Intro To Factoring
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A guide to understanding the benefits of Account Receivable Factoring.

A guide to understanding the benefits of Account Receivable Factoring.

Chris Lehnes
203-664-1535
clehnes@VersantFunding.com

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Intro To Factoring Presentation Transcript

  • 1. Introduction to Factoring By Chris Lehnes [email_address] 203-664-1535
  • 2. Seminar Objectives
    • To provide you with:
      • A basic understanding of factoring and relevant terminology.
      • A step-by-step explanation of the factoring product at Versant.
      • Competitive landscape.
      • Frequently asked questions and answers.
            • Total Presentation Time: 60 minutes
  • 3. Different Terminology Lending Term Factoring Equivalent Loan Factoring Facility Loan Amount Factoring Volume Lender Factor or Purchaser of Receivables Borrower Client or Seller of Receivables Note/Loan Agreement Purchase and Sale Agreement Interest Discount/Fee Borrower/Obligor Account Debtor/Customer Clients
  • 4. What is Factoring?
    • The sale of a company’s accounts receivable invoices to a factor in order to obtain working capital.
    • Although there are numerous types of factoring; Versant offers full notification, non-recourse factoring.
      • This means that account debtors (customers of the client company) are notified to pay Versant directly while the credit risk of non-payment is assumed by Versant.
  • 5. Prospective Client Profile
    • Small to medium-sized companies with annual revenues of $1 million to $50 million.
    • Businesses that need liquidity quickly who cannot wait 30, 60, or 90 days for payment of their accounts receivable.
    • Businesses that need funds but have limited access to traditional credit markets due to lack of track record, limited capital base, or poor earnings history – typically:
      • Start-up companies
      • Fast-growing companies
      • Seasonal businesses
      • Companies that have experienced losses
  • 6. Prospective Client Profile
    • Client’s customers are typically large corporations, municipalities or other government agencies.
    • With the exception of the medical and construction fields, Versant will provide factoring to a wide-range of industries with good quality receivables.
  • 7. How Can Versant Help Your Clients?
    • Versant’s unique factoring product can provide immediate liquidity for your clients.
      • A typical deal can be closed and funded within five business days of the initial referral.
    • Factoring transactions will typically range in size between $1million to $30 million in sales on an annual basis. Versant will fund larger transactions if the circumstances are appropriate.
    • Versant’s factoring product is non-recourse to the client and does not require an audit of the client’s business financial performance.
  • 8. Typical Use of Factoring Funds
    • Project Financing
    • Business Growth Financing
    • Business Acquisition Financing
    • Bridge Financing
    • Financing Working Capital Needs
    • Realization of Supplier Discounts
    • Preparation for High Season
    • Crisis Management
    • Debtor-In-Possession (DIP) Financing
  • 9. 6 Steps Understanding Factoring Step 1 – Initiation a Transaction Step 2 – Application Review and Legal Documentation Step 3 – Review Process - Underwriting Step 4 – Closing and Funding Step 5 – When a Batch of Receivables is Fully Closed Step 6 – Rolling Over New Receivables
  • 10. Step 1 Initiating a Transaction
    • Identify a business/client that has accounts receivable who may have a need for factoring.
    • Initiate contact with the business/client.
    • Once you identify a business/client with a need for factoring you would hand-off the completed request to The Factoring Team at Versant.
      • A copy of the client’s Accounts Receivable Aging and Intake checklist should be provided.
    • A favorable review of the accounts receivable will generate a proposal to the client – generally on the same day.
  • 11. Step 1 Initiating a Transaction 1. Find Prospect. 2. Hand off to Versant with Intake Checklist and Accounts Receivable Aging. 3. Versant reviews aging and talks with prospect. If a deal is reached Versant issues a proposal. 4. Prospect returns signed proposal with check for application fee. Versant sends prospect application. 5. Prospect returns Application and Versant sends out contracts to be signed. When contracts are returned Versant makes initial funding.
