Accounting Techniques for Factored Receivables

Okay. So, I have decided to factor my receivables to improve my cashflow and working capital position, but my CFO/controller is grilling me about how to account for factored receivables and the funds collected...what do I do?!

There are numerous ways that ledger entries may be made to account for the transactions, funds advanced, and reserves. It is incumbent upon the business owner to seek counsel and tax advice on the best manner to account for these entries. Generally, the business owner is able to successfully maintain a stronger balance sheet when using factoring versus taking on additional debt or equity partners.

Should you so desire, please contact me directly for a guide on how to account for factored receivables. My contact information is available at the top, right of this website.

Disclaimer: The information contained herein should not be construed as advice, guidance, or recommendations regarding financial reporting standards or practices, nor should it be used as basis for any claims now or under any circumstances against the author or Bibby Financial Services. It is the sole responsibility of the business owner to consult with their tax advisor and/or attorneys in matters relating to financial reporting. Bibby Financial Services holds no claim to the accuracy or authority of the information provided in this article, or any documents provided by author, or associate, and shall be held harmless in any adverse actions claimed by reliance upon the information provided in any form.

Why Do Factoring Companies Need To See So Much Paperwork???

Many people considering PO and/or AR funding have wondered why factoring companies need to review detailed transaction documentation. I have heard, "Well, the banks don't need to see that." It can be frustrating to have to submit so much paperwork, but the way a factoring company funds is based upon the transactions of a business, not solely on its financial statements.

The details of what is listed on customer POs, POs to suppliers, proforma and commercial invoices from suppliers, shipping documents and invoices to customers are of great importance in making sure that your transactions are done properly and that if anything should go wrong the documents can stand up in court. Items that may appear to be of no great importance generally are (Incoterms, shipping dates, cancel dates, payment terms, bill to and ship to addresses, etc.) and can be the difference between a transaction running smoothly with well established relationships and a distaster and damaged relationships. As in the rest of life it is the little things that really count.

Whereas a bank is mainly focused on cash flow and profitability, PO funders and factors are more interested in the credit quality of your customers and the performance capacity of your suppliers. When funding invoices and POs the key to the kingdom is solid paperwork.

Below is a testimonial from one of our clients which upon first reading is quite funny, but once you read it a second time you can see that by focusing on the documentation and flow of goods your funding company can actually help improve your successes and business processes. You can find it on our website here.

Working with Bibby Financial Services – what was it like? Well, it was sort of like hell.

Our company sells Tasers and police training to the Brazilian government. I had a two-week deadline to complete a transaction that involved multiple currencies, different time zones, multiple parties and numerous legal and governmental hurdles. And what did Bibby do? They held my feet to the fire. They made me jump through hoop after hoop. Each day, there was one more thing to do and then another and then another. They made sure every step in the process was completed on time and in excellent order. The result was a perfect transaction. So now we are doing it again.

Remember, nobody else could do this deal. Bank after bank denied my transaction because they wouldn’t do purchase order finance. Then, speed was everything because we only had two weeks, start to finish, to get the product to Brazil. And finally, this deal mattered to our company. A lot. Because this one sale was larger than all our sales for the previous year.

Here’s how the deal worked:

Our company won a contract to deliver $4 million in Tasers to Brazil. The first step was for the government to issue to us a non-transferable letter of credit through the government-owned Banco do Brasil, stating the firm two-week deadline. Because the size of the deal was so large, our company needed cash to pay the manufacturer ahead of time. Bibby stepped in at this point. First, Bibby insured that the bid process in Brazil and subsequent agreement were properly executed. The letter of credit was assigned to Bibby, who then sent third-party inspectors to the manufacturer to make sure the product complied with standards set by the Brazilian government. Bibby paid the manufacturer based on that report. Bibby also coordinated with the manufacturer, trucking company and freight forwarder to insure that the goods would arrive in Brazil on time so they could collect from the LC. The goods were shipped to Brazil by air and the Brazilian government paid the letter of credit via the Banco do Brasil, sending the funds directly to Bibby.

What was it like working with Bibby? All of the things that needed to be done were done. Bibby knew the process to keep things moving forward. Bibby has my respect – they came through when others wouldn’t. It was very special in a common way, but they did it in a very special and uncommon way.

What was it like working with Bibby? Fun.

Recourse v. Non-Recourse Factoring

It's all about credit risk. If you sell on open credit to your customers, there will be times when you are concerned about repayment. The first question you should ask yourself is: Why would I sell on open credit to a questionable credit risk? The second is: Is it worth it?

I have seen so many business owners willing to stake the future of their business on a potentially profitable deal with a poor credit risk. Yes, the deal and margin may be attractive, but if the customer does not pay (for whatever reason), will it kill your company? Often people do not understand that all transactions are NOT created equal, and some of them, even though the return might be in the 30-40% range, are not worth doing. Think about it this way: If I had information that indicates the customer in this deal has a high probability of not paying, would I put my money into it? Why would a funding company if I wouldn't?

Recourse factoring allows for the funding advance of your receivables much in the same way a non-recourse program would, but there are major differences:

1. With recourse factoring you retain the credit risk of non-payment. In the event your customer goes bust or just doesn't pay, you are ultimately responsible for any funds advanced to you by the factoring company. With non-recourse funding, the factor takes 100% of the credit risk.

2. Recourse factoring is typically less expensive than non-recourse.

3. Non-recourse funders are very cautious about what debtors they will consider eligible for funding as they take on all the credit risk. Weak credit on your customers = probably not a viable non-recourse debtor.

