What The Factor Wants To Know

Is There A Real Need For The Factoring?
Where in the business has the need for cash flow arisen? Fulfilling orders? Tax problems? Looming payroll? Inability to pay suppliers? What exactly?

When Does The Business Need The Cash Flow?
If it is needed to fulfil an expected contract, when will the contract be awarded?
When is the next payroll due?
By when do you have to pay your suppliers?

Just How Good Are Your Debtors?
Factoring is all about the creditworthiness of the debtors – the ultimate payors of the factored invoice. Factoring companies act as a Receivables Management function – they are not in the business of delinquent debt collection. There is a huge difference (and it is a different kind of financing).

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Which Funding Source ? 3

The author prefers to deal with funding sources that offer alternative products. If a client turns out not to be eligible for factoring, the funding source can still add value by offering say, venture capital or equipment leasing. Everybody wins and it saves the client the hassle of looking for alternative funders.

Besides, just because the client isn’t eligible for factoring at the moment, doesn’t mean it won’t be eligible in the future.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Which Funding Source ? 2

Since factoring is all about timely cash flow, the best factoring companies will be able to quote on the deal, or decline it, within 24 – 48 hours of a fully complete application being submitted. Note the operative words “fully complete application”. The author has seen enough companies whining to disclose the required information on the application form. It doesn’t help their case or the speed at which they might get the cash.

If a factoring company purports to charge an application fee when you’re submitting the initial paperwork, watch out. There are no grounds for it.

When the client accepts the quote, the factoring company will respond with a contract and supporting documents for the client’s signature. The contract is subject to due diligence. At that point, it is perfectly legitimate for the factor to request the due diligence fee from the client.

Some factors have preferred industries and will specifically exclude others. Others are more broadly based. Generally construction industry related factoring is a specialized niche and not all factors handle it – the risk element is highest in this sector.

Some factors have a monthly minimum value for a deal, below which, they will not fund. This is because the administrative costs of servicing the small account outweigh their returns on it. Hey, it’s business. Besides, there is a specialist market of “small factors” who will fund monthly amounts between $US2,000 – US$20,000. The author knows of some of them.

By contrast, other factors may not have monthly minimum values, but may have maximum monthly volumes, which can be increased on a case-by-case basis, or, syndicated between 2 or more factors.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Which Funding Source ?

Straight up, this author will only deal with funding sources affiliated to the American Cash Flow Association (ACFA). Several times, clients have “insisted” that the author should contact this or that funding source which a friend told them about and negotiate for them.

Forget it.

Secondly, the author is not in the business of playing one funding source off against the other, merely at the behest of the client. Within the ACFA group of funders, word gets around pretty quickly as to what’s going on. The client shouldn’t be surprised if the funding sources flatly refuse to play his game and dump the company’s applications.

The funding sources of ACFA are inherently flexible, more so than others and exponentially more so than banks. If a business is turned down, it’s not for a lack of interest, but a lack of “fit” or the due diligence didn't pan out.

So, what goes into choosing a factoring funding source? That’s the subject of this and the next posts.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Equipment Leasing Criteria 3

Once it’s clear that a business requires additional capital by way of Equipment Leasing, the funding source will require a list of the existing assets of the business to see if they are un-encumbered. If there are no un-encumbered assets, that pretty much kills the notion of Equipment Leasing.

Relevant assets (plus a Valuation Report) may include:

• Land
• Building
• Machinery
• Equipment
• Inventory
• Accounts receivables

Royalties, trademarks and goodwill are not included. This is because the funding source only considers those assets for which there is a ready market if the Borrower defaults.

Having evaluated the assets, a loan amount will be arrived at. Invariably, this is a percentage of the derived value of the assets

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Equipment Leasing Criteria 2

Equipment Leasing is an Asset Based Loan with the 3 fundamental characteristics of a loan:

• The use of the equipment as collateral for the loan;
• Defined payments to the funding source;
• The payments to be made over a specific period of time

Unlike Factoring, a debt is created and the funding source will look more closely at the Borrower’s financial position to determine cash flow strength for repayments. Specifically:

• List of assets and any encumbrances against each one
• Valuation report of the business assets – this must be higher than the loan amount, after taking into account any encumbrances.
• 2 years audited financial statements from the Borrower
• 2 years corporate tax returns
• Purpose of the loan
• Amount of the loan
• Likelihood of repayment
• Any recent contracts to verify increased business
• Bio on principals of the business
• Background and credit checks on them
• Additional data that will give the funding source a complete view of the borrower

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Factoring Denied 2

6. Invoice Cannot Be Verified or Verified In Time

• This is a problem in large organizations where there may be problems in tracking or approving invoices for payment in a timely manner

7. Contingencies, Offsets Or contracts Between The Client And The Customer

• These would cover indemnities, holdbacks, chargebacks, allowances or discounts. If they significantly reduce the amount of the future invoice or allow the customer put a stop to all payments, factoring will be denied.

