Understanding the Typical Types of Factoring

09:13 04 May in Blog, Business Funding

Factoring is a financing arrangement that is typically used by small and medium-sized businesses to help them maintain a steady cash flow. As every business owner understands, cash flow is important to ensure the successful, continuous operation of their business. This is why it’s important to know the different types of factoring.

In general, factoring means a company is turning over their invoices to a third party in return for receiving a portion of those invoices in cash within a few business days. Primarily, there are two types of factoring, recourse factoring and non-recourse factoring.

What is Recourse Factoring?

As a business owner, you are assuming a certain risk when you extend credit to a customer. Typically, the more reliable a client, the more favorable the terms you are offering. Some businesses even offer a discount if a client pays more rapidly. This type of factoring is called recourse factoring.

In fact, it is common for a company to issue an invoice with two separate terms such as offering a 5 percent discount if paid in 15 days and a 90-day net pricing. This means the client has 90 days to pay the invoice in full. Should the client not pay their bill in full at this time, the company would then begin collection activities which may involve refusing to ship additional product, having their accounts receivable department call the company about payment and in some cases, adding on a fee for late payment.

When customers refuse to pay, the business may turn over the collection activity to a collection agent or attorney.

However, if the business has opted to finance the invoice with a factoring company, they no longer must be concerned about collecting payment for the invoice.

The factoring company takes over the risk associated with the invoice, and the client is indebted to them. Om return, your business receives a portion of the face value of the invoice and the balance is held by the factoring company until the company pays the invoice. If the company fails to pay the invoice, the factoring company may ask you to substitute another invoice of similar value in its place.

This is known as recourse factoring.

What is Non-Recourse Factoring?

In some instances when a company borrows money, they are putting up assets such as equipment, real estate, or equity in the business. This allows the lender to seize, and in some instances, liquidate the asset to make themselves whole.

If the agreement between the borrower and lender calls for “no recourse” it means the lender has no option to turn to the business owner for any shortfall between what the company owed the lender, and what the liquidated assets provided.

In the case of non-recourse factoring, however, there is a slightly different meaning. When you deliver product to a customer, you do so under the belief the company will still be in business when the invoice comes due in 30, 60 or 90 days.

However, if you have factored that invoice, the factoring company is assuming that risk since they have given you a portion of the face value of the invoice up front. Should the company go out of business, and you have a non-recourse contract with the factoring company, the company will absorb that loss without any financial repercussions falling on your company. Non-recourse factoring typically only protects you and your business in the event your customer closes their doors before they pay their invoice.

If you are considering entering into any type of factoring contract, it is important to determine what your liability is should other problems occur with your customer. If the contract is non-recourse, talk to the factor to determine how they define non-recourse factoring.

At Capstone Capital Group, we work with small and medium-sized businesses to help them solve their cash flow problems. Contact us today and let’s discuss your needs and discuss your options for recourse, or non-recourse factoring.

An Overview of Factoring Agreements

09:00 01 May in Blog, Business Funding

Factoring agreements are designed to ensure a company who is using their accounts receivable as collateral, and the company who is accepting them as collateral, have a mutual understanding of their obligations. Like any other contract, factoring agreements are legal documents and are binding on all parties. Depending on the depth of your agreement with a factoring company, you will find the following information:

Sales of Receivables

This section of the agreement will include information on what agreement you have with the factoring company pertaining to what receivables will be included in the agreement. You should pay attention to this section, so you understand what you are agreeing to. For example, if you have agreed to only certain invoices, you do not want this section to be a “blanket” sales of accounts.

Credit Approvals and Withdrawals

This part of the contract will state what the company expects from you in terms of documentation to support an invoice. The factoring company may also have specific requirements you must meet if you want to change the terms offered to a company you are factoring invoices for.

Invoicing Assignments

This section of your contract will specify how you are to deal with payment for invoices you have assigned to the factor. Language must be included on the invoice issued to the client indicating they are to make payment to a lockbox controlled by the factor.

Fees and Commissions

There may be one or more sections of the contract that explain what fees and commissions are due to the factor. Before signing any factoring agreement, make sure you understand all the fees and commissions involved.

Advance Information

Your contract should specify how much the factor will advance against invoices. There may be different amounts for specific customers’ credit levels, and there may also be a maximum you may be allowed to have outstanding at any given time. This portion of your agreement should be reviewed carefully to ensure you understand the limits of the advance the factor is granting.

Warranties and Representations

You will be required to acknowledge that your company is duly authorized to do business, that you are solvent enough to enter into an agreement, and the invoices you are factoring are legitimately owed debts to your company. The factoring company will make similar warranties about their solvency and authorization to enter into a contract with you.

Defaults and Termination of Agreement

This section of the contract deals with when a contract may be terminated, what events could result in your being in default of your contract, and what notices are required to inform the factor of your intent to terminate the contract. This is typically done only when a long-term contract is necessary and may not be included in spot factoring contracts.

Security Interest in Receivables

The contract will spell out the factoring companies interest in your receivables. This section of the contract will prohibit you from factoring the same receivables with another company or using the same receivables as a security interest in any other type of loan arrangement.

Conclusion of Factoring Agreements

Whenever a company has decided to borrow against invoices, there will be a contract involved. Your contract will be unique to the agreement you reach with the factor including what the term of the contract is, what fees are paid, and what will occur should your client default on an invoice. Be sure you understand the terms and conditions you are agreeing to.

If you are considering working with a factoring company to help improve your cash flow, contact Capstone Capital Group today. You can reach us by filling out our online contact form, by calling us at 347-410-9894, or by email at [email protected]

Understanding Non Recourse Factoring

12:21 16 April in Blog, Business Funding

Like any type of financing, accounts receivable factoring is a risk taken by the factoring company. In most cases, accounts receivable factoring is based on the creditworthiness of the underlying customer. Therefore, a factoring company does not provide financing for invoices that are made to an individual customer, instead they provide funding against invoices made to other companies, or to government entities. This is why we need to understand non recourse factoring.

Collection Activities and B2B Transactions

Typically, when businesses are completing transactions, they offer terms that may give a company up to 90 days to make payment.

In some instances, they offer discounts if an invoice is paid sooner. In the case where a company has opted to factor their accounts receivable, they turn the risk, and collection activities over to the factoring company. However, what happens when the customer does not pay their invoice?

If a company is managing their own accounts receivable, they may put forward demand notices, and hold the company responsible for paying the invoice with certain late charges which are normally laid out in their contract. Many contracts also have a recourse clause which may hold the company owners accountable personally for unpaid bills.

If payments are not made as agreed, you would typically stop doing business with the company until the invoice was paid in full. Chances are, you would likely require a deposit or full payment before doing additional business with the company. This is known as full recourse.

Meaning of Non Recourse Factoring

But, what happens if you are working with a factor and they have offered to factor your receivables with no recourse?

First, it is important to understand what no recourse means. In most factoring contracts, no recourse usually means that the factoring company will not seek payment from you under certain conditions.

The typical condition is the insolvency of the customer that occurs during the time of the factoring period.

For example, if you have issued an invoice that is due in 90 days, and a factoring company has advanced you cash against that invoice, the company would have to go out of business during the 90 day period between issuing the invoice and having the payment due.

What Non Recourse Factoring Does Not Cover

Even if your factoring company has agreed to factor your receivables without recourse, there are certain exclusions which you should be aware of. For example, in most cases, factoring advances will not be considered without recourse if:

  • There is a dispute over an invoice – if you have issued an invoice and your customer disputes the invoice, chances are, the factoring company will not allow you to walk away from the debt you incurred because of factoring.
  • You deliver products to non-paying customers – if you have a customer who has been consistently late paying invoices and you are still delivering product to them, you are increasing their outstanding amount owed, meaning the factoring company is at even more risk of losing money. Most of the time, you will be held responsible for these invoices.
  • You owe the company money – if you have a reciprocal arrangement with a company you do business with, and the company credits amounts you owe them against amounts they owe you, the factoring company may not grant you the ability to factor those invoices without recourse.

When entering into a factoring contract, it is important to understand the terms you are agreeing to abide by.

We make sure our contracts are easy to understand and you understand whether you are accepting funding against your receivables with or without recourse.

