With traditional financial institutions continuing their stranglehold on lending to businesses, the factoring industry has experienced a renewed interest from companies seeking additional capital to fuel their growth and maintain even cash flow.

Believe it or not many businesses are doing quite well in the current economic climate despite all of the negative news we read on a daily basis. Companies like Apple and Google continue to have record profits and their stock prices continue to climb.

We’ve also seen an influx of initial public offerings from internet startups such as LinkedIn, Pandora, Groupon and Zillow. With any new IPO, only time will tell how well these companies will perform in the months and years to come. Coming from a person that took a company public a few years ago, get ready for 10-Qs, 10-Ks, earnings calls and every other disclosure required by the Securities and Exchange Commission.

Economic indicators are showing positive signs as well. According to the United States Department of Commerce, the U.S. Gross Domestic Product (GDP) increased at an annual rate of 1.8 percent in the third quarter of 2011. Earnings statistics in Q3 2011 were quite impressive. Based on 443 companies of the S&P 500 index, 76 percent of stocks reported higher earnings per share compared to Q3 2010. Also, 69 percent of S&P 500 topped earnings estimates.

As much as we would like to revel in all of this good economic news, it still needs to be tempered with a dose of reality. The housing market continues to struggle to gain any traction. It is estimated the home values lost over 700 million in 2011. The national unemployment rate is around 8.6 percent with several states such as California and Nevada still in double digit figures.

So what does all of this news mean for the average factoring company?

We take the position that factoring is a valuable tool for businesses in both good times and bad. Whether companies are expanding or maintaining their current structure, accelerated cash flow through factoring is always a viable solution. We advise our clients that if their company’s profit margins allow them to absorb the cost and increase sales, the margins will increase and be a win for both the factor and the client.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California.

For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com.

The guide contains information on industry related topics including, benefits of factoring, factoring vs. bank financing, sample transactions, targeted industries, qualifying prospects, overcoming objections and more.

The response was absolutely overwhelming!

Within a day of entering the post, we received requests from brokers in the United States, Canada, Mexico, Great Britain, Slovenia, New Zealand, China, Saudi Arabia, Africa, and China. I was floored that so many people from around the globe knew what factoring was and wanted to learn how to participate in the industry.

For those of you that missed our guide and are interested in learning more about brokering or just the factoring industry in general, here are a few key points that we feel you might find useful.

Factoring Defined

Factoring refers to an arrangement whereby a factor purchases an account(s) receivable from a business at a discount to the face value of that receivable. The factor earns a fee based on the number of days that the receivable remains unpaid, i.e., the longer the receivable remains unpaid, the larger the fee incurred.

Effectively, the business is no longer dependent on the conversion of accounts receivable to cash from the actual payment from their customers, which takes place on typical 30 to 90 day terms. Businesses benefit from the acceleration of cash flow.

Today, the most common form of factoring fits conveniently in your wallet – the credit card. Each time a merchant accepts a credit card, the merchant (seller of the goods) is giving up a portion of the total sale to the card issuer (typically a bank) who in turn, eventually collects from the consumer.

Benefits of Factoring Invoices

Any company, whether starting out, experiencing a growth phase, or mature in years needs good cash flow. When a business sells a product or service to a customer, that business provides an invoice stating the products or services sold and the amount the customer has agreed to pay. It is an IOU from the customer to the business. Sometimes these invoices are paid immediately but quite often they are paid anywhere from 7 to 120 days.

There are a number of benefits derived from the use of factoring:

• Immediate Access to Cash

• Take Advantage of Early Payment Discounts

• Eliminate Overhead and Invoice Processing Expenses

• Build Your Credit Rating

• No Liability on your Balance Sheet

Advantages of Invoice Factoring vs. Bank Financing

Factoring is not a “loan” – it is the sale of an asset.

A loan places a debt on a balance sheet, and it costs interest. By contrast, factoring puts money in the bank without creating any obligation to pay it back. Thus having more cash on hand and fewer receivables strengthens one’s balance sheet.

Loans are largely dependent on the borrower’s financial soundness. With factoring, it is the soundness of the client’s customer that matters most – a real plus for new businesses without an established track record.

These are just a few key points that are covered in our “Guide to Wholesale Factoring. For those new to the factoring industry there are many associations, professionals and publications that provide educational guidance and useful information about the factoring industry.

