The Factor Guru

Tips on accounts receivable financing and business practices.

Archive for category Sales and Marketing

Choosing a Factor: Just Ask Why

Sep 11

Posted by Gen Merritt in Books to Read, Sales and Marketing | No Comments

Do you ever get tired of the “…it’s too competitive out there” story? What about, “…rates are declining and it is too hard to compete?”

I read about it and hear about it, at least from those who honestly express what they are experiencing. However, is the answer really to lower the rate and offer more than you should, more than makes sense, and ‘win’ a deal putting the ‘win’ over the structure? Is this the market in which we live? Is this a market in which we can succeed?

I suppose that you can operate this way and market this way. However, many factors would thank you for this in the long run, since this mentality would be short term and eventually short lived, in the scheme of things.

The more important issue, however, is not what we give up or how low the factoring rate could be. It should not be about price and funding ‘air’ to make a deal work.

After all, at the end of the day, factors sell the same thing: money.

We make it pretty with software and perceived benefits that we all share, such as same day funding and other marketing type benefits. But, what makes each of us different? Isn’t that really why a client chooses one factor over another?

Yes, there are those clients who really do only care about rate. Those are the clients that more than likely will not become long term clients or long term referral sources. Factors still want to work with them though. Why not? It is still a closed ‘deal’ and a client.

But, for most people, what makes a factor different is not ‘what’ they sell but ‘who’ they are. Maybe it is their personal relationship, word of mouth, someone they know who provided a recommendation, or something else. Maybe, it is something even more though. Maybe it is that they believe the factor they choose is working for them and the success of their business. At least, this is my opinion.

With that said, many companies make buying decisions based on ‘who’ they work with and not ‘what’ they sell. Business owners often choose vendors, computers, stores, banks, and yes, even factors, based on the purchaser’s (or business owner’s) belief system. Therefore, those same business owners readily align with a factor that also aligns with their beliefs. Don’t take my word for it though. Look at those such as Simon Sinek (click on the link). People often make buying decisions based on the ‘why’ and not the ‘what’ or ‘how’.

So, to keep this short, what is your why? What makes you different? Is it a niche? It is your people? Or, is it just your price?

Whatever it may be, does everyone in your company know? Do they believe in that same philosophy? Do they live that culture and that belief? And, more importantly, it is not if you can sell your benefits and features, it is if someone wants to buy into them? Discover your why.

Wishing you success. The Factor Guru.

 

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Now is the Time for Factors to Hammer and ‘Wire Up’ Construction Deals a guest blog by Earl Harper of RMP Capital Corporation

Jan 11

Posted by Danny Frank in Sales and Marketing | Comments off

At this stage in our economic recovery, very few factors and almost no banks provide working capital funding for construction companies. For contractors operating primarily in the public works sector, where there is somewhat more stability and somewhat less account-debtor risk, banks are still very reluctant to finance contractors and subs.

Factors will find that there is ample opportunity to work with contractors engaged in public works construction, considering that there are nearly 400 major “shovel-ready” projects where designs are complete and a combination of Federal/state funding is in the pipeline.  Expectations have been greatly elevated because the President has made high profile policy speeches about “putting construction and building trade people back to work”.  He even identifies independent contractors and subs, a number of them family-owned small enterprises, for the public works opportunities.

Factors on the firing line of finance know that the President has been creating a serious disconnect because many of the contractors and subs in question lack working capital. Their financial capacity is weak or non-existent, their credit scores are problematic due to the challenges they confront during this current economic downturn, and their financial statements are distressed. (The most recent government regulations, like Dodd-Frank, make it prohibitively difficult for banks to put loans to these business owners on their books!) Furthermore, for the same reasons this contractor is not able to qualify for the surety bonds required to participate in most publicly funded projects.

(I get questioned: “Where is the evidence to back up my assertion?”  No bank will confess that they are unwilling to finance these contractors and subs.  Typically, they go through an application exercise with these prospective customers to act politically correct.  This is today’s  “HIV of financing” where everyone is afraid to confront it because of stigma and embarrassment.)

Factors which have typically rejected opportunities for deals in public works construction should now examine the potential, especially when they can partner up with another factor which already has the technical knowledge and invested capabilities to monitor such a project and handle disbursements through a funds control program.

For a glimpse at the contractor’s capacity, a comprehensive examination of budgets, estimates, and costs should be conducted by the factor to determine that the contractor can handle the project’s terms to completion.

The factor must confirm the ability of the contractor to pass through significant increases in the cost of materials sold or manage escalation clauses.  The factor’s receivable is diminished in value if the contractor is unable to satisfy their responsibilities under the contract for whatever reason.

Establishing the size of a factoring facility created for a contractor is a key ingredient in this program. The factor will set the bar on the credit line extended to their contractor client.  It should be more than the maximum amount the contractor anticipates having outstanding at any given time in a six-to-eight week period, depending on the average turn time of their receivables.  It should take into account the line limits for projects which are anticipated will fall under the line extended or the anticipated approved projects.

