Invoice Factoring - Learn About Invoice Factoring Financing: The Financials Crisis and How it Affects Factoring Companies

Invoice Factoring - Learn About Invoice Factoring Financing: The Financials Crisis and How it Affects Factoring Companies

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Customer Perceptions About Invoice Factoring

Many companies considering using accounts receivable factoring are worried that their customers will perceive them as "going under". This is a concern with most prospects that are unfamiliar with factoring. The issue centers around notification and collection. At the inception of a factoring relationship, each account debtor is notified that a secured party (the factor) has taken title to invoices in which they owe payment. The letter also states that all present and future invoices due must be paid directly to the factoring company until otherwise notified by the factor. This is necessary to do this because if protects the factor's collateral and to be protected by the UCC.

Many business owners worry that they will be perceived in a negative light when the customers get these notices. There is no reason to worry. Factoring is hardly a new form of financing. Many industries (manufacturers, distributors, apparel & textile, trucking, and temporary staffing) rely on the services a factor provides. Factors only interact with customers on a random basis, mainly at the inception of the relationship.
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Need a quick infusion of cash? Click here to apply for a factoring quote.

Kent Harlan, CPA
www.ocflink.com
kenth@ocflink.com
417.849.7394

Should the Government Intervene in the Housing Crisis?

Today, I'm straying from the usual topic of invoice factoring to briefly discuss a hot-button topic for me: government intervention to solve problems in the housing market. There is now pending legislation that would provide relief to home owners that are on the brink of foreclosure. Sounds compassionate doesn't it, especially when you have the perception that the homeowners are in the situation they're in because of predatory lenders. I would agree that lenders have the obligation to fully disclose all the terms and conditions of the transaction and how it might effect them in the future (especially when people opt for teaser rates, then get hammered later on). But nobody seems to bring up the personal responsibilty angle of the individuals buying properties that are outside their means.

Bailing out people who have made poor decisions in their lives seems absolutely absurd to me. Do we really want our children to grow up with the idea that they can act in an irresponsible manner without repercussions? Do we want them to view government as a saviour? I don't think so.

I made a poor decision a few years ago when I trusted what turned out to be the owner of a shady real estate company. To make a long story short, myself and many others were defrauded into buying houses that were supposedly undervalued, but actually weren't. I bought a house as an investment that I was led to believe would be sold quickly at a good gain. Two and a half years later, I'm still in a home that is twice as big as I need with a mortgage payment I can't afford. Did I ask the government to bail me out? No, I'm taking responsibility for the mortgage I signed and despite the fact that my net worth is eroding each month, I'll continue making the payments in a timely manner.

Let the free market work this mess out. Government bailouts will only magnify the problem.
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Need a free invoice factoring quote? Click here.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
(417) 849-7394

Factoring Offers Off Balance Sheet Financing

When you factor an invoice, you have not created a loan or a liability. After you receive the advance on an invoice, the customer pays the factoring company the total amount due. The factoring company then remits the amount of the invoice less the advance and factoring fee to the client. At this point, the transaction is complete. Keeping the transaction off the balance sheet is an important benefit of factoring, as it allows the company the greater chance of being qualified for other financing since the balance sheet has been properly maintained.

Using a bank credit line in a manner that does not enable frequent pay downs will ultimately result in a transition to term loan which does not look good from the banks standpoint and clearly makes it harder to borrow more in the future.
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Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
(417) 849-7394

Factoring Provides Quick Funds

Invoice factoring is one the most quick and easy means of acquiring much-needed capital. How long does it take for the factoring company to wire funds into your bank account?

The factoring application is just a few pages and most of the time tax returns aren't required. Within a day, a Letter of Intent (LOI) is sent out. Upon agreement of the factoring terms & conditions, the accounts receivable Purchase & Sale Agreement is delivered overnight. When the signed agreement is returned the funding can start. This usually can take from 5 – 10 days.

Once the factoring account is set up, then getting an advance on an invoice is a matter of verification and notification. The factor notifies the account debtor (customer) to make payment directly to the factoring company, and verifying that the work has been completed. This can usually take anywhere from a few hours to the next day. After submitting an invoice from a completed job, a bank wire goes out within 24 hrs. Can you get a bank loan that fast?

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Kent Harlan, CPA

Ozarks Capital Funding, LLC

www.ocflink.com

Why Your Customer's Good Credit is Essential for Factoring

You'd have to be living in total isolation to not know the economy is in very shaky territory. I've been asked how the volitility in the credit markets has effected the invoice factoring industry. In particular, will those companies that factor have a smaller pool of funds available to them?
The answer in most cases is no. But it is important now more than ever that your customers credit position remain solid.

Most factoring companies get their funds from banks in the way of large credit lines. These lines allow factors to advance funds to clients. As credit has tightened, banks are scrutinizing their portfolios much more closely. Due diligence from the bank's perpective means they review the credit standing of the factoring client's customers. If the credit has slipped for several of the customers, the bank may pull in the reigns by limiting the amount of the bank line. As you can see, this scenario indirectly effects the amount of funds that may be available to factoring clients.

If you are currently factoring your receivables and are considering taking on a new customer that wants credit, you should take advantage of the free credit-screening services that most factoring companies offer. It not only will help reduce the amount of bad debt chargeoffs. It will also help you get maximum advances on your A/R.
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Need a quick infusion of cash? Click here to apply for a factoring quote.

Kent Harlan, CPA
www.ocflink.com
kenth@ocflink.com
417.849.7394

Credit Crunch

Many companies are discovering that lending parameters have tightened up considerably in the past few months. Even banks that they've dealt with for years have pulled in the reigns and are not granting the credit lines they have in the past. The reason? Nearly everyone in the financial community is jittery about the state of the economy. The housing crisis, the threat of inflation, and the looming recession have all created an environment of instability.

Despite these fears, the invoice factoring industry is strong. If you are having trouble getting the working capital you need to either survive or grow, factoring could be the tool you need. As stated before, factoring isn't for everyone. But if you've got a service, manufacturing, or distribution firm that sells to other businesses on credit, you've got a decent profit margin (over 10%), and you collect payments from your customers in a reasonably timely manner, you should consider getting a factoring quote (free and no obligation).
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Need a quick factoring quote? Click here.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

Factoring Invoices Less Than 90 Days Old

Some firms have a business model in which they don't get paid by their customers until 90 days or more after invoicing occurs. For those businesses, factoring is not a viable financing option. Accounts receivable financing is only for businesses that issue thirty day net term invoices and have a history of getting paid on time. That doesn't mean each invoice every single invoice must be paid within 30 days. But it is important that the accounts receivable turnover occur at a reasonable level. That is critical for both the client and the factoring company. For the client, excessively late payments (over 60 days) can be very costly in terms of fees. For the factoring company, their line of credit may be hampered.

Most factoring companies get their funds from a bank credit line. They then use those funds to advance cash to factoring clients. The bank considers invoices over 90 days to be a non-performing asset and deducts those amounts from their credit line. That's why factoring clients must replace those invoices over 90 days with ones that are current.

Invoice factoring is an excellent means of achieving capital infusions. Making sure your customers pay in a timely manner helps maximize cash flow and keep factoring fees under control.
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Need factoring? Click here for an easy application.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

Factoring Commercial Accounts Receivable

When we talk about providing advances on your accounts receivable, we're referring to debts owed by other businesses. There are very few invoice factoring companies that give advances on consumer invoices. The main reason is due to the legal differences of consumer and commercial transactions. Since accounts receivable financing is based upon the credit-worthiness of your commercial customers, invoice factoring companies just aren't set up to work with consumer issues.

The few factoring companies that do work with consumer invoices have very steep minimums. In fact, you'll need anywhere from $500,000 to $1 million of consumer receivables to work with them.

Need a free quote for invoice factoring? Click here.

