This disturbing trend in accounts receivable financing is affecting both business owners and factoring companies. Here’s an enlightening update:

Beware! There are two types of customers who may be falling into the slow pay category. And they’re the last ones you’d suspect.

Now’s the time to talk to your CFO and Accounts Receivable manager to see if they’ve noticed this troublesome trend:

Many companies in all industries are now reporting major payment slowdowns from two critical groups:

• their biggest customers, and
• their best customers.

Not something any company can afford right about now.

And each group warrants a different approach to stop this in its tracks.

1. Big customers

Any companies that have large firms in their customer database will need to devote some extra time and attention to these accounts.

The biggest of the big companies are taking 5% longer to pay their suppliers than they did a year ago.That’s from experts out of REL Consultancy.

The kicker: These same businesses are cranking up their collections efforts to boost their own cash flow.

Turnabout is fair play here. True some mega-customers tend to call their own shots. But it doesn’t mean your business is powerless over your cash position.

You can do everything from simply highlighting payment terms on the next invoice and calling a few days before payment is due to adding finance charges to the bills (if your contract allows for them).

2. Best customers

Of course you don’t want to get walked on, but you don’t want to risk losing customers, either.

Especially if accounts have been good payers until now.

More and more companies are telling us that even their most reliable customers are now having trouble meeting due dates.

Make sure credit and collections people aren’t taking too hard a line.

The key: That finance staffers are empowered to be flexible in how they structure payment arrangements with these particular past dues. You have a slew of options that your finance chief can offer.

After all, they were your best customers for a reason, and they probably will be again when the economy stabilizes.

Article Source: Alert – The new worst-paying customers by Jennifer Azara, March 10, 2010 at http://www.businessbrief.com/alert-the-new-worst-paying-customers/

You may not have thought about it this way, but you are now in the banking business.  Even worse, you probably have the best rates in town.

If your customer went into the bank and asked to use money over time, the bank would set up a loan.  The loan would certainly incur interest charges along with late fees for payments past due. Even the use of a credit card comes with financing charges when the balance isn’t paid in full each month.

So take a quick look at your accounts receivable aging report.  How many of your customers are asking you to provide financing – at no cost?

What is this costing YOU in terms of restricted cash flow, borrowed funds, and missed opportunities?  You are losing the use of that money while you wait for them to pay the invoice.

One solution is to implement procedures for collecting on accounts receivable along with penalties when invoices are paid late. This of course takes time and effort.  Plus, it might leave you feeling like not only the bank but also the debt collection agency.

An increasing number of companies are factoring their account receivables as another solution.  Rather than a last resort, businesses see factoring as a way to:

• Receive immediate cash on invoices, often within 24-48 hours
• Reduce bad debt by screening customers upfront using the factor’s credit risk analysis
• Automate the back-office functions including statement mailing and collections
• Encourage customers to pay more timely when they feel accountable to a third party factoring company

Often the services a factoring company provides as part of their standard operations will save a business as much or more than the factoring fees themselves.  More importantly, a business has immediate access to cash.  After all, a sale actually counts when the money is collected.

What do you need for day-to-day operations in terms of equipment, technology, documentation, and know-how?

Factoring receivables can be a lucrative business with high returns, but you need to know how to manage the business with minimal overhead. Overseeing employees adds significant additional costs and responsibilities.

This informative ebook is written in the first-person by Jeff Callender, a well-respected small ticket factor who has been in the business since the mid-90s.

Jeff shows simply and clearly how he has run his company year after year with no employees.

Discover how his use of current technology, outsourcing, and common sense can enable you to manage a full portfolio of clients without the expense and complications of a big payroll.

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Table of Contents

This leaves many businesses to wonder, “What’s the difference? Is it really apples and oranges?”

Actually, the fruit analogy works here. Factoring and Asset Based Lending (ABL) are both types of financing (or fruit, if you will) offered by specialty business financing companies. They commonly involve funding based on receivables but the differences come down to the variety of financing.