Knowing the contract’s payment terms, how invoicing will be executed, the payment schedule of the owner or General Contractor (GC) and the amount which the contractor is contractually able to progressively invoice at each step in the process will determine the line limit.  It is also important that the factor checks for change orders in the contract.  Typically, factors who specialize in working with construction contractors will only allow invoices for change orders that are approved by the owner and/or GC to be included for factoring.

After this start-up work, the factor must implement proper financial and performance monitoring via disbursement procedures set up for each project.  The review inherent with the disbursement system will organize the project over its time-span to ensure compliance with the contract and the schedule of values.  Most contractors do not have in-house depth when it comes to financial or project administration.  Normally, these abilities require significant investment in staff and software, which can eat up a lot of time and expense.

Factors specializing in working with construction contractors realize that their advancing of funds to a contractor based on the purchase of a progressively billed project receivable falls within the trust laws of the state requiring those funds to pay project expenses before they can be used for any other expenses.  These laws are designed to prevent funds from Project A paying expenses associated with Project B or general overhead.

If the re-directed funds deny the rightful recipients of those funds, (i.e.: subs and suppliers) a lien could be placed on the project.  The factor is then unable to collect on the receivable until the lien holder’s claim is satisfied. Thus the requirement for a funds control program for the disbursing of project advances and proceeds.  This process not only lowers the risk associated with construction factoring, it also saves the contractor money that comes with the overhead expenses.  It brings meaningful experience to the transaction which may be able to help minor capacity issues.

To give a construction executive a sense of funds disbursement by factors:

—payroll must only be issued for hours, days, or units of work completed on the project for which invoices are being factored.

—checks are written by the disbursing agent from a segregated account in the name of the contractor for payroll, benefits, subs, suppliers, and taxes (including 940/941, Social Security, FICA, Worker’s Compensation, and related withholdings).

—job specific overhead and expenses such as equipment, materials, and project overhead personnel must be allocated and tracked against the schedule of values and project budget.

With the Miller Act (and similar laws in different states), most public works projects must have bonding from a Treasury Listed surety, rated by A.M. Best.  While the involvement of a surety implies their first position on the project receivables, the factor who performs good funds control, should not have any problem with this perfection.  The factor has already paid the statutory lien holders on the project.  The factor is therefore, perfecting the payment side of the bond which complements the surety’s agenda.

On the other hand, if contractors (because they lack the working capital) are unable to qualify for the required bonding—the factor may be able to help the contractor by providing the working capital so that they can become bonded, resulting in a win-win circumstance for all parties.  The contractor is capitalized and bonded, the surety is relieved that the factor is providing working capital and funds disbursement and the factor is pleased to get their money “working on the street” with limited credit risk.

Granted, this underwriting process often requires more time and effort than the typical deal which the factor is used to putting on their books.  However, if this is executed correctly, especially given the latest abundance of opportunity and enormous need right now—the factor can see substantial profits.

With the current administration’s commitment here, the factors should consider the excellent revenue potential in the role of a catalyst.   Factors should reach out to pro-actively educate contractors about how they can gain access to capital through non-traditional means and the growing acceptance of these forms of financing throughout the public works construction sector.

By Earl Harper, Senior Vice President, RMP Capital Corporation (WWW.RMPCAPITAL.COM), a ten-year old national factor focused on public works construction, with headquarters in Islandia, New York, with additional offices in Massachusetts, Texas and South Dakota.

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FAQs about the National Factoring Group

Apr 10

Posted by admin in Sales and Marketing | Comments off

Recently, I have had a few people ask me about a new group and their website: the National Factoring Group (“NFG”). In response, I thought it would be better to have someone from NFG discuss their business and answer some frequently asked questions. Brandi Bauer, one of the Founding Members, has agreed to answer some of these questions for us:

What is NFG?

For the past six months, we have been working on expanding our brokerage business, the Business Group of Brokers. We established The National Factoring Group as a separate entity and factoring brokerage website, designed to combine servicing the financial needs of the small and medium sized business owner with the exposure that the internet brings.

We wanted to present our collective prospective clients options that would make it easier to find you, the factoring company. We looked at factoring companies across the country and thought, “How can we present this information to the prospective client in the most organized and concise way, while still maintaining equality amongst these factoring companies?”

The website groups factors by the state (or states) in which direct representation exists, either by an operations’ center or business development office. To maintain an equal playing field, each factor then describes their range of services, niche features, and what makes them different. We believe that this strategy helps equalize local and national factoring companies amidst a competitive marketplace.

Through the website, business owners can educate themselves on factoring and determine which factoring company best meets their needs. The prospective client enters specific financing needs, industry information, and other data to help target an appropriate funder. Based on the preselected parameters by both the business owner and the factoring company, a set of matches are created.

What input does NFG have into choosing which factoring companies are sent information?

The National Factoring Group has no input into which factoring companies are chosen and does not see any client information until they are sent to the factor.  These emails occur simultaneously to the factor and to NFG.

Each factoring company is represented by certain aspects of their company such as their industries serviced, size range, and the way they describe their company.  Descriptions provided range from very simply saying, “Here is what I do…” to more in depth descriptions with a brief history of their company and why their clients stay their clients.

What makes NFG different than other brokerage businesses or websites?

The National Factoring Group strategy allows the prospective companies to decide. By inputting information about their business, their search results produce only factoring companies where a match would exist (i.e., size, demographics, other niche financing, etc). This process saves the company time in their search for financing.

More importantly, however, is that a portion of all commissions earned through NFG will go back into the factoring industry through advertising, articles, or other announcements that promote factoring for small and mid-size businesses.

Does the NFG select where to spend those funds?

Actually, no. We have set up an advisory board including factoring companies and other factoring professionals. These advisors will help to provide guidance on where these monies should be spent.

I often have people ask me if this is a website that is used to rate factoring companies in any way.

No, we do not rate the factoring companies. Every factor stands and is represented purely on what services they provide and how they choose to describe themselves. We do, however, have a code of conduct that requires all factoring companies to be honest in how they represent themselves to prospective clients.

Do factoring companies need to provide any information to NFG?

Yes.  Each factoring company provides an application or information package. This basic information focuses on their company, preferred industries, targeted size ranges, and other items. No reporting or confidential information is requested.

This application process is to ensure that the factoring company is represented appropriately to the businesses seeking factoring services. For an application, you can email me at brandi@nationalfactoringgroup.com.

What does a prospective company seeking factoring need to do?

The process for prospective clients is very simple. They provide general information about their company and their needs and select a local or national resource option. From there, they are presented with a matched list of factors that fit their company’s needs. The company can then read through some general information and select up to three factors that they would like to hear from directly. To complete their request, the company then completes more detailed information and the lead is then sent to the factoring company contacts listed.

In summary, it is also important to note that the funding transactions and relationships are directly between the factors and the clients. The role of the NFG is as a brokerage arrangement. For additional information on NFG, please contact Brandi Bauer at brandi@nationalfactoringgroup.com.

Wishing you continued success. The Factor Guru.

 

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DON’T REJECT CONSTRUCTION FACTORING OPPORTUNITIES… a guest blog by Earl Harper

Oct 21

Posted by Gen Merritt in Sales and Marketing | Comments off

The unprecedented level of public works construction projects planned and currently underway throughout the U.S. means abundant opportunities for contractors and subs, many of whom are transitioning from purely commercial projects to the public sector for the first time and most of whom are undercapitalized. For most factors and asset-based lenders, factoring construction receivables is an anathema that they do not touch but this market provides promise that they should not pass up and there are several factors which have had a demonstrated success in transacting these deals.  So factors should think twice before they discard these income prospects or, at least, referrals should be made to factors specializing in construction deals to promote business relationships.  In all likelihood there are referral fees, participation opportunities and/or commissions to be made by the referring factor or broker.  And the recipient factor, in all likelihood, will return the favor with future business.

Most factors avoid construction because of the high risk in handling these invoices.  To make significant money the factor really has to be properly set up to address this niche.  In the case of our portfolio, we add one primary eligibility safety net by only entertaining public works construction projects.

How does a factor who does not specialize in this niche know that a colleague has the capacity for public works construction?  Question them about the following capabilities:

—Does this factor engage in “progress billing”?  Can they handle invoices covering a percentage of the completed project which are part of a larger contract (different from spot factoring where each individual invoice closes out)?

—Will this factor take on “bonded contracts”? Will they factor receivables even though it is implied that the surety is in first position?

—Does this factor have a “disbursement program” with funds control, so that advances are only used to pay costs on that specific job?  Through this program the factor provides a high level of assurance to project owners, General Contractors, etc. that funds advanced go only to that job before any other contractor expenses get paid.

—Can this factor undertake initial plan reviews, evaluating the project and the bid of the contractor to make sure that the contractor has the ability to perform the work estimated with their available labor using the specified materials required in accordance with the pricing quoted, in the time frame provided?

The 6-C’s of credit (Character, Capacity, Capital, Collateral, Conditions, and Controls) are the key for factors to analyze contractors and subs seeking working capital and cash flow.  It is critical for both the contractor and the factor to fully understand their transaction.

To pre-qualify a prospective contractor or sub, company ownership, structure, existing lending relationships, current accounts payable and accounts receivable aging summary are evaluated. Also reviewed is the current and previous year’s financial statement including balance sheet and income statement. We look for a candidate who does not have liens and judgments that can get between the factor and the receivable.  We look for a record of past profitability and whether margins exist to be able to afford our form of capitalization.  At this point of the discussion, a demonstration to the contractor of how our capitalization increases their ability to be profitable and benefit from procurement discounts is important in selling a deal of this nature.

Additionally, the prospect should have at least one or two years of experience in the type of construction they are working on and have a personal credit score of 550-600 or higher. A lower credit score does not always prohibit the factor from proceeding, though. The factor must determine why the contractor suffers from weak credit and determine if there are actions that can be taken through the factoring of their receivables that can result in the contractor becoming credit-worthy without increasing the risk to the factor.

