvent during those 90 days. This is the tricky part, if your customer does not pay for any other reason, you are still liable. Many people prefer to call this type of factoring "modified recourse factoring" rather than non recourse..

Some example of non recourse factoring in action (as offered by most factoring companies):

1. You sell an invoice to the factoring company and your customer declares bankruptcy 30 days later - you are not likely to be liable to return any advance or fees

2. You sell an invoice to a factoring company and your customer does not pay because they don't want to, or they say the don't have money, or the are no satisfied with the product, or they are just jerks - you ARE very likely liable for the advance and the fees.

3. You sell an invoice to a factoring company and your customer does not pay and then they go bankrupt 100 days after you buy the invoice - this is sketchy and depends on the agreement, but you ARE likely to be liable for the advance and the fees on this invoice

Most people are surprised when they learn points #1 through #3 because they tend to believe that under a non recourse contract, the factoring company eats any and all losses. Some factoring companies may offer this, but I don't know of any.

Many people are caught by surprise when they learn about #3. Most non recourse factoring agreements specify that they only cover the invoice if the customer is declared insolvent during the 90 day factoring period only.

Since each company offers factoring in their own customized way, be sure you read the contract and understand what type of factoring is being offered. and if you are buying non recourse factoring (or modified recourse) factoring, be sure you understand what protections you are buying.

A quick disclaimer note: In this post we covered some legal terms and definitions. I am not an attorney/CPA and do not offer legal/financial advice. Please get an attorney or financial adviser to review your contracts with you and make sure oyu understand what you are getting - before signing any contracts.

Quick note number two: This subject was also covered in this recourse/non recourse factoring post. More info also in benefits of non recourse factoring.

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Want factoring quotes?

Understanding a Factoring Quote

2010-09-21T15:07:00.000-04:00

Most factoring companies have their own proprietary way of providing factoring quotes. However, most quotes have a few things in common. Here is a brief explanation of the most common sections of a factoring quote.

Fees: For most clients, this is the most important section. How much is this going to cost me? I could write a full post just on the different pricing techniques that factoring companies use. Most companies use the following formats:

X% for every Y Days (e.g. 1% for every 10 days)
X% of the invoice as a one time fee. Y% for advance funds until paid back

Other Fees: What other additional fees will be charged (e.g. management fee, wire transfer fee, etc).

Advance: What percentage of the invoice will the factoring company advance to your company? Most prospects only focus on Fees, but the advance is a very important part of a factoring offer. Most staffing and freight factoring opportunities have advances of 90%. Other industries get advances in the 70% to 80% range.

Due diligence fees: How much will the factoring company charge you to do a background check on your company and your clients.

Minimum volume: How much is the factoring company expecting your company to factor on any specific period of time (e.g. $40,000 per month).

Contract term duration: How long will the factoring contract last?

Type of factoring: Is this a recourse factoring or a non recourse factoring proposal.

Expiration date: Until when is this factoring proposal valid?

Other terms: Many factoring companies will also insert other terms, such as whether personal guarantee's are required and so on.

Although this post is not intended to be all encompassing (and not to be considered financial or legal advice), it should help you better understand how to read your factoring quote. If you are evaluating a factoring proposal and have any doubts about it - be sure to consult a financial attorney, financial adviser or CPA.

Housing starts are up - More construction factoring deals?

2010-09-21T13:48:00.000-04:00

Housing starts are up - this is probably a good news on the national scale. The jump in starts will certainly help the construction industry which is still feeling the brunt of the recession. From what I hear, there are still many areas with excess housing inventory so I would not hold my breath hoping for an easy road. But this is probably the bottom, and with any luck, the only way is up (although very slowly). We should have a better view on this if we start receiving more applications for construction factoring.

In my very humble view, I think things are getting better. We have seen an increase in both our conventional factoring and freight bill factoring businesses. Industry lore believes that there is always an increase in demand for factoring services in two points - when a recession starts and when a recovery begins - presumably because banks are shy about providing business financing during those particular economic times.

P.S. - Read this article to learn how to check the commercial credit of your general contractor (GC)

"Intentional Inaccuracies" and Factoring

2010-09-20T11:40:00.001-04:00

Peter was a young fellow who was a terrific sales person. He started a staffing company that grew too quickly (thanks to his sales skills) and predictably ran into cash flow problems. He had tried to get business financing through his bank and failed. He then came to us looking for factoring. After doing a quick business review we determined that factoring would help him so he decided to move forward with his application.

Peter's background was not perfect though - he'd gone through a recent bankruptcy due to his divorce. And thanks to the combination of rapid company growth and cash flow problems, Peter had not been able to keep up his IRS payroll taxes so the company had a tax lien. As a matter of fact, this is why the bank had declined providing him with a business loan. He consulted with a trusted business friend who advised him to hide this information from us. His friend told him that it would not matter because we'd never find out. This did not feel right to Peter but his older friend had a lot of business experience and he trusted his friend's judgment.

As you can imagine, a simple public search helped us find this information very quickly. We rejected his application because it had what appeared to be 'intentional inaccuracies'. When we called him on it, he was upfront enough to tell us he had provided inaccurate information on purpose because he really needed the funds.

It's then that we delivered the bittersweet news. We would have been able to work with him despite the past bankruptcy and tax liens (provided the IRS provided a subordination). Key term: would have. But since his application discrepancies were intentional - we would have to decline it.

Peter seemed like a nice person, albeit a little bit inexperienced in the area of financing, so I had a short conversation with him. I told him that factoring companies (or any type of business financing company) looks at the 4 C's when evaluating clients:

1. Collateral: His was good - the credit of his clients was very good
2. Capacity: Again, his was good. He could operate and grow the business.
3. Capital: Not very good - but that is why he came to us in the first place
4. Character: Providing false information is not a hallmark of business owners with character

He understood the situation very quickly - and I gave him one piece of final advice: When looking for potential lenders - tell the truth and don't provide false information. As a matter of fact, many lenders will likely respect you more if you are upfront about problematic issues and are (probably) more likely to try and help you.

Note: Names and details of the story have been altered to protect the privacy of people.
Note #2: In finance character applies to the financial history of the borrower (e.g. liens, judgments, delinquencies, late payments). More here.

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Looking for factoring quotes?

Checking the Credit of your GC (General Contractor)

2010-09-14T17:01:00.002-04:00

We work with many construction factoring prospects that are involved in large projects. Invariably, when they first call us, most of our prospects are not doing the ONE thing they should be doing before working with their GC's.

On any given day, it's not uncommon for us to get inquiries from subcontractors that want to finance a large invoice.They are always taken aback when we tell them that we will need to check the commercial credit of their client before moving forward. Their reply "What? You can check the credit and payment history of companies?!?"

Obviously, you can and should check the commercial credit of your clients before doing business with them. I am always surprised to see construction companies (or any company) granting hundreds of thousands of credit without checking credit first. That is very risky behavior.

As invoice purchasers, factoring companies are very good at checking commercial credit. Most use one of two services:

1. Dun and Bradstreet
2. Experian Commercial

Checking a company's credit is an art as much as it is a science, but here are some things you can determine from most credit reports:

1. Do they pay their clients on time?
2. What is the largest/average size invoice they usually deal with?
3. Are they solvent? (this can be hard to determine though)
4. Do they have a history of lawsuits?
5. Lastly, some reports include a score and a measure of risk.

This information can help you determine whether you should offer your client net 30 (or net 60 days), or if you should demand payment in advance. Note that credit reports are not perfect and not always 100% accurate - but nothing in life is. Their objective is to help you reduce non payment risk - eliminating risk is impossible. By the way, credit reports vary in price and level of detail. Their website show the details.

This post is not an endorsement since both services have their advantages/disadvantages. Both should do the job nicely though - in my humble opinion. Which one to use is many times a matter of preference. By the way, most factoring financing companies will provide credit analysis as part of their factoring services.

Given the risks of the construction industry, especially in today's economy, all subcontractors should check the commercial credit of their GC's and clients before working on any important projects.

Dealing with Difficult Factoring Prospects

2010-08-24T12:13:00.003-04:00

Although I don't handle many sales calls directly, I get involved in them often enough. I am a firm believer that people should have some regular exposure to the "sharp end" end of the business. This includes dealing with difficult prospects and situations. Not long ago, I had to deal with what I would describe as a difficult prospect.

This started as a conventional factoring sales call but quickly degraded. In her mind, all factoring companies were out to get her. Everything we did was viewed by her from this perspective. Therefore, everything we did was wrong and malicious. Because of this perspective, she became jaded and it became hard to work together. After thinking it carefully, I called her and told her that I did not think we were a good match for her. I thanked her for her time, wished her well and terminated the process.

Letting go of a prospect is never easy - especially in the difficult economic environment in which we live in. But I am a firm believer that you should only do business in situations where there is mutual respect and a mutual desire to do business together. Forcing a client relationship to happen is likely to be successfully as forcing a marriage.

Dealing with difficult prospects is not easy, and takes some self control. I'd say about 99.9% of prospects are really nice and great to work with. But that 0.01% can make your life hard. This is my way of dealing with that 0.01%:

1. Always be professional - even if they are not.
2. Always be polite - even if they are not.
3. Remain calm and in control of your emotions - even if they are not.
4. Don't be afraid to tell a prospect that it's not a good business match, wish them well, and terminate things.

Letting a customer or prospect go is never easy, but often it's for the best. If your solution is not to their liking, or if the personalities clash, it's usually best to shake hands and say good bye, rather than to try and force things to happen. My experience tells me that usually good sales/clients develop and unfold naturally. Bad sales don't unfold naturally, need a lot of shepherding, determination and affect profits in a negative way.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Getting yourself tangled.... in your own arguments.

2010-08-17T09:56:00.002-04:00

As I mentioned in a previous posts (are you sharp?) ever since I listed my house for sale (FSBO) I have gotten a number of calls from real estate agents wanting to represent the sale. Most have been sharp, smart and seem to know their stuff. A select few, well, they have been memorable.

I am a constant student of sales techniques. Since real estate agents are the ultimate sales people (in my view), looking at their technique is very educational. I got a call from an agent yesterday that was "surprised" I was trying to sell my house by myself, and gave me a lecture on why I should use a professional.... such as himself. Interestingly, he then took a high handed position and asked me after how many weeks of trying to sell my house by myself would I "give up" and consider using his professional help. I asked him to give me two months to see where I could get by myself. He acted surprised and said that it was too long......things should move faster. He said, and I quote, "if you don't sell your house in a month, you are not doing a good job". Those of you that know me, can guess what happened next.

I countered - "Ok. I assume you can clearly sell the property much faster than I can because you are a professional. Therefore, if I can't sell my house in 4 weeks, I'll give you the contract". He was happy and said so. Then...I added, "of course, the contract will only be for 4 weeks rather than the usual 6 months that real estate agents require. But that shouldn't be a problem for you, because you will sell this place quickly, right?".

He was caught off guard, got flustered and backpedaled faster than anyone I have ever met. He told me he needed at least a 6 month contract to sell the property because the market is very tough. "It's a buyers market" he said and mentioned I was being completely unreasonable. So basically, in his mind, if I can't sell my place in 4 weeks I need a professional......but he (the professional) gets 6 months to do so?!?

This is an example of clearly bad sales technique - at least as I am concerned. He got tangled in his own argument and could not live up to his own assumptions (i.e. if you can't sell the house quickly you need a professional...but then, he admits he needs 6 months). A clear hard sell gone wrong. I expect his sales argument may work for a few, but most most consumers are savvy and will see right through them.

By the way, others have tried a similar approach but using a soft sell. I kept their numbers because they were reasonable. They argument was similar but couched differently. They said "If you are not seeing foot traffic through your property in the next 4 weeks it probably means it's not being marketed correctly. We can help." Most added, "By the way, it takes time to sell in this market so making sure you have the widest exposure if your best bet - and as a professional - I can get you that exposure".

Yes, the argument is similar but the approach is different. The soft approach. And it works, at least for me.

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Sept 1st - My condo is now under contract :-) So far so good.

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Interested in invoice factoring? Learn about invoice factoring quotes.

Are you sharp?

2010-08-16T11:55:00.001-04:00

I recently wrote about my experience of putting my condo on the market without the help of a real estate agent (read: What do you bring to the table?) Here is a funny follow up. I actually agreed to meet with the self described "powerful agent" and he stood me up. Then he called after standing me up to try and reschedule and I politely said that I'd be happy to meet him once he had an actual buyer.

Here is the funny part. He called me a week later (probably saw one of my ads), took me through the exact same conversation of two weeks ago without remembering who I was, and tried to sign me as a client. Although he did not remember me- I remembered him! I will decline his offer for one simple reason. He is clearly not very organized and he has wasted my time. Why would I let him/her represent my transaction? In this market you need to partner with someone sharp.

Now, here is the tough question that I ask myself. When dealing with client, am I sharp? Or at the very least, do I appear sharp to the untrained observer? In this market - only sharp people get any business done. This is true for anyone who is selling anything - for business financing to factoring.

Collateral Damage in Lending?

2010-08-03T12:01:00.000-04:00

Here is a very interesting article from the WSJ about business lending and collateral. The long and short of it is that small companies are having problems meeting the collateral demands that institutions require prior to providing a business financing solution. But we all knew that, getting a small business loan is tough.

Basically, the culprit of this is the economy. Thanks to the recession,collateral such as real estate and equipment have dropped, sometimes precipitously, in value. This is why some forms of alternative financing such as factoring are gaining traction. In a conventional invoice factoring transaction, the main collateral is the invoice that is financed. Few factoring companies require the use of "secondary collateral".

By the way, although this is good for my industry, I don;t think it's completely healthy for the economy. Business loans play a big role in the economy and we should make sure that we have policies to help small companies that qualify for it (and need it!).

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Read the invoice factoring blog to learn more.

Trucking is Picking Up Speed

2010-07-28T14:25:00.000-04:00

The Journal released this report about how the trucking industry is gaining speed. Most of us in the freight factoring industry have noticed that things are improving, albeit slowly. Very slowly. But we are seeing a definite increase in demand of our services by freight brokers and by carriers.

Personally, I don't think transportation out of the woods. The recession decimated a part of the industry, and although demand is up, it's not up by a lot. Furthermore, a lot of economists are predicting a second dip (recession) in the economy, which could be catastrophic for many businesses.

Fortunately, people are very bad at predicting where the economy is heading (myself and economists included). What I can see from my factoring company is that the number of companies looking for financing is going up. Likewise, the factoring volume of existing clients is also on an upward trend. To me, that would indicate that the economy is healing. Why? Common industry folklore says that "factoring increases when you are going into a recession...and when you are getting out of it". Why? Those are the precise times when lending institutions don't want to offer business financing.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Factoring Companies Really Want to Give you Money.....Really?!?

2010-07-15T10:49:00.000-04:00

This will come as a shock to some - but factoring companies really want to approve clients and give them as much money as they can. At the rate approvals seem to be going, some may question this, but stay with me for a second. Factoring companies only make money when they finance clients. So it's to their advantage to try and put as much money out the door as possible.

However, factoring companies hate losing money more than anything. Actually they hate loosing money (principal) more than they love giving money. This is very important. If you want to qualify for factoring financing you need to spend some time making sure that the company understand they wont lose money with you. Here is your best chance at doing just that:

1. Submit a complete application: If I had a penny for every incomplete application I receive, I'd retire in a heartbeat. Nothing says "Don't Finance Me!" more louder and clear than a sloppy application that is missing items.

2. Don't Lie. Never. If an underwriter catches a lie in an application, it's game over. No exceptions. Honesty should always be your best policy. If there are some blemishes in your profile you will have a better chance of success if you explain them upfront than if you try to hide them.

3. Explain blemishes in writing. I have reviewed tons of (rejected) applications that just listed blemishes and problems, but made no attempt to explain them. Remember, underwriters assume the worst, so it's up to you to show them they are wrong. You can do this by explaining your blemishes. I had prospects with a prior business bankruptcy - which got finance once they provided reasonable explanation.

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Interested in invoice factoring? Read about business loan options.

A Banker Beat Me to It - Good!

2010-07-13T11:48:00.000-04:00

No too long ago, I got a message from a prospect in which he declined the factoring proposal we had offered. He had been able to work out a business financing deal with his bank, who gave him a line of credit. This is both bad and very good news. Very good?!?

It's bad for an obvious reason - we lost a good opportunity. But it's good because it shows that some banks are still lending to small businesses. We need more of that as I mentioned earlier. A lot more of it, if we are to see an improvement in our economy.

Although factoring is my trade and business, I advocate that each company should get the best financing that they need and can qualify for. This means that if a company is better served by a business loan and could qualify for it under reasonable market conditions - they should be able to get it in the marketplace. But we are in a crazy market, where many banks are not even lending to good customers because they consider them a risk. That is not healthy for the economy, or the factoring industry for that matter.

I think that our industry has an important role in the economy. We help companies that:

1. Need funding but cannot qualify a banks underwriting standards because of personal blemishes
2. Have invoices as their main collateral
3. Are new and don't have a long track record
4. Are in a turnaround situation
5. Qualify for bank financing but need some of the flexibility of factoring

Factoring provides these companies with a risk adjusted for of financing and helps them thrive. The key term is risk adjusted. Things become less healthy when companies that have a very good risk profile have to resort to alternative financing because they cannot find conventional funding in the marketplace. That means that their cost of funding goes up, which decreases their productivity. If this happen, en masse, the economy suffers, along with the rest of our industry.

Now you know why I am happy that I lost a deal to a bank.

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Interested in business loan options? Read the factoring blog to learn more.

Carry Trades, Low Rates, Chasing the Yield Curve and a Lack of Business Loans

2010-07-12T12:31:00.001-04:00

Here is a very interesting article from the WSJ that sheds some light as to why banks are not lending a lot. Possible culprits include the super low rates that banks can get money for, the decline in interbank lending and the good old carry trade. I will try to piece these together. Let's start with some definitions:

Interbank lending: Lending that happens between banks - usually to meet liquidity requirements.
Carry trade: A trade where one borrows money at a cheap rate and lends it at a higher rate

Let's start with the fact that banks are not lending a lot of money to each other. More importantly, they are not lending a lot of money to EACH other through interbank lending. This is important because banks depend on these loans to increase liquidity - to make business loans. Banks with excess cash lend it - banks that need cash borrow it. Pretty simple. But there is a lot less of it, so there is less money to lend.

But that's not all the picture. Banks can also get money from the federal reserve at near record lows through the discount window. Why aren't banks lending these funds then? Simple - they are chasing the yield curve by using carry trades. They borrow money from the federal reserve, depositors or other cheap sources, only to invest it in ultra safe government securities that pay a higher rate. They pocket the difference which makes them a nice profit - provided we have an upward sloping yield curve. If you can make money this safe way - why lend? This affects both consumer and business financing.

When traditional (or conventional) sources dry up, companies seek alternative such as factoring financing. Factoring companies can provide specialized funding to certain businesses. However, they can only replace business loans in a limited set of circumstances.

7/12 - 6:45PM - here is another article on small business lending. Clearly an issue.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Get a Small Business Loan.... at Wal-Mart?

2010-07-06T15:28:00.001-04:00

According to a press release, Sam's Club(r) , a division of Wal-Mart will start dabbling in online small business loans. These would be SBA backed loans from $5,000 to $25,000. It's been well known that Wal-Mart has been wanting to have a bank subsidiary and has been itching to increase their footprint in financial services. (Here is another post on the subject at Planet Money).

This has many wondering, how deep will Wal-Mart go into financial services? Could they offer factoring financing in the future and put most small and medium sized factoring companies out of business? Perhaps. Somehow, I doubt it though. Wal-Mart is mostly a consumer focused company - with a consumer focused sales force. My guess is that Wal-Mart will stick to very small business loans, in part because they are a consumer focused product (for consumers that own a very small business).

Also, bear in mind the following:

1. The maximum size of their current offering is similar to that of a credit card - I suspect they will not venture to high above that. Very small loans have mass appeal.

2. Deal complexity increases with deal size. This could also limit Wal-Mart's involvement in larger opportunities. The amount of due diligence increases with size.

3. Factoring, as a subset of business financing products, is very hands on and has it's own set of caveats. It's unlikely they would tread in this arena. If they do - we are in trouble though!

I actually think this is a good development. It is a well known fact that the small business market is undeserved when it comes to business financing. This will help increase the availability of funds to this very important sector of the economy........ I just hope I don't have to eat my words if Wal-Mart decides to go into factoring in the years to come.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Office Vacancies and Unemployment

2010-07-06T14:35:00.000-04:00

Here is an interesting article in the WSJ. It talk about the increase in the office vacancy rate. As you can expect, the jobless rate and office occupancy are closely tied (here is another article about it). I suspect that there are many reasons why this rate changes - for starters the amount of office space fluctuates. Having said that, most people agree that this is a sign that companies are not preparing to employ people in large numbers, otherwise they would be adding office space.

Since companies sign office space contracts for a minimum of a year (if not more) I view this index as a sort of slow moving medium term (year long) indicator - since it reflects companies medium term office requirements.

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Interested in invoice factoring? Learn about business loan options.

Who is your ideal customer?

2010-07-02T16:22:00.000-04:00

I recently wrote a post in the purchase order financing blog about ideal customers. I talked about ideal customers from a po financing perspective. In this post, I will talk about the same concept but from a factoring perspective.

As I mentioned, a successful company is not one that loads up with customers. That can actually be a recipe for disaster. A successful company is one that loads up with ideal customers - and avoids customers that are not a good match. Having customers that are not a good match for you (I don't call them bad customers) can wreak havoc in your business, your personnel and your success.

It is a good idea to spend sometime defining your ideal customer - that was your sales team will know how to recognize them. Few companies actually take this important step...

In our case we offer a number of products - so each product has it's own ideal customer definition. Sure, there is overlap, but an ideal factoring customer (general) will be different than an ideal small business factoring customer or a freight factoring customer.

Here is an example of an ideal freight bill factoring customer (for us):

1. They will be a trucking company or transportation broker
2. They will have revenues between $10K and $4M
3. They will have a diversified customer base
4. They will have experience in the transportation industry
5. They will use solid documentation (freight bills, BOL's etc)
6. They will be up to date in their taxes

This is a small example of how to define an ideal customer. Our lists are more extensive since we also break up products by client size. But you get the gist.

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Interested in business loan options? Learn about factoring.

The Story of Joe (The Trucker)

2010-06-30T10:54:00.000-04:00

Since my last two posts where about factoring opportunities opportunities that did no go well (see them here and here, I thought I would write a post about a deal that went well. Very very well.

One of our areas of expertise is freight factoring. We enjoy working with truckers and freight brokers and have worked with them many years. One Monday morning we got a call from a small trucking company owner - let's call him Joe. He ran a small trucking company that had been growing steadily. His wife also pitched in with the business on a part time basis.

That Monday, Maggie (Joe's wife) realized that they had a number of bills that would come due that week. They had a number of outstanding invoices that would be paid soon - but not soon enough. Joe and Maggie have always been strict about paying their bills on time. Given their situation, they needed a freight bill factoring plan .

The phone conversation went well and both Joe and ourselves thought this was a good match. By midday Monday they had submitted a completed application package. Things went very well and by Monday evening they had our proposal. They liked it and decided to move forward with us. By Thursday we had received their signed contracts and they got their first funding by Thursday night - just in time to pay bill that Friday.

Was are the differences between this fast deals and other fast deals that we have declined?

1. Joe and Maggy ran a good business and had their information readily available.

2. They moved quickly and submitted a good factoring application.

3. They were flexible - they negotiated with us, but since time was of the essence, they only focused on their more important items

4. They had good relationships with their customers. This helped the verification process go fast

5. Their business was solid!

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Until the bitter bitter end...

2010-06-29T11:07:00.000-04:00

I am going to tell you the story about a deal that wasn't. Many details have been changed to protect involved parties. Many moons ago, a prospect - let's call her Louise - approached us because she needed factoring for her company. She was very upfront about her situation - it was bad. Very very bad. She needed the funding quickly or her company would go bankrupt. Two other factoring companies had already looked at her business and declined to fund her because of serious problems with her company. I won't go into the details of the problems but they were big enough to scare two other companies.

We agreed to take a look at things but advised her that her chances were slim because most factoring companies decline opportunities for the same reasons. Nonetheless, we proceeded. As luck would have it, we found a way to work this opportunity and decided to extend a proposal. We saw there was substantial risk involved so we adapted our proposal to compensate for it. The end result - we could provide business financing to help her save her company. The terms we offered were livable but not easy.

At this point, she changed her tactics and started negotiating very very very hard. This surprised us - since with our factoring program she had a path to growth. It would take a year and it would not be easy. But she would avoid bankruptcy.

She negotiated everything point by point - aggressively and angrily. Not just the important terms - she was negotiating every single point. I appreciate her desire to negotiate (and encourage negotiation!), but it took a lot of time. In the meantime, vendors were not getting paid. Bills were piling up. Clients were not getting product. As weeks passed, we got more and more concerned about the viability of the company. Eventually, our proposal expired. Since we are nowhere near an agreement and since we now were very concerned about the viability of her business - we pulled out and did not extend it. A few days later, I learned she had closed the business.

I was surprised because based on the financial statements she had provided - we knew our terms were livable especially because her net margin was over 40%. In retrospect - I still don't understand why she did what she did. It's a sad story and it's very unfortunate. As a business owner, I see some very important lessons with Louise's story that I would like to share:

1. Start the business financing process very early - before it's an emergency.

2. Never let things get so out of hand that you reach a point where your business will close if you don't get immediate financing.

3. Live to fight another day. This is the most important lesson. If you are in a tough situation, be flexible and accommodating enough to ensure you get to live, so that you can fight another day.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

ATA Truck Tonnage and Freight Factoring

2010-06-28T16:40:00.001-04:00

I recently saw this very interesting post about the small May decline of the ATA Truck Tonnage Index. If you look at the graph of the index you'll see that although there is a small decline, it shows a nice upward trend.

From the graph that it also seen here, it appears that we are halfway between the low point of April 2009 and the high point of January 2008. If a picture says more than 1000 words, this graphs shows very clearly how the freight industry took a beating. We do a lot of freight factoring and that product has not seen a recovery yet. Sure, our freight bill factoring business is increasing but it's not as high as it was in 2008.

We all know that many trucking companies and freight brokers did not survive the recession. Clearly, the recovery for this industry will take a while. The good news is it seems that a solid recovery seems to be taking shape, especially if you look at the long term trend.

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Interested in factoring? Read the invoice factoring blog to learn more.

I am too busy! (to submit an application)

2010-06-28T11:31:00.000-04:00

One of the salespeople I work with had been in discussions with a prospect for several weeks. Basically, the prospect had expressed a big interest in factoring, but had not submitted an application because he was "too busy". This puzzled me because the prospect indicated they needed factoring urgently. The salesperson made a point to tell the prospect we'd be happy to help when they needed us - and explained how long the process would take. Given the complexity of the opportunity, the estimate was for two weeks.

I think you know what's coming next. After weeks of discussions, the prospect finally submitted an application on a Wednesday and told us they needed funding by Friday, otherwise his payroll would not be met. That's a big challenge. A very big challenge.

Here is the odd thing - I am not going to tell you about how we raised to the occasion and heroically funded the account in two days. Rather, we declined accepting the application and advised the prospect we would not be able to help them. Two days was not enough time for us to do the required work and we did not want to misguide his expectations.

He was flummoxed by our response - but I told him we were just being realistic.

I don't know what ultimately happened to this prospect, and this story happened many many many months ago. But it's a good example of the need for proper planning. Even if a business owner is extremely busy running all the operational details of his or her company, being too busy to apply for business financing when you really need it is not a good strategy. The days of quick and easily available financing are gone - replaced by the present days of careful and thoughtful financing, which takes time and planning.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Are these Terms for Real?

2010-06-24T10:39:00.000-04:00

Every so often, a prospect will dismiss our factoring proposal because they claim they go something **much** better. And what I mean by much better, is they they got a proposal that is outrageously better than ours. Not just bit a bit. But, by a LOT! For example, they may say they their factoring fee is comparable to prime rate.

I am certain that there are other factoring companies that can offer lower rates than we do. But when I hear about a term that sounds outrageously low, I become concerned. Most likely, the prospect did not understand what they are getting and are missing some cost information (or they are working with a shady sales person?). For example, most people would think that if they get Audi A4 for $29,249, they got a decent deal. At least according to this pricing on the website I linked. If they brag about getting the same Audi for $15,000.... you know something is wrong. Same with factoring.

If you get a factoring proposal that is outrageously better than what other companies are offering, you should be careful before you sign on the dotted line. Things you may want to look for include:

1. Has the factoring company disclosed all fees?
2. Do you understand how those fees are calculated?
3. Does the factoring contract have any minimum funding requirements?
4. And if 3 is correct - can you realistically meet those requirements?

Our mothers have taught us well when they said - if it sounds too good to be true.... it usually is.

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More information at the factoring blog.

Strategic Defaulters Day of Reckoning

2010-06-23T12:03:00.001-04:00

I know this blog is dedicated to factoring, but living in South Florida I have a fascination with the gyrations of the real estate market. In a previous post I mentioned that I suspected that strategic defaulters could face some nasty tax bills and unhappy bankers. The Miami Herald recently published this about firms that would profit from strategic defaulters....... by buying the debt cheap from the bank and then collecting.

I had a suspicion this would happen soon. It's unrealistic to expect banks to write off all the bad loans and let them evaporate. The most likely path is that they will sell them to collections agencies and hedge funds who will try to profit form this. This process may take a while, so a strategic defaulter could think they are out of the blue until they get a reality call from the company that bought the debt a few years later.

I have read some articles advising people to consider a strategic default just because their home is under water. Personally, I find this to reckless advice. The better strategy, in my humble opinion (disclosure: this is NOT advice. Consult a professional) is to hire a CPA with experience in personal financial planning and an Attorney and craft a strategy with them to get you out of your problem. And above all, be sure you understand what you are getting into as well as the implications of your actions.

Note: This article should not be considered to be financial or legal advise. Consult a professional.

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Read the factoring blog.

Canada's Economy is an Envy to Others

2010-06-20T19:44:00.000-04:00

The Miami Herald had a very interesting article about Canada . In the early 2000's many people referred to Canada's banking system as boring and risk averse. Now fast forward to 2010, having gone through a super world recession and financial meltdown that almost took down the world financial system. Of note, a recession that Canada avoided for the most part. People are suddenly people are starting to regret having what they said about Canada in the early 2000's.

One thing that we have noticed is that our Canadian factoring portfolio (yes, we do factoring in Canada), withstood the recession fairly well. For us, this confirms what the article said.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

The Effects of the Recession on Small Companies

2010-06-10T18:28:00.000-04:00

We recently ran an outreach program - basically reaching out to old prospects. We wanted to see how they were doing, and more importantly, if they were looking for any factoring services.

We were surprised by the number of letters that were returned with an "undeliverable" or "out of business". We don't have exact percentages yet, but it's certainly much higher than what I have seen in previous efforts to market our factoring services.

A big chuck of these companies went out of business because of the recession. I suspect many closed because they had few - if any - sales. These are companies that employed people, had suppliers, and in aggregate helped to the well being of their communities.

I have said this before, and I will repeat it again. We will be stuck in this nasty economic environment with it's volatile ups, downs and sideway movements until there is a viable program to provide business financing (and business survival) for small companies.

An Interesting Fact about Construction

2010-06-08T11:21:00.000-04:00

I read an interesting post at Calculated Risk about the increase in small business optimism. Tu summarize, it's going up but not as fast as it had gone up in previous recessions. Then they point an interesting fact - small businesses have a heavy concentration of construction companies. We can all see why they are not feeling very optimistic, having gone through the worst bubble in recent (and not so recent) history.

Surely, things are not going too well for many construction companies - or for many transportation companies either. We can see that in out freight factoring and construction factoring portfolios. But it's worth mentioning that it's not bad times for everyone. I have noticed some companies in these industries (including some niche players) that are doing very well.

Most would agree that transportation will recover sooner than construction. But it will be a turbulent recovery.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

It's a Turbulent Recovery

2010-06-08T11:14:00.001-04:00

In may, the economy added 431,000 new jobs. That should be cause for celebration, right? Well, it is.... until you realize that the majority of those were temporary census jobs added by the government. Private employers added only 41,000. I think we are all in agreement that the recovery will come in fits and starts - with good numbers and bad numbers mixed in. Think of James Bind's Martini - shaken - not stirred.

My bigger concern is with temporary employment and small businesses hiring. Here is a post from Calculated Risk that discusses them. My bigger concern is small business hiring. That is crucial for a recovery.

Here is the catch 22 - small business financing is very hard to get. Small companies wont be able to hire in any substantial numbers until they get the financing they need. You all know I am a big advocate of factoring. And it's true that factoring can help companies grow organically - however - factoring can only help a small subset of companies that need financing. We need all forms of business financing to be accessible.

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Interested in invoice factoring? Read the invoice factoring blog to learn more.

Construction Industry Stabilizing - Good for Construction Factoring

2010-06-01T14:53:00.000-04:00

Calculated Risk has an interesting post about how construction spending increased in April. One of their graphs (the first one) does a great jobs showing the effects of the real estate bubble. Depending on whether you are looking at commercial or residential - we are back to 2006 levels in commercial and about 1998 levels for residential. I find this to be incredible.... I think that we must have built 3 to 5 years worth of supply (my guess) during the boom.

Amid the bad news, both residential and commercial construction seem to be leveling off. We are noticing this in our construction factoring practice as we see that demand for our services in that area has an uptick. Actually, I think overall demand for factoring is increasing, not just construction factoring.

I think this will be a very interesting summer construction season. By August/September we should have a good idea whether things have stabilized - or not.

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Learn more about business financing and invoice factoring.

Gliding in South Florida (Miami and Ft. Lauderdale) - Miami Gliders

2010-05-26T19:32:00.000-04:00

For today, I will go off subject and write about a new interest of mine - Gliders. Also known as Sailplanes.

One week ago I decided to take the plunge and try flying a glider. I tried my local gliding company - Miami Gliders which as far as I could tell, they are the only company offering glider rides and instruction in South Florida (Miami, Ft. Lauderdale and Palm Beaches). They are a small but very well run operation.

Angel, their instructor, took me up to 3000ft in an introductory flight. He hooked up the Blanik glider to the tow plane and off we went. The ride up was fairly smooth and we release from the tow plane just in front of a cloud. After steering the glider for a few minutes to put it in position, Angel gave me a mini lesson and handed me the controls...

Much to my surprise, what little flying I did was quite easy. The glider responded nicely and just sail through the air. And the view was just incredible. Most introductory flights are short so after 25 minutes or so we landed. Overall I had a great experience. I actually bought a 3-pack lesson and plan to go flying again this weekend.

Ok - now my next post will be related to business financing - as always.

What is Your Number?

2010-05-26T19:15:00.000-04:00

Many business owners I know can gauge how their business sis doing by looking at one quick statistic. I call that statistic/metric - "your number". For example, a restaurant owner I know counts weekly tabs. If he has X number of customers eating at his restaurant per week, he knows he is doing well.

My number is based on leads. Like any business, I need to keep adding clients. I know the conversion rates of my team, so I can predict the number of accounts will add (and their revenue to an extent) just by knowing the number of factoring clients we speak to in a month. I watch that number - like a hawk.

When I speak to prospects, many times I will ask them about their number. Most don't have one. But when I find one that does - I consider him a very good prospect. Anyone that has a number (that works) has clearly combing through their business and knows which metrics matter, and which don't.

One thing I have learned is that these numbers are personalized. I know people who run very similar companies and yet use a different number that works well for them.

So, what is your number?

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Clothing Retailers Show Improving Numbers

2010-05-20T10:50:00.001-04:00

The garment industry has always been popular with factoring companies. As a matter of fact, a few decades ago factoring was almost entirely focused in that industry. So in a back to basics way, it's good to see that clothing retailers are reporting higher numbers. This is clearly good for those of us in factoring and other similar industries.Although that news bodes well for the rest of the economy as well.

On a personal note, it's interesting to see how factoring has evolved from being focused in the garment industry into a flexible financial tool that can also work in staffing, industrial companies, transportation and other specialties.

In general, most economic news seem to be pointing towards a recovery. Most would say it's a very mild recovery - but a recovery nonetheless.
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No - We Won't Beat That Deal......

2010-05-18T16:14:00.002-04:00

It's not uncommon for me to get call from business owners looking to switch factoring companies. Although I am happy to get as much business as I can from my competitors, I am always careful when I get these calls. Invariably, their first question is "My factoring company charges me XX, can you beat that deal?".

Much to their surprise, I always retort by asking about why they are changing their factoring companies. If they are happy with their factoring company and only reason they are looking to change is due to rate - I usually decline (unless I can give them a much much better deal).

I always explain to prospects that switching factoring companies can be a lot of work, and should only be done if their is a substantial and clear benefit. Benefits can be:

1. Better cost structure
2. More aggressive terms
3. You are very dissatisfied with the service of your current factoring company

Most factoring clients are in constant communication with their factoring companies - approving credits, funding invoices and managing things. Because of this, relationship dynamics are very important. As a matter of fact, Sometimes, at least in my personal opinion, more important than saving a little bit of money.

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More information at invoice factoring resources. Information by Marco Terry.

More on Strategic Defaults

2010-05-17T14:18:00.005-04:00

I mentioned strategic defaults in a previous post. Today I saw a post about the same subject on Calculated risk. You can find the post here.

I am not for or against strategic defaults specifically. That is a personal decision that one needs to make with their advisers. What I do know is that there are consequences. And I am not sure people are thinking them through.

The general gist of the strategy seems to be that the strategic defaulter will save money by defaulting, possibly move to a better (yet cheaper) house and eventually save up for a new house.

The catch, in my opinion, is that it wont be that easy. They are they risking a higher tax hit, as mentioned here. But they are also risking their credit - and probably more than they think. I suspect that credit rating agencies will be able to track these and impact their credit accordingly, and perhaps differently than someone who just lost their house to a foreclosure or short sale.

I don't know this..... but I am speculating that this will be the case. And if credit taring companies don't catch it, I think future lenders will.

If you were a lender - say 5 years from now - would you lend money to someone who "strategically defaulted" on their property?

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Interested in invoice factoring? Read the invoice factoring blog to learn more. Learn more about Marco Terry

Looking for Small Business Financing - What To Make of Europe's Bailout Package?

2010-05-10T11:37:00.000-04:00

I was surprised that lately, economic news was positive as I mentioned here and here. Today's big news is that the 16 countries that use the Euro have agreed to create a 1 trillion dollar fund to support nations burdened by heavy debt.

One question I asked myself - what will be the effect of this for small companies in the USA looking for business financing? Don't make the mistake of thinking that because Europe is "far away" it will not have an effect here. Any rescue effort of that magnitude is likely to have world implications, just like the US bailout did.

I have a gut feeling that the effect could be negative. Although many will argue that this bailout adds liquidity and stability to capital markets, it also proves that the world is not out of the woods. Furthermore, Europe is trying to prevent the collapse of their currentcy (and economy) much like we did last year and the year before. This is certainly proof that we are not out of the woods.

Given the the increased uncertainty of things business owners may want to ask themselves if they will need financing later this year. If they do, it may be wise to accelerate those plans and start talking to funding companies and financial experts now.

I am not saying that the sky is falling. Not at all. But I am saying that in light of this information, it may be prudent to make sure your near term and mid term financing needs are met. This applies to companies that are looking for business loans and/or factoring. And if you are looking for factoring,

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Looking for business loan options? Learn more about factoring quotes.

Foreclosures , Short Sales and Unintended Consequences

2010-05-09T11:59:00.001-04:00

Note: This is article not financial or legal advice. Please consult an attorney and/or CPA before making an important legal/financial decision.

For some reason, not many people are paying attention to the potential tax implications of not paying a mortgage fully - whether by foreclosure or short sale (this varies!). The fact is that many consumers may end up owing taxes on the forgiven amount. Here is an article on the Journal about the tax hit. I have a gut feeling this will become a larger problem in 2010 and 2011.

Here is the gist of it. You walk away from a mortgage or similar debt. As a result of that your lender may end up forgiving (writing off is probably also another term) the unpaid portion of the loan. The IRS in many cases can consider this forgiven debt as "income". This is income that you have to pay taxes on.

The "unintended consequence" is that by walking away from debt, you may end up owing money to the IRS. And getting out of IRS debt is not as "easy" as getting out of a mortgage. I think this will likely hit so-called strategic defaulters very very hard. -A strategic default is a person those that could afford their mortgage but chose to default and buy a cheaper property. If they did not plan for this, it could derail their plans...

Another unintended consequence is that in many cases, bigger defaults may lead to bigger potential tax liabilities. This could hit people that bought homes that were way too expensive for them the hardest. People that can least afford it.

I have only one piece of advice: Most large financial decisions, and walking away form large debt is a large financial decision, can have many consequences. Consequences for your credit, your ability to buy things and even your ability to get future employment. You should always consult both - a financial adviser such as a CPA and an attorney specialized in these matters before making the decision. Yes, consulting BOTH experts is expensive.... but less expensive that getting it wrong.

I will return to the subject of factoring in my next post.

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Learn about business financing in Mississippi. Information about factoring in Mississippi and Mississippi factoring. Learn more at the business financing blog.

The Current Job Market

2010-05-08T17:55:00.001-04:00

The folks at Planet Money did a great job explaining why even though we are generating jobs, things are still not very good with the unemployment number.Indeed, we generated jobs and unemployment went up? That is because of how the statistic is calculated. it does not include unemployed people NOT looking for work (e.g. discouraged). As jobs are created, more of those discouraged people enter the market making unemployment figures worse.

Depending on who you ask/believe, the economy has lost about 8 million jobs. It will take a while to get the back. I believe it was Larry Summers who said, "We have a statistical recovery and a human recession....". Indeed.

But things are improving. Business financing is still tough to get,but alternatives such as factoring remain accessible. One of the big advantages of factoring? It allows clients to leverage the credit worthiness of their customers.

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Interested in business financing? Read the invoice factoring blog to learn more.

Job Growth Ahead?

2010-05-06T11:19:00.001-04:00

When things get tough, companies try to optimize their operations. They reduce staff and also try to squeeze as much productivity as they can out of their existing employees. You can only do that up to a point, though. Eventually, there is no more additional productivity to squeeze out. You employees are doing the best they can.... If you need more work done, your only available solution is to hire people.

Well, productivity gains are slowing. This could be a leading indicator that job growth is about to follow. I would not expect companies to hire at a crazy pace. Rather, they will being hiring strategically, or perhaps increasing their use of staffing agencies at first. Either way, this could be good for a lot of people.

This bodes well for us in the business financing industry. Adding employees to a payroll usually has cash flow implications...... implications that can be solved using factoring. So yes, this is another indicator that the next 12 to 24 months may be positive for the factoring industry.

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Looking for business financing in Minnesota? Learn about factoring in Minnesota and invoice factoring in Minnesota. More information in the factoring blog.

My Business Has No Risk At All!

2010-05-05T12:30:00.000-04:00

"My business has no risk at all - This is a risk less transaction for you (us). I can't understand why your terms are so strict". A prospect recently said that to me, surprised that the proposal we had offered was not to his liking.