4. Collection calls in a non-recourse arrangement may be more aggressive than in a recourse program. I qualify the "may" in the previous sentence, but my experience has been that clients have been bothered by the efforts of non-recourse funders to collect in some instances when the funder gets concerned about seeing their money back.

5. If you have quality customers who pay near their stated terms, what is the point of needing/wanting non-recourse funding?

Overview

Recourse factoring is typically less expensive, and with the addition of credit insurance can function similarly to non-recourse funding regarding risk. If you are selling to high quality customers (from a credit perspective), then recourse funding makes more sense. Also, factoring companies tend to be much gentler in their approach to verification calls/contact with your customers in a recourse arrangement.

Non-recourse funding is typically done in the trucking industry, though some factors will consider it in any industry provided the creditworthiness of the customers warrant it. Rates are typically higher than recourse programs, and advances can be limited due to debtor credit and concerns about repayment. If your main purpose of wanting a non-recourse program is to eliminate the credit risk of dodgy customers, then you are probably out of luck and need to reconsider using a recourse factor who will help you on the credit decisions and collection efforts.

Click here for a free quote/consultation.

Bruce Rector: How to Attract Outside Capital Successfully

A colleague of mine has been kind enough to allow me to reprint here an article he wrote recently on how to attract capital. This is a bit outside the arena in which I work directly, but for some companies finding investment or a debt package may be the right way to go. Often it can work well with an AR / PO facility too.

Bruce Rector is the President of The Rector Group. He has worked with large and small companies across a wide variety of industries, including technology, healthcare, biotech, distribution, utilities, and consumer product manufacturing.

A graduate of the University of Virginia, with an MBA from the Wharton School, Bruce has established an enviable business consulting record in the areas of strategy, finance and operations, with a proven track record of value-adding engagements. therectorgroup.com

_____________________________________

I've been having many conversations lately with CEOs and management teams about how to best position themselves to raise growth capital for their businesses. Companies are ready to start investing in their future again rather than just trying to survive. The good news is, with the right strategy, there is plenty of money out there ready to be put to work. Last month I did a quick tour around the state and visited with several venture capital and private equity shops. We discussed what companies should know when they are looking for capital. This article that I wrote for The South Florida Business Journal sums it up nicely and is a must read for business owners and entrepreneurs. While it is focused on early stage companies, the principles apply to all stages. Enjoy!

Are you ready for venture investors? You’ll have to prove it first.

Many early-stage companies seek outside investment capital in order to grow the company through additional infrastructure – both physical and human resources. I have met many companies through the years that eagerly sought funding and could explain why they deserved funding.

Passion is admirable, but regardless of how passionate you might feel about the opportunity the company is addressing, there are several criteria that management should consider in assessing the probability that they will actually be successful in attracting outside capital. Remember that any outside investor is going to take a very hard look at facts before deciding to invest. What are some of the facts they will consider?

Read more.

Thanks Bruce!

Fed Data Dump Part III: Elizabeth Duke's speech at the 2011 IFA conference in DC

Interestingly enough the good governor did not have much to say that had anything to do with factoring or PO funding. Did she realize that the International Factoring Association focuses on, mainly, non-bank lending? Apparently not. Her speech was all about the statistics related to traditional bank lending and had no bearing (or much interest) for those in attendance. Let me rephrase: I didn't get much out of it other than the impression that Ms. Duke was not very excited to be with us. She was pleasant for the most part, but did tend to deliver her presentation in a rather robotic and disengaged read-from-the-textbook manner and she danced around the pre-screened questions during the Q&A without actually answering them. Not too surprising.

Long story short: Bank lending is trending a bit upward year on year, but the recovery is fragile. Quit asking questions about Fed policy.

Great Post by James Altucher on Dreams of Greatness and the Reality of Business Ownership

I woke up at about 4am, made coffee, and read stories by Miranda July, Charles Bukowski (from his book “Hot Water Music”) Nora Ephron (from her book “I remember nothing”) and half a story from John Updike before I was ready to start my own writing for the morning. It was 4:47am when I got an instant message on Facebook. “Hi James. Can I just get one piece of advice from you”. I didn’t recognize his name. “Ildar” something.

The sun was just peeking through the curtains. I felt good. Within a few minutes, the first train going into the city would pass by the house. I like the sound of it. I don’t like to talk to people so early in the morning. I like morning sounds. Privacy. That’s why I wake up early to start writing. I wasn’t sure I wanted to IM with anyone at 5 in the morning. But…

“Sure,” I wrote.

He had a business selling eco-friendly bags. And he wanted to raise money from venture capitalists and wanted to know how to go about it.

Click here for full post.

Fed Data Dump Part II: What they didn't want you to know

Looks like the data implies that there is more structural disintegrity in the system worldwide than initially believed. Lots of US taxpayer money went to overseas banks. I am at the International Factoring Association Conference in Washinton DC this week and will hear one of the Federal Reserve board members speak on how the Fed operates and her forecasts for the future. Should be rather interesting...will post more after her speech and Q&A.

Time to start reviewing your supplier contracts?

It may be a bit alarmist, but I am of the opinion that if your products are tied in any way to the commodity markets (they probably are even if indirectly), then you need to take time to review potential impacts to your COGS as prices start to escalate.