Because most banks continue to be unwilling to lend working capital to contractors, the current need in this space is extraordinary.  Factors should not dismiss these opportunities for income-producing deals in the building trades and general construction which are ready-to-go.

About the author. Earl Harper is a Senior Vice President with RMP Capital Corporation, a national factor specializing in public works construction based in Islandia, New York.  Mr. Harper has more than 15-years of experience with the management of contractor financing and employee benefit program administration.  Mr. Harper’s specialty at RMP Capital is servicing the needs and businesses of their client contractors, from bringing in new contractors, to giving extensive coverage and care to their existing clients. Prior to his success in the financial world, Mr. Harper spent over 24-years as a military officer retiring from the Army as a Colonel.  Mr. Harper is also a graduate of the US Army War College and has a bachelor’s degree from Iowa Wesleyan College. To find out more about Earl Harper or RMP Capital, visit their website at www.RMPCapital.com.

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Cross Border Financing. A guest blog by Elizabeth Hastings.

Sep 22

Posted by admin in Sales and Marketing | 1 Comment

Recently, I have received questions on what foreign receivables financing can provide, the differences between factoring and forfaiting, and other international financing option questions. To answer these, Elizabeth Hastings with FGI Finance has provided an article that may help delineate some of these differences…

While working with customers in foreign jurisdictions can generate substantial rewards, such trade also comes with great complexities that are uncommon in domestic transactions.  One must consider foreign credit, political, currency, extended payment term and legal enforcement risks before engaging in business abroad.  Despite the aforementioned challenges, the number one difficulty in cross border transactions is finding a lender who understands these risks, yet is still willing to provide the working capital needed to fund foreign transactions.  Cross border financing is often the key factor in growing or turning around an international business.

What are some of the common solutions for financing cross border transactions?

US banks often exclude international sales from the available borrowing base unless the client obtains credit insurance or working capital guaranty through the Export-Import Bank of the United States (Ex-Im) or through private insurance providers.  While each seems a viable option, each carries its own restrictions.  Although Ex-Im is designed to promote trade between the US and foreign countries, it has certain exclusions including, but not limited to, the suppliers’ locations and the buyers’ countries.  Another issue to consider with Ex-Im is the extensive underwriting process that may take months to obtain approval for a transaction.

Private credit insurance also has its downfalls.  Insurance providers help exporters extend competitive payment terms by protecting their foreign receivables against almost all non-payment risks.  Almost is the operative word here, as it is limited to political and insolvency risks.  It is important to remember that an insurance company can decline or reduce coverage at any time.

Both insurance options can prove costly and time consuming. Also important to note, is that if the insurance policy is cancelled, subsequently the loan will be as well, leaving nothing to show for the time and hard work obtaining this loan in the first place.

What are some of the most effective solutions for cross border financing?

Confirming, Forfaiting and Factoring are the most effective solutions for cross border financing.

Confirming is a financial service in which an independent financial entity offers to discount an export order in the seller’s country and makes payment for the goods.  For the exporter, confirming means that the entire export transaction from the manufacturing to the delivery stage is coordinated and paid for over time by the bank.  This type of financing is available in Europe, mainly in Spain, and has yet to be adopted in the US.

Forfaiting is the selling of long term promissory notes or negotiable instruments of the foreign buyer.  These instruments may also need to carry the guarantee of a foreign government or a highly rated bank.  Forfaiting is often used in medium and long term transactions and is normally very paperwork-intensive.

Factoring, another popular solution for cross border financing, is the discounting of a foreign account receivable and is used in short term financing.  In the factoring of foreign accounts receivable, the exporter sells its foreign accounts receivable to a factoring company for cash at a discount from the face value.  Factoring of foreign accounts receivables is less frequently used than factoring of domestic receivables.

Factoring of foreign accounts receivables is complex and only a few banks and firms have the knowledge to work with such complex asset classes. Factoring of foreign receivables requires extensive knowledge with foreign laws, advanced understanding of previously highlighted risks and building an effective platform to manage it all.

As the world opens its borders through the use of Internet, financing solutions for open trade continue to evolve.  My advice is to always seek a lender that is knowledgeable in foreign transactions and who can take your business to the next level.  Seek a lender who has experience in foreign markets, in all of its complexities and one who is willing to partner with you to achieve your goals while mitigating risks.

About the Author: Elizabeth L. Hastings is a Senior Vice President of Business Development at FGI Finance (www.fgifinance.com), global commercial finance group with offices in New York, Dallas, Chicago, and Los Angeles. Ms. Hastings sits on the board of the Dallas CFA.  She is a member of ACG, TMA, WFE, the Finance Forum, and the International Factoring Association. She can be reached at the Dallas office at 214.295.3216 or ehastings@fgifinance.com.

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Why We Do What We Do ~ a guest blog by Brandon Bauer

Sep 8

Posted by admin in Sales and Marketing | Comments off

Finally, after a year, I have a story to share with all of you.  I have worked in the factoring industry for over a decade and have loved almost every minute of it.  I could have done with fewer workouts or without the heartbreak that comes with those companies that did not survive.  Fortunately, there are many more good memories than bad.  For my money, nothing makes me feel better than knowing you helped a business make payroll, keep their doors open, and retain their valuable employees.  Like many of you, this is why I don’t mind getting up a little earlier in the morning, or working later into the evening.

In April, after being a factor all of these years, I set out to start a brokerage company.  This experience has given me a different perspective, as now I am helping businesses in various areas of financing while also working more closely with companies that were once my competitors.  This new perspective also has reaffirmed what I already knew: factors are definitely doing business and helping our economy.

The economy has, however, changed. Sadly, not all small and mid-sized companies have changed quickly enough to save their businesses.  These small to medium sized businesses and start ups are what will help rebuild our economy.  For many of them, factoring is the best way, or the only way, for them to maintain their cash flow.  Since there are a variety of factoring companies within different markets, industries, niches, size ranges, etc., I can now introduce my clients to the factor that best suits their needs and their situation, thereby being able to say ‘Yes’ a lot more. Being able to say ‘Yes’ allows me to make a greater impact in the small and mid-sized market.

After all, factoring is the lifeblood of many of these small and medium sized businesses; it enables these companies to grow and saves many businesses that have been hit hard by the economy.  With factoring, business owners and their businesses are also able to purchase more inventories, accept more orders and jobs, pay vendors on time, and hire new employees.  This trickles down allowing their vendors to do the same.  By helping one company, we are helping many. We are all helping to rebuild the economy.

During these past months, I have rediscovered the joy of factoring.  Recently, I was able to help a company that was struggling to find a way to make payroll at the end of the week.  With the funding provided through a factoring facility, twelve families did not have to worry about how they were going to put food on the table.  Our client was so happy, he cried. To me, that is worth all the early mornings and late nights.

While I don’t know if this is the nature of what my article was supposed to be, I felt it was important to share these thoughts and to say to all the factors and their dedicated teams, “Keep up the good work.”  You have a direct impact on the people and companies with which you interact. You are doing more good than some may realize. Thank you.

The Business Group of Brokers, LLC was created to provide a multitude of alternative financing options, utilizing the strengths of different finance companies to make sure clients find the best financial match for their specific needs. Businesses benefit from expertise and years of experience in helping them find the working capital needed to grow and expand their company.  Since every finance company and their clients are unique, The Business Group of Brokers strives for complete satisfaction on both sides of the transaction and plays an intricate role in creating a good match for the financier as well as for the company. To find out more, visit www.mybgb.com.

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Keeping Your Old Friends

Aug 31

Posted by Gen Merritt in Sales and Marketing | 2 Comments

We all have a tendency to focus on new business. Did you see that commercial from Ally Bank? A friend of mine sent me this commercial. It got me thinking… Sometimes, it is more about the customers you already have… the ones who have stayed with you, appreciated the benefits your products provide them and their business, the ones who have chosen you over others: your old friends.

Maintaining strong client customer service speaks volumes! It says your clients can rely on you for their funding needs. It says your clients know they would rather be with you than another competing financing source. It says your clients stay with you because you are their right choice, the one they count on to operate their business. You provide the right service while solving their working capital needs. Again, they chose you and have stayed with you.

So, how do you ensure strong client retention?

You are candid. You ensure the reporting you provide is accurate and transparent. Clients can see everything online or you will provide the information. There are no hidden fees, untimely reports, or slow responses.

You are honest. Clients know where they stand and they understand the rules for funding.

You are reliable. Clients do not have to worry about their funding needs. They know they can rely on the stability of your company to meet their working capital challenges and daily operating cash flow needs.

You are available. Clients can call or email you and know they will see results promptly.

These are just a few of the concerns your clients may encounter when working with a financing company. Overall, communication is a key factor in retaining customers. Most of the time, fees are not the reason a client chooses a competing factor. It is not always about the price, even when they tell you it is.

But, it is critical to them to feel and know they can count on you, their funding source, to provide information and service so they can run their company efficiently. Remember, your clients have a company to run… they do not need to worry about their financing source on top of that.

Why is that important? In the long run, most factoring companies obtain new deals because of their existing clients, by providing referrals and recommendations. These relationships with already existing long standing clients can indicate the service, reliability, and even stability of a factor. And, your clients are a reflection of you as their factor.

What is that saying we always hear? You are who you associate with… Your old friends reflect who you are… they prove your history… they are the evidence of why you exist with the reputation you have. Ultimately, they have been with you and they want and choose to stay with you, no one else.

Focusing on your customer service is and continues to be an important element of what we do as factors. Client retention is essential, especially in the competitive markets in which we exist. Understanding your old friends and them understanding you and your business can be the key.

Wishing you continued success. The Factor Guru.

