Create Immediate Working Capital

How to Create
Immediate Debt
Free Working
Capital!
The
InvoiceXchange The Financing Tool of Choice_____________________________________________________________________________________________
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2005-2016 The Finance Institute
Greenwise Capital Solutions
www.greenwisecapitalsolutions.com

The History of Factoring
Recorded history reveals that the concept of turning future payments into
cash ( or cash equivalents) dates back thousands of years. Much like
today, the need for liquidity, or “cash” to pay everyday expenses, has
always been a great need. Think of the days when merchants would travel
the seas in search of various treasures. Ships would be filled with those in
need of food and necessities to survive.
Financiers offered payments against future rewards as a means to earn a
return on their investment. This financing was an integral part of the
success in establishing world trade. Thus, the concept of factoring was
born dating back some four thousand years.
Prior to the 1980’s, factoring was used primarily in the garment, textile,
and furniture industries – typically only available to larger companies.
Entrepreneurial funding companies, changed all this in the late 1990’s.
Due to the recent credit crisis and bank meltdown (2008) more
companies than ever are turning to factoring to create immediate debt
free working capital. Did you know Small to Midsize business bank loan
application decline rates are continuing to reach epidemic proportions.
Today factoring is becoming the alternative business finance tool of
choice, in many cases the only choice. There are over 55 million Small to
Midsize businesses across North America but, less than 10% of them
utilize factoring because most have never heard about the many benefits.
SMBs assume factoring has overwhelming costs. However, the reality is
factoring costs have been on a steady decline since 2008. Why?
Supply and Demand. Today, there are more factoring companies than
ever, which results in lower costs as they compete for clients. The
creation of The InvoiceXchange has created a unique auction based more
efficient marketplace providing the most liquidity for the least cost with a
simple process and flexible terms.
The
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2005-2016 The Finance Institute! 2www.greenwisecapitalsolutions.com

Today big box retailers including Walmart and the Government have
entire departments dedicated to working with their vendor’s factoring
company. These big name brand retailers recognize that a factoring
company has deemed their vendor as safe to do business with and credit
worthy. As more companies embrace the many beneﬁts of factoring, the
face of the factoring industry will continue to change forever.
The Facts
A recent study conducted by the Credit Research Foundation found nearly
80% of North American companies report that the economy has had a
direct negative effect on their business with a majority citing:
1. Lack of Available Working Capital
2. Tightening of Cash Flow
3. Slow Down in Customer Payments
As the three major issues that are having disastrous affects on the
viability of their businesses. Companies that were accustomed to
receiving payment on their invoices in 30 days are faced with the reality
that the payment cycle is now surpassing 60 days or longer. The national
average for invoices to be paid across North America is a staggering 73
days!
The trickle down effect of this is tremendous. Without the needed cash
ﬂow, companies are forced to make tough decisions. Employees are
being let go (no money for payroll), supplier payments are delayed
(resulting in delayed or cancelled shipments for future orders), delaying
payment of operating expenses (negatively affecting the company’s credit
history which will adversely affect their purchasing power), payment of
taxes are delayed (resulting in judgments and tax liens) and the list goes
on.
The
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2005-2016 The Finance Institute! 3

