#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.

Of course these stats are no surprise to business owners.  Rebuffed by banks, they increasingly turn to factoring and purchase order financing for cash flow needs. The New York Times recently ran an article on the shift, highlighting individual companies that used purchase order funding last year when long-time bank loans had left them standing solo at the financing alter.

This alternative business financing market increased an astounding 80% in 2009 for one of the purchase order funding companies interviewed.

The article, entitled The Places They Go When Banks Say No, (by Andrew Martin, January 30, 2010) can be read at NYT online.

Purchase order (PO) funding provides a cash advance so the business can pay the source company manufacturing the goods. This allows the business to obtain the product, or materials needed to create the product, that will ultimately be delivered to the customer.

On the other hand, factoring provides cash through the purchase of invoices or accounts receivable at a discount for services rendered or products already delivered. Factoring involves funding after performance while purchase order financing requires funding prior to performance.

Both factoring and purchase order funding are in demand during the credit crunch providing opportunity for cash flow brokers and investors. To learn more be sure to read How I run My One Person Factoring Business, by Jeff Callender.

First, let’s define the differences between Factoring and PO Funding.

Factoring: The purchase of business to business INVOICES (or ACCOUNTS RECEIVABLE) at a discount for services rendered or products delivered

PO Funding: The advance of cash against a PURCHASE ORDER or CONTRACT so the client can source the product or the raw materials needed to create a product, in an effort to deliver to the end user. In some cases, PO Funding is needed to hire employees or source equipment needed to fulfill a contract.

As you can see from the definitions, Factoring involves funding AFTER performance of an obligation and PO Funding requires funding PRIOR to performance.

Ok, so, now put your funding hat on  – would you advance money to a client and HOPE they end up performing so you can get paid back? Or, would you prefer to fund them after they have performed? Ask yourself these questions:

• If I advance my client the money and the very next day they go out of business, will I get paid?
• How can I be assured that they will perform?
• Does the client have enough money to pay me back in the event that they are unable to perform?
• What happens if the end user (debtor) cancels the order after I have advanced the money?

Certainly, there are more questions to ask, but, I think you get the point.

So, with that said, why do funding sources offer PO Funding? Well, we offer this in certain situations. First, we would never provide PO Funding for a service contract, nor, would we provide PO Funding when the money is needed to purchase raw materials. We do provide PO Funding when the transaction involves the purchasing of finished goods. Let me give you an example:

Our client is in the Apparel business. The client receives a Purchase Order from a large retail outfit (lets say Macy’s) for 1,000 Silk Shirts. Our client needs to source the shirts from a manufacturer in China. China refuses to ship the product until they receive a Letter of Credit or Cash.  Millennium is approached with this opportunity. Millennium provides the letter of credit needed and China ships the shirts directly to Macy’s. Our client creates an invoice to Macy’s and Millennium now factors the invoice.

To summarize, when you are approached with a potential PO Funding opportunity, ask the client the following questions:

• Is the funding needed to source finished goods? -  if the answer is no, no deal
• Do you have a history of managing these types of transactions -  again, ask yourself if you would fund someone that is doing this for the first time?
• Do you have any current outstanding Accounts Receivables (Invoices) that my funding source could finance against as extra security -  if they don’t, most funding sources will run away.

In conclusion, many times prospects feel they need PO Funding when all they really need to do is factor their current invoices to free up the cash needed to pay suppliers. Ask the right questions and you will save a great deal of time and energy in the future.

Timothy J. Sardinia – Mr. Sardinia is currently a Partner with Canfield Capital Management, LLC, a Member of Steelkilt, LLC, a Member of Millennium Automotive Group, a Member of Millennium Legal Funding. Tim can be reached at tim@millenniumfunding.com or by calling 716-204-4800.