Kent Harlan, CPA

Ozarks Capital Funding, LLC

www.ocflink.com

417.849.7394

When you Factor Invoices, Be Ready to Give Up Title

A few years ago, I was contacted by a local printing firm. They had been in existence for many years and were well-known in the community. That year, they had been experiencing impressive growth with many of their large commercial accounts. They needed working capital to support the growth and their bank would not loan them the amount they needed. (You know how banks are).

It was a family-owned business and I worked with the Son of the original owner. The Father was still active in the business, but mainly dealt with the larger customers and allowed his Son to run the administrative areas. I explained the factoring concept to him (including the fact that it is a lot more expensive than bank financing). He was happy to know that his ability to generate working capital from invoice factoring was only limited by the company's pool of receivables. He filled out an application and submitted the other information required.

When I got the quiote back from the funding source, I set up a meeting with both the Father and the Son to go over the LOI. They were fine with the fee structure, advance rate, and other points in the agreement. But when the Father noticed that the factoring company would be filinig a blanket UCC on the receivables, he got angry and said there's no way he would do this. That was the end of this deal.

I don't know what he was thinking. If he ran a factoring company, wouldn't he want some type of protection for the money you've outlayed to companies? Unless you're willing to encumber your accounts receivable, you should not consider factoring (or most any other type of outside financing). There will ALWAYS be a UCC filed on the A/R.
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Need a free factoring quote? Click here to apply.
Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

A Broker can be Helpful in Choosing the Right Invoice Factoring Company

Many people cringe when they hear the word "broker". A common stereotype is that a financial services broker is strictly out for himself and will choose the funding source that pays the highest commissions, as opposed to matching the factoring company that can best serve the client. There are many brokers like that, but I believe they are in the minority.

I'm not ashamed of being a broker because my first priority is the satisfaction of the client. If I don't think factoring is a viable financing tool for a given situation, I will make that clear to the client. I will give them alternative ideas if available and thank them for giving me the opportunity to try to help them. I work with funding sources that I can implicitly trust and that have a track record of reliability and honesty.

A company does not pay extra fees for using a broker for setting up a factoring arrangement. That's because the commissions paid to the broker are paid by the factoring company as an expense. A broker like myself can be invaluable in bringing together companies and sources of capital that work well together.

Need factoring? Click here to apply!

Kent Harlan, CPA
www.ocflink.com
kenth@ocflink.com
417.849.7394

Recourse vs. Non-Recourse Factoring

When you are thinking about entering into a factoring relationship, one important consideration is the whether to utilize a recourse or non-recourse factoring company. It is important to understand the difference as it relates to non payments from your customers. In a non-recourse situation, the factoring company takes the loss from bad debts. With a recourse factor, you must either reimburse the company for the advance or replace it with another invoice of similar amount.

Not only can the type of factoring arrangement have a profound impact on the rate you pay, it can also effect the way you do business. One client spent a lot of time setting up a line with a well-established non-recourse factoring company only to find out that the terms of the contract made it very difficult for the customers to make product returns. Had he gone through with this relationship, it likely would have disrupted his business and alienated customers.

Just like any contract, make sure you clearly understand the terms on the front end before signing on the bottom line.

Need working capital from invoice factoring? Click here to apply.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
417.849.7394
kenth@ocflink.com

Checking Your Company's Background

I was approached by a potential factoring client a few years ago that seemed motivated to grow his business. He owned a commercial printing company that was growing rapidly. The bank he used wasn't helpful in providing the additional working capital he desperately needed.

The company was close to where I live, so I met the owner in person. After getting some basic information, I started asking some pointed questions about the business and asked if he had a recent financial statement. His demeanor changed on the spot, as he became defensive and uncooperative.

I wasn't giving him the "third degree". I was merely trying to establish if his company would be a good fit for the factoring company I represent. I like to do this up front before a lot of time is invested in processing the application.

It's important for there to be a level of trust on both sides. We're there to provide a valuable service for our clients. It's important for us to find out relevant information on the front end to make sure we can provide an excellent level of service.
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Need working capital? Click here to apply.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
417.849.7394
kenth@ocflink.com

Why Medical Receivables Factoring is More Challenging

Those who are unfamiliar with the nuts and bolts of factoring may think that getting funding for medical receivables is just as easy as that of a distributor or manufacturing company. Nothing could be further from the truth.