8. Client’s Customers Are Not Creditworthy

• Remember that factoring companies always do credit checks on the Client’s customer. If there are no independent records of the customer’s payment history, factoring will be denied.

9. Potential Federal Tax Liens

• The Client has not paid payroll, excise or income taxes on time.
• There is an agreement with the IRS for late or deferred payment, but the IRS will not approve a subordination agreement with the Factor.

10. Lawyers And Accountants

• Those unfamiliar with Factoring may advise against it, since they still see it as a loan rather than the outright sale of the invoice at a discount.

These 10 deal killers will become apparent during the factoring company’s due diligence. Every factoring company will react differently to these 10 items, depending on their risk tolerance.

Source: Peter Pirri, Deal Killers: 10 Reasons That A Factoring Deal Dies In Compliance, American Cash Flow Journal, October 2002.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Factoring Denied 1

Factoring is certainly easier to obtain than bank loans. But not all deals will be funded, just like not all bank loans are approved. Business owners might be surprised and disappointed to find their factoring applications rejected, especially where there is an urgent need for the cash flow.

Below are 10 reasons why a factoring application might fail. The author acknowledges the article by Peter Pirri published in the American Cash Flow Journal October 2002, entitled, Deal Killers: 10 Reasons That A Factoring Deal Dies In Compliance.

1. An Incomplete Application – The main reason that funding fails.

• The client may be reluctant to disclose confidential information to the factor
• The client refuses to allow the factor to contact its customers to verify invoices during due diligence
• The invoices presented with the application are not properly prepared and cannot be relied on by the factor to obtain payment from the customer.

2. The Factor cannot obtain a first security interest in the Client’s Receivables

• A prior creditor e.g. a bank, another factor or an equipment leasing company has a prior interest There are existing federal or state tax liens
• Assets are pledged to an insurance company to obtain a performance bond.

3. Payment Terms On The Invoice Are Invalid Or Poorly Documented

• Terms of payment are greater than 60 days from the receipt of goods or services
• There is a dispute between the Client and the customer on the terms of payment
• Payment is contingent on payment from a third party that will be available at a later date
• Invoice does not comply with the Purchase Order and fails to show terms of payment, delivery method, product or service description.

4. Invoice Does Not Represent Fair Value For Goods Or Services Delivered

• The Client may be overbilling, or billing in advance
• Discrepancy between what was ordered and what was delivered

5. Payments Cannot Be Assigned

• The Client’s customer is unwilling to send current and future payments to the factor. This used to be a problem with municipalities and state governments, who were reluctant to deal with third parties. Changes in federal law have removed their ability to ignore a properly drafted Notice Of Assignment.

Source: Peter Pirri, Deal Killers: 10 Reasons That A Factoring Deal Dies In Compliance, American Cash Flow Journal, October 2002.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Factoring In A Strong Economy

By way of contrast to an earlier post entitled Recession & Factoring 20 March 2007, here’s an overview of how Factoring is just as relevant in a strong economy.

The obvious sign that the business is doing well, or that the economy is good, is that the business sells more product or services. Additional staff may be taken on and overheads such as rent and salaries are paid without the usual hand-wringing. Gross margins and profitability increase.

What is not so obvious is that inventories may be stretched and only just keeping up with customer demand. Just-in-time production may not be able to keep up with increased capacity as product demand soars. The ability and the need to have access to guaranteed quick capital is critical. It’s no accident that many businesses fail immediately after their biggest ever sales period.

In profitable times, a business will be eligible for bank loans, even though interest rates may be higher during these periods.

It is important to remember that Factoring remains relevant during a sustained economic upswing. Why? Factoring grows exponentially with the business – debt free. In other words, the greater the sales and the better the customers, the greater the amount of factoring funds potentially available. Traditional bank financing cannot offer this flexibility.

As mentioned previously in this blog, factoring companies offer credit checks on customers (because this is where the factoring risk lies). This is a Risk Management service to clients that banks do not offer.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved