But wait, how about all of those smaller invoices that larger factors did not find appealing since the fees could not justify the costs?

Remember, an invoice of $5,000 would typically generate a discount fee somewhere between $150 and $200 dollars, based on a 30 day cycle. For larger factoring companies, these amounts could not cover overhead costs to underwrite and fund these invoices.

As the English proverb states, “Where there’s a will, there’s a way.” Enter the small factoring company. Typically, this brand of factor prefers smaller invoices and usually works with companies having revenues below 1 million per year.

The popularity of this niche factoring group has shown amazing growth over the last few years. The current financial crisis created an enormous opportunity for smaller companies in desperate need of working capital.

However, for those new to the factoring industry, growth can be a painful process. Since there is very little, if any, barrier to entry in the asset based lending world, many new companies are unaware of the pitfalls and risk associated with funding invoices.

Often, I get calls from friends and acquaintances asking me about my factoring company and how they can get started in the factoring industry as well. Usually they have some capital raised from private sources and they see the returns factoring companies get on their funded deals. Usually I ask the first and most important question, “What happens when your invoices don’t pay?” Then I will follow-up with additional inquiries regarding recourse vs. non-recourse, legal documents, verification, software, marketing, etc. My intent is not to frighten anyone from entering this industry but rather educate. More often than not, the person on the other end of the phone thanks me for giving them my views on the good and the bad of invoice factoring.

Yes, an opportunity is available for small factors to thrive in a market where alternative financing is needed due to the current economic climate. Be diligent, be professional but most important, be PROFITABLE.

Don D’Ambrosio is President and CEO of Oxygen Funding, Inc. located in Lake Forest, California. Don’s company specializes in factoring small invoices for businesses and more information can be found at his company’s website, www.oxygenfunding.com. Don can also be reached directly by phone at 800-790-3419 or email at don.dambrosio@oxygenfunding.com

Less competition from the large factoring companies can equal more opportunity.

Just ask Jeff Callender, founder of Dash Point Financial Services.  He went from start-up cash flow broker to small business factoring funder in just a few short years.

Jeff generously shares his tips for success gained from real life experience.  In addition to his acclaimed Small Factors Book series, he provides workshop instruction at factoring trainings and association meetings.

Here’s a look at an upcoming workshop designed especially for small business factoring.

International Factoring Association Presents:

Small Factors Workshop

Thursday & Friday, October 14th & 15th, 2010

Rio All-Suite Hotel & Casino Las Vegas, NV

Small Factors have unique needs. This workshop is designed to give small factors a forum to discuss and learn. Emphasis will be on round table discussion, networking and education.

We will be discussing specific topics that are of concern to Small Factors. Some of the topics that we will concentrate on are:

* Locating working capital

* New and innovative technologies

* Risk mitigation in the present economy

* Legal issues

* Marketing

* Making your business mobile

* New products to offer

* Outsourcing

* Working with attorneys

* New due dilligence techniques

* Case Studies

The second component of our meeting will concentrate on networking. We will begin on Wednesday evening with a Welcome Reception. Breakfast and lunches will be held together to give you a chance to network with the other attendees. Dinner on Thursday evening will also be included.

Moderators: Jeff Callender of Dash Point Financial and Ryan Jaskiewicz of K & L Finance Company with legal council provided by David Jencks, Esq.

The workshop cost is $645 for IFA Members (or $695 for Non-Members) with registration available online at factoring.org

Source: International Factoring Association

We can’t promise you’ll walk away from the Vegas casinos with money but we do know you’ll take  home valuable factoring training!  If you aren’t able to attend the workshop you might want to check out these affordable eBooks authored by Jeff Callender:

How I Run My One Person Factoring Business – $10.95

Marketing Tools (also included in the Small Factor Series) – $13.95

Small Factor Series – 6 Essential eBooks for Factors and Consultants – $95.00

Improve your chances for approval by keeping four qualifiers in mind when courting receivable financing:

1) What’s Your Type?

Factoring firms tend to specialize in certain types of invoices. They have fine-tuned their systems to fit a particular niche of the industry. If their specialty is medical factoring then they might not be into transportation factoring.

