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.

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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.

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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.