Commercial Invoices & Factoring

Factoring is all about the funding source buying the commercial invoice. In other words, the funding source buys commercial paper.

A company seeking Factoring legally assigns the invoices to the Factor. Depending on the financing needs, the company may assign, from a specific date, all invoices as they arise or, it may simply choose to factor certain invoices over a set time period to get them over a cash flow hump.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

The Commercial Invoice

It's an essential document that evidences the sale of goods or services in a B2B transaction. Yet, it's often taken for granted and not properly scrutinized.

Since Factoring is all about the funding source (the Factor) buying the commercial invoice, herewith is a summary of the important features of an invoice in order for it to qualify for Factoring:

1. Value Of The Invoice - This must be clear and unambiguous. Rarely is there any problem in determining how much the debtor owes to the vendor.

The invoice will usually itemize the quantity of the product of length of time the services were provided. This will be done by a unit price and a total price for the product or service delivery.

2. Payment Terms - The invoice must have the payment terms clearly stated on its face. To be factorable, the invoice must be payable in full and must be in respect of a completed supply of goods or services.

The Factor has to be pretty sure that the debtor will pay within that time frame. Otherwise, factoring fees and discount rates may be affected. The longer the debtor takes to pay, the greater the risk of default - and the greater the risk to the Factor buying that invoice.

3. Verification - The invoice will have the name and contact details of the debtor required to pay it. When it is submitted to the Factor for funding, the Factor will always verify the authenticity of the invoice to confirm that the debtor will no make any set-off, charge-back or adjustments to the invoice amount.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

PO Funding And Factoring

When the manufactured product that is the subject of PO Funding is delivered to the ultimate buyer, the Invoice that is generated will be subjected to Factoring. The PO financing charges will be deducted at this point.

If the sale is COD, the ultimate buyer will pay the PO funder, who will first deduct the PO Funding fees, before remitting the balance to the company.

PO Funding is more expensive than Factoring. Companies are advised to consider it after they have factored, or borrowed on their Receivables and still require additional funding to complete existing Purchase Orders.

Cashwerks www.cashwerks.com is a Commercial Finance Consultancy providing intelligent capital solutions to start ups and mid-sized companies.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Levels Of Purchase Order Funding

There are 3 levels of PO Funding depending on how closely the company is involved in the manufacture of the goods.

1. The company is not directly involved and has a domestic or foreign supplier manufacture a finished product. The supplier will not start production or will not release the goods until they receive cash payment or, a Letter Of credit is issued to assure payment.

The PO funder will determine that the finished product matches the specifications of the PO and is shipped to the ultimate buyer within the contractually stipulated time.

The good news is that since the finished product will move directly from the producing supplier to the ultimate buyer, the financial condition of the company applying for PO Funding is not as critical. This is the easiest type of PO to be funded.

2. Most of the product is produced by an outside supplier and the partly completed product then moves to the company's facilities for final assembly or packaging. PO Funding may be possible, but the company's financial strength becomes more relevant.

3. The company fully manufactures the product itself. PO Funding will only be provided if the company is financially strong and has a good track record.

Companies that fall into this category already have traditional bank financing, but may have fully drawn down on their credit facility. These companies need further financing due to a sudden increase in new orders.

Cashwerks www.cashwerks.com is a Commercial Finance Consultancy providing intelligent capital solutions to start ups and mid-sized companies.
© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Purchase Order Funding 101

A company may have Purchase Orders by which it is to supply GOODS to another business. However, the company does not have enough liquid capital to begin manufacturing the goods. In this case, the company might use PO Funding. Note that PO Funding is only available for a manufactured product. It is NOT available for the supply of services.

PO Funding is short term funding. The company submits the PO and a manufacturing costs breakdown to the funding source. The funder will advance a portion of these costs to the company (or to the company's supplier of the manufactured product).

When the goods are delivered to the company's ultimate buyer, an Invoice is generated. This Invoice will immediately be subjected to Factoring. The funding source of the PO is repaid the advance plus his fee by the funding source who factors the Invoice.