While you’re at it, check out this publication for great insight from professionals giving you their perspectives and experiences on a wide range of factoring topics. This is a great time to get involved in the factoring industry with many resources available to new brokers.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California or online at www.oxygenfunding.com.

For a complimentary copy of his How To Guide for Factoring Brokers and to register as a broker please email don.dambrosio@oxygenfunding.com. 

Whether I’m conducting a cash flow workshop or networking with colleagues, this question seems to come up at least once per event.

With the recent downturn in the economy and banks constricting lending, invoice factoring has become a popular alternative for many businesses seeking capital to expand their operations.

Although factoring has been around for ages, its newfound popularity and low barrier to entry has created an influx of new factoring brokers and funding sources looking to make deals. Having worked in both the insurance and mortgage industries many salespeople contact me inquiring about factoring and where to find new referral business.

So, back to the original question,

“Where does a factoring broker or funding source go to find prospects for invoice factoring?”

From my perspective, there is no magic place or formula, otherwise everyone would have figured it out by now. Here are a few points to consider before you begin to prospect for new clients:

1. Personality

Every person is unique and what works for one may not work for another. Some brokers may prefer speaking in front of groups of people while others are more comfortable with networking groups. Several of our colleagues are extremely proficient with social media or have very popular websites that draw new prospects through ad clicks.

2. Experience

I have found that many successful brokers have experience in a particular industry, which utilizes factoring giving them an edge in finding prospects. For example, we have funded many prospects from brokers in the apparel and transportation industry that had previously worked in those industries.

3. Persistence

Plant seeds. The prospect or business referral you meet today may not connect with you at first but may bear fruit sometime in the future. I cannot tell you how many times we receive calls and emails from brokers, bankers and CPAs that were from events from months and years past.

The bottom line is that your success depends on you. Some factoring brokers may prefer to stay in their sweet spot when looking for new business while others may wish to venture into new areas of opportunity. No matter which course you choose be persistent, be patient and most importantly enjoy the ride.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his factoring company website at www.oxygenfunding.com.

You may also enjoy these additional articles by Don on the factoring business:

Factoring Invoices – Waking a Small Sleeping Giant

Is Factoring Always About the Account Debtor?

Starting Your Own Factoring Business?  It’s Your Call!

Every business owner wants to succeed and have their company flourish which is why we took the leap of faith in the first place. Sometimes however, our actions or lack thereof can answer that question in ways that may surprise even the savviest entrepreneur.

Anyone familiar with the asset based lending industry knows there are numerous risks associated with invoice factoring. How many times have we heard from our salespeople,

“This prospect is a no brainer and we should be able to fund him in less than a day.”

Those of us that fund accounts receivable know that what may look like the perfect prospect could be your worst nightmare.

As I have previously written in our June 13th  article, “Factoring: Is It Always About the Account Debtor?” we all know that there is no substitute for good underwriting policies and procedures that focus your due diligence on both the client and the account debtor. However, besides focusing strictly on underwriting guidelines, every now and then common sense can play a very large factor in determining if a certain deal is right for you. Below are a few common sense suggestions you may want to consider before you send out that next ACH or wire:

1) Does the factoring deal make sense?

I realize this may sound foolish, but I cannot tell you how many times there are conflicts between what the prospect says and the paperwork gathered with the application. If you cannot understand the deal flow, run it by a colleague or professional in that field who may have more experience and continue to ask questions.

2) How long has the prospect been in business?

Even though the debtor has excellent credit, if your client has no track record and produces faulty goods or delivers shabby services, chances are pretty good that you will wind up in a dispute and not get paid.

3) Why is the prospect looking for a new factoring company?

Whenever a prospect is leaving a factor and wanting to start a relationship with a new factor, be cautious. The prospect has every right to shop around because they may have received poor customer service or they feel they can get a more competitive rate from another factor. It may be worth your while to put a call into the current factoring company to see if they could provide some background on the client. Even though it may be an uncomfortable call, you will be surprised how many times factors cooperate with one another in buyout situations.

4) Is it best to just walk away?

This is probably the toughest one of all. You’ve worked so hard to bring in this lead, gather the paperwork and the returns look amazing. Unfortunately, the deal just doesn’t fit your company’s profile. As a very good friend and colleague of mine once told me when I first started my business, “Sometimes the best deal is no deal.”

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com

Oftentimes, factoring prospects annualize the percentage charged by factors, extrapolating three percent per month to an interest rate of 36 percent per year. In the world of healthcare staffing financing, this scenario is like comparing apples to oranges.