Capstone is a private finance company offering various solutions to businesses to provide them with more consistent cash flow.

Contact us today to request funding or to speak with one of our representatives to learn more about how Capstone can help your business grow and flourish.

Small business financing and invoice factoring | capstone

Understanding the Costs of Factoring

23:04 14 March in Blog

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Factoring your invoices is a great way to improve your cash flow. The ability to obtain immediate cash, instead of waiting 30 or 60 days for a customer to pay an invoice can help you grow your business faster, negotiate better terms with your suppliers, and make sure you are able to meet usual business expenses. For business owners, the cost of factoring must play a role in their decision-making process.

Customer Creditworthiness

One of the primary considerations a factoring company will review before determining the amount to advance you, as well as the interest rate you will pay is the creditworthiness of your customers. Keep in mind, since you are factoring the invoices you issue, the type of business they are in, as well as the strength of the customer are key factors.

Size and Term of Contract

Many factoring companies will require you to sign a long-term contract for factoring services. In many cases, the company may insist you factor all invoices to get a better rate. This is often a hurdle for companies who do not want to turn over their entire accounts receivable base to a third-party. There may also be hidden fees which makes the cost higher than originally disclosed.

Typical Costs Associated with Factoring

Generally, you will be able to get 65 to 80 percent of the value of your invoices issued to you within a few business days of the factoring company receiving the invoice. Factoring in these cases can cost between four percent and seven percent of the face value of the invoice. In some cases, if the customer takes longer to pay than anticipated, you could be facing additional fees.

In addition, many companies charge set-up fees and if you work through a broker, you could be paying a brokerage fee as high as three percent. It is important to review the terms of your contract before beginning the process. If you are interested in one-time invoice factoring, long-term invoice factoring, or temporary factoring, these could all play a role in the fees you will have to pay.

Recourse or Non-Recourse Business Factoring

It is important to keep in mind that if you are working with a company that does not require recourse in the event an invoice is not paid, you may be paying a premium for this. When an invoice is paid later than it should be, you could also be charged a premium for the “late” days.

When you are considering factoring invoices, the best thing you can do is work with a company with a proven track record in your field of expertise. Some companies charge more for areas of business they are unfamiliar with, or they avoid businesses they feel are too risky. You should always work with a factoring company offering flexibility in terms as well, the more innovative, the more likely you are to find a true partner.

At Capstone Capital Group, we take pride in offering a variety of programs to meet the needs of customers. We offer innovative solutions to your financing needs. We never tie you into a long-term contract and we always work hard to find a solution that best meets your needs. Whether you are looking for help factoring invoices for one customer, or for all your customers, we can help. Contact our offices today at  347-410-9697 or by Email at: [email protected]. You can also fill out our online form for easy approval for your factoring.

Top 100 Contractor Purchase Order Factoring Case Study

16:23 17 January in Case Studies

This company is located in Pennsylvania and has active projects in 125 countries worldwide, including regional offices in Honolulu, Hawaii; Phoenix, Arizona; Fort Lauderdale, Florida; and Bataan, Philippines, and satellite offices worldwide. As a global commercial construction company, the company develops, manages, and builds projects worldwide. This means their cash flow is important; they must keep cash on hand to move onto the next project.
Capstone stepped in to help the company with its cash flow issues. We knew this company would need a customized solution enabling them to continue their work. Working together, we found the right solution to address their specific needs.

• Company is a global commercial construction company and the largest construction/ general contractor company in the Pittsburgh, PA region

• The company been in business for more than 90 years with clients including major corporations, developers, and municipalities

• Company has consistently ranked among the Top 100 Contractors in the United States

BACKGROUND

COMPANY CHALLENGES
This company was facing significant problems with cash flow. The company struggled with stretched payables demand, less profitable terms, which constricted margins, operating leverage, and the company’s ability to generate new and profitable business. This challenge had to be addressed; as a company with worldwide projects, they had to be ready to meet new opportunities head-on.