The world is in much turmoil lately and this has already pushed up the costs of numerous items. Your supplier(s) will have to increase their pricing, and this means you may have to consider the same. Time to start discussing these matters with your colleagues and representatives.

The marginal growth of the US market seems to be more of a propping up than structural soundness. Look for opportunities to take discounts from your supplier(s) and incentivize your customers with them as well to maintain solid cash flow.

I expect in the next few weeks to get back to the more detailed posting that started this blog, but I will continue to place these smaller posts in the mix.

 

For an easy way to validate emails for free, visit: http://www.convincingmail.com/emailvalidation.aspx

Link for post on inflation

http://www.economicpolicyjournal.com/2011/02/nyt-on-coming-price-inflation.html

Source: Economicpolicyjournal.com and nytimes.com

Unit Input Costs (and personal consumables) look like they are heading upward

I have been waiting to post on the topic of the pending inflation or deflation to get a sense from various economists and first hand experience.

My sense is that price indexes across the board are trending upwards, and I know well that I am personally paying more for items from coffee to gasoline.

My point here is to encourage you to look into this topic further and determine what preparations need to be made for your business to minimize the squeeze to your margins and find backup sources for you raw materials and/or components. You may also want to review your business structure and processes to find inefficiencies that may be eliminated.

With Federal, State, and Municipal debt at high levels, a rather moderate economic response to continued quantitative easing, weather related crop and arable land damage, and growing political unrest across the globe, watch your costs.

Feel free to call or email me with questions.

Fed Data Dump: lots of details on what the Fed bought/supported

Here is the link to the data. Let me know what you think, and how it has affected small and medium sized businesses.

Once I've had time to digest the info, I will post my thoughts on the subject matter implications.

http://www.federalreserve.gov/newsevents/reform_transaction.htm

Challenges, opportunities ahead for carriers

Active truck capacity is tight at about 94%. Couple that with an increase in the regulatory environment and driver shortages expected over the next few years and you have set the stage for an interesting time in the trucking business.

http://fleetowner.com/management/news/challenges-opportunities-ahead-carriers-0917/

Credit: Sean Kilcarr - FleetOwner.com

Possible Tax Breaks for Small Business

New article from the Boston Globe on the possible new legislation designed to help small business. Please leave comments on your thoughts. Thanks, Sean.

HY98JBH4USTC

Credit Insurance

Insurance is something each of us will purchase at various points in our lives. Whether it be car insurance, health insurance, life insurance, homeowners insurance, or any other of the many types of insurance available it serves one main purpose: to mitigate the risk of loss. Credit insurance is no different. This type of insurance (aka: trade credit or receivables insurance) is designed to protect a business from an event where a customer who was offered net credit terms (i.e. Net 30 days) on an invoice cannot meet its obligation to pay.

Typically, this type of insurance will pay out an agreed upon percentage of the face value of the invoice in question, but as with all other kinds of coverage there are innumerable ways a policy may be structured and priced. Often the triggering event for a claim to be filed and honored is an insolvency, bankruptcy, or documented inability to pay on behalf of the customer.

Credit Limits/Decisions: When you apply for credit insurance you can submit only one customer (usually if they are a high volume exposure, read: multi-million), or, as is more often the case, your entire customer base, or perhaps a subset of your customers. Credit insurers would rather have multiple customers included as it minimizes their risks to some degree. Once you have submitted your list of customers to include in the policy along with the requested credit limit the agent will review the list, check their proprietary database of payment and financial information on your customers, and consult with their underwriters to determine how much credit they are willing to extend to each. You will then receive your quote with the credit decision list showing you what amounts of coverage per customer the insurer is willing to accept. You should expect the proposal and credit review process to take at least two weeks.

Pricing: This can vary, but is typically based upon a fraction of a percent of anticipated sales volumes. Premiums for the first year are typically due at the time of accepting the proposed policy and are then due on a monthly basis after that. Sometimes, you can find a company willing to accept less than a year's premium upfront, but expect to pay at least $10,000 for a policy. So, if your company has annual revenues of under $1 million credit insurance might be too expensive and you will want to conduct (as you should in any situation) a thorough review of any customers requesting net credit terms.

Providers: There are three main credit insurance companies in the world and they account for over 80% of all policies sold. They are Euler Hermes, Atradius, and Coface. As with any insurance you should shop around and find out which policy will provide you with the best combination of price, coverage, and service. Each of the above companies has its own database of credit information and one may approve one of your customer while another may not. Do not be convinced that the lowest priced policy will necessarily be the best for you as how responsive and attentive your agent is can be the difference between a miserable claims experience and a very smooth and helpful one. Also, it should be noted that as with every single insurance company on the planet (regardless of what they are insuring) if you have an imminent loss or a "pre-existing condition" there is not a company out there that can help. This is a risk management tool to help guide credit decisions and support you in the event of an unexpected loss.

There are also national, quasi-govermental entities that can provide trade coverage and guarantees, but these are usually focused exclusively on exports. In the United States there is the Export-Import Bank, and in Canada there is Export Development Canada.

How credit insurance relates to factoring: If your company factors or is considering factoring its receivables and you sell overseas odds are you will need to buy a credit insurance policy since the factoring company will require insurance. Sometimes they will take out insurance against your customers on their behalf, but note that regardless of how the insurance is structured the factoring company will have to be named as beneficiary/loss payee to ensure that they will be reimbursed for any factored funds that are not repaid by a customer/debtor. Factoring companies love to see credit insurance policies as it further mitigates everyone's risk. Just something to think about if you are looking for a factoring company.