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Purchase Order Financing a guest blog by Richard Eitelberg

Nov 21

Posted by admin in Sales and Marketing | No Comments

WHY PURCHASE ORDER FINANCING AND LETTERS OF CREDIT HAVE BECOME SAINTS AMIDST THE EVILS OF “THE GREAT RECESSION”

BY RICHARD EITELBERG, CPA, FOUNDER-PRESIDENT OF HARTSKO FINANCIAL SERVICES, LLC, A SEVEN-YEAR-OLD PURCHASE ORDER FINANCE FIRM WHICH HANDLES ABOUT $150M IN ANNUAL TRANSACTIONS, BASED IN BAYSIDE, NEW YORK (WWW.HARTSKO.COM)

e9dc31192f4c8656“The Great Recession” has left a lot of asset-based lenders and factors weak and lame.  Their inability during this period to access credit lines from banks, hedge funds, and equity investors often means they must restrict money to existing customers or refuse prospective clients.

Purchase Order Financing and Letters Of Credit generally looked upon as a last-resort bitter pill have seen increased acceptance as a way for a business owner to preserve a transaction opportunity.  With up front honesty, PF is expensive because of the very high risk issues involved and the intensive servicing requirements.  However, if a deal has the potential to yield a 30% profit or more—why should the business owner be concerned about sacrificing a few more percentage points over and above a traditional lender?  Is losing the opportunity to do the deal altogether, a better alternative?

Factors and asset-based lenders should realize that if they are at the end of their line with their client, referring the PF route can keep their relationship and income opportunity alive.  PF is a fast way for their client to secure funds needed to fulfill customer purchase orders and expand their business without giving up equity or trying to borrow additional funds (an option which no longer exists).

Here’s the process:

1.   The customer submits a purchase order to the client with all documents

2.   The client submits the customer purchase order to the PO financier for approval with all costs associated with transactions

3.   The PO financier will then will make direct payments to the client’s vendors so that the merchandise for the customer PO can be produced

4.   The client’s vendors deliver final product directly to the end customer or to a third party warehouse until shipped to end customer

5.   The seller then invoices the shipment and sends invoice and corresponding copy of customer PO to the factor

6.   The factor funds the invoice at his discount, paying the PO financier their loan plus fee

7.   The factor (or bank) collects from the end customer and pays the client their residual left from the advance

PF is taking a piece of equity in a client’s deal on a temporary basis, perhaps, thirty, sixty, ninety days, or 120 days.  A PF firm earns a fee on a precise part of the deal.  The PF firm doesn’t really “lend” a business money.  Most times, PF firms do not actually give a business any money or hard cash.  The PF firm’s money and equity backs up and supports the integrity of said purchase order.  It makes transactions work by opening up an LC usually overseas to procure merchandise, products, and materials for businesses.  (Or, wires are sent to domestic manufacturers to make purchases in behalf of businesses.)

PF is only transactional and temporary with the money going to fund the goods or merchandise in that specific transaction.  PF funds are not allocated to fund payroll, rents, cars, or any other business operations. Therefore, PF enables start-up companies to grow and troubled companies to survive.  Even bankrupt companies are generally able to access PF because the fees are guaranteed by the court.

Finally, in terms of the relationship, PF firms are not offended that a business owner may use this process one day, while returning to the factor or traditional lender the next day.  The PF community recognizes that PF is only going to be used when it is absolutely necessary and all other lender options have been exhausted.  The PF firm accepts that business owners and their lenders will only use it when they need it!

For more information on purchase order financing, feel free to visit www.Hartsko.com, or contact the IFA directly.

More about the author.

IMG_1009Richard Eitelberg is the Founder, President of Hartsko Financial Services, LLC., with offices in Bayside, New York and Deerfield, Illinois.  Mr. Eitelberg, was graduated from Michigan State University with a BA in Accounting.  He earned his license in certified public accounting (New York State).

Mr. Eitelberg has been the Chief Financial Officer for two garment industry companies: Adrian Landau Designs, and B. Lucid.  He was a Senior Auditor for Josephson, Luxemborg & Kantz, CPA’s, PC. He began Hartsko about seven years ago, assembling a group of private equity investors.  Today, Hartsko handles purchase order financing and letters of credit with some $150m in annual outstandings. (www.hartsko.com)

Mr. Eitelberg, a resident of Plainview, New York is a member of the Commercial Finance Association, the International Factoring Association (preferred vendor) and the Turnaround Management Association.

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No Horror Stories Here… a guest blog by Darla Auchinachie

Sep 12

Posted by Darla in Sales and Marketing | Comments off

halloweenAs the aisles in the retail stores remind me, Halloween is just around the corner.  I just received an invite to a friend’s annual costume party in Phoenix – this year the theme is Mel Brook’s movies; it will be fun to decide what to wear to that!  To be honest, Halloween isn’t my favorite hallmark holiday – you see my birthday is in October – and throughout my childhood my mother thought it was “cute” to have a witch, ghost, goblin themed or (insert wacky Halloween reference here) themed birthday party for me.  What if I didn’t care for spiders or skeletons?  Well, it just didn’t matter – moms will be moms… enough said. Even though October is generally the “scariest” month of the year with haunted houses and jack-o-lanterns dotting the landscape, I’m in the mood to shine a good light on factoring…

This has been an amazing year so far for factors. I say amazing, but I could probably come up with dozens of adjectives and each would be fitting.  Words like challenging, tough, and busy come to mind too.  This year is different though; I have observed something markedly different than in all my history in this business, which is the huge amount of exposure our industry has enjoyed.  Never before has the word “factoring” appeared so many times in news searches on the internet.  Sometimes the stories are good, you know the ones where factoring is seen as a positive form of finance – other times the stories aren’t so great, like fraud occurring either within a factor’s portfolio or those rogue entities that raise money ostensibly for the purpose of purchasing receivables to only use the funds for anything but factoring.  CIT’s troubles alone have brought factoring into the limelight.  While I truly wish the best for that company and who knows how that will all end up, I suppose I am grateful that more and more of the population has heard of factoring just from reading about CIT in the news.