CAPSTONE’S SOLUTION
• Provided a Master Invoice Factoring Facility to inject the working capital required for supporting a larger volume of contracts
• Provided Purchase Order Financing Facility

PROGRESS & FUTURE OUTLOOK
• Eased constraints on cash flow dramatically ï Company is now paying their vendors on time
• Company focus is now on rapid company growth
• Revenues have doubled monthly since the company began factoring
• Capstone is funding projects valued at over $350 million

Top 100 Contractor - Purchase Order Factoring - Capstone Capital Group
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Engineering Staffing Company Factoring Case Study

16:23 17 January in Case Studies

Staffing agencies often face challenges meeting their cash flow needs; even an agency successful enough to secure a contract with Fortune 500 companies. Staffing agencies need cash flow in order to secure new contracts; this means they often need financing solutions tailor-made to their needs.

Capstone has extensive experience dealing with unique funding needs. By taking a solutions-oriented approach with each client, Capstone finds the solution that best meets their needs. Fortunately, thanks to this approach, Capstone was able to help this staffing firm.

In November 2015, Capstone met with a Temporary Staffing Company that places engineers in Fortune 500 service contracts. • • One of their main clients is Qualcomm • Engineers are placed in telecommunications centers and laboratories

• Engineers complete timesheets and turn them into a third-party monitor who submits the timesheets to Qualcomm Qualcomm pays on a monthly basis

BACKGROUND

COMPANY CHALLENGES

It is not unusual for a staffing agency to face cash flow problems; this agency was no different, but their situation was getting critical. The company lacked sufficient working capital allowing them to meet payroll. For the agency to meet four successive payroll payments, it needed to receive payments from Qualcomm. The company needed working capital, and without this capital, they would have had to exit the contract with Qualcomm.

CAPSTONE’S SOLUTION

• Entered into a Master Factoring Agreement to provide working capital for payroll

• Purchased weekly invoicing from the Company and advanced proceeds to allow the company to fund payroll

PROGRESS & FUTURE OUTLOOK

• Number of engineers employed under the Qualcomm contract is increasing

• Company is bidding on other technical staffing contracts with other Fortune 500 customers

• The company is confident it can bid on larger contracts even ones it does not have proper capital for

• Capstone intends to provide additional capital as additional contracts are won

Engineering Staffing Company - Factoring Case Study - Capstone Capital Group
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Private Label Outerwear Factoring Case Study

16:22 17 January in Case Studies

Capstone has solutions to a business’s most challenging financing needs. In some cases, our clients need more than one solution; we look at the challenges facing the company, identify solutions, and work with management to implement these solutions. Capstone understands the importance of cash flow, but we also understand that immediate cash flow through factoring is not always the answer.

BACKGROUND

  • New York City-based outerwear company receives a $28,000,000 order from Costco Warehouse Club
  • Order received in November of 2016, with goods to be delivered from March of 2017 through February of 2018

COMPANY CHALLENGES

The company had no established banking relationship that included open letters of credit resulted in a lack of working capital. This created an untenable cycle: cash collateral was needed to open a letter of credit to support the manufacture of the goods in Vietnam.

Combined with a need for logistics support for international and domestic shipments and accounts receivable collection; the company was facing numerous challenges.

CAPSTONE’S SOLUTION

  • Provided Trade Financing and a Factoring Facility ï Set up a worldwide logistics platform to ship to each Costco market
  • Became the vendor of record to Costco
  • Issued $22,000,000 letters of credit to two Vietnamese manufacturers
  • Established an inspection regime to ensure only first quality goods were shipped to Costco
  • Streamlined order processing, billing, and payment through the purchase of subscription to an online database with Costco

PROGRESS & FUTURE OUTLOOK

  • Costco has indicated an additional $10,000,000 of orders for lady’s wear will be placed between September 2017 and November 2017 for fall and late winter delivery
  • The client has been given several additional styles from Costco to bid on for the 2018 sales cycle

Private Label Outerwear - Factoring Case Study - Capstone Capital Group
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Minority Business Factoring Case Study

16:17 17 January in Case Studies

This company is a full-service construction management and design firm providing services for a wide range of clients. Like many other companies that experience growth, their cash flow was stifling their growth potential and creating challenges to obtain traditional financing.

As with each individual client, Capstone understood this company had unique needs. Our goal was to ensure they had the existing cash flow to accept additional work, and provide the support they needed to go after regional and international clients.