That’s why the first round of qualifying questions will include:

“What industry does the business work in? What are the goods or services they provide?”

While some companies offer funding on a variety of invoice types it pays to know any preferences upfront to avoid turndowns.

2) Size Matters

The size of a transaction matters to the factoring company. Make sure you know,

“What is the average monthly invoice volume and desired credit facility?”

Larger companies might require a minimum volume of $50,000 per month. If that’s the case then it’s better to send the smaller deals to a small business factoring specialist.

3) The Company They Keep

Good news! The credit worthiness of the business is not the primary concern. With invoice funding new businesses and other companies deemed “unbankable” are able to access working capital.

That means the main focus is shifted to the quality of the customer paying on the invoice, leading funders to ask:

“Who are the customers and how long do they take to pay?”

A factoring company generally likes to see customers or debtors paying on invoices in 30 days, although some will accept 60 to 90 days. They will look to the credit of the customer and ask for an accounts receivable aging report. If the risk of timely payment seems too great they could decline funding invoices owed by a particular customer or altogether.

4) Let’s Be Exclusive

Factors provide working capital with an advance on invoices. They need to know they are first in line to receive payment on the account receivables purchased. They’ll want to know,

“Has the business obtained prior financing with another company?”

They are trying to determine if existing claims have been filed against the receivables, making a lien search a standard part of underwriting. If it reveals there is already a UCC-1 Financing Statement of record the factoring company will want it terminated or subordinated by the creditor.

It pays to be prepared. Whether business owner or factoring broker be sure to know the answers to these questions. Then do your homework so the funding request goes to an investor that fits the deal. It will save you and the factoring company time, frustration, and rejection!

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.

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!

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.

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.

Since the overall goal is improved cash flow, a company considering accounts receivable financing will carefully weigh the benefits against the costs. Here are five ways a business can reduce or offset the cost of factoring and still improve cash flow:

Strategy #1 – Early Payment Discounts

Use the money to take advantage of early payment discounts offered by suppliers and service providers.  A standard early payment discount is 2/10 net 30.  In this scenario the vendor will provide a 2% discount if the bill is paid within 10 days, with the full amount due in the standard 30 days.  While the savings might seem small ($2.00 for every $100), over time it can really add up.  It will also help offset the discount fee charged by factoring companies. If you don’t see an early pay discount on the invoice, then ask!

Strategy #2 – Bulk Purchasing

A supplier will often provide a reduced price for bulk purchases.  If you can order 500 widgets for $1.00 each or 1,000 for $0.75 each it makes sense to take advantage of bulk pricing since this can equate to a savings of 25%, or more.  Just be sure to purchase items the company is certain to need and utilize.

Strategy #3 – Target Fast Paying Customers

Time is Money and the length of time it takes a customer to pay on the invoice has a direct relation to the cost of factoring.  The discount fee charged by the factoring company goes up the longer it takes your customer to pay.  By targeting invoices with customers that normally pay quickly a company can reduce their factoring cost.

Strategy #4 – Delay Invoice Submission

Another way to make the “Time is Money” principal work for your business is to first age the invoices for 10-20 days before submitting to the factoring company for a cash advance.  Even customers that typically pay in 45 days can be turned into 30-day customers by first aging the invoice for 15 days prior to factoring.  Policies on this strategy can vary by factor so discuss the parameters upfront.

Strategy #5 – Increase Growth and Profit

If a company can increase profits by an amount greater than the cost of factoring it can make economic sense to consider this business financing option.  An increase in working capital can provide the funds it takes to accept and fill another order.  Additionally, it can contribute to increased profit margins since many overhead costs are fixed and may not incrementally increase with the cost of goods.

When a company wants to increase cash flow by factoring accounts receivables the impact of the factoring cost can be greatly minimized.  Just be sure to consider these 5 cost reducing strategies that pay close attention to the timing of invoices and how the factoring cash advance is spent.

Related Articles:

When Should a Business Use Factoring?

How to Factor on Small Margins

About the Author:  Tracy Z. Rewey is a 20 year veteran of the cash flow industry, respected author, and recipient of the ACFA Million Dollar Club Award and the DBAA Lifetime Achievement Award.  She helps businesses and brokers solve cash flow needs.

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