THE ART OF MANAGING CASH FLOW MADE EASY

AN INTRO TO FACTORING

WHAT YOU SHOULD KNOW ABOUT INVOICE FUNDING FOR BETTERCASH FLOW TO OPERATE YOUR BUSINESS MORE EFFECTIVELY, GETMORE CUSTOMERS, MORE SALES AND MORE PROFITS

The Introduction to Factoring Guide was created for the business owner who is looking to understandwhat factoring is, the types of businesses that benefit from factoring and the commonmisconceptions about factoring services. Enjoy!

ACCOUNTS RECEIVABLE FUNDING - FACTORING EXPLAINED 3HOW DOES IT WORK? 3GETTING STARTED 5REQUIREMENTS 6TYPES OF ACCOUNTS 6FACTORING MYTHS 7SUMMARY 8

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ACCOUNTS RECEIVABLE FUNDING – FACTORING EXPLAINEDAccounts receivable funding is an excellent source of capital for businesses that are growing orexperiencing a temporary cash flow squeeze. Accounts receivable funding, also known as factoring,is the sale of invoices at a discount. It is a method of financing that is used by businesses to raise capitalquickly and improve cash flow without going into debt.

HOW DOES IT WORK?Precisely when a business sells a product or service to a customer it creates an invoice. Typically, an invoicewould itemize the unit sold, the price and the terms of the sale. The invoice can either serve as a receiptif it acknowledges that payment has been received, or as a bill if payment is due. An outstanding invoicemay also be called an account receivable. Instead of waiting to collect payment, a business may elect tosell the invoice to a factor and receive immediate cash advance. A factor is an individual or business thatis engaged in the buying of accounts receivables.

A TYPICAL FACTORING PROCESS:

For the privilege of receiving immediate access to money and early payment, you will be charged a nominalfactoring fee by the factor. Your customer will be notified of where to send payment. The fee for the factoredinvoice will be deducted after payment is received from your customer. You do not have to factor all yourinvoices or change your billing process except for the payment address, and in some cases the factor willhave to submit the original invoice to your customer.

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YOUDeliver goods and/or services

then create an invoice

Submit the invoice to a factor per agreement

Factor verifies invoice with your customer

Factor collects payment from your customer

The 20% balance is held in a reserve account

Factor rebates you the 20% minus the factoring fee

You are done! Submit more invoices to factor and continue

the cash flow

Factor advances 80% of the invoice immediately

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Factoring is simply another option of financing that businesses have. Factor funding should notbe weighed against a bank loan option because a fund received through factoring is not consid-ered a loan, legally or in practice. The fee is not considered as interest, it is a purchase discount.

Attempting to multiply and annualize the discount rate may be well intentioned, but it is misleading.

If you borrow $100,000 from a bank at 12% you could make monthly payments of $1,000 and in12 months would have paid $12,000. Yet, you would still owe $100,000. If you factored $100,000each month at a 2.5% discount, in 12 months your fees would be $30,000. However, you wouldhave received $1,200,000 (12 x 100,000) and the fees would still be $30,000 total.

What factoring does is like converting your invoice terms to Cash-on-Delivery (COD). You allow adiscount for being able to receive substantial upfront payment. The real bottom line is that withbetter cash flow you can grow your business rapidly and exponentially. In theory, your profitshould increase not decrease. For example, take the case of a T-shirt design and distributioncompany that does about $8,350 in monthly sales or $100,200 per year without the benefit offactored revenue. However, with a cash advance to buy supplies and meet expenses, revenuecould possibly double. Look:

Without Factoring With FactoringSales Revenue $100,200 $200,400Cost of Goods 60,120 120,240Gross Profit 40,080 80,160Overhead 36,072 (36%) 48,096 (24%)Cost of Factoring 0 2,505 (2.5% OF $100,200)NET PROFIT 4,008 (4%) 29,559 (14.8%)

With increased expenses and cost of factoring as a result of additional volume you would get amuch higher percent of profit overall. Net profit increased from $4,008 or 4% to $29,559 or14.8%. This is a significant increase. The core question is can you do more business with bettercash flow? Fixed cost and overhead would not necessarily increase in proportion to sales. Youmay increase staff, but because your sales double does not mean you have to double overheadsuch as office space, utilities, or labor etc.