Asset Based Lending

The asset-based loan is just that – a loan. The company borrows money incurring loan fees and interest charges. The loan is collateralized or backed by assets of the business. This can include the account receivables but can also extend to other assets including inventory, raw materials, equipment, patents, or fixed assets.

Factoring

Rather than a loan, the factoring transaction involves the purchase of the invoice itself. The factor buys account receivables at a discount through a cash advance. All or a portion of the reserve is released upon payment of the invoice by the client’s customer. Instead of earning interest the factor earns a discount or factoring fee.

All in the Family

When an asset based loan is secured just by the accounts receivable the distinction between the two can become blurred. Both the lender and the factor usually verify invoices and use some sort of lock-box system to accept payment on the invoices.

The costs can vary greatly so neither factoring or ABL can be deemed the most or least expensive. It is safe to say that specialty financing is generally more expensive than traditional bank financing. It is best to shop around and compare the costs and benefits of both options.

Factoring and asset based lending can both be categorized as types of asset based financing, with the big difference being an asset loan versus an asset purchase at a discount. At the end of the day, both can be a tasty option if it fills the company’s appetite for working capital at a cost that still enables growth and profit.

This business financing solution enables a company to receive an advance on a single outstanding invoice.

While traditional factoring arrangements are often structured on the expectation of monthly reoccurring business, spot factoring can be a one-time transaction. Also known as single invoice factoring, the business can obtain the working capital they need without lengthy contracts or ongoing commitments.

A Factor will review the invoice, confirm the goods or services have been delivered, and underwrite the credit worthiness of the debtor. Once the factor is satisfied they will advance a percentage of the invoice to the business, generally 70 to 90 percent of the amount billed. The balance is kept as a reserve to be released upon payment of the invoice less the factoring fee.

Since the transaction is based on a single occurrence a company offering spot factoring is likely to set a minimum invoice amount to make the accounts receivable purchase worth their time, effort, and investment.

While a factor might hope for future business, there is no obligation for the client to use these services in the future. This makes single invoice factoring a viable business financing strategy for companies that do not use or expect to use factoring in their normal course of business.

Factoring Fundamentals How You Can Make Large Returns in Small Receivables

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Factoring Small Receivables  How To Make Money in Little Deals the Big Guys Brush Off

Book 2 in The Small Factor Series, this complete how-to manual provides everything the beginning factor or private investor needs to know to start buying accounts receivable of small companies.

With common sense directions and first-person experiences, you’ll learn how factoring small receivables can be a lucrative, enjoyable business and an excellent tool for investing retirement or discretionary investment funds.

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Factoring Case Studies - Learn and Profit from Experienced Small Factors

Book 3 in The Small Factor Series, this work describes 21 real-life experiences from the files of 8 small factors around the country.

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Unlocking the Cash in Your Company How to Get Unlimited Funds Without a Loan

Book 4 in The Small Factor Series, this book is written for owners of small to medium -sized businesses who don’t know much about factoring and will benefit from learning about it.

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Understanding this important distinction will help a business select the right financing terms when factoring invoices and accounts receivable.

Understanding Recourse Factoring

When a factoring company advances funds to a business client on their accounts receivable they expect to receive payment from the client’s customer or account debtor.  However, if the customer does not pay the invoice then the factor can demand payment from the client with recourse factoring.

Since the factor does not assume the credit risk with recourse factoring it is generally less expensive than non-recourse factoring. A factor may also demand less control and have fewer requirements pertaining to systems and customers.

Of course the flip side is the business receiving the advance is ultimately at peril for loss from bad debt with recourse factoring.  If their customers don’t pay on the invoice they must repay the advance along with any fees to the factor.  A factoring company will generally charge back any delinquent invoices to the business client after 90 days, depending on the terms of the agreement.

Understanding Non-Recourse Factoring

The factoring company takes on the risk of bad debt with non-recourse factoring.  This means the factor goes after the customer or account debtor for payment on delinquent invoices.