There are a limited amount of factors that fund medical receivables because it can be very risky for them. It takes a company who is very familiar with the complexities of medical billing. They must be able to accurately project the net collectible billing percentage to be applied to each invoice. An audit of the historical third-party receivables is conducted before the contract is signed. This can be fairly expensive (up to $5,000 for a small practice), so it's important that the provider be committed to factoring before the audit is conducted.

The audit allows the factor to determine the percentage of discount off the bill. The advance rate is applied to the predetermined net collectible billing. As you can see, this type of factoring is much more complicated than for most businesses.

Need working capital? Call me at 417.849.7394
Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com

How Invoice Factoring can Fuel a Company's Growth

When a company is growing at a rapid rate, additional working capital is usually needed to pay for materials, labor, and additional overhead. Relying on internally generated funds probably won't suffice, especially if customers are paying on credit. If the average customer pays in 45 days and vendors expect payment in 30 days, a cash shortfall is created. The same is true for production employees who get paid weekly. They certainly would have a problem if they had to wait until customers paid their bills.

Accounts receivable factoring is an ideal way to provide funding for companies on the "fast track". When an invoice is generated, the factoring company will advance between 70% and 85% of the face amount up front. The remainder, called the reserve, is remitted back to the client upon collection less factoring fees. Unlike a bank line of credit, the amount of funding is limited o only by the pool of receivables. The advance enables the company to pay for the labor and might even give them the opportunity to take advantage of purchase discounts on materials.

Need working capital? Click here for a free quote.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

Read the Fine Print on Factoring Contracts

Most factoring companies are ethical and honest. But there are some out there that will take advantage of you. Therefore, you or your attorney should read the contract very carefully before signing on the dotted line. In looking for working capital, you might fill out more than one application in order to get the best "deal". In one scenario, a customer inadvertently pledged his companies receivables by simply signing the application. Then, when he chose another factor to work with, due diligence disclosed that there was a lien on the A/R from the other factoring company. Although it was cleared up, it caused a delay in funding.

My funding sources are all above board and do not add ridiculous clauses like that to their contracts. If you are wanting to establish a factoring relationship with a trustworthy and reputable factoring company, click here for a free quote.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

Credit Screening is an Important Benefit to Factoring

Invoice factoring is an important financing tool for firms that are not "bankable". This situation comes about because either they are in a poor financial condition or they are growing at an extremely fast rate. In addition to the fast and consistent funding, there are other benefits to establishing a factoring relationship. One of them that most factors offer is credit screening.

In a fast paced and competitive environment, business owners often don't have the time to analyze the creditworthiness of new customers. They may ask that a credit application be completed, but many don't follow through with checking credit references or running a Dun & Bradstreet report on the prospective client. Factoring companies have the necessary tools at their disposal to ferret out those customers who might pose a credit risk. The benefits to both the factoring company and their customer is enormous. Thousands of dollars in bad debt can be averted and the factor has a better comfort level of advancing funds to the client.

Need quick working capital? Click here to apply.
Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

The Verification Process In Invoice Factoring

When a factoring company advances funds to a company based upon an invoice that has been generated, that is the only collateral or protection they have. In other words, the factor has wired the funds to the company's bank account based upon the belief that the invoice is correct, above-board, and will be paid in a timely manner. Factoring companies rely upon a verification process to minimize their risk. This process helps establish that the work has completed (or the products received), that the price of the goods or services is what was agreed upon, and that the remit-to address is that of the factor. Normally, the verification is done by phone, fax, or email.

In some cases, a more formal process may be involved. If there is a very large invoice, or if there are a small amount of customers, the factor will likely have the customer to sign a document stating that the invoice is correct and will be paid in full.

Many recipients of factoring get nervous about the verification process and how it might cause their customers to view them in a negative light. Those fears can be allayed by letting the customer know that they are merely pledging their receivables to a third party. Verfication is done in the ordinary course of business.

Need working capital? Click here
Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

Purchase Order Funding vs. Invoice Factoring

Many business owners get confused about the differences between purchase order funding and accounts receivable factoring. Although the type of funding is somewhat the same in that funds are advanced to the company relating to products or services sold to customers, there are important differences.

Invoice factoring is the result of products sold or services performed that have been satisfactorily accepted by the customer. Once the invoice is generated, the factoring company advances a contractually agreed upon percentage of the invoice total. Therefore, the credit risk for the advance is based upon the creditworthiness of the business customer.

Purchase order financing involves a situation in which the company needs raw materials or components to produce the product, but lacks the capital to purchase them outright. Once the P.O. has been verified, a letter of credit will be issued to the supplier which guarantees that they will be paid upon shipment of the order. When the order is delivered the P.O. funders’ letter of credit must be paid off. The LC only secures the shipment from the supplier. Since it does not provide the capital advance necessary to pay off the PO finance company, many companies use invoice factoring in conjunction with P.O. financing so that the order goes through without interruption. Since the risk of PO funding is based upon the reliability of the company to both produce and sell the product, rates tend to be more expensive than factoring.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
417.849.7394
www.ocflink.com
kenth@ocflink.com

Use Factoring as Bridge Financing

As we've discussed many times, invoice factoring is a necessary form of financing in our economic structure. If you're considering using this form of financing for your capital need, it should be done on a short-term basis. This is especially true for a business that is experiencing an intense growth period. Accessing capital in this stage is critical, and one of the advantages of invoice factoring is the company's ability to receive funding is only limited by its pool of accounts receivable. By receiving bank financing too early could restrict or limit production.

While factoring does have many advantages, it should not be used as a long-term strategy because of its high cost of capital. Your goal should be to use factoring to get through the tight-squeeze phase of your business cycle until you become "bankable". Factoring should be used as a tool to get your company to the next level.

Kent Harlan, CPA

Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

Invoice Factoring as a Financial Tool

Despite the fact that factoring volume continues to grow year after year, most business owners do not know about this financing concept. The ease of use, simple application process, flexibility, and the ability to provide unlimited capital are all advantages to businesses that use accounts receivable factoring.

With so many forms of financing available, (term loans, revolvers, direct public offerings, private placements, equity participation loans, etc.), it is critical that today's business owner have a working knowledge of every option available and its drawbacks and benefits.

Invoice factoring is no exception. While factoring is not a good fit for everyone, it can be a valuable tool in a firm's financial arsenal.

Kent Harlan, CPA

Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849.7394

Making Wise Credit Decisions

When you extend credit to a customer, you are in essence the customer's banker. If that same customer went to a bank for financing, they would be asked to supply certain information which would be forwarded to the underwriting department. They would check credit references, run a D&B report, and perform other due diligence that would allow them to make a logical decision as to whether or not to grant a loan.

As a business owner, you should take the same approach. Even though you don't have a large underwriting departement, you can still take the time to require that a credit application be filed out. You can call the customer's credit references to determine if timely payments have been made. You can require a personal guaranty of the owners of the business and run credit checks on them.

Finally, don't assume that a business that has been in existence for a long time is automatically a good credit risk.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
417.849.7394

Here's to a Great 2008!

I hope all of you had a wonderful Christmas and New Year's celebration. I spent yesterday alternatively watching some college bowl games and listing my goals for the upcoming year. Note that I said goals and not resolutions. The former seems to be longer-lasting if you're the serious-minded type. The latter is short-lived. Take the people that show up in mass at the health club on January 1st who haven't been there since early the past year. They have a new year's resolution to "get fit". The health club is packed until around February 15th, at which time the "resolutioners" have retreated. Old habits set in quickly. The resolution turned tou to be just a fad. The year-round people, dedicated to keeping in shape are the ones that remain.

Set some meaningful goals. Make them specific and set time frames for completion. Periodically measure results against what you had hoped to accomplish and make adjustments where necessary. Goals aren't cut in stone. They are blueprints for your future.