Without Factoring With Factoring

$4,008

$29,559

NET PROFIT OUTCOME

Factoring fills the money gap and creates a predictable and dependable source of cash. Instead of waitingon payments from your customers for uncertain number of days, weeks and sometimes months, funds canbe made available immediately each time you invoice. This will make cash available to meet payroll, payrent, buy supplies and meet other operational needs.

The factor will wait to collect from your customer. When the invoice is paid, the factor will retain a sum equalto the initial cash advance plus applicable fees. The balance is then refunded to you along with accountstatements. The exact factoring fee will depend on volume and time of payment.

With factoring, a business owner might be able to completely avoid loans and other financing options thatcould restrict independence and the ability to operate freely and efficiently.

Until recent decades, factoring was only available to large corporations that were able to meet the minimumthreshold required by major factors, many of which were wholly-owned by or subsidiaries of banks. Today,factoring is available to small and medium-sized businesses, because there are now diverse factors andbrokers that require no minimums or maximums.

GETTING STARTEDTo begin a factoring relationship, you will:

• Submit an application • Submit documents to support your business

registration, ownership and possibly sales volume

If accepted, you will sign an agreement that may include: • UCC filing statements • Tax information release forms • Other documents

In most cases, no term commitment is required and your credit limit will be directly related to sales. Theprocess can take anywhere from 3 - 10 days to establish an account. After which funding is often immediate,usually within 24 - 48 hours of submitting an invoice, and does not particularly matter what state you are located in.

Factoring has evolved into a very fine financing technique for companies that are experiencing rapid growthor have other cash flow needs but may not qualify or want conventional funding.

There are countless reasons why businesses factor. For example, you may need and/or want: • A continuous level of cash to give you the ability to operate in a timely and efficient manner• An unlimited credit line that is directly related to sales• An alternative to borrowing without encumbering other valuable assets• To extend terms to your customers and make it easy for them to pay and encourage them to buy more• Immediate access to your money rather than waiting on your customers to pay

There are countless reasons why businesses factor, and many articles and books have been published aboutthem. You may obtain a generalized benefits list by contacting Factor Funding.

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“A bank is a place that will lend you money if you canprove that you don’t need it.”

– Bob Hope

REQUIREMENTSA perfect credit rating is not required to establish a factoring account. The single most importantrequirement to qualify for factoring is that you must be a registered business and have accountsreceivable due by credit-worthy customers. It is the factor’s responsibility to verify your customer'scredit worthiness. You can qualify whether you are a start-up or an already established and profitablebusiness with credit problems, and even if you already have a loan or line of credit.

TYPES OF ACCOUNTSFactoring sources are very diverse and several approachesmay be used. However, there are two major types offactoring - recourse and non-recourse. Recourse factoringrequires re-purchase guarantee by the seller who isultimately responsible for unpaid, disputed andfraudulent invoices. With non-recourse factoring thefactor assumes total risks provided the invoice is notdisputed. Regardless of what type of factoring, allagreements require a principal’s guarantee againstcommitting fraud.

Operationally, there is also factoring with notification and non-notification. Factoring with notification iswhere a seller's customer is notified by the factor and verifies the invoice. With non-notification factoring,the seller's customer is not notified and may not be aware of the factoring relationship. Non-notificationfactoring is largely available only through banks and institutionalized lenders. This is most likely due tovolatility and market uncertainty as well as recent corporate shenanigans, which only the largest andbest financed organizations can withstand.

After an agreement is signed, a UCC-1 lien against all accounts receivable is filed. It is a blanket lien,and it is similar to a lien on a house that is against the entire home and not just parts of it. Accountsreceivable is simply looked at as one of the assets of a business.

Generally, most factors will gladly provide references and testimonials from satisfied clients. However,they do so sparingly only to serious prospects and with the consent of their clients, so as not to violateconfidentiality agreements.