I always groan when I hear this argument. And I hear it all the time. In finance, there is wide agreement that the risk free asset - the assets with no (theoretical) risk of default is the US treasury. Small businesses have risk. A lot of risk. Factoring companies that buy invoices from small businesses also have a lot of risk.

Factoring company terms don't eliminate risk. That's impossible. They minimize it to a manageable number, enabling us to provide business financing and make a profit.

If I were a customer and I wanted to negotiate better terms from a factoring company, I would not use the argument that my business is risk free. It's a loosing proposition and it will get me nowhere. Rather, I would ask the factoring company to help identify their risk concerns and do my best to minimize those that are within my control. Then, I'd try to negotiate better terms.

There is one thing to remember - sometimes - the business owner itself represents the biggest risk. Please don't take offense, but it's true. Factoring companies work with owners that have little business experience, have had prior business failures, have no financial experience, have limited management experience and have other issues. If this is the case, your best alternative, in my opinion, is to build a track record of successful business ownership and increased profits. Actions speak louder than words.

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Looking for business financing in Massachusetts? Learn about factoring in Massachusetts and Massachusetts factoring.

Finally?

2010-05-05T12:08:00.002-04:00

It seems that lately I have been posting positive news. Or at least, I have not been posting negative news. Here is a recent post about manufacturing and another one abut factory orders. Well, the ADP report indicates that non farm employment grew in April. The increases are modest. And a bright star in all of this is that manufacturing employment is also increasing.

Manufacturing jobs are dear to my heart because they provide (usually) good paying jobs, and while they require a lot of skill, they don't require (usually) a college education.

Although the magnitude of the good news is anemic, it's good nonetheless. This bodes well for us in factoring. As the economy improves, demand for factoring services will also go up.

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Interested in business financing? Learn more about invoice factoring. More information about Marco Terry.

Manufacturing is Up

2010-05-04T10:36:00.002-04:00

The journal has an interesting article about the signs of growth in Manufacturing. Although we are not seeing any large scale hiring, firms are adding employees and shifts. These improvements seem to be across the board. Now, let me throw in a little bit of caution. This means we are doing better - not that we are doing well.

Industry folk wisdom says that the factoring industry benefits from the initial part of economic upturns. This is because firms are ramping up while financial institutions are still reluctant to make business loans. Because of this, companies with cash flow problems look at factoring as an alternative. At least, until the economy recovers sufficiently enough and banks start lending again.

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Looking for business financing in Maine? Learn about Maine factoring and factoring in Maine. Learn more about Marco Terry.

Lies

2010-05-04T10:01:00.002-04:00

Most people will agree that getting business financing nowadays is tough. Unfortunately, many try to resort to lying in the factoring applications hoping to try and convince the lending or banking officer to approve their financing request.

Some applicants will try to justify their lies as being white lies. Other will complain that without lying they will not be approved for the funding they need.

In my opinion, lying is never a good strategy. I think it is a pretty bad strategy that can have some pretty bad consequences. If you are caught, you could have civil liabilities. If your lies were "big", I imagine you could also face criminal liabilities (disclaimer: I am not a lawyer - I am guessing here).

Is lying really worth this? No!

Here are some of the more common lies that we see in the financial industry. Most institutions will catch these fairly quickly:

1. Opening a business using a front person (e.g. wife/husband/daughter) to hide one's criminal/legal/credit problems. Most in the factoring business tend to ask lots of questions. It's easy to tell the the "front person" (owner in paper) has no clue about the business.

2. Mis-characterizing the nature of the business. This happens when you tell the finance company that you are in one line of business when you are actually in another "higher risk" line of business. i.e. saying you are a business consultant when you are really a collection agency or a construction company.

3. Omitting important facts by leaving them blank in the application. For example, the application asks if you have any judgments and oyu leave that blank even though you do have judgments

There are others, but these are all common applications lies. Some are blatant. Others are "lies of omission".

We see these with unfortunate regularity in our factoring company, especially #1 and #3.

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Learn more about factoring quotes and business loan options. Learn about Marco Terry.

Factoring Rates and Risk Pooling

2010-04-27T09:46:00.001-04:00

I had a prospect that recently asked me why the cost of factoring was much higher than the cost of other forms of business financing. The short answer: risk pooling.

This can be a little bit hard to swallow for business owners, because few owners consider their businesses to be risky. But the fact is that all business is risky. Start ups and small growing businesses, your typical factoring clients, tend to be very risky ventures.

When a factoring company start buying invoices, they have to assume that some wont be paid. In other words, they will lose their capital for those specific invoices. Now, let's do a simple math excersie. The numbers are strictly hypothetical.

Let's say an factoring company buys a $100 invoice. They advance $80 and hold $20 in reserve. So far, their risk is $80. Let's assume that the expected factoring fee for this invoice will be $2. Easy enough. Now, assume that this invoice is never paid and the factoring company is not able to recoup their loss from the client.

The company will need to buy forty $100 invoices successfully (40 invoices x $2 fee = $80) to be able to make up their lost capital. They will need to finance forty invoices before they can get out of the hole and start making a profit again.

I am sure you can see how this situation could get out of hand easily and put the factoring company out of business. Factoring companies compensate for the risk by being very careful in their due diligence, pooling lots of invoices to share the risk, and by charging fees that are commensurate to their potential loss.

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Interested in Louisiana business financing?Learn about Louisiana factoring and invoice factoring in Louisiana. Learn more about Marco Terry.

Consumers are Spending

2010-04-26T11:41:00.003-04:00

According to an article in the WSJ, consumers are spending. I think this is both good and bad, and needs to be viewed carefully.

It's good because consumer spending lifts the economy. It helps retailers, and all those businesses that depend on retailers. It also shows that consumer have a higher degree of confidence in the economy and their ability to pay for things.

But it's not all good.

It's also bad (up to a point) because I don't think consumers are really in good financial shape. Many of them are still saddled with debt. And those that have been through bankruptcy or foreclosure should be focusing on building their wealth, not spending in "stuff".

Neither extreme is good, of course. Look at this graph that shows the personal savings rate:

Sure, it's gone up since the recession by 300%. But having it go from 1% to 4% is really not that great. and opens ourselves to other problems.

However, this is good for those in the factoring industry. Many in our industry work with retail suppliers, and these folks are going to benefit from the increase in consumer spending.

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Looking for business financing in Kentucky? Learn about factoring Kentucky and invoice factoring Kentucky. More information at business loan options.