7 Common Mistakes Factoring Brokers Should Avoid

12:46 18 January in Blog, Broker Resources

As a broker in the factoring industry, you know that business development takes a lot of time and effort. So, when you find a potential client, you want to be sure you are prepared. It will save you and your client a lot of time and help to avoid mistakes that may result in lost business.

Don’t let the excitement of landing a prospect divert you from the preparation successful factoring brokers use to develop business.

Here are 7 common mistakes factoring brokers should avoid in order to close more deals.

Not Networking Enough

Prospecting for new clients by contacting leads from call lists, internet searches or other data mining techniques is time-consuming, tedious, and has a low probability of success. Make sure you are investing enough time networking to increase your chances of locating and developing clients.

Joining professional, civic and fraternal organizations gives you the opportunity to network with CPA’s lawyers, business executives and owners. Networking can result in leads and contacts for new business prospects. It helps you to learn about a prospect so the contact goes smoothly. Contacts developed through networking are more likely to be successful.

For additional discussion of networking, please read: Tips to Generate Lead Opportunities as a Factoring Broker

Using Outdated Technology

Many new business opportunities come in the form of start-ups and early-stage companies. These business owners are often tech-savvy entrepreneurs, who conduct their business and communications on the internet and smart phones. If you want to pursue these prospects, you should have a website and a social media strategy to attract and draw entrepreneurs to your services.

Factoring transactions are now in a digital and electronic format. You need to have the necessary technology infrastructure to effectively do business with clients and factors. Make sure you have up-to-date technology for electronic transactions and communication by voice, text and email.

Not Using a Script

When you connect with a prospect don’t just wing it when you make a presentation. Based on what you know about the client, prepare and practice a script for discussions. Whether you are on a Zoom conference, Skype or a phone call, a script will help the discussion flow more smoothly and ensure that you have covered all the important points. A script will also help you to avoid digressing and making statements that are not relevant to the factoring program and may confuse or mislead the client.

Clients appreciate well-organized presentations that don’t take more time than they should. Using a script will improve communication, reduce back and forth, and avoid unnecessary emails which slow down the due diligence and underwriting process.

Not Knowing a Prospective Client Well Enough

Not knowing a client well enough can leave you open to surprises in the due diligence and underwriting process that may result in the factor declining the business. Your time is wasted unnecessarily and it may affect your relationship with the factor and the client.

Prepare a thorough client profile and make sure that you understand the industry, business and client’s customers. Review the client’s financial strength, credit history and business reputation. A little homework will help you avoid misunderstandings and delays.

Not Speaking the Lingo

Like other forms of financing, factoring has terminology that has specific meaning. Not knowing the correct factoring terminology can create misunderstandings and problems with the client and factor. For example, confusing PO financing with factoring. These two financial products are very different and yet many brokers will use the terms interchangeably. You should understand and use the same terminology the factor uses as well as avoid using lending terms that do not apply in the context of factoring.

For additional insights on factoring terminology, please read: Common Terminology Used in Factoring

Create False Expectations

Statements like “When you factor your invoices, you can literally receive cash the same day you invoice”, or telling a client their customers can be automatically credit approved for a certain credit line can give the client false expectations. Misleading statements may cause confusion and strain your relationship with the client and the factor which can ultimately be a deal killer.

Avoid misleading statements on the turnaround of transactions and the length of due diligence and underwriting. Never provide a client with a proposal; that is the factor company’s responsibility. A factor will end up needing to restructure the program you presented, which further hinders the closing of the deal.

Handing Off the Transaction at the Improper Time

Speak your piece, then be quiet. Once you have found the client a suitable factoring company for placement, it’s important you hand the transaction off to the factor at the proper time. Many times brokers will remain overly engaged with the deal and some may even continue to shop it around to other funding sources. More parties involved can mean more confusion and it creates inefficient communication. This slows down the due diligence and underwriting process which can ultimately prevent the transactions from ever closing. Follow the factor company’s directive when they tell you “We got it from here.”

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Avoiding these common factoring mistakes will save you time, increase your success in developing and closing deals, as well as enhance the relationships you have with your client and the factor. Putting in the time upfront to increase your knowledge and hone your skills will return the investment many times over.

 

Common Terminology Used in Factoring

14:48 10 January in Blog, Broker Resources

Invoice factoring is a widely-used form of working capital financing. Like all forms of financing it uses terminology, and this terminology has specific meaning when used in a factoring context.

If a client of yours is thinking of using factoring to increase their working capital and accelerate their cash flow, it will be easier for the client to understand the terms of the factoring agreement if the client knows the meaning of factoring terminology.

The following list of commonly used factoring terminology will help clients be more comfortable when they discuss a factoring agreement with factoring brokers and factor personnel.

Invoice Factoring: A form of debtor financing that businesses use to accelerate cash flow by selling their invoices to a third party (factor) at a discount. Businesses receive cash immediately for their unpaid invoices instead of waiting for their customers to pay.

Advance Rate: This is the percentage of the invoice amount that will be advanced. The percentage depends on certain criteria including the client’s customers’ credit quality and financial condition. The advance rate percentage is generally around 70% – 80% of the gross invoice amount.

Advance: This is the amount of money that the factoring company advances to a client when it buys an invoice.

Account Debtor:  A client’s customer.  This is the business that owes payment on a client’s invoice.

Customer Credit Limit: The maximum amount of credit applicable to a specific Account Debtor.  A client may be unable to receive an advance against an invoice if their customer’s credit limit has been reached.

Factoring Fee: The fee the factor charges to factor a client’s invoices. The fee is expressed as a percentage charged on the face value of the invoice.

Funding Period: This is the time period that begins when the factor purchases an invoice and ends when the Account Debtor pays the invoice.

Rebate: The invoice balance, fewer fees, that is deposited into a client’s account when the invoice is paid.

Factoring Agreement: The agreement between a client and the factor. It will cover all aspects of the program including fees, advance rates, credit limits, and other details.

Due Diligence: This is a review of a client’s and a customer’s financial backgrounds to determine eligibility for factoring.

Recourse Factoring: The client is responsible for paying the invoice if their customer fails to pay the factor.

Non-Recourse Factoring: The factor absorbs any credit losses that result from an Account Debtor not paying an invoice. Fees for non-recourse factoring are generally higher than recourse factoring, and credit limits may be lower.

Client: This is the business owner that wants to sell its invoices.

Notice of Assignment: A notice that is sent to an Account Debtor informing them that the invoice has been assigned to a factor.  It also informs the customer of the new address for payment.

Aging Report: A report that shows how long accounts receivable have remained outstanding.

Credit Terms: These are the terms of payment that appear on your invoice, such as Net 30 Days or Net 60 Days, which is payment due by 30 or 60 days after the invoice date.

Collections: These are payments the factor receives for invoices that were factored.

Lockbox: A bank cash management system designed to receive payments by mail and quickly deposit them into the factor’s account. Lockbox systems usually provide scanning of documents, online viewing and cash management systems.

Bad Debt: A bad debt is the unpaid balance of an invoice that is deemed to be uncollectible. A bad debt is either written off or referred to a collection agency or lawyer.

Credit Insurance: An insurance policy that covers the potential loss due to non-payment of an invoice.

The following table compares lending terminology with factoring terminology to make it easier to understand the context that factoring terminology is used in.

LENDING TERMINOLOGY   FACTORING TERMINOLOGY
Loan Agreement Factoring Agreement
Loan Factoring Facility
Loan Amount Advance Amount
Lender Factor
Borrower Client
Interest Fee/Discount
Loan Payments Collections

Understanding factoring terminology will help your clients ask the appropriate questions when deciding which factoring company to work with and if factoring is the right solutions for their needs. Factoring can provide the additional working capital clients will need to finance the business opportunities that will arise in 2022 as the economy continues to grow.  Capstone has the experience and capability to tailor a factoring program to meet your client’s working capital needs.

White Paper: Funding the Cyclical Business – Post Pandemic

10:56 15 December in Blog, White Papers

The Dodd-Frank banking regulations are now eleven years old and have been fully implemented by the government regulators. The impact of Dodd-Frank on the small business community, as we predicted in 2014 and 2018, has significantly reduced the amount of bank lending to small business owners. Small business loans from banks are only made available in small amounts assuming that the borrower is willing to pledge all of their business and personal assets to the bank. These loans generally range from $50,000 to several hundred thousand dollars and are highly dependent on the quality and value of the small business owner’s balance sheet. Loans of this size are generally sufficient for small businesses to maintain their existing operations, but during times of growth or expansion, these businesses will find these facilities lacking very quickly.

The small business lending void created by Dodd-Frank has been filled by third-party hedge funds and commercial finance companies like Capstone. These multi-billion-dollar hedge funds tend to lend to smaller business
lenders who can aggregate and service a portfolio of small business loans and direct lending to larger operating companies where the loan size can be $50,000,000 or higher.

 

Read the Full White Paper Here

White Paper: Infrastructure Investment & Jobs Act – Contract Opportunities and Funding Analysis

12:54 30 November in Blog, White Papers

Capstone has created this white paper to assist our clients and associates to benefit from the types of projects that have been authorized by the Infrastructure and Jobs Act (IIJA) which was signed by President Biden on November 15, 2021.

Since the IIJA passed the Senate in July, many of our clients have been receiving contacts from general contractors who are approved, federal contractors. Their excitement about these opportunities, after having suffered through a difficult business environment as a result of COVID-19, faded as delays in getting the IIJA approved by the House stretched from weeks to months. Now that it has been signed into law, our clients and associates need to understand what spending has been approved and how that funding may create contract opportunities for their businesses.

Unlike the last major infrastructure projects funded during the Obama Administration, the Biden Administration has pledged that IIJA funding will actually go towards much-needed infrastructure, including roads and bridges, highways, trucking, pipelines, hazardous materials handling, broadband, modernization of public transportation, the power grid, water systems, and environmental remediation.

As you read this white paper you will see the allocation of dollars by state and by the categories listed above. We urge our readers to avail themselves of the opportunities that the IIJA creates.

We expect funding to trickle down into contract authorizations by the end of February 2022 to the middle of March.

Capstone is hopeful that this brief summary of the IIJA will allow you to take advantage of the opportunities presented to rebuild your business or expand it further.

Download White Paper Here:

Why Sureties Should Work With Factors

09:59 04 November in Blog

The word subordination is one of the scariest words in the world for payment and performance bond issuers. It is understandable that sureties who are paid anywhere from 1% to 5% of the bond value take on enormous payment and performance risk relative to the premium earned. It is normal for the surety to want to keep as much collateral as possible to secure their position and not risk a loss on a bond.

Factors often require a subordination agreement when dealing with a surety because statutorily, the surety has a first lien on the contractor’s accounts receivable. In order to factor the account, the Factor needs first lien rights or clean title to purchase the account.

The first reaction of the surety is to say “no,” because they know that the subordination reduces their collateral, thereby increasing the risk of loss. This is a conventional way of looking at the problem. However, the surety is not taking into account the problems that Dodd-Frank legislation has created for the construction industry. In the past, banks were happy to issue lines of credit to contractors. However, those contractors that have earnings and profits that vary from year to year are no longer welcome at their local bank. Dodd-Frank classifies lines of credit to these contractors as “risky.”

Banks that once issued lines of credit to contractors have spoiled sureties. As long as there had not been a prior bond claim there would not be a UCC-1 filing against a potential borrower. The bank would issue the line of credit and all would be well. All would be well until such time that the first bond claim comes in and a chunk of the bank’s collateral, which they have already leveraged, is no longer theirs. Because of the bond claim, the most a bank can do is accelerate

payments or keep all the accounts receivable collections until such time that the shortfall is collected. Depending on the size of the claim and the circumstance this can be resolved quickly or could cause the contractor to fail. Most likely the contractor will fail because other trust fund payments go unfunded as the bank pays itself back. This creates a whole host of new problems for the bank and the contractor.

If the surety has an open mind, working with the right Factor actually reduces their risk of loss. The Factor is injecting capital into a project that is causing the material men and subcontractors to be paid in a timely manner. A Factor that operates in the construction industry typically collects lien waivers in exchange for each payment made to a material man or subcontractor. Any time this happens, the surety’s liability decreases because the lien releases indicate that the material supplier and/or subcontractor have been paid and cannot file a lien or make a demand against the payment bond, thereby reducing the surety’s exposure under the payment and performance bond.

From experience, a surety will tell you that they conducted their due diligence on a contractor and that they issued the payment and performance bond because the contractor had adequate liquidity. That may be true, but once the due diligence process is complete, one never knows how many other bids have come in where no bond is required. This dilutes the working capital of the contractor and increases the potential for loss to the bonding company should the contractor take funds from job one to fund job two. This is not an uncommon phenomenon in the contracting world.

Capstone employs funds control, which ensures that all of those with lien rights get paid in a timely manner. In the alternative, we can fund the surety’s funds control provider to effectuate the same result.

It is our belief that when a surety subordinates to the right factoring company like Capstone, there is a smaller likelihood that their payment or performance bond will have a claim made against it. As Capstone purchases invoices and effectuates payment during the course of a job, the surety benefits each time purchase of an account occurs, and those participants with lien rights are neutralized through the exchange of a payment for a lien waiver.

Tips to Generate Lead Opportunities as a Factoring Broker

13:00 25 October in Blog, Broker Resources

New business development is crucial to being a successful factoring broker. It’s essential to keep your business pipeline full and growing. Generating lead opportunities and convincing others of the value of working with you is the first step to keeping your book of business flowing.

Focus on Your Market Niche

From construction trades to consumer products, from manufacturers to staffing companies, from suppliers/ distributors to publishing, invoice factoring can quite literally be applied to any industry and everything in between.  Choosing your niche and focusing in on it essentially sets the stage for your brokerage as well as future business relationships.  Focus on companies that need a knowledgeable, professional intermediary to help them obtain alternative financing solutions. Companies that may be less sophisticated financially, and do not have the depth of in-house financial expertise to take advantage of invoice factoring.

Leverage Your Knowledge, Experience, or Connections 

Do you have knowledge, experience, or connections in certain industries? These touchpoints could be through education, work experience, family, or friends. Leverage your touchpoints to identify lead opportunities.

Utilize Networking Opportunities

Professional and social networks can be an excellent source of lead opportunities. It’s usually better to use networks to promote yourself instead of direct selling. The network connections you establish can become ambassadors for your brand who have exposure to many more lead opportunities than you can reach by yourself.

Some examples of networks you can develop to identify leads include:

Industry Associations

Many industries have associations to promote member interests. They often have different categories of membership or affiliation. This allows vendors and service providers to participate in association activities. They can be great opportunities to network with prospective clients. Certain associations will sometimes sponsor presentations on products and services that are important to members including financing and alternative lending solutions.

Professional Groups

Like industry associations, professional groups such as CPAs, lawyers, CFOs and engineers belong to groups, which may allow service providers some form of affiliation to benefit the members. Better yet, you may qualify to be a member of these groups yourself based on your education or work experience.

Personal Associations

Alumni associations, fraternities/sororities, religious organizations, social clubs, and hobby groups can all be sources of lead opportunities. Associations can be a strong connection for building networks.

Chamber of Commerce

Membership in your local Chamber of Commerce is a great vehicle for meeting and networking with CPAs, lawyers, bank loan officers, business leaders, and prospective clients. Chamber membership usually has a cost, so see if you can attend as a prospective member to determine if it makes sense for you.

Angel Investors

Angel investors provide capital to start-ups and early-stage companies. There are angel investor groups around major metropolitan areas and they typically hold regular meetings where small business entrepreneurs “pitch” the opportunity to invest in their company. These meetings can be great opportunities to meet prospective clients, and angel investors who can be a source of business referrals.

SCORE

The Service Corp. of Retired Executives (SCORE) provides assistance and mentoring to small business entrepreneurs. SCORE chapters hold seminars and workshops on topics that benefit small business entrepreneurs including financing. Be sure to attend these events to network with prospective clients and SCORE counselors.

SBDC

Small Business Development Centers (SBDC) are usually partnerships between the Small Business Administration (SBA), area universities, and local government business development agencies. SBDC’s provide training and support to small business entrepreneurs. They also hold educational workshops for business owners. SBDC’s can be a great place to meet prospective clients, and network with SBDC staff.

Data Mining

A vast amount of information is available on various industries in databases. Some information may be available free to members of industry associations, but most data must be purchased. The data may be available for download to your computer or by access to a cloud-based website.

You can use various commercially available software solutions to manipulate the data in many ways to help you “mine” for lead opportunities.

Develop Your Online Network

Many new businesses today are run by “tech-savvy” people, who rely on the internet to communicate and run their businesses. It is essential to develop your online network to identify lead opportunities.

Website

A website is your headquarters in the digital world. An online office where you meet and greet lead opportunities, and tell them about you and the services your business offers.

The landing page on your website is where potential leads land after being directed from an ad you’ve posted on the internet, or from a link in your social media posts. It provides an opportunity to showcase your business and convert the visitor into a lead.

Social Media

Social media websites such as LinkedIn, Facebook, Twitter, and Instagram offer additional opportunities to present your business and convert visitors to lead opportunities. Visitors can click on a link to your website for additional information.

Webinars

A webinar is a live discussion online of topics of interest to prospective clients. Your audience needs to sign up to attend your webinar, so you can follow up on lead opportunities afterward.

Use your online network to provide information of interest to prospective clients. It is a much easier and more efficient way to generate lead opportunities. There are many ways to identify lead opportunities. Use your creativity to identify the approaches that will work best for you and for more information on developing as a broker, visit our broker resources.

How To Become A More Valued Supplier Through Capstone’s Purchase Order (PO) And Trade Finance Programs

12:54 20 September in Blog

Become a Valued Supplier Through Capstone’s Purchase Order And Trade Finance Programs

Being a valued supplier or contract manufacturer for customers today requires a lot more than just the best price, quality, and on-time delivery. Customers want suppliers and manufacturers that can be a seamless part of their supply chain, and partner with them to grow their business. This means that if you want to win new business and grow volume with your existing customers, you will need to be able to:

  • Diversify product offerings and increase availability.
  • Create flexible credit terms for customers.
  • Accept larger orders and make more frequent bids.
  • Reduce procurement times and accelerate shipping.
  • Offer logistics and warehousing operations to support customer requirements.
  • Participate in product and packaging design to achieve customer cost and quality goals.
  • Support customer growth plans and meet unanticipated spikes in demand.
  • Maintain a reputation as a business worth continuing to work with.

Having the financial resources to win new business and support existing customer requirements is a significant challenge for many companies. The pandemic sapped the financial strength of many suppliers and contract manufacturers. It reduced the working capital needed to maintain adequate levels of inventory for normal business volume, and finance new business opportunities and spikes in demand. 

Finding Working Capital

Finding the working capital financing to take advantage of business opportunities as the economy recovers has been a problem for many companies because of their weakened financial position and the ‘risk-averse’ mode of banks. Lending to many small and medium-sized businesses is restricted even when they have firm POs for future business.

Fortunately, there are alternative financial solutions to help you become a more valued supplier. Purchase order and trade finance programs can provide the working capital you need to grow with your customers and win new business.

Purchase Order (PO) Financing

PO financing gives you the ability to obtain the inventory needed to support current customer requirements, spikes in demand, and capture new business. Unlike bank financing where the focus is on your collateral, financial statements, and credit rating, PO financing relies on the future business a customer order represents and the financial strength of your customer. 

The way PO financing usually works is your financing source reviews your customer’s credit, accepts your PO, approves your purchase order loan, and makes payment directly to your supplier. Once your supplier receives payment, they will begin working on fulfilling the order.  After the goods are shipped and your customer receives the order, you’ll send an invoice to your customer.  Payment for the account receivable is made by the customer directly to your financing source, not you. Your profit is paid to you after payment is received, closing the transaction.

PO financing is easy, immediate, and flexible. It has a number of advantages for your company including:

  • Faster and easier to obtain than bank financing.
  • No need to tie up your assets as collateral for a loan.
  • The credit decision is based on your customer’s financial strength, not your company’s credit rating.
  • Combining with a factoring program reduces trade cycle funding gaps so you receive cash quicker.
  • Expands your working capital financing so you can support current customers and gain new business.
  • Allows you to accept large orders without using up the cash needed for operations, or avoid borrowing against the bank line of credit you need to backstop operating cash flow.
  • Increases ability to be more competitive in the marketplace.
  • Leverage additional volume to negotiate better pricing and terms from your vendors/ suppliers.

Trade Financing

Trade financing utilizes PO financing for international transactions. It can help you obtain financing to support existing customers, gain new business, and finance surges in order volume.

Sometimes, the best deal on supplies or the particular product simply cannot be found domestically.  Many small and medium-sized companies can be deterred from looking for suppliers abroad due to the paperwork and jargon used in international transactions. Ultimately they end up foregoing business opportunities. Trade finance simplifies the process, especially if the financing source, such as Capstone, has extensive experience in international transactions. 

Trade financing typically includes the importer (you) obtaining a Letter of Credit (LC) from your financing source.  An LC is a payment instrument with the main purpose of mitigating risk associated with international trade for both importers and exporters. The LC also protects you against non-performance by the foreign supplier, because payment is not made until all terms of the LC have been met, the product meets desired specs, and the product is shipped.  In short, a LC assures payment and contract obligations. 

A factoring agreement between you and your financing source closes out the loop on the transaction. When you ship to your customer and send them the invoice, the customer pays your financing source directly. Your profit is paid to you after payment is received. An easy, fast, and flexible solution.

Trade financing has all the benefits of PO financing structured to facilitate international transactions. It gives your company the ability to do business around the world without tying up your working capital or using your bank line of credit. Trade financing reduces trade cycle funding gaps and improves cash flow.

Capstone’s PO and Trade Finance Programs

Capstone recognizes that every business operates under different circumstances and can tailor a program to fit your needs.  Capstone’s PO financing and trade financing programs provide businesses with access to flexible financing and logistics solutions through Capstone’s network of buyers, wholesalers, and distributors. Capstone can partner with you to provide the working capital you need to grow your business internationally and domestically and be a more valued supplier.

If you would like to discuss PO and trade finance programs with a Capstone representative, please call (212) 755-3636.

8 Tips on Selecting the Right Factoring Company

11:04 10 September in Blog

Choosing a factoring company is an important decision that should be considered carefully. You want a factor that understands your industry and that will work with you to provide the working capital needed to grow your business.  A relationship that is transparent as well as flexible.  The process you use to vet a factoring company should be as rigorous, in its own way, as the one you would use to select a key supplier.

The questions to ask when vetting a factor should be comprehensive and tailored to fit your business. There is no one-size-fits-all solution. 

  1. Industry knowledge and experience – Does the factor have hands-on experience working with companies in your industry and if so, how long?  Request the level of experience from any factoring company you plan to work with.  Having keen insight and experience relative to your industry as well as other industries is invaluable.  Experienced factoring companies are best positioned to serve your needs and ensure you are working with the best resource possible.  This is also important for things such as structuring/ custom tailoring transactions, coming up with innovative business ideas, and helping you avoid pitfalls.     
  2. Financial resources – Does the factor have the financial resources to fund the necessary transaction size and support your growth plans? What is the amount of credit facility the factor can provide?  You will want to work with a factoring company that has the capacity to fund your transaction size.  Small or new factoring companies may lack the resources to factor in your invoices or finance your POs.  If you have a need to factor a $1MM invoice, you want to make sure they have the ability to do that. 
  3. Customer service and immediacy – Does the factor have a presence in the same area that you are operating? If you need to get in touch with your Account Manager, how quick are they to respond?  It can be very important for business owners to want to stop into an office if they have questions or are not sure about something.  If there is no physical presence, you will want to see if they perform office visits or use virtual conference software such as Zoom, Skype, or Microsoft Teams.  Factoring is a service industry and business owners need to have answers to their questions now; not in a few days or a week.  
  4. Factoring programs – Do factoring programs include single invoice (“spot”) factoring and ongoing factoring programs?  Some factoring companies will require a business to factor all their accounts receivable.  However, businesses may only have a single-one time need for immediate capital to get them over a period of slower cash flow.  It is important that the factor is flexible and are able to tailor a program to fit your needs.  Working with a factor that offers both programs gives business owners the freedom and opportunity to factor all eligible customer invoices or select only specific ones.
  5. Recourse and non-recourse – Are recourse and non-recourse factoring programs available?  Consider working with a factor that provides both types of factoring.  Some of your clients may make better candidates for recourse factoring than others.  Factors with a competent credit team can help your business deal with customers with poor payment histories. A good factoring company can help you make significant reductions in your losses due to non-payment by assisting you in analyzing the credit of your customers before you start the work or deliver goods.
  6. Other products – Does the factor offer other financing products such as purchase order financing, and trade and import financing? Find out what other services the factoring company offers.  A single source for alternative financial funding can be more efficient and facilitate seamless business transactions.
  7. Funding turnaround time – How long does it take to receive the advance for factored invoices?  You want to make sure the factor has the ability to provide you with prompt on-time funding.  This can be especially important when you are in a pinch and have last-minute unexpected expenses pop up.
  8. Fees and discount terms – What are the fees charged and discount terms?  How are they calculated?  In certain factoring arrangements, the number of days the invoice remains outstanding increases the factoring fees.  The factoring fee is typically calculated as a percentage of the total invoice value.  Your factor fees rates may also be based upon the level of risk of your industry as well as the contract length.  Be wary of factoring companies that offer very low discount rates as there typically will be other hidden fees.  Additional fees may include monthly (or contract) minimums, applicable transfer fees, servicing fees, legal fees, termination fees, and the initial startup fee.  Make sure the factor is upfront with you regarding its rates, service charges, and fees.   

Once you’ve chosen a suitable factoring company to work with, like Capstone, you’ll want to start right away by providing the necessary due diligence for the underwriting process.  Working with the right factoring company is important as it will ensure you have adequate access to cash flow to fuel the growth and long-term success of your business. 

If you would like to discuss invoice factoring programs with a Capstone representative, please call (212) 755-3636.

 

Frozen Foods Manufacturer and Supplier: Purchase Order Financing and Factoring Facility Case Study

09:57 26 August in Blog, Case Studies

This Client is a family-owned and operated frozen foods manufacturer headquartered in New York.  They offer a full line of convenience products, which includes an extensive line of appetizers/ hors d’oeuvres, pre-plated meals, gluten-free certified, vegetarian, bulk entrees, breakfast products, crepes, and blintzes.

Background:

  • Formed in the 1970s, the company is a nationally recognized leader in the production of high-quality, kosher endorsed (OU Kosher Certified), frozen foods products.
  • The Client manufactures under its own brand as well as private label which are distributed to all major renowned discount warehouses based in the United States.

Company Challenges:

  • This company is well established and has a well-deserved reputation however they were struggling to make timely payments to vendors due to working capital constraints imposed by their existing bank facility.
  • The Client’s growth significantly outpaced its ability to leverage its balance sheet and cash flow.
  • They were unable to meet the growing demands of their major customers using their bank sponsored ABL Facility.

Capstone’s Solution:

  • Provided a seven-figure Master Factoring Facility and a Purchase Order Facility.
  • Opened ad-hoc Letters of Credit for the purchase of new equipment.

Progress and Future Outlook:

  • Since the commencement of the relationship back in 2019, Capstone has purchased $72 million in total sales.
  • Cash flows and business operations were stabilized through the uncertainty of the COVID-19 pandemic.
  • Cash flow constraints were eased resulting in the Client meeting/surpassing order demand from all major customers.
  • The Client has found Capstone to be flexible, practical and knowledgeable about their industry; Capstone took the time to understand their business needs and provided a customized funding solution.

Strategies for Businesses That Want to Mitigate Credit Risk

11:08 10 August in Blog

Although the economy is recovering, many companies are suffering additional losses which have further weakened their financial position.  Losses derived from insufficient credit risk management policies and practices have many businesses without sufficient working capital to meet their daily cash flow needs. Payments for open invoices are being “stretched” out longer and businesses are experiencing increased late payments and write-offs.

You can mitigate your credit risk and protect your financial condition by reviewing your credit policies, procedures, and processes to be sure they make sense for an economy in transition, and consider implementing the following strategies:

Credit Criteria

In a growing, stable economy companies tend to accept lower credit quality on the assumption that a rising economy will mitigate the risk.  The economy is recovering but shortages, price inflation, and the COVID-19 Delta variant have created significant challenges for many businesses.

Tightening credit criteria to include the following can mitigate credit risk:

  • Years in business
  • High trade credit amount
  • Credit rating score
  • Litigation, lien, and bankruptcy history
  • Key financial indicators such as current ratio and acid test ratio

Generally, this information will be available in a business credit report.  Reports can be ordered from credit bureaus such as Dun & Bradstreet, Experian, Ansonia, etc.   Try to find the right balance that will mitigate credit risk, but not weaken competitiveness.  Further credit information can be obtained by requesting trade references, bank references, and financial statements from customers, or even by internet searches.  Information for companies that are public may be more accessible on the internet by using YAHOO Finance or EDGAR on the SEC.gov website as these businesses are required to regularly submit public filings and financials.

Credit Limits

How much can your company afford to lose to bad debts? Analyze credit loss exposure to your top customers under varying scenarios. If the potential exposure is too great, carefully adjust credit limits to avoid jeopardizing customer relationships.

Payment Terms

Payment terms are often dictated by competition and industry practices. However, overly generous payment terms increase credit exposure, and your company may not be able to finance the level of accounts receivable.

Credit risk can be mitigated by reducing payment terms to accounts with higher credit risk, e.g. changing from Net 30 to Net 15. Reducing excessive payment terms for other accounts will further mitigate risk and reduce investment in accounts receivable.

Discounts for Early Payment

Offering a discount for early payment, e.g. 2% 10 Net 30 can be an effective way to mitigate credit risk. In a low-interest-rate environment, cash discounts can be a powerful incentive to pay early. The cost of offering a cash discount can be high. Make sure you have the profit margin to absorb the cost. 

Deposits

Requiring a deposit with an order helps to mitigate credit risk. Deposits are not unusual for special orders, large orders, higher credit risk, and orders with long lead times.

Letters of Credit

Letters of credit to guarantee orders are a common way to mitigate credit risk in international trade and on special and large orders. Letters of credit can be expensive for a customer, and the amount of the credit is counted against the availability of borrowing facilities the customer may have at the issuing bank.

Collection Procedures

Increased customer contact reduces late payments and mitigates credit risk. On large orders contact customers shortly after the invoice has been issued to make sure it has been received, and there are no problems that will delay payment. Add a payment reminder just before the due date, and shorten the time between past-due payment reminders. In collections, the squeaky wheel gets the grease.

Automation 

Automation of credit and collections processes can reduce DSO up to 10 days. Lower DSO increases cash flow and reduces credit risk. Automated credit scoring and monitoring, electronic invoicing, email automation, and online customer portals reduce late payments and mitigate credit risk.

Third-party options to mitigate credit risk should also be considered. Even companies with the best credit policies, procedures, and processes can benefit from the additional risk mitigation available from commercial finance companies.

Credit Insurance

Insuring against credit losses is a common method used to mitigate credit risk. While credit insurance may be helpful in certain circumstances, there are a number of drawbacks that need to be considered, including:

  • Cost: There may be a minimum premium and the cost may be high for low volumes.
  • Deductible: You may have to incur credit losses up to a deductible amount before the policy pays.
  • Coverage: The policy may exclude disputed amounts and high-risk accounts, or limit coverage for an account.

Credit insurance is generally best suited for companies with a small number of large accounts.

Invoice Factoring

Invoice factoring is a widely used form of financing which can mitigate credit risk and provide immediate funding. Factoring can be provided for a single invoice, or as a program for all of your accounts receivable.

With a non-recourse factoring structure, the factoring company willingly assumes the risk of credit default once the invoice is purchased, mitigating your credit exposure.  Invoice factoring credit approval is based on your customer’s financial strength, not the creditworthiness of your business. Credit analysis and collections services for factoring with recourse (the most common form of invoice factoring), can be provided to clients that need help managing their credit risk.

Invoice factoring is an excellent solution for companies that need to mitigate their credit risk and receive immediate funding for their accounts receivable.

How Capstone Can Help

Capstone Capital Group, LLC is a leading commercial finance company that is focused on providing capital to growing companies. Capstone can tailor a program using existing accounts receivable to generate working capital and provide credit risk mitigation services that fit your business needs.

If you would like to discuss invoice factoring and credit mitigation with a Capstone representative, please call (212) 755-3636.

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