When comparing a bank loan with invoice factoring, it’s important to keep a few things in mind:

• A factor does not loan money like a bank does. Rather, a healthcare staffing accounts receivable factor purchases invoices at a discounted rate. Factoring is a form of short-term funding, so a discount rate should not be converted to an interest rate. For example, some firms offer a two percent discount (2% for net 10) for quick payment. In a year, there are roughly 36 10-day periods. Using the annualized percentage parallel, that comes out to 72% “interest.” Are these companies really paying 72% for quick payment? No, and healthcare staffing factoring companies don’t earn 36% interest either.

• Moreover, a factor is continuously advancing and collecting funds, compared to a bank that provides the money only one time, the day that the loan is received. An accounts receivable factor has the ability to grow as its clients grow. Once a company uses the funds from a bank loan or exceeds its credit limit, there’s little room for it to grow.

• Banks approve business loans or lines of credit based on a company’s historical operating and financial performance, a factor’s main criteria is the creditworthiness of a prospect’s customers. Banks tend to shy away from business owners who are just starting up, going through seasonal growth, have bad personal credit or have too much concentration of their sales with one or two customers. Many factors are able to look past the above criteria because their decisions are based off of a prospect’s customers’ ability to pay. So it’s very possible for a business that has creditworthy customers to work with a healthcare staffing factoring company even though they have been previously turned down for a traditional bank loan.

• The loan process with a bank is time-consuming and cumbersome, and it could take weeks or even months to receive the loan proceeds. Whereas a factoring firm’s application and approval process can take less than a week, and factors have an ongoing ability to approve additional lines of credit quickly.

• Oftentimes, a bank loan requires collateral in addition to a company’s accounts receivable. The only collateral that a factor requires is the company’s accounts receivable. A bank will most likely require business owners to personally guarantee the loan as well, and factoring companies won’t always require a personal guarantee to advance money.

• Taking out a business loan creates debt on a company’s balance sheet, and credit ratings go down because of loan limitations. On the other hand, healthcare staffing funding through a factor increases credit ratings by creating better cash flow and helping the company pay their bills promptly.

• Whereas banks only loan money, there are a multitude of services that factoring companies provide their clients in addition to ongoing funding. Some of these supplementary services include: posting payments, dispersing reports, handling collections and reviewing credit for their customers’ clients.

When looking at the big picture, entrepreneurs have to weigh the costs of factoring against not having immediate cash. More often than not, the decision comes down to either selling the accounts receivable or putting up with crippling cash flow problems and missed sales opportunities.

Philip Cohen is the founder and president of PRN Funding, LLC, which is an extraordinarily focused niche player in the healthcare staffing funding marketplace. Through a process known as factoring, PRN Funding provides business owners with the financial resources needed to grow and effectively compete in the industry. With no minimums or fixed terms, PRN Funding provides healthcare staffing agencies with flexible and immediate access to capital. We give you the freedom to factor what you want, when you want, whom you want, for as long as you want. Prior to founding PRN Funding, Mr. Cohen was an executive officer of The MRC Group, a national provider of Medical Transcription Services. Contact Philip Cohen at toll-free 866.776.5407 or via email at pcohen@prnfunding.com. Please visit PRN Funding, LLC on the web at http://www.prnfunding.com/

Article reprinted with permission by PRN Funding, LLC.

Factoring Company Competition

Along with this newly found popularity, competition within the industry has increased and everyone wants to make a deal. Common slogans are,

“Same day funding since we base our approval on your client’s credit,” or “Even if your credit is poor, we can still get you funded.”

Conventional wisdom within the factoring industry has always stressed that deals of this nature can be funded since it’s the client’s customer (otherwise known as the account debtor) that will actually be paying the factoring company. For example, a small consulting firm with little or no credit can get funded as long as their customer is creditworthy.

While much of this long standing rule is true, should all the focus of your due diligence be solely on the account debtor?

Providing Factoring Services In Today’s Economy

As I mentioned earlier, the same current economic climate that has created opportunities within the asset based lending industry can also be your worst enemy. Unfortunately, many businesses needing factoring services have taken some tremendous hits over the last few years. We have seen industry declines in apparel, transportation, manufacturing and staffing to name a few.

If your prospect is in a declining industry and sales have slowed, generally, some bad things start to occur. Unless they have sufficient cash reserves (which most don’t otherwise they would not be calling you) vendor payments get pushed back, payroll may be late and taxes go unpaid. Many times your prospect may need factoring just to stay afloat until the inevitable happens and you are left holding the bag.

