Financing your Business with Accounts Receivable Factoring

Having to wait up to 60 days for commercial customers to pay their invoices can be one of the biggest challenges that owners of small to mid size companies have to face. Waiting to get paid is not usually an issue for well-established companies that have a significant cash cushion in the bank. However, it can seriously affect smaller companies or companies that are going through a significant growth phase.

Most owners react to this cash flow problem by going to the bank, hoping to obtain a loan or a line of credit. However, banks have strict lending guidelines and seldom lend money to businesses that cannot demonstrate three years of profitable operations and cannot provide audited financial statements. Furthermore, most bank financing products tend to have arbitrary limits, which are based on your existing financial capacity, rather than your projected growth.

What growing businesses need is a form of financing that is tied to sales, allowing you to get more working capital, as your company grows. Furthermore, the solution should work for small and mid size businesses that may not have established credit histories, but that have great paying customers. Is there such a solution?

If you are in a situation where your business is growing and selling products or services to great credit worthy customers, you should consider factoring your invoices as a possible solution. Accounts receivable factoring allows you to convert your slow paying receivables into cash, by financing them through an accounts receivable factoring company. Accounts receivable factoring is a flexible line of financing that is directly tied to your sales. Basically, the more you sell to good customers the more financing you can obtain.

The process is fairly simple. Once an accounts receivable factoring agreement has been established, you send copies of your invoices to the factoring company, who in turn advances you a significant portion of their value. A small percentage is usually not advanced and kept as a reserve to cover disputes/etc. You obtain immediate funding to pay for company expenses and grow the business, while the factoring company waits to be paid by your customers. Once they get paid, they will rebate the funds that were kept in reserve and charge a small fee for the service.

Accounts receivable factoring is an ideal product for companies that are growing quickly and cannot afford to wait 30 to 60 days to receive payment from their customers. It provides you with the necessary financing to operate and grow your business, and as opposed to bank products; it's easy to qualify for this service.

Financing Legal Fees (Factoring)

While most small and medium sizes law firms want to grow and prosper, few have the necessary working capital to handle increased case loads or extended settlement payment. Factoring, which is the purchase and sale of accounts receivable (in this case, legal fees) at a discount at or near the time of creation (settlement), can help solve this all too familiar cash flow problem.

Financial transactions with attorneys are shaped by ethics issues. The intrinsic problem is that the non-lawyer entity has an incentive to attempt to "maximize its earnings to the detriment of the representation of clients." However, once a case has settled, these issues are not in play any longer and the ethics issues go away. Legal fees on settled cases are just like any other account receivable and can be sold, assigned, factored or otherwise financed.

Specialty finance companies like CapTran (www.captran.com) will purchase legal fees on settled cases. Most companies will deal in all fifty states.

• Minimum Transactions amounts are as low as $5,000

• Individual fees can be aggregated to meet minimum

• Maximum Transactions amounts are generally in the millions as most factoring companies are very well capitalized

• A portion of a fee may be sold

• Generally, there are no application fees

• The fees must have no known motions or actions challenging the settlement

How it works

Once a case has settled and all documents have been properly executed by both plaintiff and defendant, the fee receivable is purchased for a small discount, usually between 2% and 12% depending on the payor and amount. The main difference in rates is the factor’s estimation of the time it will take to collect the fee.

Step 1 – Master Fee Purchase Agreement

A Master Fee Purchase Agreement is executed specifying the terms of the under which fees will be purchased, including minimum and maximum amounts, advance rates, fees and rebates. Before you begin factoring, please fax us the following documents:

• If your firm is a Proprietorship:

o Fictitious Business Name Statement or other document you filed with your local governmental agency allowing you to conduct business under your company name;

• If your firm is a Professional Corporation or Limited Liability Company (LLC):

o the document stamped by your state governmental agency confirming your company's registration and allowing you to conduct business under your company name. This is often known as a Charter or Articles;

• A copy of the declarations page of your malpractice insurance policy.