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“In the world there are approximately 3,200 factoring companies (or bankswith a specialized factoring division) active. Together they financed at the endof 2010 an impressive amount of $255 billion to around 320,000 factoringclients. The industry employs around 35,000 staff.”

Source: IFG – Global Industry Activity Report 2010

FACTORING MYTHSThe following are some of the prevailing misconceptions about factoring:

MYTH: FACTORING IS ONLY SUITABLE FOR LARGE CORPORATIONS OR BUSINESSES THAT ARE INEXTREMELY BAD FINANCIAL CONDITION.

FACT: It is true that factoring used to be the exclusive domain of corporate giants. However, by sharenumbers alone, more small businesses than big corporations are factoring today. Almost any business canreceive funding through factoring and the rates are very competitive. Factoring is not just for companiesexperiencing cash shortages. Most astute business managers use it in long-term planning and in conjunctionwith other revenue generation methods. It is increasingly becoming part of many businesses’ overall financial plans.

MYTH: CUSTOMERS MAY HOLD A NEGATIVE VIEW OF YOUR COMPANY IF YOU FACTOR AND MAYSEEK ALTERNATIVE VENDORS.

FACT: Being able to qualify for outside funding should speak bundles to your confidence, and the confidencefinanciers have in your company and your customers. Business owners, more than anyone, understand thedifficulty in securing outside funding. To have access to funds when you need it should put your suppliersand customers at ease because you will be better equipped to meet their needs at any time, even on shortnotice. Therefore, they’d prefer to continue working with you rather than seek another vendor. Approval tofactor is usually based more on the credit-worthiness of your customers than your personal or business credit.

MYTH: FACTORS HOUND AND HARASS CUSTOMERS WITH COLLECTION CALLS, LETTERS AND NOTICES.

FACT: A factor's goal is to enable you to continue to do business. Therefore, it is in a factor's interest to helpyou succeed. It's folly to think that factors would intentionally offend and harass your customers withcollection calls. Additionally, without direct pressure, factors more often improve and enhance the collectionprocess to the amazement of clients. This is because most businesses realize that their ability to securemore accounts can be directly related to their credit reports and references. The reports that factors mightprovide to business credit bureaus, such as Dunn and Bradstreet, may impact the ability of your customers todo business. Therefore, in order to have and maintain a good credit rating, they will pay on time.

Factors do and sometimes call customers, but only as a reminder, rather than to harass a customer. Factorsare more likely to successfully resolve payment issues in ways that would satisfy the client than the clientwould on their own.

MYTH: FACTORING IS PROHIBITIVELY EXPENSIVE AND WOULD ABSORB ALL PROFIT MARGINS ANDPUT YOU OUT OF BUSINESS.

FACT: A generalized response given by a prospectthat does not have complete details is that factoringis too expensive. The cost of factoring is relatively favoredcompared with other financing. It can be relatively bettercompared to other types of financing, but can vary greatlydepending on many conditions, not unlike bank loans.

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“It’s easy to meet expenses – everywhere we go,

there they are.”– Anonymous

SUMMARYMost businesses would prosper with better cash flow. However, it takes more than just money to run asuccessful business. How well you grow your business and how much profit you can make would dependon a number of factors (no pun intended). It requires knowledge of your business, your skills, andabilities and so on. Numbers used here are for illustration purposes only. We make no guarantees thatyou will achieve the same results.

You now have more information about factoring and we hope that you are better equipped to make aninformed decision about the service. However, we are not engaged in rendering legal, accounting orother professional services. If legal advice or other expert assistance is required, you should seek theservices of a competent professional.

The methods of operations and specific processes may vary from one factor to another. Factor FundingCo. has been supporting small and medium-sized businesses seeking a better source of cash flow since1996. If slow-paying customers are delaying your research and development, manufacturing, vendorpayments, payroll or other cash needs, we can help you get the cash you need.

As your financial partner, we will provide you with immediate working capital while assuming the time-consuming task of collections. No “bugging” or harassment of your valuable customers is involved –just a commitment to turn your outstanding invoices into ready cash to help you achieve your businessgoals. Contact us today to see how we can help your business grow.

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