I have the pleasure of working with multiple factoring companies on a variety of projects – and in so doing have gained a very unique perspective on the state of the industry today – guess what, there are many new deals being booked daily all over the place!  Those factors who have strong underwriting and portfolio management standards as well as their own capital and access to liquidity are finally able to grow their client base simply because other forms of finance are not available.  On the other hand, there are factoring companies who struggle with access to liquidity and declining sales volumes because their client’s sales have decreased.  There are also start up factoring companies opening all over the country as they see factoring as a good business to be in – as long as those folks are seeking out education and assistance and respect established standards, they should be able to do well.  Unless every single factor I’ve been talking to is fibbing, they’ve all been busy putting on new deals – and don’t see their pipeline dwindling any time soon.  Nope, no horror stories here.

A factoring company (just like any other business) wants to make a profit at the end of the day.  This is no easy task when you consider the amount of overhead it takes to run a factoring operation.  Salaries, Credit Expense, Cost of Funds, Rent, Due Diligence Expense, Lock-Box Fees are just a few of the expenditures a factor has.  The smart ones also put a little away each month to build up a loss reserve should the inevitable occur.  To the average person on the street, when they see what a factoring arrangement is priced at, may feel it is exorbitantly high, but when you take away the actual costs to provide this service, you’d be surprised at how little of those fees actually make it to the bottom line.

All that being said – factors have to charge what they charge because factoring is labor intensive and expensive to operate.  If the factor just purchased invoices and advanced funds, they would be out of business very quickly – that translates into fewer companies providing this critical form of finance – not a good thing for the general business environment.   That would be a horror story.

I think that many factoring companies (at least those that I deal with and talk to routinely) are in this business both to make a little profit and because it’s rewarding to help companies survive by providing working capital.  No one I know is in the business of gouging their client base. Moreover, it takes effort to find a client, to perform due diligence confirming the factor can make a difference for that company and then to bring the client on board to provide financing.  We all strive at that point to keep the client active for as long as possible – the average being 18-24 months.  I recently spoke to the head of a factoring company that said they’ve been able to keep their average client to up to 30 months!

Factors actually work hard at the collection process to help keep receivables turning so that the costs of factoring remains as low as possible for their clients.  These aren’t heavy handed collection tactics, merely good old fashioned solid receivables management techniques.  The result is that the client also maintains a healthy bottom line.  Client’s who grow or mature enough to be able to qualify for bank financing make this all a win-win situation.

When I hear of “client horror stories,” I am disheartened by the hyperbole.  I guess I come from the side of the fence that a client horror story is one wherein the client  figured out the perfect fraud and then absconded with big piles o’ cash.    While there is press that suggests that factoring companies are Good, Bad or Evil – these are all emotional terms – working capital shouldn’t be emotional.

If a business needs a factor they can look to any number of resources to find the best arrangement possible.  Price and Structure should not be the only deciding factors (pun intended).  One company may offer a low rate but then require monthly minimums and a term of one year, while the next company may offer a higher rate with an easy out and no minimums.  Some companies even offer programs that adjust with the client’s sales volume.  If you spend the time to understand the differences, you’ll probably find that in the end most offers are relatively equal in costs (plus or minus some basis points).  So if all terms are equal, what can a business seeking a funding source do?

The answer: get to know the factoring company. Ask for client references, and then… actually call them.  Does the factor have a history of taking care of their clients?  How long does the average client stay with the factor?  Is it only three months?  Or is it two years?  What other services does the factor provide? Same day funding on schedules received by noon or does funding take 48 hours or more (routine funding not the initial funding)?  Does the factor understand your business?  How well do you relate/communicate with representatives of the factoring company?  Is the company secure – do you think they will be there when you need them?  Are they in the same time zone as you, and if not does it make a difference (to some it might – to others it won’t).  Are you working directly with a funding source or through a broker?  How do you know the broker is really looking at the best deal for you?  There are so many other issues besides price alone!  If sales volumes can be maintained, maybe the smaller fee with minimums is the way to go. If not, then the higher priced deal may look more attractive.