This is a basic introduction to credit insurance. For more information, please contact my recommended sources and kindly let them know that Sean sends his regards.

Christina Montes de Oca
Euler Hermes ACI
christina.montesdeoca@eulerhermes.com

Art Warner
ARI Global Insurance
art@ariglobal.com

Click here for a free quote/consultation on AR funding and credit insurance.

Exports

“With our increasingly interconnected world — where 95 percent of consumers reside outside our borders — global markets can help revive the fortunes of U.S. companies and spur future economic growth.”

-U.S. Department of Commerce, November 2009

Exports are a critical component to the success of the U.S. economy and small to medium-sized businesses help to drive that success. Now may very well be the time for your company to consider expanding its business borders. The number of small business exports has tripled in the past decade, while the value of small business exports has increased 300 percent in the past five years. 20 percent of small to medium-sized enterprise (SME) exporters are companies with a single employee. In fact, 97 percent of all exporters are small to medium-sized companies.
International trade: Will it drive your company’s future growth and success?

IS EXPORTING RIGHT FOR MY BUSINESS?

You see the opportunities made possible by international trade. Now how can you maximize that potential for your business? There are several important questions to think about:

1. Your product has done well in the U.S. What overseas markets will be able to use it? Are there local competitors? Will your product easily adapt overseas? How can you assess demand for your product in other countries?

2. How will you sell your product overseas? Will you set up a local office, obtain a local agent/distributor or depend on internet sales? Will you need any special licenses to ship overseas? Will you be able to visit your overseas customers in person?

3. How will you ship your product overseas? Have you identified international freight forwarders and freight costing?

4. Does your company have capacity to support additional production? Are you prepared to accommodate changes in labeling that might be required to conform with overseas markets? Have you identified translators who can help you with documents, labeling and even cultural issues that might arise? Do you have employees to help with that or will you hire people on site to be your eyes and ears and provide market intelligence?

5. How will you finance this growth in your business? What are the special financing tools required for international trade, such as letters of credit? Have you identified financing experts who can help you with these issues? How will you collect your invoices from overseas sales and protect yourself from bad debts?

OPPORTUNITIES FOR EXPORTING

Globalization has made exporting — even for the smallest companies — a reality. It is changing the way companies make money. New markets diversify revenue streams for SMEs, helping to protect their companies. A recent survey of U.S. exporters found that 60 percent of small companies derived 20 percent of their annual earnings from exports. This percentage grows to 44 percent for medium-sized companies. More than three-quarters of the companies surveyed forecast export sales to grow by at least 5 percent each year for the next three years.

Would growth be good for your business? In this case study, Bibby Financial Services helped a client cross borders and expand into international markets in a complex transaction that involved five counterparties:

"Our company won a contract to deliver $4 million of our product to Brazil. This sale mattered because it was larger than all of our sales for the previous year. To begin with, the Brazilian customer issued us a non-transferable letter of credit through their bank, detailing the terms and conditions of the sale. Because the size of the deal was so large, our company needed cash to pay the manufacturer ahead of time. We turned to Bibby Financial Services (BFS). BFS ensured that the Letter of Credit (LC) was in order and that it could be assigned to BFS. They then sent third-party inspectors to the manufacturer to verify the product complied with standards set by the Brazilian customer. BFS paid the manufacturer based on that report. BFS also coordinated with the manufacturer, trucking company and freight forwarder to ensure that the goods would arrive in Brazil on time so they could collect from the LC. The goods were shipped to Brazil by air, and then BFS presented the paperwork to the bank to obtain payment under the LC."

WHY EXPORT?

95 percent of the world’s consumers live outside of the United States, so if a U.S. business is only selling domestically, it is reaching just a small share of potential customers. Free trade agreements have opened up markets in Australia, Chile, Singapore, Jordan, Israel, Canada, Mexico and Central America, creating more opportunities for U.S. businesses. Exporting helps small companies grow and become more competitive in all of their markets. Selling into new markets diversifies your revenue stream and can help you take advantage of currency fluctuations. For example, a weak U.S. dollar can reduce manufacturing costs, giving you a pricing advantage for your exported goods.

In the past 30 years, U.S. exports increased from $224 billion to nearly $2 trillion by 2008. Small and medium-sized firms account for the vast majority of growth in new exporters. About one of every five factory jobs — or 20 percent of all jobs in America’s manufacturing sector — depends on exports. Workers in jobs supported by merchandise exports typically receive wages higher than the national average. Small and medium-sized companies account for almost 97 percent of U.S. exporters, but still represent only about 30 percent of the total export value of U.S. goods.

Because nearly two-thirds of small and medium-sized exporters only sell to one foreign market, many of these firms could boost exports by expanding the number of countries they sell to. The quality of your product, competitive pricing and supply of your product are key to its success in international markets — the same as selling in your own backyard.

FINANCING INTERNATIONAL TRADE

Getting paid is always the hardest part for any business, and working with customers many thousands of miles away can be intimidating. Understanding the language of international financing and working with an experienced lender can smooth out that bumpy process. Here are some terms that will be helpful for you to know:

Letters of credit (LC) – a very secure way of controlling the international shipment of goods (both import and export) and obtaining payment that requires your customer to obtain the
guarantee of a lender.

Export finance – cash advanced against the value of your outstanding export invoices and an ongoing supply of working capital. Similar to accounts receivable financing or factoring, it provides your business with a source of funding, which grows in line with your export sales. This can be very useful in overseas transactions where customer payments often extend beyond the traditional 30 days, resulting in a cash flow gap.

Export-Import Bank of U.S. – the Ex-Im Bank guarantees the financing that a lender provides to its clients. If the exporter fails, the Ex-Im Bank will step in and pay off the lender under the terms of their guaranty. A financing company is more willing to provide funds to companies seeking exporting opportunities with Ex-Im Bank’s guaranty in place.

Purchase order finance – provides funding against confirmed orders, so that you have the cash in hand to pay for the production and delivery of the goods. The lender advances the funds to your supplier or opens a letter of credit. Once the goods are delivered, you invoice your customer and the lender collects those payments and pays you the balance minus their funds advanced. This is especially useful when your supplier is based overseas and you need to import the goods/arrange for direct delivery to an overseas customer — all with the peace of mind that the goods will be manufactured to your specifications and delivered on time.

HELPFUL RESOURCES ON INTERNATIONAL TRADE

The Small Business Administration, http://www.sba.gov/ — for information related to running a small business, including financing options.

U.S. Department of Commerce, http://www.buyusa.gov/ — the primary resource center for new and seasoned exporters to research markets and gain information.

World Trade Center Association, http://www.wtca.org/

The Export-Import Bank of the United States, http://www.exim.gov/ — provides credit insurance, finance guarantees and advice for U.S. exporting companies.

Small Business Exporter’s Association, http://www.sbea.org/

International Chamber of Commerce, http://www.iccwbo.org/

The International Factors Group, http://www.ifgroup.com/ — the leading worldwide association of factoring companies.

U.S. Council for International Business, http://www.uscib.org/

The International Freight Association, http://www.uscib.org/ — to find accredited companies for handling shipments.

National Federation of Independent Businesses, http://www.nfib.com/ — offers training seminars, legislative updates and statistics about small businesses.

The U.S. District Export Council, http://www.us-dec.com/ — supports the U.S. Commercial Service by offering advice on private sector export matters.

Local chambers of commerce, industry associations and state commerce departments can also provideinformation on exporting and importing.

Credit: Bibby International Trade Finance

Trucking Factoring

The trucking industry is highly sensitive to the economics of trade and requires good cash flow to maintain service levels since there are needs to pay for fuel and drivers. If a trucking company's customers are paying slowly or if the company does not have the capacity to make sure employees are paid and fuel tanks are full to keep the company moving, then factoring might prove to be an excellent way to ensure funds are available.

Most factoring companies only work with companies that actually haul goods, but some will consider working with brokerages. There are some factoring companies that specialize in freight brokerage factoring. If you run a company that offers brokerage services, you will want to make sure the factor you are talking with can advance on those invoices.

One of the biggest concerns trucking companies have regarding factoring their invoices is the standard requirement that the original bill of lading be submitted to the factor prior to funds being advanced. The major misconception surrounding this issue is that the factor has to keep the BOL. Typically, the factor just needs to see and scan into their system the original to make sure the document is legitimate and then can forward it along to your customer should they require the original prior to making payment.

The trucking factoring marketplace is highly competitive since there are so many companies out there that offer the services and the trucking industry is very familiar with such services. Advance rates and fee structures vary widely from company to company. If your company delivers loads to both US and Canadian based customers, you will want to make certain that your factoring company is able to work with Canadian based businesses (and ideally has a presence in Canada) otherwise you may find that you are not getting the most out of the service. Typical trucking advance rates are about 85% - 90%, but can be as high as 97% depending upon customer credit and average monthly sales volume. Fees vary depending upon the same criteria. If you are doing $50,000 in monthly sales, you should be getting rates of 1.59% for the first 30 days with at least an 85% advance rate. If you are paying more, maybe you should start shopping around.

Also, there are some companies out there that will factor a single invoice instead of having to factor all your invoices. They usually charge higher fees since there is higher risk involved for them, but this can help out in a pinch if you only need a one-time infusion of cash. Most load boards have loads listed with pre-approved invoices for this type of factoring. One of the best known single invoice factoring companies is FreightCheck.

Factoring agreements typically auto-renew and require a 30 or 60 day notice to terminate, so if you are looking to get into a new relationship check your agreement to find out when you would need to notify your current factor that you plan on ending the relationship. It is possible to leave early, but there are typically penalties for doing so. Most agreements are for 12 months, some are for 6 months, and there are some that are month-to-month. The more you are willing to commit the better deal they can offer you. Make sure you read your factoring agreement thoroughly prior to signing.

Also, ask if they offer fuel cards to help make sure your drivers have a way to stay out on the road without having to wire cash or deposit funding into a separate account. Most factoring companies offer both a credit based and pre-pay fuel cards that offer discounts at the pump along with other perks.

If you have any questions about how factoring your freight bills might help your business, please feel free to contact me.

The Uniform Commercial Code or UCC

If you have talked with any funding sources or colleagues who factor, you have probably heard about the UCC...and you may be wondering: What the heck is it?

First published in 1952 after ten years of development, the UCC was designed to harmonize interstate trade. It deals with personal (moveable) versus real (immovable) property and is a guideline for transacting business. The overriding philosophy of the Uniform Commercial Code is to allow people to make the contracts they want, but to fill in any missing provisions where the agreements they make are silent. It also seeks to impose uniformity and streamlining of routine transactions like the processing of checks, notes, and other routine commercial paper.

There are separate sections that deal with different aspects of commercial transactions broken down as follows:

Article	Title	Content
1	General Provisions	Definitions, rules of interpretation
2	Sales	Sales of goods
2A	Leases	Leases of goods
3	Negotiable Instruments	Banknotes and drafts (commercial paper)
4	Bank Deposits	Banks and banking, check collection process
4A	Funds Transfers	Transfers of money between banks
5	Letters of Credit	Transactions involving letters of credit
6	Bulk Transfers and Bulk Sales	Auctions and liquidations of assets
7	Warehouse Receipts, Bills of Lading, and other Documents of Title	Storage and bailment of goods
8	Investment Securities	Securities and financial assets
9	Secured Transactions	Transaction secured by security interests

The main Article factoring companies use is Article 9: Secured Transactions. Factoring companies will typically file a UCC-1 financing statement securing an interest (filing a lien) in the assets of a business for which it intends to fund. This statement outlines what collateral is being secured. For an equipment leasing company financing, say, a packaging machine, a typical UCC-1 statement would list that piece of equipment as the sole item secured. Most factoring companies will file what is called a "blanket" UCC-1 to secure all assets of the business. It is similar to the statement a bank would file if a business were to obtain a secured line of credit.

Many factoring companies file their UCC-1 at the time a business submits an application which would force that business to have the filing terminated should they choose to work with another financing company.

*When contemplating which factoring company to work with, make sure you consider those that file their UCC-1 only at the time you sign a proposal outlining the terms of the relationship, not when you submit an application.

When a factoring relationship comes to an end and the factor has been paid back all funds advanced, a business will need to make sure they obtain a UCC-3 financing statement release. This is a document stating that the company which held the security in the business no longer has any rights to the underlying assets. This will free a business to find other financing and remove that particular lien.

A given business may have many UCC-1s filed on it and the secured parties (financing companies or individuals) hold different priorities depending upon when they filed. For example, XYZ Corp. has three blanket UCC-1s filed. One by ABC Bank, one by 123 Factors, and one by John Doe (the former owner who is financing the purchase for the new owner). Assuming that ABC Bank filed on January 1st, 123 Factors filed on February 1, and John Doe filed on March 1, ABC Bank would hold the first position, 123 Factors would hold the second position, and John Doe would hold the third position. What this means is that in the event of a bankruptcy on the part of XYZ Corp., the first position holder would be paid back first, the second position holder would be paid back second, etc. so long as the underlying collateral would provide enough value to make repayment an option.

Almost all factoring companies require that they hold a first positon UCC-1. There are a select few out there which do not require a UCC-1 to be filed, but beware that these companies are advancing funds without a security in a business so they may be more inclined to make frequent and aggressive calls to your customers and actively pursue their first line of offense - a personal guarantee. The personal guarantee is used as, at most, a secondary right for financing companies to recoup if they have a UCC-1 filed.

The UCC is in place to help all parties to commercial transactions and actually supports a factoring client's ability to obtain financing. Factoring companies are mainly interested in the accounts receivable as collateral and will usually, without issue, subordinate their security interest in other assets to other lenders.

To view the UCC in its entirety, please visit: http://www.law.cornell.edu/ucc/

If a business currently has a factor or bank funding them, odds are the financing company has filed a UCC-1 to secure its position. Should a business decide to change financing companies one of two things will need to happen: 1) a subordination of the existing lender's UCC-1 to the new company (sometimes a limited subordination will work, but most frequently a full subordination is required moving the old lender into a lower position and the new lender into first), or, 2) the new lender will need to payoff the old lender.

More on this in the next post...

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Bibby Financial Services: Facebook Fan Page

Feel free to visit the Bibby fan page on Facebook. It has a wealth of information and customer testimonials.

Should I Expand My Business?

Here, as promised, is the guest post from Domenic Rinaldi of www.bizbrokerjournal.com. Please see the last post on this blog for his contact information.

Despite today’s market, countless business owners are finding ways to weather the economic storm and keep their businesses profitable. The gut instinct for many is to look for ways to cut costs internally by trimming headcount, salary, employee hours, or seeking ways to reduce production costs or improve efficiency. Some business owners, though, could benefit from considering business expansion.

There are plenty of ways to expand a business. The most basic form of expansion is to focus on your current customer base and adapt your business’s offerings to fit their changing needs. This may involve purchasing new equipment or enhancing the inventory selection to provide more products or services applicable to a variety of demographics. Excellent customer service is also essential when today’s consumers have many options available to them. Providing additional support hours at the request of customers, for example, is a surefire way to maintain a more loyal following and possibly generate word-of-mouth recommendations.

You can also look to expand your business to new customers by introducing a new location, acquiring a competitor or moving into a related industry. Not only will these expansion opportunities help position your company for continued growth, they will also enhance your business’s selling power once it comes time to exit the business.

Here are some questions every business owner should ask themselves, however, before considering any type of expansion.

What Type of Expansion is Right for Me?

Not all types of expansion will work for every business or for every industry. Business owners need to be particularly diligent in researching what will work for them and what resources they have at their disposal. Before considering expansion, rule out the options you know are not plausible, or that you simply don’t have the time, money or desire to pursue.

You can make this decision by doing some initial research. If considering expansion that goes beyond internal activity or purchase, talk to local business brokers and ask for their input into what trends they are seeing in your industry.

You can also look at competitors that may be expanding to see what they did and where they had success or failure.

Will I Really Benefit From Expansion?