Step 2 – Submit Fee Purchase

Submission of fee for purchase using factor’s submission process/forms. (CapTran has an online e-from to make the process of submitting fees for purchase as easy as possible.) The documentation is simple and closing is usually within 24-48 hours.

Documentation:

• Copy of client fee agreement

• Copy of settlement or judgment

• Must be signed by defendant

• must be signed by insurance company or other payor

• Letter of instruction from attorney to payor directing payment to factor’s bank or lockbox.

Step 3 – Acceptance

Purchase of fees is subject to the factor’s acceptance,(acceptance occurs when you receive your advance), at their sole and absolute discretion at a the discount from face value agreed to in the Master Fee Purchase Agreement, which is usually wire transferred directly into your checking account. The discount will include the factor’s fee as well as any margin or “haircut” form the face value, which the factor has required. Usually, the factoring of legal fees requires no haircut if the payor is of unquestioned credit worthiness.

The assignment and letter of instructions from you is sent to the payor of the fee (usually an insurance company).

Step 4 – Payment

The payor sends their checks to the factor, which amounts are credited to your account, as received.

If the payor pays in a timely fashion (less than 90 days), you will also receive a Rebate when enough money has been collected to close any particular transaction. The Rebate is calculated by a predetermined formula that adjusts the original discount in Step 3. Here's an example assuming a 12.5% factoring fee and a rebate of 4.8% for payment within 90 days:

Amount of Fee $10,000

Less Advance Disocunt (12.5%) $1,250

Net Advanced to Attorney $8,750

Rebate if payment within 90 days (4.8%) $480

Net retained by attorney if paid within 90 days = $9,230

Net retained by attorney if paid after 90 days = $8,750

Every factor has its own rules, preferences and idiosyncrasies. However, the welcome mat in clearly out for accomplished small to medium sized law firms.

Some firms also offer working capital loans which may, for certain firms, compliment factoring very nicely.

Wayne C Walker, President of Capital Transaction Group Inc www.captran.com

Wayne C Walker, president of Capital Transaction Group Inc http://www.captran.com

The History of Invoice Factoring

Factoring is one of the oldest business practices known. We know that it was used at least as long ago as the time of the Ancient Roman Empire, when merchants would enlist the help of collectors in order to settle trade debts. The primary reason for factoring’s long history is that it addresses a very fundamental problem in business itself: cash flow.

Let’s say you run a small company that’s developing a unique idea. Everyone works hard in designing the product, and your sales department hits pay dirt: a large manufacturing contract. This is exactly what you wanted, but you now have a problem: you need to hire more people and invest in some machinery to fulfill the contract, but you won’t see any money until the goods are delivered.

In this situation, a lot of your options aren’t too appealing – a large loan (assuming your business has the credit,) or convincing your employees to accept a deferred payroll. In many cases the best solution is to strike a deal with an invoice factoring company. What the factoring company will do is effectively buy your invoices at a discount - the “factor,” which are typically 3 - 4% - and provide you with the up front cash that you need. When they come due, the factoring company will then collect your invoices in full. Although the invoice factoring company will collect the receivables, this is usually done in a transparent way to the customer: as far as the customer is concerned, they are simply paying an invoice to a company as they normally would.

Even if it’s not out of a need for capital, many smaller businesses also turn to factoring companies to alleviate cash flow issues. When selling to large corporations, some businesses find themselves dealing with long gaps between invoicing and payment and with little leverage to narrow it. By turning to an invoice factoring company they can create a steadier cash flow.

The Beginnings: Invoice Factoring in Early America

Factoring made its way to America almost as soon as the pilgrims did. Many early American merchants made use of factors in order to sell tobacco and cotton abroad: they would ship their goods to England where a factor would take a percentage for selling and collecting money owed, and English merchants would do the same using American factors. In this way factoring played a pivotal role in rapid growth of American industry – without factors it would have been much more difficult for merchants to maintain a steady cash flow and trade of goods overseas.

As the American economy grew, American factors were able to concentrate more and more on domestic business. From the early colonial factors, and group of around 40 large factoring companies descended, based mostly on the east coast, that played a major role in financing the textile and transportation industries until the early 1950s. In the early part of the 20^th century these factoring companies began to establish percentages of receivables that they would advance companies upon the purchasing the invoices, usually around 70%-80%. This provided much of the large amounts of capital needed in these industries.

The mid 1950s saw the emergence of smaller businesses using factoring to address cash flow issues, moving the factoring industry away from the exclusive realm of large industry. As smaller businesses began to make use of factoring, the industry grew rapidly and became more competitive. The result was a trend towards mergers beginning in the 1970s that saw the number of large factoring companies reduced to around 10 by the end of the decade. At the same time, banks and other large financial institutions began to offer factoring services, and the business of factoring became the domain of large, institutional organizations.

The Impact of Invoice Factoring on Today’s Small Business Trends

The factoring industry more or less remained this way until fairly recently. The last 10 to 15 years has seen the re-emergence of small, independent factoring companies catering to a much wider range of businesses and needs. This trend has created a split market with a few mammoth factors targeting traditional factoring industries, and many small factoring companies that are continually creating new markets.

This trend towards newer, smaller invoice factoring companies is a reflection of contemporary business trends. The pace with which smaller companies develop and operate, particularly in the competitive technology and service sectors, requires a steady cash flow that can’t always be provided by receivables. An example of this can be seen in the emergence of temporary staffing agencies. These companies have large payrolls and depend heavily on cash flow. The competitive nature of this industry puts many temp agencies in a position where their payroll is due before their invoices are, and many smaller factoring companies have come about to provide solutions for this gap between payables and receivables.

David Springer is a consultant for Sovereign Funding Group. Sovereign Funding Group is an experienced, reputable company that offers convenient, no-risk services to help you with the selling of your deferred payments and business financing including invoice factoring.

Tips on Choosing a Factoring Company!

Factoring, what is this financial tool you are looking into that will hopefully fuel your business with the capital it needs to prosper.

Each person and business varies so how do you know which factor is the right choice for your company.

Some things you need to know before you choose a factor!

Term Contracts:

Do they require a term contract?

There are pros and cons to a term contract;

Some Cons:

You are not happy with the factor due to the way they service your account.

They may treat your customers poorly, jeopardizing them as your customer.

They may have poor reporting.

You need to make sure they do not have a hefty termination fee, lets say for what ever reason you may need to terminate the relationship, what will it cost you.

Pros:

You may get a better fee structure due to locking in on a term contract

When choosing a factor here are several questions to ask them before you sign up:

Do they bulk your receivables; in other words, when you sell them your receivables, do they release your reserves as each invoice is paid, or do they wait for all the receivables to collect from a given schedule before they release your reserve.

As an example, you sell a factor 100k in receivables on one schedule which consist of 4 different customers at 25k each, 2 of your customers pay the invoice within 30 days and the other 2 pay in 45 and 60 days. That would mean you would have to wait until the last customer pays at 60 days before you get your reserve, this is not good, try to avoid signing up with a factor that does this.

Ask about additional fees, do they have a service charge or any fees on top of the discount. This is not uncommon if you are set up on a prime plus rate, yet it still needs to be accounted for when choosing between factors. You may get some smoke and mirrors from conversations and proposals. When you receive the contract, that will spell it all out, take the time to add up all fees to accurately and compare proposals, the one that seems to be the highest at 1st may not be that far off.

Ask about up front fees:

Some factors charge a due diligence fee, this can range from $250.00 to $500.00 dollars, even higher for construction. Stay away from application fees, they are not necessary. A due diligence fee is okay and understandable since the factor does have cost associated with opening an account, however some factors do not even charge any up front fees.

Ask how long they have been in business, some factors are larger than others and you want to make sure they are capable of handling your companys growth.

Some factors are small and do not have adequate funding backing them, it has been known of some factors running out of money and were not able to fund their clients.

Working with consultants / brokers

You certainly do not need a broker to get set up with a factor, but it can be to your best advantage. Here are some pros and cons.

Cons:

The broker has not been in business very long and does not really understand factoring to it fullest yet themselves, ask them how long they have been in business and how much business they have done.

The training they received was not adequate and they do not know how to pre qualify and may end up wasting your time filling out an application and sending in documentation when certain questions could have been ask that may point out obvious reasons that would prohibit you from qualifying.

They over shop deals; some brokers will send out your application to as many factors as they can., this can be a bad reflection on you. Just like having too many inquiries on your credit is a red flag to banks, when a factor sees your application from several different brokers it may raise a red flag. Keep this in mind, shopping rates to a certain point is healthy, however rates only go so low, choosing the right factor sometimes means the rate is a touch higher. Customer service is very important.

Some brokers are part time, which means they are not established.

Pros:

Nothing can be better than a in depth consultation, a seasoned consultant / broker can asked you questions and explain things in a way you may not have thought, plus when you are dealing directly with a factor, you are not getting a third person perspective.

An experienced consultant / broker should be dealing with trustworthy and reputable factors. Plus they make sure factoring is the right financial choice for your company.

Shares advice on how to utilize factoring to its fullest. This is a very powerful form of finance that provides many advantages when properly used.

Using a seasoned consultant / broker helps you get prompt attention from the factors they use. Established brokers mean that the factors pay attention to the clients they refer because this is repeat business for them since the broker sends numerous clients for them to fund.

You get straight forward answers, no smoke and mirrors. A Consultant / Broker can help you cut through the decision making process without pressure. You have at times too much information coming at you, especially from the internet.

A Consultant / Broker can let you know what kind of fees and advance to expect, in other words, you see low advertised rates, which most will not qualify for. You can have it explained to you what the factors are looking for and how you qualify. If you already have a written proposal a Consultant / Broker can help you make sure you have a fair deal.

Mark Little is President of Diversified Funding Services, Inc. He can be reached at 888-603-0055. His company website can be found by Clicking Here and the Company blog Click Here.

Invoice Factoring Basics

 

Can’t afford to wait 30 to 60 days to get paid by your clients? If you are like most business owners, waiting to be paid can be very challenging. In some cases it can mean lost opportunities. It can mean that you don’t bid for big sales because you know you won’t be able to play the waiting game. At its worst, it can spell disaster. It can mean that you need to delay payroll. It may mean that you don’t pay rent or taxes. It may force you to shut down your business.

If you are like most business owners, your first reaction will be to call your banker. Unfortunately, banks will not lend money to businesses that are new, have no hard assets or don’t have three years worth of profitable financial statements. At this point, most business owners give up, thinking that they don’t have any other options. However, they do.

If your company sells products or services to large credit worthy companies, you could qualify for invoice factoring financing. Invoice factoring reduces the time it takes for you to get your money to one day. How quickly could you grow your business if your invoices were paid in 24 hours?

As opposed to bank loans, factoring companies do not require hard collateral. The only requirement is that you have invoices form credit worthy clients. Factoring companies work differently than banks. A factoring company will provide you with financing based specifically on your invoices. This means that if your invoicing grows, your financing also grows.

Factoring is very simple:

1. You generate invoices for your products or services

2. You submit the invoices to your clients and to the factoring company

3. The factoring company advances you up to 85% of the gross value of your invoices (the remaining is kept as a reserve to offset disputes)

4. Once the invoice is paid by your client, the factoring company releases the 15% reserve and charges their fee

Factoring financing is easy to qualify for and can virtually eliminate the 30 to 60 days it takes for your customers to pay. It provides you with the necessary working capital to grow your company and take new opportunities.

Need to receivables factoring? We can provide you with a factoring, invoice factoring or accounts receivable factoring quote for free. Marco Terry, the president, can be reached at (866) 730 1922