May 13, 2009 BETHESDA, MD  

The Interface Financial Group (IFG), North America’s largest alternative funding source for small business, reports instances where invoice factoring, when a business sells its accounts receivable invoices at a discount, has helped a company stay in business in the midst of the current global economic downturn.

A recent report by BizBuySell.com, which tracks the health of small business, indicates that there has been a decline in business-for-sale transactions and valuations. Additionally, the number of closed transactions reported in the first quarter decreased by 36 percent as compared to the same 2008 time period. As many small business owners across the country are struggling, many looking for answers on how tough times are affecting the value of their businesses.

Also dropping during this current economic environment are the value metrics for businesses. Revenue multiples for closed transactions dropped 5.5 percent to .69 in the first quarter of 2009, while cash flow multiples fell 3.8 percent to 2.69. This is determined by dividing the selling price of a business by its annual revenue or cash flow. The report also indicates that median business sale price for closed transactions decreased 17.3 percent to $165,500.

According to The Interface Financial Group’s Chief Operating Officer Steven DeYoe, “Valuation multiples are going down and now buyers are hesitant to pay the asking prices for a business. Uncertainty causes concerns about a business and its future revenues and cash flow.”

It also appears that many buyers are having difficulty accessing the capital they need to purchase a business, and in some cases, to keep it going. Traditional banks, angels or venture capitalists, and even SBA-backed loans have all but dried up. When there are fewer buyers able to bid on most businesses, there’s less pressure for upward pricing. Economic conditions have made it more difficult to close deals, but a number of business brokers are reporting a record number of buyer inquiries due to an increasing number of corporate layoffs.

The good news includes the fact that market conditions for small business transactions should improve as selling prices continue to decline, because credit will slowly become available to new buyers.

Standard factoring has been around for more than 4,000 years, and it is a highly effective cash management strategy, allowing businesses to obtain funds based on their current accounts receivables and benefit immediately from 90 percent advances against invoices that would otherwise not be paid for 30, 60 or 90 days.

A business often times doesn’t get paid right away for a product or service that it has already delivered, so the bottom line is that accounts receivable factoring, also known as single invoice or spot factoring, might just be the answer. Factoring is an extremely quick way to turn a company’s receivables into cash rather than waiting up to 90 days for an invoice to be paid. Factoring companies like IFG will look at your customers’ credit rather than yours.

IFG begins the single invoice factoring process with due diligence that typically takes one to two business days. Once completed the client is at liberty to offer invoices to IFG for purchase. Factoring is not a loan — it is the purchase of a financial asset, or the receivable. Factoring varies from a bank loan in several ways. Banks base their decisions on a company’s credit worthiness, whereas factoring is based on the value of the receivables. Bank loans involve two parties, while factoring involves three parties.

IFG will typically look at the creditworthiness of a client’s customers and does not expect to buy 100 percent of a company’s receivables. There are no minimum or maximum sales volume requirements. IFG’s professional rates are competitive because each client’s circumstances vary, which may have an impact on the fees charged. The program allows choices of invoices to be factored, enabling customers to retain most of their money, while spending the minimum fees to guarantee adequate cash flow.

Upon receipt of invoices, IFG checks the credit of the debtor named on the invoice and makes sure that the sale represented has been satisfactorily completed. Once this is done the debtor is advised of the purchase by IFG and the client receives their funding. At the end of the credit period, the debtor pays IFG directly completing the transaction.

About The Interface Financial Group (www.ifgnetwork.com)

The Interface Financial Group (IFG) is North America’s largest alternative funding source for small business, providing short-term financial resources including spot factoring (invoice discounting). The company serves clients in more than 30 industries in the United States, Canada, Australia, and New Zealand, and offers cross-border transaction facilities between the U.S. and Canada. With more than 140 offices across North America and over 35 years of experience, IFG provides innovative invoice factoring solutions by offering short-term working capital to growing businesses. Single invoice factoring, or spot factoring, is an extremely fast way to turn receivables into cash.

IFG was founded in 1972 to provide short-term working capital to help small to medium sized businesses grow. The IFG organization operates on a local level, providing clients with local knowledge and experience and business expertise in numerous diverse areas including accounting, finance, law, marketing and banking.

Media Contact: Kristin Gabriel MarCom New Media T: 323.650.2838; E:  Email Contact  Headquarters: The Interface Financial Group, Inc. 7910 Woodmont Avenue, Suite 1430 Bethesda, MD 20154 T: Toll Free: USA; 877.210.9748 Canada; 877.340.6893

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.