There are several benefits that could come with business expansion, but also a lot of assumed risk.

Some things to consider include:

Economies of scale -- Expansion may expose you to economies of scale, with cost advantages that result from having expanded. Consider if this might be the case for you.

Customer base -- Not only should you ask yourself if expansion will expose you to new customers, but also if your existing customers will remain loyal while you work out all the growing pains.

Yourself -- Will expansion bring unavoidable stress into your life that could potentially deter your ability to successfully operate the business under the new expansion?

Can I Afford Expanding the Business?

In today’s market, business loans are not easy to come by. With big lenders struggling to survive the market, receiving a loan for your business may be a bit more difficult than anticipated.

People who are getting loans are being forced to leverage large pieces of collateral, such as their homes. This adds a lot of risk to any type of business expansion because failure could mean the loss of not only your livelihood, but your home as well.

For buyers considering the purchase of another business – whether it’s a competitor or a business in a related industry – seller financing is proving to be one of the only ways to get a deal done. Seller financing is a loan provided by the seller of a business to cover an agreed percentage of the sale price.

Consider how you will fund your expansion before taking any drastic steps.

[Editor's note: Please see my interview with Domenic on using receivables finance as a component of your acquisition funding plan.]

Getting Started with Expansion

Once you have decided to take the initial steps toward expansion, consider how exactly you will make it happen. If it is only internal growth, put together a plan for how you will allocate resources and what you will do to make your current business bigger and better.

If your plan includes acquiring a new business, judge how well you feel you can take on that process yourself. There are several tools already in place, such as buyer acquisition programs that utilize the expertise of business brokers and intermediaries to set your goals, identify target businesses, screen the businesses, advise on offers and assist with negotiations and closing.. Business-for-sale online marketplaces like BizBuySell.com offer an alternative resource for those seeking to buy a business on their own.

While there are countless considerations to make before deciding to expand your business, these three standard questions can help facilitate your decision-making process. Taking advantage of the downturn -- with its lower business-for-sale asking prices -- by buying up your competition can put you in a great position for when the economy bounces back.

Interview with Domenic Rinaldi (CBI) of www.bizbrokerjournal.com

I recently had the pleasure of being interviewed by Domenic for his business brokering blog www.bizbrokerjournal.com. Domenic brings more than 24 years of proven experience in merger/acquisition, sales, service, marketing and operations to the business brokerage arena. He is also part of the Sunbelt Business Network, the world’s largest business brokerage firm with approximately 300 licensed offices located throughout the world, works out of Chicago, and is an expert in his field. Expect to see a guest post from him here in the not too distant future on growing through acquisitions.

Thanks to Domenic for allowing me to introduce his readers to the possibilities of using receivables finance as a means to assist in acquisitions.

The full text of the post is below. For more information on what Domenic does, or if you have an interest in buying or selling a business in Chicago or the greater Midwest, feel free to contact him: Domenic Rinaldi, CBI.

Tuesday, September 8, 2009

Factoring to Finance a Business Acquisition

Financing has been a common theme for most of our blog posts this year. The lack of bank funds for business acquisitions has left the marketplace to scramble for alternatives. One such option is to 'factor' a company's receivables to secure a transaction. Factoring is simply the ability to obtain upfront cash against a company's accounts receivables.

As with most financing options, factoring has its pros and cons, and I recently had the opportunity to interview Sean Lelchuk of Bibby Financial Services to learn more about this service. Below is a recap of my interview with Sean and some insights into how this may apply to your business acquisition plans.

First, a little background on Sean and Bibby Financial. Bibby Financial Services is an independent, family owned business that operates in 27 countries. Bibby provides receivables funding services for domestic and export receivables, and purchase order financing. Sean is a Business Development Officer in their Florida office and is responsible for assisting clients with their factoring needs. Sean is a former small business owner and understands the importance of having access to capital for business growth and maintenance.

Interview with Sean Lelchuk from Bibby Financial Services:

Q: Please explain factoring?
A: Factoring is where an advance of cash is made to a Client against the purchase of an accounts receivable by a financing company (aka Factor). The Factor then proceeds to collect the receivable. The balance of the receivable less any fees due to the Factor is then payable to the Client on collection of the receivable by the Factor. Factoring is an effective way for a business to finance growth or to assist in the restructuring of a business. It is also a means by which an acquiring company may leverage existing assets of a target company as collateral for secured financing to help close a deal. It also does not lead to any loss in equity of your business nor does it involve taking specific security over personal assets.

Q: How can factoring be used to help buyers and sellers in a business sale transaction?
A: For the buyer, there are two main ways to use receivables finance to creatively finance an acquisition transaction.
1. Funding your receivables: In this scenario, you establish a factoring facility on your own receivables to extract cash out of your business to bring to the closing table. Usually, this can be done on a relatively short term basis allowing for the purchase of the target company with the conversion of a current asset.
2. Funding the target company's receivables: This approach is a little bit more complicated, but can work to even greater advantage. Assuming it is an asset sale, you can work with a factoring company to finance the existing receivables of the target allowing for the seller to essentially help finance the sale of their business. At the closing table, the factoring company will provide an advance on the outstanding receivables of the seller's company to contribute to the cost of acquisition.

For the seller, the advantages of this approach are that the seller usually does not need to offer direct financing to the buyer, can "take home" some of the money they have earned through delivering their product or service, and can, in some instances, offer this method as a way to finalize a deal.