The factoring company will generally check credit on account debtors and handle the collection and bookkeeping functions.  They tend to underwrite the creditworthiness of the client’s customers more than the client itself.

While the client may not have to refund the advance to the factor if a customer does not pay for credit reasons, they are still liable for any payment disputes involving the product or service itself.

Popularity Contest

The use of Non-recourse factoring is by far the most popular type of factoring arrangement.  Overall non-recourse factoring accounts for about 85% of transactions with full recourse factoring making up about 10%.  The final 5% is a blend of the two with partial recourse to the client. (Source: Commercial Finance Association 2007 Factoring Survey Results).

Rather than a loan, factoring is primarily structured as an outright purchase of accounts receivable on a non-recourse basis.  This enables factors to say yes to cash advances on creditworthy invoices when traditional banks say no to business loans.

Any company generating accounts receivable with creditworthy customers can take advantage of the cash flow benefits offered through factoring. 

In factoring, like any industry, there are certain clients that make up the greater share of business.

The textile and apparel industry has long dominated the factoring business, generally attributing to over half of the factoring volume.  This makes sense since factoring in the United States evolved from European textile mills using stateside agents to sell their fabrics.  Agents earned commissions on sales and then began establishing credit terms and advances to the mills for delivered goods.

Many other businesses also benefit from discounting their invoices to Factors. The most recent factoring survey results published by the Commercial Financing Association (CFA) reflects the following breakdown of U.S. factoring volume by industry:

Textile/Apparel Factoring                  54%

Furniture                                                  8%

Business Services                                  7%

Electronics                                               5%

Transportation                                        3%

Other                                                        23%

The survey also reported $135.5 billion in factoring volume in 2007, sustaining its 30- year pattern of growth.  Follow the link to the Commercial Financing Association (CFA) site to review the complete annual survey results for asset based lending and factoring.

There’s no secret banks are putting the squeeze on business lending and credit lines. In fact 55% of small to midsize businesses surveyed by the National Small Business Association reported difficulty in obtaining credit last year. And that was in early 2008 before the credit crunch really hit.

So where can business owners turn for working capital as banks say no to business financing? Here are three places to consider during the 2009 credit crunch:

CREDIT UNIONS

The local credit union has long served the interests of members by offering attractive rates, services, and products not generally available through traditional banking institutions. To date, Credit Unions have weathered the sub prime mortgage crisis far better than banks and members are turning to them for business financing.

This trend is reflected in last year’s 18% growth rate increase for member business loans (as reported in the 2008 US Credit Union Profile published by the Credit Union National Association on February 25, 2009). These not for profit cooperatives helped Americans through the Great Depression and today offer assistance to business members with alternative financing options.

MICRO LENDERS

A recognized champion to business startups and minorities, the Micro lender provides small loans, generally ranging from $500 to $40,000.  These are often offered by nonprofit organizations to stimulate growth in lower income communities.

As reported in a recent Wall Street Journal Article, a Micro lender’s flexibility and willingness to accept borrowers deemed a higher risk by banks can be appealing to the small business borrower in today’s economy.

FACTORING

As banks say no, businesses are turning to factoring companies to raise needed cash and working capital.  Rather than lending money based on the strength of a business, a factor purchases an outstanding invoice or accounts receivable at a discount.

Once goods or services have been delivered to a customer a business may wait 30 to 60 days for payment.  A factoring company solves this problem by providing an immediate cash advance on the invoice (generally 70 to 80%).  When the invoice is paid the factoring company retains their discount fee and releases the remaining reserve to the business. The ability to obtain cash without debt is just one of the many Benefits to Factoring Invoices and Accounts Receivable.

When times are tough businesses often turn to credit cards, home equity, or loans from family and friends.  It’s good to know that credit unions, micro lenders, and accounts receivable factoring can provide alternative financing solutions to businesses in need of working capital during the credit crunch.