Dealing with a client who has just declared bankruptcy is the last place where you want to be as a factor. I am not a lawyer and if you ever find yourself in this position, I would suggest that you consult one as soon as possible.

Reducing Factoring Risks

While there are no exact formulas for you to avoid risky clients, there are several steps you can take in your due diligence to mitigate your risk and limit your exposure:

• Run current credit reports on your factoring prospect. There are numerous credit reporting agencies you can utilize that will provide as little or much as your budget can afford.

• Gather the most current quarterly and year-end financial reports available. If the client has audited financial statements, read the auditors notes to the financial statements. Also, look for trends on both the balance sheet and well as the profit and loss.

• Request the last two years of business tax returns for both the federal and state returns including payroll tax filings. If necessary, also request personal returns of the owner and or majority shareholders.

• Check with the state where the business is domiciled to see if they are in “Good Standing.” If a business is not in “Good Standing” or “Suspended” it usually indicates they are delinquent with their annual reporting requirements, have not paid their taxes, or have some other form of dispute with the state.

• If the prospect is required to maintain a license to conduct his or her trade, check with the local licensing board to see the license is current. If the license is suspended, you may not have a valid claim against the debtor or in the event of a dispute.

• Run a UCC-1 search to see if there are any liens against the business. This is extremely important since you as the factor will always want to be in first position on all collateral. In some cases there may be another UCC-1 financing statement already in place. This is not necessarily a negative indicator as the prospect may have an existing loan with a bank or equipment financing with another lender. In some cases the other secured party may subordinate their filing to allow you to be in first position on the prospect’s accounts receivable.

These are just a few basic steps you can take when performing due diligence on your prospect. Every deal is unique and your due diligence may vary according to the type of prospect and the industry in which they participate. Remember, no matter how well your Factoring Agreement between your prospect and you is written, as Benjamin Franklin so correctly stated, “An ounce of prevention is worth a pound of cure.”

About the Author: Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com for accounts receivable factoring.

Head on over to the IFA website to check out the great information.

The Factoring News and topics include:

• Elizabeth Duke – Forecasts for the Future from the Federal Reserve Bank
• Dr. Michio Kaku – How Technology Will Affect Business and Finance
• Michael Ullman, Esq. – Due Diligence Issues
• Darla Auchinachie, Consultant – Factoring 101
• David Jencks, Esq, Jencks & Jencks, PC. – Current Topics in Transportation Factoring
• Blaine Waugh – Introduction to Sales and Marketing
• Jason Peckham, Esq. – IRS and Tax Liens
• Marianne Eby, Esq. – Negotiation Techniques
• Bob Zadek, Esq., Buchalter Nemer – Report from the Courts
• Defending Bankruptcy Panel
• Factoring in Canada Panel
• Frauds, Fairy Tales and Facts Panel
• Letters of Credit Panel
• Topical Legal Issues Panel

In January 2011 exports set a record 167.7 billion up 16% from a year ago and beating the prior high of 165.7 billion in July 2008, according to reports issued by the US Bureau of Economic Analysis on March 10, 2011.

Exporting improvements can be attributed to a variety of sources including:

• Goods are more affordable to overseas buyers with a relatively weaker US dollar

• Increased prosperity of developing countries and their growing middle class

• Greater accessibility between US suppliers and foreign buyers facilitated by online interaction

• Focus on doubling US exports within five years to stimulate economic growth and jobs

So how does this all apply to invoice factoring?

Increased trade equates to increased financing demand. For example, a US business sells parts to a foreign buyer. The goods are delivered and the invoice generated. It might take the foreign buyer 30-60 days to issue payment but the US business needs capital now to manufacture parts to fill another order. Factoring the accounts receivable provides immediate access to cash.

International factoring can work the other way around too. A foreign company may sell to a US buyer generating an invoice for the imported goods or services.

Factoring foreign accounts receivables comes with it own set of unique challenges.

First, overseas companies are likely to speak a different language…literally. The laws and paperwork for adequately securing and protecting the factoring company can also differ in another country.

Other details include the use of credit reporting companies with data on foreign creditors along with the issuance of credit insurance policies and letters of credit to improve the level of comfort for the factor.

When brokering international invoices it pays to work with factoring companies experienced in the nuances of overseas buyers and sellers. The 2011 Directory of Factoring Companies is a solid resource for identifying reliable businesses. Here is a highlight of one such company listed in the updated directory.

