The “Dilemma”

The exchange started with a simple post from a factoring broker that had a “dilemma” with a new soon-to-be client.

In going over the client’s information, the consultant discovered that the client really did not need factoring help. He had two other alternatives that were clearly better choices for the client , with no additional risk.

The consultant was concerned how he was going to keep is his client focused on factoring so he could get the deal. “Any feedback would be helpful.”

Enter the “Expert”

The post was almost immediately replied to by a so-called “industry expert” that had been involved with similar negotiations (all going his way of course).

His advice bordered between “bait and switch” and “smoke and mirrors.”

Seriously?

In the ongoing posts back and forth neither of them ever considered actually telling the client that there were better options available.

What? Risk losing the deal in exchange for taking the professional higher ground?

Yes, and here is why…

1. The client is going to find out anyway. When they do, you are going to look like either an idiot or a thief. Ok, maybe those sound a bit harsh, but you will probably be viewed somewhere in the not so favorable middle.

2. They have friends to send you. Your “missed opportunity” with this client could come back ten-fold if you actually help your client. Trust me, he is going to tell every one of his colleagues about you. You saved the day, even if it didn’t involve invoice factoring. Who do you think his friends are going to call?

3. They have friends to steer away from you. Same as the last point, but in a bad turn of reversal. Remember, he will find out what happened, and will be sure to tell his friends if he thinks you purposely didn’t help him in order to make a few bucks.

Look, the rule of thumb is simple…

Always do the right thing.

Help your client in any way, shape, or form that you can. If it involves factoring receivables and you get a commission on the deal – that’s great!

If it doesn’t, but you are still able to help, just consider that you put some future business on lay away – maybe it will show up just in time for the holidays!

All Done!

In a few short minutes you will be receiving (via email) your very own copy of The Factoring Hot List.

You are also part of the Factoring Investor “inner circle.”  This entitles you to receive free weekly updates on what is going on in the factoring industry including special funder interviews and real world strategies to help you excel in the cash flow business.

Until then, check out the FactoringInvestor.com site and be sure to visit a few of our sponsors that make this possible.

If you have any questions, or would like to know more about a particular topic, don’t hesitate to contact us.

We look forward to working with you!

All the best,

Fred and Tracy Rewey, FactoringInvestor.com

How will they be treated? What if they pay me directly? What do I tell them? Here are some common questions and helpful answers.

I don’t want to sell all my invoices. Is that possible?

Yes. Most factoring companies will allow you to pick and choose which invoices to factor. Of course they must be “credit worthy” but the factor will help you decide which ones are in your best interest to sell.

Where do the payments get sent?

Your customers will mail payments directly to the factoring company. Any “reserve” will then be forwarded on to you.

What if the customer mails me the money?

This is common, especially on the first payment. Factoring companies will require you to forward them the check. In other words, you are not to cash it and write another check to the funder. This helps the factor keep track of each customer’s credit worthiness (as well as avoid fraud). Your clients will then be notified that they need to mail payments directly to the factor.

How do I know the factor will treat my clients well?

The factor is in business with you. They want you to succeed and continue to grow. They are not a collection company. They want to maintain your customer satisfaction just as you would.

What should I tell my customer? Will it look bad if I am factoring?

Odds are your client may already be familiar with the process and not really think anything of it. If for some reason they are not, you simply need to tell them that you have chosen to use an outside company to manage your account receivables.

Still looking for more information? Check out 5 Things to Know Before Applying for Factoring.

In the past, financial relationships were largely with your own personal banker. Nowadays, your car loan may be from a completely different financial institution than your home loan, business credit line, or credit cards.

The reason being is that, with competition, you are able to get specialized service and better pricing.

For the most part, Bank Factoring and a Factoring Company will have similar pricing, but price is not your only consideration.

A full-service factoring company comes out on top when you think of what additional benefits you receive…

Speed – Most banks are not known for their quick turn around. Factoring companies will typically fund the same day or within 24 hours. Factors use a lot less paperwork.

Credit Help – Today’s factors do more than buy your receivables. They can check out your prospective clients credit and help you avoid bad accounts.

Collection – A full service factor will supply you a collection expert. These people are good at what they do. They know how to maintain the credibility of your business, and also collect some money!

Collateral – Although banks suggest they are only interested in the receivables, they will also typically require a secured position in all your assets as security. This can be very problematic when you need additional funds and the bank has tied up your collateral. A Factor will usually only use the actual invoices as security – enabling you to continue to run your business as you see fit.

Flexibility – Face it, banks are not flexible. Today’s full service factors have to be flexible to compete with each other. They can think outside the box and most deals, unlike a bank, are not “pass or fail.” A factor will try to find a way to make the deal work for you.

All things considered, you are typically much better off dealing with a full-service factor than going to a bank that just happens to “also offer” factoring services.

For more information on improving cash flow with factoring be sure to read Unlocking the Cash in Your Company – How to Get Unlimited Funds Without a Loan!

Well, this article is for you!

What is factoring?

Factoring is the sale of accounts receivables or invoices at a slight discount.

How does it work?

You set up an account with a Factor. Once set up, you send the new invoice to the Factor who then cuts you a check for the agreed upon percentage, referred to as the advance. Read More…

How much does it cost?

The factoring fee depends on the strength and performance of the accounts. For the most part the fee will be between 2-5%. Read more…

How long does it take?

Setting up an account can take 5-10 days. Once the account is set up an advance is typically funded within 24 hours of invoice submission.

Do I have to factor all my accounts?

Not unless you are looking for a “one time” shot. Otherwise you pick and choose which invoices you would like to factor.

How long do I have to work with the Factor?

There is no set time. The average business may factor for 2-3 years but some companies continue on indefinitely.

What if I have poor credit?

For the most part the factor is looking at the strength of the payer (your customer), not you or your business.

What happens if my customers don’t pay?

That depends on how you set up the transaction with the Factor. If it is “non-recourse factoring” then you may not be responsible. If it is “recourse factoring” then you will need to repay or replace the bad invoice. Read More…

What if I have a bank or tax lien?

Oftentimes the factor can work with the bank or tax entity to have them subordinate their position. If there are enough receivables you may even be able to pay off the loan or tax obligation. Read More…

How can I get started?

There are numerous great factoring companies right here at FactoringInvestor.com. We recommend that you “interview” more than one to see which company may best fit your needs. Read More…

What if I want to learn more?

There is a lot of great information on this site. There are also many in-depth resources available from a variety of authors. Check out the “Resources” section of FactoringInvestor.com. Read More…

1. Referral Fee
2. Establish Your Own Fee
3. Set Commission Fee

1. Referral Fee

Pros: Very Little Paperwork/Time.
Cons: Typically smaller commissions.
Cash Flows: Just about any cash flow can be “referred.”

The Referral Fee structure is the easiest, particularly if you already have a full time job and you have limited extra hours in the day.

With the Referral Fee structure you simply find a deal and refer it on to a Funder or Master Consultant that accepts referrals.

For the most part, you have no or very limited paperwork. You fill out a worksheet stating the person’s name and info about the cash flow. Once that information is sent, you are pretty much done. The funder will do all the work and if the deal closes send you a referral fee.

2. Establish Your Own Fee

Pros: Greater control, greater fees
Cons: More Paperwork (but not overwhelming).
Cash Flows: Mortgage Notes, Lottery Winnings, and Structured Settlements

The Establish Your Own Fee method takes a bit more work than the Referral Fee method but may double or triple your income.

With the Establish Your Own Fee method you will still fill out the worksheet but you will work with a couple funders to get the best “net” price from them. Once you have a “buy” number from a funder you simply subtract how much you would like to make and offer the seller something less.

How much less is up to you. On some deals you may only make $500, while on other deals you may make several thousand. It really depends on how much the seller needs and your negotiation skills. In the end, you are trying to find a fair price for your time and the seller.

Once the seller has agreed on a price, you will need to send the seller a contract agreeing to the terms. Typically the seller will not know your fee but that information will certainly need to be shared with the Funder (how else can they mail you check?!).

Depending on the type of cash flow deal, you may need to handle and/or pay for some of the due diligence, like an appraisal or title work for a real estate note.

3. Set Commission Fee

Pro: Potential Residual Income, Funder Does Most of the Work.
Con: Some ongoing follow up may be needed.
Cash Flows Include: Factoring Receivables, Delinquent Debt, and Pre-Settlement Lawsuits

A favorite among cash flow consultants is the ability to create residual income. Some cash flows, such as Factoring, do not allow the consultant to determine his or her own fee.

The cash flow consultant gets a “percentage” of what the Funder makes on a monthly basis. This percentage is established in advance.

Not all Set Commission Fees are ongoing. Some insurance based or delinquent debt fees are set and not reoccurring (a one-time purchase) – but the commissions can be very attractive.

There are also ways to create ongoing income on some cash flows such as mortgage notes using methods such as the “Buy Full, Sell Short” strategy using the partial purchase.

For the most part, which fee structure you use will be determined by the type of cash flow or the Funder. Given enough time in the industry you will realize the benefit of each of the ways to earn income!

In some cases a company may still be eligible to work with a full-service factor and realize the benefits of factoring.

For starters, oftentimes banks may not have used the current receivables as collateral. If there is no lien on the receivables being factored than a company is free to sell them as the owner sees fit.

Secondly, depending on the situation, if the bank does have a lien oftentimes they are willing to subordinate once the bank understands the situation.

The other alternative is to pay off the existing loan. This requires enough receivables to leverage the buy out, but it may be an option.

Believe it or not, many referrals actually come from loan officers that were unable to provide additional help to their banking clients. Many lenders are very familiar with “interim factoring” and welcome the help.

Tax liens work in much the same way as working with a bank. They are handled on a case-by-case basis.  Remember the government wants to get paid as well. They have been known to subordinate their position to help improve their chances of receiving payments on back taxes.

Having a bank loan, line of credit, or tax lien may not exclude you from the benefits, and financial freedom, of utilizing a full service factor. Just be sure to mention the situation upfront when making application to factor accounts receivable.  This will help set the stage for good working relationships and avoid delays or confusion during the due diligence process.

You may have even wished you could “crunch the numbers” yourself for peace of mind or to make sure no one was taking advantage of you.

If either of those situations sounds familiar, then you need to learn how to use a financial calculator. There are some great books and training materials out there, but you first must start with the calculator itself.

You want something that can efficiently calculate credit lines, mortgages, notes, investments, and loans with ease – well, there are plenty to choose from.

The big question now is, “Which one?”

Many calculators can handle financial functions and some are much easier to operate than others. Here is the top four used in our industry. If you want avoid the technical stuff just skip to the bottom and discover what we use personally!

The HP12C

Clearly the industry’s front-runner, the HP12C was THE standard for anyone in real estate for years and can still be found in most investors’ desks.

The HP12C is very powerful but comes with some initial challenges. You may have noticed that it does not have an “equal” sign. The HP uses Reverse Polish notation so 1+1=2 would be calculated as 1 [enter] 1[+] (then you get the answer of “2?). The catch here is that if you don’t already know how to use one, it may be worth skipping on to the next model.

The newest model has six times faster speeds for calculating TVM, loan payments, interest rates, standard deviation and more. Work more efficiently with memory for up to 80 cash flows. Ideal for real estate, finance, accounting, economics and business work. The HP 12C Platinum Financial Calculator is a classic!

The HP10B and TI BA-II Plus

Probably the most basic of the financial calculators, the HP10B (now the HP10B-II) or the TI BA-II Plus will get the job done.

Created in competitive nature, both deliver the basic needs of a financial calculator. Along with the standard capabilities of time-value-of-money, accrued interest, amortization, cost-sell-margin, and depreciation, users will calculate more advanced business and finance related issues.

If you are wondering what exactly the “plus” buys you in the TI BA II Plus model, you have to look pretty close (initially the only extra things found were keystrokes). The BAII Plus does allow differing compounding periods to payment periods. You can even calculate bonds to call as well as yield.

With that said, for basic workhorse calculators, you can’t go wrong with either the Texas Instruments BA II Plus Professional Financial Calculator or the HP 10bII Financial Calculator.

Texas Instruments Financial Analyst

This out of production calculator is still a favorite and worth keeping an eye out for at local garage sales and eBay.

In addition to great speed, the TIFI has a large screen that is capable of holding up to four different calculations simultaneously (Column A, B, C, and D).

Additionally, the TIFI can easily amortize any cash flow and give you the balance at any given point in time.

So, what calculator do we use personally?

Well Tracy always grabs the HP12C while I prefer the TIFI (yes a house divided).  When teaching workshops we typically gravitate towards the HP10B due to the affordability and ease of use for new learners.

No matter which calculator you choose, the time spent learning the calculator will no doubt be worth it! Going forward you will save time and money, but perhaps more importantly have better control of you cash flow.

This leaves many owners losing sleep and making extra trips to the mailbox in hopes of finding the payment that will turn things around.

Unfortunately, when dealing with a slow or late payer there are not a lot of good options for the small business owner.

Banks are not likely to lend you money unless you have significant assets to back it up. Even when they reluctantly grant approval, as if adding insult to injury, banks may charge substantial fees and interest for the short-term loan. Plus, the debt will show as a liability on your books.

In need of improved cash flow, many business owners look to factoring account receivables as an alternative to bank business loans.

When considering factoring it is important to remember you do not need to factor ALL accounts receivable. You get to pick and choose which ones to factor and which will continue to pay you directly.

So, when should you NOT factor your invoices?

1. Your customer typically pays within 10-14 business days.

Although you could factor a quick payer (and the Funder would love you to), you may be better off just budgeting for that time frame. However, a Factor will often give you a really good discount rate for such strong payers. Decide if the factor’s fee is worth having the money to work with sooner. If not, just wait it out and pass on sending these invoices to the Factor.

2. You don’t need the money.

Ok, this one sounds obvious, but you would be surprised. Some companies get into the factoring routine, but then don’t get back out. It is easy to become used to the create an invoice and get paid within 24 hours routine. But if your business is not crunched for cash, or you do not have a better use for the money immediately (such as the ability to realize discounts on your own goods or services) then you may just pass on factoring altogether or at least scale back on the number of invoices you factor.  You can always bump the number back up if you need to in the future.

3. You have a line of credit with a grace period.

If you have a line of credit, or even a credit card, that allows a 30-day grace period it might be better to tap into these funds on a short-term basis. A “grace period” will allow use of funds at no cost. The down side is you better be certain in your ability to pay off that balance at the 30-day mark. If you cannot pay off the debt it is likely the charges on the line of credit or credit card will outweigh the cost of factoring.

Factoring is not for everybody, but almost every small business has situations where factoring, even in the short term, can offer the perfect solution. Although some businesses use factoring permanently, most utilize factoring services for approximately 18-24 months.

Knowing when to factor and when not to factor invoices can keep your business financially fit for years to come.

More and more small businesses are realizing that the process of factoring is not out of their reach.

There are many reasons a small business will turn to factoring. Oftentimes they are not able to get reasonable lines of credit through banks due to invoice volume or assets.

A small company, with less than $12,000 per month in accounts receivable, is often financially at the mercy of those paying the invoices. Any late payment can significantly jeopardize a small company’s operation.

Fortunately there are small business factoring specialists that have stepped up to fund companies that would otherwise be overlooked due to:

• Business less than two years old
• Current credit or tax issues
• Prior Bankruptcy
• Low or small balance receivable volume (too low for a large Factor to consider)

With these new “Small Factors,” a small business can realize the benefits usually reserved for the “big boys.” Benefits such as:

• Increased cash flow
• No incurred debt
• Increased purchasing power
• Improved credit rating
• Professional collection services

If your company has less than $12,000 per month in invoices, you might want to look into a Factor that specializes in small business factoring.

Related Articles:

Investor Spotlight: Become a Small Business Funding Specialist!

Small Factor Series – 6 Essential e-Books for Factors and Consultants