PO Funding is regarded as high risk since the goods have not been manufactured - or are only partially complete. Factoring is always involved in PO Funding. The entire transaction of PO Funding and Factoring can be done by a single funding source, or can be split between a PO funder and a Factor.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

10 Reasons Why Businesses Fail

Timeless advice. The source of this posting is acknowledged below.

1. Undercapitalization
Too many SMEs underestimate how much money is needed at start-up and during a potentially lengthy transition as the business attempts to make it to commercial viability. By starting out undercapitalized, a business may never have enough to catch up.

2. Poor Cash Flow
Intermittent or poorly managed cash flow fails to meet recurring and capital expenses. The business develops a “cash flow burn rate that is not met by income.

3. Lousy Planning
Lack of a comprehensive business plan that covers all the bases.

4. No Competitive Edge
Lack of clearly identifiable niche and a failure to identify at least 1 element that sets the business apart from its competitors. Becomes a facsimile of ever other business in that field.

5. Lousy Marketing
Poor and non-unique marketing

6. Delayed Flexibility
The ability to correct on-the-fly is crucial to SME’s success.

7. Incomplete Customer Service
Not just the obvious, but the stuff that goes beyond the ordinary.

8. Lack Of Specialist Help
Refusing to talk to Accountants, Lawyers, Tax Advisors who specialize in SMEs.

9. Disconnect Between Founders And Staff
Failure to share the vision, failure of staff to buy into it, inadequate staff training, lousy staff compensation, self-indulgent executives.

10. Poor Scaleability And Uncontrolled Growth
Many SMEs that succeed too early, fail early too. Further, SMEs may have their highest sales volume just before they fail. Production systems must keep up with demand and there must be sufficient cash for expansion. Expansion must be tracked and controlled.

The above posting is taken from an article entitled “10 Reasons Why Businesses Fail” published in the American Cash Flow Journal, December 2002.

www.cashwerks.com

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Cash Flow And The Quick Fix

Often, companies approached Cashwerks looking for an instant solution to their cash flow problems. The Directors proclaimed their own solution and demanded the Quick Fix. They were reluctant to talk about the company’s business, its future growth, the effectiveness of the funding or even the cost of the funding.

Fixated on their solution to a perceived problem, they turned defensive when told the Due Diligence requirements of the funding source.

Predictably, these deals failed and the encounter was somewhat childish. There was no solution to a multi-layered problem and if there was, it was probably wrong or deficient.

Months later, Cashwerks would be contacted again by the same company. This time, there was panic in the Directors’ voices. The company was going under, the banks had turned hostile. The company was now ready to listen.

After the deal had gone through, the Directors quietly admitted they should have listened and acted months earlier.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Sanjeev Aaron Williams

Sanjeev Aaron Williams is a Lawyer. He’s also a Commercial Finance Consultant affiliated with the American Cash Flow Association. Sanjeev has an extensive network of reputable private funding sources in North America. His corporate website is at www.cashwerks.com

Cashwerks niche is Factoring new and mid-sized companies in North America. So why this blog?

First, the various issues in Factoring were better dealt with in a blog rather than swamping the Cashwerks website.

Second, a Factoring deal sometimes involved Commercial Finance issues which the client wanted to discuss with Sanjeev and his funding sources.

Third, the client needed specific Commercial Financing and wanted Sanjeev's funding sources to handle it.

The blog gives start-ups and mid-sized businesses a context in which to consider financing options. These Commercial Finance solutions can be used jointly or independently.

The blog covers the following Commercial Finance topics:

Accounts Receivables Funding (Factoring)
Purchase Order Funding
Letter Of Credit Funding
Asset Based Lending
Equipment Leasing
Venture Capital

Comments can be made to Sanjeev Aaron Williams via the Cashwerks website www.cashwerks.com or directly on the blog. Copyright to this blog vests in Sanjeev Aaron Williams and Cashwerks.

Dated the October Full Moon 2006

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved