When banks say no

When Banks Say “NO”When Banks Say “NO”
The Small Business GuideThe Small Business Guide
toto
FACTORINGFACTORING

““Lack of Money is theLack of Money is the
Root of All Evil”Root of All Evil”
For large and small businesses alike,For large and small businesses alike,
capital, in adequately suppliedcapital, in adequately supplied
amounts, is the key to businessamounts, is the key to business
expansion and growth.expansion and growth.
Large, established companiesLarge, established companies
with favorable credit histories,with favorable credit histories,
have many options from which tohave many options from which to
choose when periodic injections ofchoose when periodic injections of
working capital are needed.working capital are needed.

Small, newly formed businesses areSmall, newly formed businesses are
often challenged, however, to findoften challenged, however, to find
adequate sources of ready cashadequate sources of ready cash
simply for daily operations much lesssimply for daily operations much less
sources for continuous growth.sources for continuous growth.

The lack of excess working capitalThe lack of excess working capital
often prevents small businessoften prevents small business
entrepreneurs from taking advantageentrepreneurs from taking advantage
of those periodic “exceptional”of those periodic “exceptional”
business opportunities that presentbusiness opportunities that present
themselves. In many cases,themselves. In many cases,
lucrative contracts or purchaselucrative contracts or purchase
orders must be declined simply dueorders must be declined simply due
to working capital limitations.to working capital limitations.

One of the most common problemsOne of the most common problems
faced by small business owners isfaced by small business owners is
the need for payroll capital whenthe need for payroll capital when
lucrative opportunities are offered bylucrative opportunities are offered by
large, creditworthy customers thatlarge, creditworthy customers that
demand payment terms for servicesdemand payment terms for services
provided of 30 days, 45 days, 60provided of 30 days, 45 days, 60
days or even longer.days or even longer.

The necessity to make a weekly orThe necessity to make a weekly or
bi-weekly employee payroll whilebi-weekly employee payroll while
waiting for the first checks to comewaiting for the first checks to come
in from new customers can mean ain from new customers can mean a
small business owner may need tenssmall business owner may need tens
of thousands of dollars available justof thousands of dollars available just
to accept the new contract. Withoutto accept the new contract. Without
accessible payroll capital, suchaccessible payroll capital, such
contracts must often be declined.contracts must often be declined.

The most common and best knownThe most common and best known
source of small business finance is,source of small business finance is,
of course, local community andof course, local community and
commercial banks. Unfortunately,commercial banks. Unfortunately,
however, banks must work underhowever, banks must work under
very stringent lending requirementsvery stringent lending requirements
and in many instances, attempting toand in many instances, attempting to
access and employ bank credit linesaccess and employ bank credit lines
often is just a source of frustration.often is just a source of frustration.

Banks will always require a source ofBanks will always require a source of
collateral and a credit history...bothcollateral and a credit history...both
difficult to obtain for many newdifficult to obtain for many new
business owners in the early stagesbusiness owners in the early stages
of business growth. Withoutof business growth. Without
collateral for lines of credit, thecollateral for lines of credit, the
difficult decision to pass up “goldendifficult decision to pass up “golden
opportunities” for business must beopportunities” for business must be
disappointingly made over and over.disappointingly made over and over.

When banks say “NO”, small businessWhen banks say “NO”, small business
owners must turn to alternativeowners must turn to alternative
methods of finance for growthmethods of finance for growth
capital. This can often includecapital. This can often include
friends and family, angel investors,friends and family, angel investors,
credit cards, home equity lines ofcredit cards, home equity lines of
credit, and on occasion, venturecredit, and on occasion, venture
capital providers.capital providers.

For companies that provideFor companies that provide
products or services on aproducts or services on a business tobusiness to
businessbusiness basis, rather than retail,basis, rather than retail,
one of the most powerful forms ofone of the most powerful forms of
easily accessible business financeeasily accessible business finance
is that of invoice finance or as itis that of invoice finance or as it
is universally known, accountsis universally known, accounts
receivable FACTORING.receivable FACTORING.

FACTORINGFACTORING
In its purest form, factoring refers toIn its purest form, factoring refers to
a well-practiced method of businessa well-practiced method of business
finance in which short-term tradefinance in which short-term trade
debt (invoices) having terms ofdebt (invoices) having terms of
payment other than C.O.D. arepayment other than C.O.D. are
purchased at a discount by apurchased at a discount by a
company (the factor) for immediatecompany (the factor) for immediate
payment to the seller.payment to the seller.

FACTORINGFACTORING
Though certainly not a householdThough certainly not a household
word, factoring in the North Americaword, factoring in the North America
is an enormous industry with currentis an enormous industry with current
purchase volumes in excess of 125purchase volumes in excess of 125
billion dollars annually. Well knownbillion dollars annually. Well known
lending institutions such aslending institutions such as
SunTrust, Wachovia, GMAC, GeneralSunTrust, Wachovia, GMAC, General
Electric Credit account for billions inElectric Credit account for billions in
factoring volume each year.factoring volume each year.

FACTORINGFACTORING
For many start up and “first stage”For many start up and “first stage”
businesses with little or no access tobusinesses with little or no access to
traditional bank lines of credit,traditional bank lines of credit,
factoring has no equal in its capacityfactoring has no equal in its capacity
to provide working capital and dealto provide working capital and deal
with the funding problems associatedwith the funding problems associated
with growth and business expansion.with growth and business expansion.

FACTORINGFACTORING
One of factoring’s strongestOne of factoring’s strongest
attributes is its simplicity. Factoringattributes is its simplicity. Factoring
is nothing more than a method ofis nothing more than a method of
commercial finance that relates tocommercial finance that relates to
the accounts receivable (invoices) ofthe accounts receivable (invoices) of
a business. Factoring is never aa business. Factoring is never a
working capital loan. It simply doesworking capital loan. It simply does
one or two things......one or two things......

FACTORINGFACTORING
Factoring....Factoring....
 allows businesses that are currentlyallows businesses that are currently
operating on a cash basis with theiroperating on a cash basis with their
customers to begin offering terms ofcustomers to begin offering terms of
payment of 30, 45, or even 60 days.payment of 30, 45, or even 60 days.
In virtually all cases when terms ofIn virtually all cases when terms of
payment are offered, customers willpayment are offered, customers will
tend to buy more and more oftentend to buy more and more often
thus increasing business.thus increasing business.

FACTORINGFACTORING
Factoring....Factoring....
 allows businesses that are alreadyallows businesses that are already
offering payment terms and whichoffering payment terms and which
may have tens of thousands ofmay have tens of thousands of
dollars “trapped” in accountsdollars “trapped” in accounts
receivable to free up that cash byreceivable to free up that cash by
selling the accounts to a factor forselling the accounts to a factor for
immediate payment.immediate payment.

FACTORINGFACTORING
In many ways, factoring is like aIn many ways, factoring is like a
mirror image of bank lending. Whilemirror image of bank lending. While
bankers focus entirely on a businessbankers focus entirely on a business
owner’s credit score and ability toowner’s credit score and ability to
repay the loan, factors primarilyrepay the loan, factors primarily
focus on the creditworthiness of afocus on the creditworthiness of a
business owner’s customers since itbusiness owner’s customers since it
is they who will be making paymentis they who will be making payment
upon the invoice.upon the invoice.

FACTORINGFACTORING
In most cases, factors care little if aIn most cases, factors care little if a
business owner has tarnished creditbusiness owner has tarnished credit
or if the business itself is new withor if the business itself is new with
no credit history. A factoringno credit history. A factoring
arrangement will generally bearrangement will generally be
approved so long as the customersapproved so long as the customers
of the business are creditworthy.of the business are creditworthy.
Even large, slow paying customersEven large, slow paying customers
are generally acceptable.are generally acceptable.

THE FACTORING PROCESSTHE FACTORING PROCESS
One of the most powerful attributesOne of the most powerful attributes
of accounts receivable factoring isof accounts receivable factoring is
its simplicity. As opposed to bankits simplicity. As opposed to bank
lending with lengthy applicationlending with lengthy application
times and “approval by committee”,times and “approval by committee”,
factoring arrangements canfactoring arrangements can
generally be put in place in a mattergenerally be put in place in a matter
of two or three days.of two or three days.

Once accepted, the process ofOnce accepted, the process of
receiving working capital throughreceiving working capital through
weekly advances is relatively simple.weekly advances is relatively simple.
 Your invoices generated for weeklyYour invoices generated for weekly
services or goods delivered toservices or goods delivered to
customers are batched and sent tocustomers are batched and sent to
the factor via overnight courier.the factor via overnight courier.

 The factor’s operations departmentThe factor’s operations department
will process the invoices and createwill process the invoices and create
an advance schedule listing eachan advance schedule listing each
invoice to be purchased.invoice to be purchased.
 Once created, the advance scheduleOnce created, the advance schedule
will be faxed to the client (seller ofwill be faxed to the client (seller of
the invoices) for review andthe invoices) for review and
signature.signature.

 After review and signature, the clientAfter review and signature, the client
will return the advance schedule viawill return the advance schedule via
fax. Based on the rate of advancefax. Based on the rate of advance
(typically 75%), the funds for(typically 75%), the funds for
purchase will be wire transferredpurchase will be wire transferred
directly into the client’s businessdirectly into the client’s business
bank account.bank account.

 The purchased invoices will beThe purchased invoices will be
“noticed” with the factors legend,“noticed” with the factors legend,
directing the customer to remitdirecting the customer to remit
payment (under normal terms) topayment (under normal terms) to
the factor’s address or lockbox.the factor’s address or lockbox.
 The invoices are mailed to theThe invoices are mailed to the
customers of the client, usuallycustomers of the client, usually
within 24 hours of processing.within 24 hours of processing.

 Each week as payments upon theEach week as payments upon the
purchased accounts are received, thepurchased accounts are received, the
client will receive a collection reportclient will receive a collection report
which documents the payment, thewhich documents the payment, the
account for which it was paid, andaccount for which it was paid, and
the check number. Overduethe check number. Overdue
customers are contacted by thecustomers are contacted by the
factor’s collection department.factor’s collection department.

 Periodically (usually twice eachPeriodically (usually twice each
month), the factor will releasemonth), the factor will release
reserve (the 20% not initiallyreserve (the 20% not initially
advanced) which will be wiredadvanced) which will be wired
directly into the client’s businessdirectly into the client’s business
checking account. Prior to itschecking account. Prior to its
release, the factor will deduct itsrelease, the factor will deduct its
service charge or factoring fee.service charge or factoring fee.

 Chargebacks, those invoices not paidChargebacks, those invoices not paid
within a specific time (usually 90within a specific time (usually 90
days), are also deducted fromdays), are also deducted from
reserve distributions.reserve distributions.
 The process of weekly advances,The process of weekly advances,
collections, and reserve distributionscollections, and reserve distributions
continues indefinitely providing acontinues indefinitely providing a
never ending supply of workingnever ending supply of working
capital to the client.capital to the client.

OPENING A FACTORINGOPENING A FACTORING
ACCOUNTACCOUNT
Establishing a factoring account is aEstablishing a factoring account is a
relatively simple process whenrelatively simple process when
compared to applying for a bankcompared to applying for a bank
loan. In general, it includes...loan. In general, it includes...
 Completing aCompleting a company profilecompany profile
providing a “snapshot” of yourproviding a “snapshot” of your
company, its business, and how youcompany, its business, and how you
operate.operate.

ACCOUNTACCOUNT
 Providing a current accountsProviding a current accounts
receivable aging report and customerreceivable aging report and customer
list.list.
 Receipt of aReceipt of a Terms and ConditionsTerms and Conditions
LetterLetter provided by your factorprovided by your factor
outlining the proposed factoringoutlining the proposed factoring
relationship, factoring fees to berelationship, factoring fees to be
charged, and other importantcharged, and other important
features.features.

ACCOUNTACCOUNT
 Receipt of the Factoring AgreementReceipt of the Factoring Agreement
oror Master Purchase and SalesMaster Purchase and Sales
AgreementAgreement which is the contractswhich is the contracts
and documents necessary to beginand documents necessary to begin
the factoring relationship.the factoring relationship.
 A PPSA or UCC Search and FilingA PPSA or UCC Search and Filing
which will perfect the factor’swhich will perfect the factor’s
security interest in your accountssecurity interest in your accounts
receivable as collateral.receivable as collateral.

ACCOUNTACCOUNT
 Notification of customers regardingNotification of customers regarding
the assignment and rights tothe assignment and rights to
payment upon all accountspayment upon all accounts
receivable. This is generally donereceivable. This is generally done
through an introductory letter signedthrough an introductory letter signed
by the factor and the client.by the factor and the client.

ACCOUNTACCOUNT
Collateral Note:Collateral Note:
Unlike banks which require anUnlike banks which require an
abundance of collateral andabundance of collateral and blanketblanket
liensliens for even small lines of credit,for even small lines of credit,
factors only require a lien onfactors only require a lien on
accounts. This means otheraccounts. This means other
collateral such as equipment, realcollateral such as equipment, real
estate, etc. are free to pledge forestate, etc. are free to pledge for
other forms of business finance.other forms of business finance.

SPECIALIZED FACTORINGSPECIALIZED FACTORING
TRANSACTIONSTRANSACTIONS
While the vast majority of factoringWhile the vast majority of factoring
transaction focus on the everydaytransaction focus on the everyday
working capital needs of the averageworking capital needs of the average
small business owner, there aresmall business owner, there are
other transactions that address theother transactions that address the
special requirements of certain non-special requirements of certain non-
typical businesses or specialtypical businesses or special
situations. These include...situations. These include...

 International Factoring: Which offersInternational Factoring: Which offers
a complete financial package ofa complete financial package of
working capital solutions, credit riskworking capital solutions, credit risk
protection, accounts receivableprotection, accounts receivable
bookkeeping, and professionalbookkeeping, and professional
collections on an international basis.collections on an international basis.
International factoring provides non-International factoring provides non-
recourse payment guarantees to therecourse payment guarantees to the
exporter without letters of credit.exporter without letters of credit.

 Medical Receivables Factoring:Medical Receivables Factoring:
Providing working capital toProviding working capital to
physicians, surgeons, ambulancephysicians, surgeons, ambulance
services and other medicalservices and other medical
practitioners which are billingpractitioners which are billing
insurance companies for medicalinsurance companies for medical
services performed and waiting 90services performed and waiting 90
days or longer to receive payment.days or longer to receive payment.

 Construction Factoring: WhichConstruction Factoring: Which
provides advance payment to sub-provides advance payment to sub-
contractors which are forced to waitcontractors which are forced to wait
extended periods to receive paymentextended periods to receive payment
from slow paying but creditworthyfrom slow paying but creditworthy
general contractors or progressgeneral contractors or progress
billings due from lending institutions.billings due from lending institutions.

 Factoring Clients in Bankruptcy:Factoring Clients in Bankruptcy:
Factors are one of the few financingFactors are one of the few financing
institutions which are able to provideinstitutions which are able to provide
financing to companies operatingfinancing to companies operating
under a Chapter 11 Bankruptcyunder a Chapter 11 Bankruptcy
Petition. This is primarily due to thePetition. This is primarily due to the
“purchase” nature of factoring as“purchase” nature of factoring as
opposed to lending.opposed to lending.

 Purchase Order Finance: AlthoughPurchase Order Finance: Although
not true factoring, purchase ordernot true factoring, purchase order
finance goes hand-in-hand andfinance goes hand-in-hand and
addresses the need for the workingaddresses the need for the working
capital required to actually buildcapital required to actually build
products prior delivery. Once builtproducts prior delivery. Once built
and delivered, they are invoiced andand delivered, they are invoiced and
factored under normal terms.factored under normal terms.

QUESTIONS AND ANSWERSQUESTIONS AND ANSWERS
Q. My company is less than a year oldQ. My company is less than a year old
and my personal credit is tarnished.and my personal credit is tarnished.
Will I still be able to secure aWill I still be able to secure a
factoring facility for my company?factoring facility for my company?
A. Yes, in almost all cases. FactoringA. Yes, in almost all cases. Factoring
is ideal for new startups and factorsis ideal for new startups and factors
will care little about the owner’swill care little about the owner’s
credit history.credit history.

Q. How long does it take to establish aQ. How long does it take to establish a
factoring arrangement?factoring arrangement?
A. Factoring arrangements can be setA. Factoring arrangements can be set
up must faster than a typical bankup must faster than a typical bank
loan. Factors have no creditloan. Factors have no credit
committees. Your account iscommittees. Your account is
generally set up in 2-3 days.generally set up in 2-3 days.

Q. I was approached by a brokerQ. I was approached by a broker
which introduced me to a factor.which introduced me to a factor.
Will I be charged for his services?Will I be charged for his services?
A. Generally not although someA. Generally not although some
consultants do charge a small initialconsultants do charge a small initial
consultation fee. Other that that,consultation fee. Other that that,
brokers will be paid by the factor.brokers will be paid by the factor.

Q. I already give my customers a 2%Q. I already give my customers a 2%
discount for payment within 10discount for payment within 10
days. Should I continue this whendays. Should I continue this when
factoring?factoring?
A. Absolutely not. Your factoring feeA. Absolutely not. Your factoring fee
will generally be less than half thatwill generally be less than half that
amount for 10 days.amount for 10 days.

Q. What other services are provided byQ. What other services are provided by
my factor?my factor?
A. In addition to finance, your factorA. In addition to finance, your factor
will provide collections, statementswill provide collections, statements
and bookkeeping, and accurateand bookkeeping, and accurate
records for income tax preparation.records for income tax preparation.

Q. What is the most common reason aQ. What is the most common reason a
company would utilize factoring?company would utilize factoring?
A. Although there are many reasons,A. Although there are many reasons,
the most common is to smooth outthe most common is to smooth out
the payroll cycle when providingthe payroll cycle when providing
terms of payment to large,terms of payment to large,
creditworthy customers.creditworthy customers.

Q. If I establish a factoringQ. If I establish a factoring
arrangement, will I be required toarrangement, will I be required to
factor 100% of my invoices?factor 100% of my invoices?
A. Generally not. Factors will want aA. Generally not. Factors will want a
good mix of customers to spreadgood mix of customers to spread
their risk but C.O.D. customers andtheir risk but C.O.D. customers and
those that pay quickly can bethose that pay quickly can be
excluded.excluded.

Thank You for your time.
Ken McLean
604-800-5181 | Toll Free: 1-888-651-0004

When banks say no

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