Tax forfeitures affect an entity’s liability protection.  You are all familiar with the various entity forms.  You know that some entity forms provide limited liability for owners, shareholders and partners.  These include limited liability companies, S corporations, C corporations, limited liability partnerships, and professions corporations.  You also know that sole proprietorships, general partnerships, joint ventures and DBAs have no limit on liability.  Entities can lose their liability protection by failing to pay state franchise taxes.

Using Texas as an example, entities have three levels of standing.  They are (1) “Good Standing,” (2) “Not in Good Standing,” (3) and ‘Temporary Good Standing.”  Most states have the same or similar designations.  “Good Standing” means the entity has filed all franchise tax reports and paid its franchise taxes in full.  This allows the entity to continue doing business in the state.  “Temporary Good Standing” is really no reflection on the entity itself.  This simply means that the state has not yet processed the franchise tax reports. Until it does, all entities are granted temporary good standing.

“Not in Good Standing,” however, is very different. “Not in Good Standing” is a red flag for factors.  It means that the entity has not paid its state franchise taxes and has, therefore, forfeited its right to do business in Texas.  In practical terms, this means the entity is now operating as an assumed name or DBA so any shareholders, owners or partners are not protected personally from liability for debts incurred while the entity was “Not in Good Standing.”  Or, to be more direct, you are now factoring a sole proprietorship or general partnership.  My experience is that this not only can affect how you factor the client and perfect your security interest, but it is also a red flag that you may very well be factoring into a liquidation.

Because of the effect of failure to pay state franchise taxes, I recommend factors be vigilant in checking this.  Usually, the state comptroller’s office will have this information.  If you have a client whose account status changes for the worse, you should immediately contact the client to learn why this has happened and whether the client intends to correct the problem.  This may allow you to catch a failing business early on and take appropriate steps to protect yourself. Or, it may allow you to avoid factoring a business that just wants your money while intending to file for bankruptcy protection. The bottom line is factoring a client who is not paying its state franchise taxes can be a recipe for disaster.

About the author:

Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas.  He has represented a number of factors with commercial litigation and bankruptcy issues.  He also regularly writes articles and presents speeches on creditor issues, including an upcoming teleconference on Issues to Consider when Litigating against Account Debtors.  He can be reached at 817/339-2474 or spierce@belaw.com.

Yes, factoring does go back over 4,000 years to the Mesopotamian King Hammurabi. He was the ruler who established the world’s first metropolis, Babylon, considered the bed of civilization. The Mesopotamians are accredited with being the first to implement notes/borrowings on clay tablets between two parties. These clay ‘contracts’ indicated promises to pay; they were promises for future payments. This concept expanded trade and increased economic power for that time, setting a foundation for certain alternative forms of finance today.

Since then, factoring has evolved becoming a critical financial tool for doing business in almost every civilization that followed, the Romans included, who were the first to sell discounted promissory notes. The first documented form of factoring in the American colonies, however, was prior to the revolution.

Merchant bankers in Europe gave the American colonists advances for materials, allowing the colonists the ability to harvest their lands. Raw materials like cotton, furs, tobacco and timber were shipped from the colonies to Europe. Factors during these colonial times advanced against the accounts receivable of these companies. This practice became very beneficial to the colonists, as they didn’t have to wait for the money to begin their harvesting again.

Later, during the economic revolution, factoring became more concentrated on the issue of credit, as factors began assuring payment for certain clients (today known more as non-recourse factoring). Before expanding to varied business types after the war, factoring specifically catered to the textile and garment industries in the United States.

By the 1960s and 1970s, an escalation of interest rates and tighter credit spawned a new interest in the factoring market, with a number of private factoring companies coming into existence. By the 1980s, further rate increases combined with new regulations within the banking industry caused many small businesses to seek alternative sources of funding outside of traditional banking. It was at this time, factoring became a more popular option for many of these companies.

As many of you know, factors make funds available even where banks cannot often do so; typically, factoring companies focus on the creditworthiness of the customer (debtor). In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the company itself, not that of its customers.

Factoring is a financial transaction wherein a company sells its invoices/accounts receivable to a factor at a discount. In exchange for this, the company receives immediate working capital. Three parties are involved in the transaction: the factor, the company seeking financing and their customer (the account debtor). The sale of the accounts receivable transfers ownership of those invoices to the factor, at which time the factor obtains the right to receive the payments made by the customers.

Today’s factoring still focuses on advancing funds to small to mid-size, rapidly growing companies who sell to larger, creditworthy customers. Factoring is among one of the most effective and efficient forms of financing utilized by businesses. It immediately improves the cash flow of a business.

In addition, today’s factor offers other support services for their clients including providing credit checks on new and existing customers, sending monthly statements to customers for payment, performing collection calls, processing and maintaining history on invoices and customer payments, and providing reporting for this information, typically with online access for the client. Some factors even provide additional financing services for their client companies.

After all of that, the only history question from Factoring Jeopardy that this actually addressed and answered: Who is Hammurabi? I no longer remember the other questions… maybe some of you do and want to comment…

Wishing you success. The Factor Guru.

The hibernation of hedge funds, private equity interests and investors is ending as they become hungry for stronger returns.  However, coming from a strategy where this community pretty much shut down their money flow altogether—they now want very high returns in exchange for cash and credit lines.

Meanwhile, commercial banks have turned off their lending spigots for small business because of the volatile credit conditions, and the aggressive enforcement oversight by government regulators who prohibit these lenders from any perceived questionable transactions.

At this time, the credit line needs of factors should be one of the best income-earning risks which banks can entertain.  Unfortunately, many bankers have a mind-set:  They do not lend to finance companies.

When their questions and concerns about this issue are examined, their reasons are often distorted and lacking in fact.  Many commercial bankers ask:  “Why should our bank give a credit line to a finance company, when we would not make the small business loans being made by the finance company, ourselves?”  They argue that the loans often made by the finance company are to “unbankable” business entities.  These companies are not strong enough, not old enough, with a problematic track record and worse.

We are not lending solely on historical balance sheets.  We are lending mainly based upon collateral which we manage on a daily basis (while most banks only look at financial statements on an annual basis). We also look at a company’s future business based on their orders in the pipeline.

Commercial banks and factors need to find common ground to reach prosperity together.  When driving a car, do you spend most of your attention looking in the rear view mirror, looking at where you have been?  Or, do you stay focused on the windshield and watch where you are going as you move forward?

If those “unbankable” small businesses have valued collateral, which we as factors and asset-based lenders can control—we are able to provide them money to help these businesses grow.

The lending marketplace has room for both the commercial bank along with factors and asset-based lenders.  If a business owner has a strong balance sheet, they are going to seek out a bank because it is cheaper and less work to submit occasional financial statements.  If a business owner is undercapitalized yet their company offers a lot of potential, and they want to take advantage of every opportunity which comes along—asset-based lending and factoring is very appropriate.

So long as banks conduct their usual due diligence, they will find that extending credit lines to finance companies is a good quality risk, many times better than their regular lending standards.  Most times these loans are diversified, spread out, over different industries, different geographic areas, different customers, different payment schedules, so the finance company is not dependent on any one particular loan, the risk is much less than they would find in one regular business.

Furthermore, the people running these finance companies are often very experienced, very professional in the depth and knowledge of the industries they are financing.  They are executives the banks can “talk to” as opposed to many businesses where an owner’s lack of understanding breeds a strained, perhaps, negative relationship.

Another silver lining, for banks giving credit lines to factors and asset-based lenders, is the potential of a finance company to provide mutual referrals.  As a business becomes more stable where it progresses into a more attractive prospect for a traditional bank, now the factor or asset-based lender is in an advantageous position to hand off their client to a bank of its choice.  There will be strong influence in that decision by the finance company which has helped the business owner.

There are only a small handful of banks which have recognized the vista of lending to finance companies. They have benefited from these relationships for many years.

About the Author:

BY NEVILLE GRUSD, C.P.A., EXECUTIVE VICE PRESIDENT, MERCHANT FACTORS CORPORATION (WWW.MERCHANTFACTORS.COM) WITH OFFICES IN NEW YORK CITY AND LOS ANGELES.  MR. GRUSD IS A DIRECTOR AND ACTIVE MEMBER OF THE EXECUTIVE COMMITTEE OF THE COMMERCIAL FINANCE ASSOCIATION (CFA).  HE IS A MEMBER OF THE EDITORIAL BOARD FOR THE C.P.A. JOURNAL, THE OFFICIAL PUBLICATION OF THE NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS.

I have received some phone calls this past month from newer entrants to the factoring industry asking me about this conference and if it is worthwhile to attend.  I respond, with full disclosure that I am actively involved with supporting the IFA and say wholeheartedly “OF COURSE!  This conference is a must for any professional associated with receivables finance in any way.”  I say if you can only afford (both in terms of time or money) to attend one conference each year then this is the one.  Yes, you can probably purchase an audio CD after the event – but that’s only half of the draw.

The people that you will meet at this conference you are likely to develop relationships with that will serve you well over the course of your career or through the growth of your company.  I’ve watched alliances form over the years… folks that met each other for the first time who nine, ten, and even 12 years ago are now engaged in participations together, have bought and sold portfolios amongst each other, and have hired one or another in various roles.  I’ve met owners of factoring companies who started with nothing and have grown their portfolio to wild heights.  I’ve met others who have built up a portfolio, sold it, and are now in their second round.  Sad to say, I have seen folks come and go too.  I’ve met new business development people who have moved up the ranks to sales managers, account executives who have moved up to operations managers, operations managers who have moved up to portfolio managers – and many of those will go on to start their own companies.  The amazing thing is that almost all of them will take a moment to provide advice and share war stories, or in general, they are just pretty fun to be around.

It is important to note that it is not just other factors who attend this meeting; Vendors, service providers, attorneys, complimentary businesses also are in attendance – these too can be healthy contacts for you. For example, I really enjoy the folks over at 20/20 Tax Resolution, Ansonia Credit, MotherFund and First Corporate Solutions just to name a few. They know their business and the factoring industry well. Think about it: Where else can you interact with the likes of Mike Ullman, John Beckstead and Steve Kurtz? Even the face reader guy, Mac Fulfer, is scary “spot on” with his observations, and Brian Van Nevel (who must have been a game show host in a past life) will channel his inner Alex Trebek for a very educational round of Factoring Jeopardy.  The creator of the Factor Guru blog, Genevieve Merritt, will be there as well as all the other contributing writers such as myself, Scot Pierce and Rich Eitleberg.

So if you haven’t already signed up… I’d be thinking of doing that soon.  The room block ends this weekend – I hope to see you in Scottsdale! It’s sure to be an educational and productive event.

For new business, many of us have looked at more and more prospects to ultimately only fund the same number of deals. Issues arising from the economy last year have spurred additional due diligence and research on these prospective clients to ensure a long standing relationship will exist, or can exist in the first place. The question that always comes to mind: can you get out tomorrow?

So, where does that leave 2010? Well, we are well into the first quarter and business opportunities have been increasing, provided you have the capital available… but that is another discussion for another day.

By now, you hopefully have already evaluated your portfolios to determine areas of potential loss and/or weakness. You have also by now identified areas of improvement in your operations and portfolio management to help ensure proper checks and balances internally. For an extreme example, does your account manager handle the verifications, daily fundings, collections, and payment application for their clients? How would you know if something arose that should be a red flag? Maintaining appropriate checks and balances can be critical in today’s environment. Establishing certain communication protocols both internally and externally can prove to be invaluable within an operations department.

The recent increase in deal flow should, however, not equate to reducing the recently increased monitoring and account management standards. This year will be just as challenging for many as last year. Time and time again, I hear that factors are going back to the basics: maintaining verification and collection efforts, monitoring collateral trends in purchases and cash  management, reviewing and adhering to debtor credit limits, and understanding the billing of the client and what they do (i.e., industry in which they operate, etc). Factors are also paying more attention to early warning signs that may be indicators for potential concerns.

All I can say is be prepared… be proactive and not reactive, as they say. Surprises are not always a good thing.

Wishing You Continued Success. The Factor Guru.

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)

“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.

Richard 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.

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.

Tell me about your business. How long has the business been around? What did you do before starting this business? Hints: This conversation may also help establish the type of monitoring that would be involved with the account.

How many trucks are you running? Depending on the type of loads being hauled, trucks may typically carry from $8,000 to $12,000 a month in loads; loads hauled generally do not exceed $15,000 a month per truck unless the company operates in a unique niche of the marketplace, provides heavy hauling, etc.

Are you hauling full loads or LTL (less than a truckload)? Hints: LTL means smaller invoices and more paperwork; risk is spread among many invoices and customers which helps diversify the risk profile while also creating additional work in the account management.

Where do you get your loads? Do you have steady customers or do you get loads from load boards? Hint: if all loads come off the web, the client may struggle maintaining business profitably as these loads tend to be lower paying.

Who are your major customers (i.e., shippers, brokers, names of companies, etc.)? How many customers do you have? How many of them are repeat customers? How do your customers typically pay? Hints: if the customers pay very slowly, then your fees will be higher; the client may not be able to afford factoring. Trucking industry receivables tend to pay in less than 45 days. These questions will also give you an idea of how much time an account will take for notification, verification and collection purposes.

What is your typical invoice size? Hints: there is no “typical” but get a range from low to high. However, unless a trucking company is doing heavy hauling loads, they should not have large dollar invoices (i.e., $5,000).

What is your current billing process? How does it work? Can you walk me through what you typically do to get your customers their invoices and how long that process takes?

Do you have any special arrangements with any customers on advances for fuel, quick payment terms, or anything else?

Do you have a line of credit at the bank now? Hint: if yes, then a bank take out may be in order or subordination on the receivables.

Do you have employees? Hint: if yes, the client should be current with payroll taxes and other obligations. The client may use owner operators as well. If so, how many; are they always the same drivers or different ones each time, etc.? This may also reveal whether the company is brokering loads to other carriers.

Is the company profitable now? Hint: if they have a reasonable profit margin, the client should easily be able to afford factoring.

What about 2290 (heavy vehicle highway use) taxes? Do you have these? Are they paid currently? Hint: remember that these taxes are due annually and have the same priority on factors and lenders as payroll taxes.

The list of questions can go on and will expand based upon the company’s answers. Understanding their business, the collectibility of the invoices, and your risk-reward profile will help you better structure a transaction. Feel free to add more by commenting to this post.

Wishing You Continued Success. The Factor Guru.

Who said factoring was like gambling? Lately, now that I have been playing poker, I wanted to examine this concept… or misperception. Many people seem to say this ‘gambling’ comment flippantly only because of a perception that they believe exist. However, sometimes, you have to delve deeper… to find the truth. After all, perception is reality… right?

No. Not always, if you choose to look hard enough. So, let’s go with my basic assumption of Texas Hold ‘Em. After all, I am from Texas.  

The first rule: the one with the most bank has the best chance of winning. Do you have enough capital to play the game for the long run? Factoring is not a game you get in with limited capital. Don’t take it lightly. Real money is at stake. You have to have sufficient funds to play the game. One loss cannot dictate your endurance in running a finance company. Putting “all your eggs in one basket” may help you grow; however, can you survive the loss? If you experience losses, are you still in the game? And, will a large fraud break your bank?

If so, factoring is not the business for you… when you are new to the game. This mainly applies to those who do not do their homework, who do not understand that vigilance in underwriting and monitoring deals remains a key aspect to the factoring business. No one can teach you how to start a factoring company without also explaining the risks. It’s about your people, processes, systems… and more. Just think, all that is before you start.

You also have to understand the risks, how to mitigate those risks and how to monitor those risks over time. When you set out to start your factoring business, capital is essential… But, keeping your capital is critical. It’s not just about putting the money out there; it’s really about getting the money back!  Funny that in poker, it’s not about the risks, it’s really about getting your return (and your money back). Hmmm…

The next rule: Do you know the cards you have been dealt? Are you really looking at what’s in your hand, or are you just chasing the cards you think you have? For example, what do you offer relating to your corporate ‘tiers’ such as People, Processes, and Systems? These tiers are your strengths. Know your tiers. Know your strengths. Play to those cards. Within this,

First, know your people. Can the personnel you have handle the type of clients you are seeking? Can they handle the type of account management required for those specific accounts? Do those personnel truly understand the dynamics of various industries in which you may want to branch out into to diversity your portfolio?

Second, know your processes. Setting up procedures within your company can be essential. Think about those unique situations that require governmental regulations (i.e., Assignment of Claims, CAGE codes, etc), monitoring transportation carrier payments, or even subcontractor payments (i.e., lien releases, etc.). If the processes you have in place do not include this type of account management, then those processes are insufficient to effectively manage those types of client accounts.  

Finally, know your systems. Do you have the proper software to effectively monitor certain types of accounts? This also may include transportation, construction, or other types of processes and reporting that are being done manually within your company. Technology options exist that help monitor certain industries and assist in improving your systems to better manage your client accounts effectively.  

If you don’t know these basic tiers about your business as a factor, then how can you know what you can do? How do you even know how to read your cards? Again, if you don’t understand these fundamentals of your factoring business, you will experience challenges in managing your portfolio, let alone expanding or diversifying. Know how to read the cards you have been dealt.

With all of that said, I’ll save the next rules for another blog. But, good luck! Remember, know your capital. Know your cards.

Wishing you success in your game. The Factor Guru.

I have a family member who believed a common misconception that I have always been involved in a sub-prime, “loan shark” type of business: factoring. No matter how many times I attempted to discuss how factoring works and how it benefited a small business, they just would not listen. Their theory focused on, “Why can’t the company just go to a bank?” and “That is just too expensive.”

Have they looked around at the banking environment lately?

Well, recently I was discussing a transaction that was funded by a factoring company I know. It was a small business that works with government entities (i.e., state and city municipalities) that recently experienced a massive increase in growth, or had the potential too… they just needed working capital. The company did have a line of credit; however, the bank was unable to raise their current facility to the level the company needed, as the company’s historical sales and cash flow would not justify this increase. However, by factoring their receivables, the company could accept these new orders and grow their business. The perceived ‘strain’ and ‘expense’ of factoring was immediately offset by the ability to expand the business and ultimately create more profitability.

This ‘family member’ overheard the conversation and began asking questions about how it worked, the structure, the credit guidelines, and how the factoring company would be repaid if the customers of the client did not pay.

Yes, the fees are more than a traditional bank source; however, we walked through an example of the overall impact to a business that would now be able to grow from factoring its receivables. It was then, that light bulb moment, that they realized the potential gain in income and profitability by using factoring versus continuing with the business without this working capital arrangement.

Using only generalities, they finally said (in amazement), “I didn’t know that factoring could help a company like this?” Yes, I too was shocked and amazed as they say.

Hadn’t we already talked about this? Sometimes, though, real examples help explain a transaction better. Moreover, showing the value added from factoring receivables and the potential financial gain and impact on a company’s bottom line can be a revelation.

So, once again, I had to sit back and evaluate what had just transpired. Perception in this case was not the reality. It was just a distortion of what people had ‘heard’ and a misperception of factoring itself. Sometimes, factoring accounts receivable can be the answer to the growth of a small business.

Wishing you continued success. The Factor Guru.