  • 12. Step 2 Application Review and Legal Documentation
    • Receipt of fully executed Proposal Letter, signed Application, and non-refundable application fee from client (generally $2,500).
    • Factoring Agreement and related documents prepared by Versant based on client information provided in their Application.
    • Client signs a Factoring Agreement with Versant (typically 2-year term).
      • Commitment to a minimum monthly volume (depending on company sales volume).
  • 13. Step 3 Review Process - Underwriting
    • Client delivers Accounts Receivable Aging of receivables to be factored.
    • Public records search of UCC filings and liens.
    • Account Debtor (customer) credit review is conducted.
    • Receivable verification (Versant conducts calls to account debtors).
    • Purchase and sale agreement for each batch of receivables is executed.
    • Performance guarantee by principals/operators to deliver conforming goods and proper services to debtor.
      • This is a non-recourse transaction – no personal guarantee of credit for the accounts receivable is required – Versant assumes the credit risk.
  • 14. Step 3 Review Process - Underwriting
    • 100% Security Interest taken on all of the assets of the client. Versant will subordinate on all assets other than the A/R if required by another lender.
    • Package of invoices, purchase orders, delivery receipts and accounts receivable aging report delivered.
    • Original invoices with Versant assignment sticker mailed to account debtors.
    • Notification of assignment of accounts receivable prepared, sent via certified mail (return receipt requested) and faxed (confirmation receipt retained).
    • Receivables selected and batched.
    • UCC filed.
  • 15. Step 4 Closing and Funding
    • Versant purchases the client’s account receivable and assumes responsibility for their collection.
    • Accounts receivable are batched together in agreed upon size.
    • Client is typically advanced 75% of face value of approved receivables in the batch.
      • The balance is paid when the receivable is collected and the batch is fully closed.
    100% face value of receivables 75% of face value in cash of initial funding Client Versant
  • 16. Step 5 When a Batch of Receivables is Fully Closed
    • When a batch of receivables is fully closed, Versant pays the client:
      • The difference between the amount collected on the invoices in the batch and the advance payment (75%) less Versant’s fee.
      • Versant’s fee is typically 2.5% of the face value of the purchased invoices for each month that the account receivable is outstanding. Some flexibility in the fee structure may occur depending on the client’s financial condition and the alternative financing sources available to them.
  • 17. Step 5 When a Batch of Receivables is Fully Closed
    • Online platform (FactorSQL Software) enables clients to review reports and determine if/when it’s economical to close out aged receivables “batches.”
    Cash due against invoice The Advance — 75% of the face value of the accounts receivable. The Rebate — The remaining 25% of the face value of the A/R less the factoring fee (2.5% of the face value of the A/R per month outstanding.) Client Versant Client Client’s Customer
  • 18. Step 6 Rolling Over New Receivables
    • For the term of the agreement (typically 1 to 2 years), Versant provides constant cash flow to the client.
    • New invoices issued by the client are purchased by Versant based on predetermined terms.
    Client’s Customer Versant Client Cash due against invoice Goods/Services Receivables 100% of face value of receivables 75% of face value in cash – up front Face value (100%) less cash advance (75%) less 2.5% of face value for each month outstanding upon closing the batch.
  • 19. Competitive Landscape
  • 20. Competitive Landscape
    • There are many factoring companies in the marketplace that fit into two general categories:
      • Category I – a large group of factors with limited capital that hampers their ability to both manage the risks of factoring and to take on larger deals.
        • Most of these factors service deals in the $10,000 - $75,000 per month in sales.
      • Category II – a smaller group of more established factors (i.e. CIT, Capital Factors, GMAC, Rosenthal) that service larger deals that traditional banks avoid.
        • This group of factors has similar underwriting processes as traditional banks which limits their ability to fund the type of deal that Versant would execute.
        • Their focus is on the financial condition of their clients and not the verification of accounts receivable.
  • 21. Competitive Landscape
    • The difference between Versant and the other factors – and what gives Versant its competitive advantage is:
      • Versant handles larger, more complex deals.
      • Versant provides fast service and is set up to fund promptly.
        • For the first funding - Versant can fund within one week of the initial contact.
        • On an ongoing basis, funding typically occurs on the same day that accounts receivable invoices are received.
      • Versant assigns an Account Executive to every account – similar to a personal banker relationship.
      • Versant provides clients up-to-date web based reports that enable them to monitor the performance of their accounts receivable.
  • 22. Frequently Asked Questions and Answers
  • 23. FAQs
    • What is Factoring?
      • The sale of a company's accounts receivable invoices to a factor, in order to obtain working capital.
      • Although there are numerous types of factoring; Versant offers full notification, non-recourse factoring. This means that account debtors (customers) are notified to pay Versant directly while the credit risk of non payment is assumed by Versant.
    • What are Versant’s basic requirements for factoring?
      • That prospective clients provide goods or services to credit worthy customers and that we can verify that the invoices being considered for factoring are accurate.
  • 24. FAQs
    • Does Versant offer factoring in all U.S. states?
      • Yes.
    • Does Versant require certified financial statements in the application process?
      • No, there are no financial statement requirements.
    • Does a company have to be profitable to qualify for factoring?
      • Not always, some clients are new companies that have not yet turned a profit, or they have suffered recent financial losses. Versant looks at the quality of a company’s customers rather than its specific financial condition.
  • 25. FAQs
    • How long does the closing process take?
      • A typical deal can be closed and funded within one week of the initial referral - in some cases a closing can be expedited.
    • What industries will Versant purchase accounts receivable from?
      • Almost all industries - except medical and construction – where clients sell a service or goods and their account debtors (customers) have good credit.
    • Is there a minimum volume of receivables that needs to be committed to in order to qualify for factoring?
      • In most cases, Versant will look for a minimum monthly volume of no less that $100,000 per month.
  • 26. FAQs
    • Does Versant require personal guarantees?
      • No – this is because Versant takes the credit risk based on the factored invoices. Versant does require a Performance Guarantee to assure that the invoices are valid. The principals may be responsible for loss suffered by Versant if there is a non credit problem with the accounts receivable.
    • Who qualifies for factoring?
      • A wide range of companies in a multitude of industries, including some with a negative net worth, that are losing money, and often even companies in Chapter 11 Bankruptcy. Companies that have a bank loan secured by its accounts receivable may not qualify for factoring unless the bank agrees to release its lien on the accounts receivable.
  • 27. FAQs
    • Can a company with little or no credit history qualify for factoring?
      • Yes, as long as they have credit-worthy customers.
    • Will a company seeking factoring be viewed negatively by its customers?
      • No, factoring is used by many large corporations in the U.S. and globally to improve cash flow, support growth and increase profits. In fact, over $100 billion worth of factoring is done every year in the U.S.
    • Do a company’s customers always know when a company is seeking financing through factoring?
      • Yes, Versant must notify the account debtor to pay the amounts due to Versant.
  • 28. Example: Impact of Factoring on Profits NOTE: The profit after factoring increased both from a dollar perspective and percentage – from $5,000 to $20,000; and 5% to 10% - respectively. By investing $10,000 in factoring (assumes invoices pay in 60 days and a 2.5% per month rate), the net profit increases by $15,000. Before Factoring After Factoring Revenues $100,000 $200,000 Cost of Goods/ Services Sold $65,000 (65%) $130,000 (65%) Gross Profit $35,000 (35%) $70,000 (35%) Variable Cost $10,000 (10%) $20,000 (10%) Fixed Costs $20,000 $20,000 Cost of Factoring N/A $10,000 Net Profit $5,000 (5%) $20,000 (10%)
  • 29. Broker Commissions Schedule Assumes all Invoices paid in 41 Days. Commissions paid at the end of each month based upon batches of invoices closed in that month. Month 1 Month 2 Per Annum Sales $1,000,000 $1,000,000 Invoices Closed $ - $1,000,000 $12,000,000 Factoring Fees $ - $41,800 $501,600 Broker Commission Per Month Per Annum 5% $2,090 - $25,080