Factoring Company Spotlight

J&D Financial has been providing domestic and international invoice financing for over 30 years. Financing options also include government receivables, construction factoring, and purchase order financing. They work with factoring brokers all over the world paying commissions for referrals based on their factoring fees.

Commission Structure and Funding Guidelines:

• 15% commission on any factoring affiliate deals with a 4% fee or higher
• 10% commission on any deal with less than a 4% factoring fee
• Negotiated commission on purchase order financing
• If we can’t fund, we will provide factoring referrals to alternate funding sources
• Any industry (except third party pay medical)
• Any size invoice
• Pre and Post Petition Bankruptcy Financing
• Minimum $5000 per month to $2,000,00 per month.

Source: JD Financial at http://jdfinancial.com/factoring-brokers.php

If you are interested in doing business as with JD Financial just use the link to their website and fill out the Broker Sign In Form. Once complete you’ll have access to a factoring brokers contract as well as other documents you can download.

Are we getting too impersonal when it comes to making offers or negotiation?

Despite the technological advances over the years the rules of negotiation have not changed. They have a set of “best practices” that the conveniences of technology can derail.

So, can you negotiate Factoring deals online?

To answer, let’s look at three basic negotiation techniques (that apply to factoring and business in general):

1. It must be personal.

Well, despite your ongoing political debates with friends and the numerous jokes being passed around by co-workers, email is anything but personal. Here’s a hint, when the proposal is being sent to BullDOG345@wherever.com, you are already losing the deal.

2. It must allow for interaction.

Don’t mistake emails going back and forth as meaningful interaction. Although the English language is powerful in the hands of a gifted writer, all bets are off when it comes to sending emails back and forth. There is no room for error when it comes to interpretation. Sarcasm, humor, and a host of other real-life emotions not only get lost, they get abused.

3. Sharing becomes easy.

This one is relatively new, but if you are up against someone else, expect your offer to be immediately forwarded to several of your competitors. I am going to guess you didn’t want them in on your best offer letter if you could help it. It also gives the competition to “one-up” your deal out of context. That is not to suggest that you don’t put an offer in writing but a potential client is far less apt to fax on your offer versus just hit “forward” on the email.

Email is a great “foot in the door” vehicle – at most. People want to do business with people, not computers. I receive numerous business proposals on an almost daily basis. Although I like them from a screening process, I would never continue ongoing communication from someone online. Sometimes you just need to get on the phone or meet face to face.

Modern technology can help us cut numerous corners, but the subtlety and importance of the negotiation process is just not one of them.

So, what do you think?  Should a factoring broker or factoring company use email to make and negotiate offers?  Tell us what you think in the comments below!

#1 – Targeting the Wrong Business

Factoring financing is all about “business to business” transactions. That means targeting companies that provide goods or services to other businesses. If they sell retail the invoice will be direct with the consumer, which doesn’t qualify for accounts receivable factoring.

When starting out it makes sense to further maximize marketing efforts by focusing on businesses that are frequently cash strapped and easier to qualify. Service companies like temporary staffing, janitorial, guard services, etc. are historically great candidates. While industries like medical, construction, and transportation can be more competitive and/or harder to place with investors.

#2 – Confusing Factoring with Purchase Order Financing

These are two different types of financing which are often confused. Factoring is the purchase of an invoice after the goods or services have been delivered. The sale is complete and the invoice has been generated.  The invoice or receivable is purchased at a discount.

Purchase order financing occurs before the service has been rendered or product delivered. It is PO Funding that often provides the capital to manufacture or complete the goods so they can be shipped, delivered, and invoiced.  Some factoring companies will consider offering Purchase Order funding in conjunction with invoice factoring.

#3 – Failing to Get Face to Face

Successful marketing is all about getting one-on-one with the business owner. Networking through professional groups like the Chamber of Commerce is effective for factoring marketing. It is estimated that over 50% of new factoring clients are located through networking.

Networking allows for personal interaction. It’s unlikely a business owner will share their needs for financing until they are comfortable with you and that takes personal interaction.

If your marketing involves any type of direct mail know it will take diligent telephone follow-up to set-up meeting appointments. The ultimate goal is to get face to face with the potential client to see if invoice factoring will meet their needs for business financing.

Looking for more factoring broker training?  Be sure to grab your copy of How I Run My One Person Factoring Business in the bookstore.