If I go back to how I started this article, I was shopping… so, look at it this way, when you buy a plain white shirt from a low cost retailer, you probably don’t expect for the shirt to last very long – seams unravel, it gets stretched out, etc…  Buying a similar shirt from a more expensive retailer probably means the shirt will cost more, but the stitching will be different and the fabric might be stronger, and generally speaking, that shirt ought to be in your wardrobe for much longer than the less expensive one.  Which do you buy?  That’s a personal decision. For me, I’d spend extra just to know I would have something of quality… something that would last.

One more thing, you know that factor that quotes a lower rate but then imposes minimum volumes – well, I’ll be willing to bet that can be negotiated.  The negotiation however probably won’t be that the factor will maintain the same low rate without minimums – they simply can’t afford to do business this way.  In order for any transaction to work, it has to benefit all parties – everyone needs to “win.”

It’s a shame when clients don’t fully understand what they’ve signed up for though.  I was taught early on to never sign something that I either didn’t understand or didn’t agree with.  I make it a matter of practice to fully read any document I need to execute and if something isn’t clear to me, then it’s my duty to learn more before signing, and that’s just personally.  Shouldn’t a business owner follow the same rule?  Imagine signing a three year lease and then three months into the lease deciding that you no longer wish to rent the space.  There will be penalties from the landlord to break that lease, why should factoring be any different?

So, I don’t have any horror stories, even though Halloween is near.  Factoring works because those providing the capital know what needs to be done in order to protect that capital, and clients understand that having access to that capital comes with a price. Clients need to look at their business critically to determine if factoring works for them or not.  The business that has very low margins probably shouldn’t factor; the businesses that have some room to absorb the costs of factoring almost always benefit by having the working capital to sustain and grow their operations.  Most factoring companies probably have tons of success stories, and even those that do will have experienced a relationship that did not end well.

I think it’s up to us as an industry to maintain how positive factoring arrangements can be for everyone – not just the factor and not just the client.  This is the business we’ve all chosen to be in and I’m proud to be a member of this community.  I don’t want to dwell on situations that I’m not directly involved in, and I try not to lay blame when the facts aren’t public.  I’d rather shout out that factors are here to serve the businesses that need our funding, and we’ve got the capital to be able to help.

Let’s all take advantage of these current economic times by continually promoting that factoring is a great form of finance!  Lift up our industry for the greater good.

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Understanding the Billing

Aug 1

Posted by Gen Merritt in Operations, Sales and Marketing | No Comments

invoice-imageSince posting the FAQs: Transportation Qualification, I have received other industry specific questions, all of which seem to relate to understanding the paper being purchased. This got me thinking about the primary focus areas when reviewing invoices and their backup. Here are some questions you may want to ask yourself when looking at your documentation… or when discussing transactions with prospective clients…

How is the sale requested from the debtor?

In any industry, each party typically can evidence the ‘sale’ that generates an account receivable or invoice. Generally, a customer (Debtor) will ask the Prospect (Client) to perform a service or provide goods. This request can be in several formats such as verbally, a contract, work order, services agreement, purchase order, etc. This underlying agreement, when available (and yes, it’s available and does exist), dictates the terms of the sale. Pay special attention to those documents that refer to another agreement, the other side of the purchase order, or a website to print their underlying terms and conditions. You may find this information ‘enlightening’ when you are contemplating purchasing invoices and understanding the true sale arrangement.

How is the sale completed?

Once the service has been completed or the goods have been delivered, the Client can usually show that they did provide this service or deliver these goods. This can be in the form of a timesheet, delivery ticket, bill of lading, third party delivery, etc. There should be a way to show the completion of the sale, such as a sign off of the work completed, delivery documentation, etc…

When does a company invoice?invoices

It is at this point that an invoice is usually created and sent to the Debtor. Remember, the invoice is not what dictates the terms and conditions of a sale. It is a reminder of payment for the services or goods delivered. Understand too that just because the Client prints the invoice off their system does not mean a completed sale has occurred or that the customer will pay. For example, a Client may invoice when an order is shipped; however, the goods may need to be inspected (as per those terms and conditions you found on their website) before payment can occur.

What do I ask for then?

Many times, it is easier to ask the Client how they do their billing. What do they receive letting them know their customer wants to order something or have something done? What do they get when it is completed? What does their customer require for payment? Sometimes, it is better to ask these open ended questions to gain a better understanding of the Client’s overall billing process. For example, if you just ask for the purchase order, it may not include the original underlying contract that exists.

Many factors will request a sample of the Client’s billing during the due diligence phase. Often times, Clients tend to provide a sample that doesn’t match as they are just pulling the closest information they can find on their desk (meaning, you may receive a work order for one sale, an invoice for another and a delivery ticket for another). However, it is important to be able to review an entire sale from beginning to end. Try to have the Client provide you with an invoice and all the backup relating to that ONE entire sale or order.

Once you have a basic understanding of their sales process, new questions may arise as you review this paperwork. Understanding that paperwork is critical, so ask the Client whenever in doubt or whenever something is not clear… it is better to know before you fund an invoice than when you are trying to collect on that invoice.

It is also important to remember that each industry is different and may have various types of documentation specific to their industry. But, we’ll leave that discussion for another day…

Wishing You Continued Success. The Factor Guru.

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