Banking versus Factoring
When cash flow is tight, where do companies turn? Traditionally, this
answer has been to banks. Pick up today’s paper, listen to the news,
research the internet and you will see that banks are NO Longer the
solution. Due to the recent credit crisis, their directives had changed to
protect their existing portfolios, while becoming extremely conservative
in providing new loans (if any) due to loose credit policies of the past.
Today banks concentrate on generating revenue from deposits, bank fees
and a whole host of ancillary services like insurance etc.
So, what is factoring?
The definition of Factoring is simple: The purchase of business to
business (B2B) or business to government (B2G) accounts receivable
(current or outstanding invoices) for products delivered or services that
were rendered in the past, at a discount.
Factoring is NOT A LOAN and NO INTEREST is charged. It is simply the
discounted purchase (sale) of a company’s non performing asset
(accounts receivable – an invoice that is paid over time)
Is factoring just for a few selected industries?
Factoring related transactions are somewhat vast. By definition, invoices
must be from one business to another business or, from a business to
the government. With this in mind, the number of potential prospects is
HUGE! At the time of publishing this white paper, there were over 55
million Small to Midsize businesses scattered all across North America
(United States and Canada). This number is sure to increase due to new
start up companies that have sprouted up recently, mainly as a result of
those individuals that have been downsized and subsequently have
started their own businesses. While many industries have been
floundering over the past few years, the Factoring industry has been
experiencing explosive growth.
The
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Ask yourself this question: “How many businesses do you know of that
provide a product or service to another business or the government”?
Now ask yourself: “How many of those businesses are getting paid in over
30 days? 45 days? 60 days? 90 days?”
Since just about everything in a factoring transaction is centered on an
invoice, let’s see what a typical invoice may look like….
The
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There are a number of sections that make up an invoice. Let’s quickly
highlight and talk about an important section of an invoice. TERMS!
One of the most important sections of the invoice is the TERMS of
payment. Typical terms in business are: 2% 10/net 30 days which means
if the customer pays for the invoice within 10 days they will receive a 2%
discount off the face (total value) of the invoice. If the customer pays for
their invoice after ten days, they are required to pay the total (face value)
of the invoice. This is fundamental for the factoring industry. The longer
the terms (time to receive payment), the larger the ultimate burden on
the businesses cash ﬂow.
The
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How Factoring Works
First, let’s deﬁne the participants in any factoring transaction.

•
Payee (Seller of invoices)
The Payee, also referred to as the “Seller”, is the company that has
manufactured a product and shipped that product or rendered a service
to their customer. In the factoring process, we call the “seller” a
prospect/client. That company will now create an invoice for a sales
transaction that has taken place and sends to their customer.
•
Buyer (factor)
The buyer (factor) is the company that supplies the capital in a factoring
transaction. The factor is commonly referred to as a funding source that
buys invoices at a discount.

•
Payor (also known as the debtor or customer)
The payor is a company (customer) or government agency that makes
payments against an invoice of the Payee, the “seller” (prospect/client).
The factoring process begins when Payee (client) is introduced to a Buyer
(Factor/Funding Source). The Buyer then makes their funding decisions
based on whether or not the Payor has the credit strength to pay for the
invoices and how long they typically take to pay for their invoices.
The
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The Factoring Industry is Recession Proof
Strong Economy - when the economy is strong companies will utilize
factoring to accommodate the growth they are experiencing.
Weak Economy - when the economy is weak companies will utilize
factoring to help them survive, stay current with ﬁxed costs/taxes, meet
payroll etc. With the banks not lending and customers on average paying
their invoices in 73 days - the factoring industry is poised to experience
another wave of tremendous growth.
How does Factoring work?
There are two key disbursements that are associated with a factoring
facility. The ﬁrst disbursement is called an “Advance” and the second
disbursement is called the “Reserve”.
·
· Advance – the client receives up to 95% of the face value (total) of
the invoice when the invoice has been purchased by the factor. The
advance rate depends on the “risks” involved with the transaction –
the greater the risk, the lower the advance.
· Reserve – the client receives the reserve balance (total invoice
amount minus advance rate) once the customer has paid for the
invoice – less the discount fee charged by the factor.
For example - if the invoice is $1,000.00 and the “Advance” has been set
at 90% by the factor, then the “Reserve” would be 10% (100% of invoice -
90% = 10%). The reserve is released (paid back to the client) once the
invoice has been paid by the customer (debtor).
The
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How do Factors make money?
When entering a discussion on how a factoring (funding Source) company
makes money, you must first embrace the idea that a factor is not a
“lender.” This is a grave error perpetrated by many who not only enter
the field, but also by those companies who are considering using
factoring as a tool to accelerate immediate cash flow in their business.
Why is this important, you ask? It is important for a few reasons:
Annual Percentage Rate: We are all conditioned to believe the only way to
get money is through a bank. After all, our first account was a passbook
savings account at a bank. When we grew older and it was time to get a
checking account, we secured this at a bank. To further the example, we
ask: Where does the business owner turn to get a business checking
account or a loan for his/her company? One thinks that the only place to
get these things is… at a bank. Therefore, it is safe to assume that
whenever you are talking to a company about financing, they will equate
factoring, to a bank.
We must emphasize again that banks charge interest on money they lend
while Factors buy invoices at a “discount fee”. No Lending, Different
Regulations: Since factors are actually purchasing assets at a discount
and not lending money, they are not regulated in the same way that
banks are. This flexibility allows factors to pursue funding opportunities
that are typically avoided by the banks (e.g. Service companies, new start
ups to < 3 years old, companies that are growing quickly, companies
declined by bank, companies with historic losses or liens against them/
bankruptcy). Said another way, why would a factor fund a company that a
bank would not lend to? When a bank makes a loan to a company, they
are relying on that company’s ability to pay back the loan.
The
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They look to hard assets like property, equipment, inventory and cash as
security in the event the company defaults on the repayment of the loan.
When a factor purchases an invoice at a discount, they are simply relying
on the client’s customer/debtor to pay the outstanding invoices, in full.
Ask yourself this question - how many companies do you know that are
non-manufacturing companies? Now ask yourself this question - how
many of them do you think are getting paid in 30 days, 60 days, 90 days
or longer?
To summarize, factors prosper by taking a different approach to
commercial ﬁnancing. Banks are making their credit decisions based on
the strength of the borrower’s assets. Factors make their credit decisions
based on the credit strength of the Borrower’s customers.
How Does Factoring Work?
The following is an example to demonstrate how this works:

Invoice Amount:

$100,000.00

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Amount Advanced to Client = 90%: $ 90,000.00

Amount Held In Reserve = 10%: $ 10,000.00

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30 Days Later:
Amount paid by client’s customer:
$100,000.00

Advance amount back to factor:
- $ 90,000.00
Discount Fee = 2.0% of invoice:
- 2000.00

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Amount Held In Reserve = 10%: $ 10,000.00
MINUS Discount Fee 2000.00
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Amount rebated to client:

$ 8,000.00
The
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During the transaction, the amount held back in Reserve serves to protect
the factoring company against any potential credit offsets taken by the
client’s customer (debtor). If there were a credit taken by the client’s
customer, that amount would be subtracted from the “reserve” before
rebating the remaining monies to the client.
As you can see, in total, the client received an advance of $90,000 and a
reserve rebate of $8,000 for a total of $98,000. The factor received a
discount fee of just $2000 for the service.
Factoring Case Studies
Here are some real life case studies that will serve to better illustrate the
benefits of factoring.
Health Care Staffing
First, we must define the players in the transaction.
· Payee – Health care staffing company providing nurses to hospitals
on a temporary employment basis (client)
· Buyer – “”Funding Source” (factor)
· Payor – Hospitals (customer)
The Current situation:
Client was providing temporary nursing services to various hospitals.
Client’s major operating expense was in meeting the payroll demands of
its temporary workforce (nursing) on a bi-weekly basis. Client was
receiving payment on invoices to hospitals in 60 days. However, the client
had the ability to “cash flow” these expenditures out of current working
capital.
Client received a phone call from a very large hospital informing them
they had been awarded a contract for 50 nurses to be employed 40 hours
The
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per week. The hospital was mandating 60 day payment terms on all
invoices.
The Math:
Client (health care staffing company) pays its nurses (on average) $24.00
per hour.
Client charges it’s customers (on average) $36.00 per hour for hours
worked.
Hospital pays its invoices for services provided by the client in eight
weeks or every 60 days. Client must pay nurses bi-weekly for hours
worked.
In order to fulﬁll this new contract, the client is faced with the reality of
having to come up with $96,000 in cash every two weeks to cover the
payroll burden:
50 (nurses) X $24.00 (average hourly pay) x 40 (hours worked per week) x
2 (number of weeks payroll) = $96,000.
The Issue - The Bank:
Client approaches the bank to request a loan for $200,000.
Bank declines the loan due to “insufficient collateral” – only asset is
accounts receivables. In addition, the health care staffing company had
only been in business for 16 months and did not have enough ﬁnancial
history.
The Solution:
Client is introduced to the merits of factoring by one of our Cash Flow
Consultants who gathers some simple information. The information is
forwarded onto The InvoiceXchange File Manager/Factor - a review of the
credit history of the payor (hospital) determines it to be a solid credit
risk. The Factor agrees to advance 90% against invoices purchased.
The
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Keep in mind, the $24.00 per hour was not the amount that the client
charged the hospital. If it were then the client would not earn a profit. In
this transaction the client charged the hospital $36.00 per hour, so the
client earned $12.00 per hour (gross profit) for each hour the nurses
worked ($36.00 amount charged to hospital - $24.00 amount paid to
each nurse = $12.00)
50 (nurses) X $36.00 (average hourly pay) x 40 (hours worked per week) x
2 (number of weeks for hospital to pay) = $144,000
The Factor will “Advance” (first key disbursement) 90% against invoices
created: $144,000 X 90% = $129,600
Note: Keep in mind that Factor will fund weekly based on verified hours
worked per nurse. This figure provides an aggregate amount that is
funded over the two week period.
Since the payroll burden is $96,000, The Factor’s advance of $129,600 is
more than enough to cover the payroll and provide additional working
capital every week/2weeks etc. The client now has additional working
capital to source out new contracts, and to help meet fixed costs like
rent, telephone, utility payments, etc.
A win-win situation!
Delta Components
Delta Components, Inc. (“Delta”) is a relatively small distribution company
located in Reston, VA. Delta currently has just over $500,000 in revenues
and during the past year, Delta enjoyed significant sales growth. While
most business owners would be thrilled to experience the growth that
Delta has, Ron Cotton (Principal), was very concerned that his company’s
cash flow status would be unable to keep pace with its sales growth.
The majority of Delta’s customers are strong financially and have a
history of paying their invoices on time. However, “on time” these days
The
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means 45 to 60 days. Delta pays their employees every week and they
must pay their vendors in 30 days. The discrepancy between the time
Delta needs to pay their employees and vendors has, and will continue to
create a cash flow problem for Delta.
In an effort to meet his internal cash flow needs, Ron has delayed vendor
payments resulting in placing his purchasing power at risk. This could
result in his vendors implementing more restrictive payment policies
(basically, Delta would need to pay faster, if not up front, in order to
receive future shipments from the vendors).
This lack of cash flow has also caused Ron to take a pass on a number of
significant business opportunities.
In Ron’s mind, it did not make sense to just take on new orders if it
meant increasing his inability to pay his vendors on time, and most
importantly, hindering his need to pay his employees on time. Let’s
review the following table:
Delta Components, Inc. Current financial position (without factoring)
Yearly Sales

$500,000
Variable costs (70% of sales)

$350,000
Fixed Costs

$50,000
Total Costs

$400,000
Gross Profit/Loss (Sales - Costs)