Q: What are the Pros's of Factoring?
A: The biggest pro in working with a factoring company is that the main determinant in whether or not the funding will come through is the credit of the business's customers - not the credit of the buyer or seller or their companies. To obtain traditional debt financing everyone knows that it can be a challenge to close on a facility, especially for an acquisition, and more challenging in these times. The other pros are that you will also acquire a built in credit team to monitor the business's customer quality and aid in decisions to sell to new customers, a collections team to help make sure payments are received in good order, and access to other types of secured financing as most factoring companies have a long list of colleagues that finance other assets (i.e. equipment, inventory, property, etc.) that may prove to be helpful in the event additional funding is needed. Also, factoring companies do not require the submission of a regular borrowing base certificate and all the time necessary to compile one, and in the event additional availability on the facility is needed it is much easier to obtain an increase from a factor than it would be with a bank - if the invoices are there and the debtor credit is good, these companies make money by putting money out the door.

Q: What are the Cons of Factoring:
A: Most often the biggest concern is cost. It is true that factoring rates are higher than a traditional line of credit, but the flexibility with a factor, the ease with which a factoring facility may be obtained, and the opportunities that can be realized usually outweigh the additional cost. There is documentation that is required on a regular basis, but this is usually related to the transactions conducted by the business (i.e. PO's, invoices, and proofs of delivery) and is typically readily available. Customer notification and invoice verification can be worrisome for those who are guarded with their customers, but I have found that this is usually managed very well by the better factoring companies.

Q: Can you give a recent example of how you used factoring in a sale transaction?
A: Recently, a venture fund wanted to acquire a company that manufactures flooring and sells to distributors. The fund had allocated a set aside amount for the acquisition, and expected, based upon purchase and sale negotiations that it would be sufficient to close the deal. At the last minute, the seller decided to raise the selling price due to an uptick in backlog orders and argued that the price increase was justified by the addition of the pending business. The fund went back to management, but was denied an increase in allocation for the purchase. The lead agent contacted one of our brokers who directed him to us. We discussed the opportunity, reviewed the supporting documentation (i.e.transactional paperwork for the target company's typical sale, financials, receivables and payables, legal entity documentation, etc.) and the revised draft of the purchase agreement. We proposed on the transaction where we would finance the receivables of the target company for 12 months at the specified discount, advance on the eligible receivables outstanding at the time of purchase to contribute the shortfall created by the revised selling price for the business, and the fund was pleased that they did not have to come up with additional cash to finalize the deal. The target company did not have any secured financing, so we were able to secure the assets and close on the transaction.

Q: Where are the pitfalls in this type of acquisition financing?
A: The biggest thing you want to watch out for using receivables financing as collateral for secured funding in an acquisition transaction is that you do not want to strip the target company of operating capital. This may happen by taking too large an advance on the receivables to support the purchase - make sure the company will have sufficient working capital to operate when the transaction closes and those funds are removed from the business. Another thing you want to watch out for using receivables (or any other asset) as collateral for secured financing in an acquisition transaction is that you do not pay too dearly for the asset as a line item in the purchase agreement. If the seller wants to sell at a price over book value of the asset try to structure the purchase such that you pay for the book value at closing and any amounts over that (i.e. goodwill) on a schedule out of future profits from the accounts sold or as some kind of royalty. Make sure that any receivables collected by the seller during the negotiation stage are either removed from the asset listings or credited against the purchase price. You may want to include a provision in the purchase agreement that allows for a credit or repayment for any accounts uncollected (bad debt) after 90 days from closing. As an alternative to the above, you may consider setting an allowance for bad debt/uncollectable accounts and discount that from the purchase price.

One other item to look into is whether the assets are currently secured.
In this case, you must make sure that the receivables you intend to use as collateral are unencumbered since almost all factoring companies require a UCC-1 filing in the first position on at least the receivables themselves. The best way to avoid these issues is to do your due diligence and speak directly to a factoring company that is capable of handling these types of transactions during the purchase and sale negotiations.

Q: What are the costs of Factoring and typical terms?
A: Some factoring companies will provide you a rate sheet showing you what discount they will take for x number of days an invoice is unpaid. I find this to be misleading and counterproductive since each business is unique and you cannot put a generic formula to task for businesses in various industries, operating a differing volumes, and, most importantly, with very different customers. Most factoring contracts are structured on a 12 month commitment with minimum monthly factoring volumes. They are typically full-turn which means that all invoicing must be submitted to the factor regardless of whether or not you want an advance on the sale. Advances, once product or service is delivered and verified (directly by the factoring company), range from 70 - 95% of eligible receivables. Accounts that will be excluded from eligibility are those that are over 90 days old, are cross-aged (meaning that even though there may be outstanding invoices under 90 days, there are some, usually a percentage of total outstandings, that are over 90 days for the same account), and those for which a credit limit decision was unfavorable. Pricing can range widely and is dependent upon two main
criteria: 1. Debtor (customer) credit, and 2. Monthly volume. These items are inversely related to pricing - the better the quality of the customer and the higher the committed volumes, the better the rate. Rates typically range from 12 - 24% on an annualized basis.

Summary
In these uncertain times, finding creative ways to finance an acquisition is a given. You need to be aware that the cost of money derived from factoring receivables is usually higher than if you were to take out a traditional loan or line of credit, but the flexibility and ease of obtaining increased limits often allow for more business to be transacted or supplier discounts to be realized, thus offsetting (an in some cases eliminating) the effective costs.