$100,000
Note: Ron has calculated that he has lost close to $200,000 in sales
opportunities due to the fact that he did not have the cash needed to pay
his vendors on time, nor to pay his employees, which were both needed
to fulfill on these commitments.
Ron was being forced to make a decision that would dictate the future
success or failure of Delta. Find a way to increase the cash flow within the
The
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company or continue to turn down future sales/growth opportunities.
Ron reviewed his options for improving his cash flow.
First, Ron reviewed the options that were available to him without seeking
financing:
1. Demand more strict payment terms from his customers.
2. Increase the sale price of his products.
3. Negotiate more conservative payment terms to his vendors.
4. Reduce employee cash burdens (e.g. insurance, bonus, wage increases
or possible layoffs).
5. Delay his payment of payroll taxes.
After much thought, Ron came to the following conclusions:
Options 1 and 2 were not possible. Demanding his customers to pay their
invoices faster was a recipe for disaster as his competitors were offering
more liberal payment terms now in an effort to induce his customers to
conduct business with them. Raising his prices would position him as
unattractive option to his customers. Ron was in a very competitive
business, and his customers would simply choose to buy their products
from another, less expensive resource.
Option 3 was not possible. His vendors had already placed him on credit
hold. Asking them to now give him more liberal payment terms would be
counter intuitive.
Option 4 was not possible: Simply put, if Ron were to increase his
business, he would need all his employees, if not more, to work for him.
In order for him to either keep current or attract new employees, he
would have to offer competitive wages and benefits to bring them to
Delta.
Option 5 was an option, but, a potential “death blow” to Delta. Avoiding
the payment of employee tax burdens to the government is never a good
long term solutions. Although the impact of not paying the taxes will
result in an immediate improvement in cash flow, the long term
implications could amount to tax liens and high financial penalties due.
The
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If Ron was unable to “recover” cash by making internal changes to his
business, he must now look to outside financing to help him.
Ron viewed his outside financing options as:
1. A line of credit with a bank
2. Offering ownership (equity) in his company, in exchange for working
capital
3. Factoring Delta’s accounts receivables
It is necessary to keep in mind that while Ron was considering all options,
he was losing orders (daily) with potential customers that may never
return.
Ron knew that a line of credit with a bank was not a valid option, as he
attempted this in recent memory and knew that he did not have the
collateral needed to secure a loan.
Ron had been approached in the past by a few potential “investors”, but
this option came at a very high price, as he would have to give up
ownership and control of his company in exchange for cash.
Ron determined that an accounts receivable factoring line of working
capital would be the best solution to help his company strengthen his
company’s financial position. This would enable Delta to now accept new
orders and to pay both vendors and employees on time. In fact, the
acceleration of cash into his business would put Ron into a position of
strength with vendors in that he could now be in a position to negotiate
early payment discounts.
Ron received a 90% advance from The Factor and a discount rate of 1.9%
(per 30 days). Since Delta was now getting paid on average in 60 days,
Ron budgeted a discount rate of 3.8%.
Ron then reconstructed his financial statements by adding the following:
1. The 3.8% factoring discount rate
2. The projected $200,000 increase in new business
3. Supplier discounts offered for quick pay.
The
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Delta Components, Inc. projected financial position (with Factoring)
Yearly Sales

$700,000
(Note: Increase of $200,000 from new orders)
Variable costs (65% of sales)

$455,000
(Note: 5% supplier discounts)
Factoring discount fees
(Note: 3.8% of sales)

$26,600
Fixed Costs

$50,000
Total Costs

$531,600
Gross Profit/Loss (Sales - Costs)

$168,400 Additional
Profit of $68,400, over 60%!
Therefore, by selling his invoices and ultimately giving a 3.8% discount to
the factor, Delta gained over 60% ($68,400) in profits - truly, addition by
subtraction!
So In Conclusion - Why is the Factoring Industry important to business?
When the Banks say “No” we typically say “Yes” and companies are
seeking our resources. Unlike a bank the credit line increases with the
value of the sales.
Small to midsize businesses across this country every single day are
delivering products and/or services. In order to remain competitive these
businesses issue invoices with credit terms and now wait to get paid.
Through Factoring a business can now turn this non-performing asset
(accounts receivable) into “C.O.D” creating immediate, continuous,
predictable cash flow without incurring debt.
For questions or more information email us at:
The
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info@greenwisecapitalsolutions.com
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