In May 2015, Capstone met with a successful Minority and Women-owned Business Enterprise (MWBE) construction management and design-build firm located in Philadelphia, PA

Clients included Comcast, Philadelphia Chamber of Commerce, Philadelphia School District, and Marriott

Total funding to date: $1.1 million

COMPANY CHALLENGES

While the company was successful at winning large contracts for their construction management and interior design services, they could not afford financing with their existing cash flow. The company sought to expand its services regionally and internationally

CAPSTONE’S SOLUTION

  • Provided a two-year $30 million Master Factoring Facility to provide working capital required for supporting a larger volume of contracts
  • Provided letters of financial support to supplement the client’s bid during the bidding process

PROGRESS & FUTURE OUTLOOK

  • The company was awarded an additional two-year contract extension with their main client and is now in the process of adding additional personnel on the project
  • Anticipates being awarded an additional $7 million in new contracts with their main customer
  • Client has been able to bid on much larger contracts including public works projects, Temple University and the Philadelphia Airport
  • Total bid list is now over $100 million

 

Minority Business - Factoring Case Study - Capstone Capital Group

NYC Steel Erector & Fabricator Factoring Case Study

16:17 17 January in Case Studies

This client provides New York, NYC, and the Tri-State area with structural steel fabrication services. Without cash flow, the company could be forced to turn down new projects.

Capstone knew to assist this company, they would need a solution that generated immediate cash flow. Therefore, single invoice factoring made sense; the company would not need to take on additional debt, and they would have the capital they needed to ensure funds were available to cover payroll and make timely payments to vendors.

BACKGROUND

Locally owned and operated full fabrication and erection service company of structural steel and is one of NYC’s largest plank erectors.

  • Projects consist of large residential and commercial buildings located throughout New York City
  • Clients: Two major plank manufacturers on the East Coast
  • Since August 2015, the company has factored over 190 invoices ranging from $8,000 to $140,000
  • Total funding has been $6 million BACKGROUND 01 capstonetrade.com

COMPANY CHALLENGES

This company has a well-established reputation and has been in business since 1967. They have a well-deserved reputation and yet the company was struggling to make payroll and timely payments to vendors. The company’s growth significantly outpaced cash flow and due to this cash crunch, however, they were forced to turn down work from two of their main customers.

CAPSTONE’S SOLUTION

  • Provided a Single Invoice Factoring Facility to inject the working capital required for supporting a larger volume of contracts
  • Increased customer credit line by over 400 percent since the start of the relationship

PROGRESS & FUTURE OUTLOOK

  • Cash flow constraints have been drastically eased and now the client can focus on taking on a higher volume of projects for its customers
  • Business volume has tripled since the client started factoring

NYC Steel Erector & Fabricator - Factoring Case Study - Capstone Capital Group

IT & Staffing Factoring Case Study

16:15 17 January in Case Studies

One of our recent clients has several high-profile clients in financial, government, insurance, manufacturing, publishing, and technology sectors. Like any other company, they were interested in additional growth but they lacked the cash necessary to pursue that growth.

Capstone worked with the company to identify the issues they were facing, evaluated their immediate and their long-term needs. Capstone determined the best solution was a 2-year factoring facility and proceeded from there. The outlook for this company is vastly improved; they have been able to pursue new business, and as a result, Capstone has expanded our business with them.

BACKGROUND

  • Incorporated in 2004, the company has continually offered software development, IT Solutions and Staffing to several clients in the USA
  • Factored receivables the period ending 2015 were $2.4 million with sales for fiscal 2016 projected to increase to $2.6 million

COMPANY CHALLENGES

The company lacked cash flow to pursue growth and was unsure how to meet increased payroll demands.

CAPSTONE’S SOLUTION

  • Capstone provided a 2-year Factoring Facility so the company could meet its payroll requirements and increase business

PROGRESS & FUTURE OUTLOOK

  • This solution was a great success for both the owner and Capstone leading to repeat business
  • The company is confident it can bid on larger jobs even those it does not have capital for
  • Capstone looks forward to assisting the company in the future and fueling their growth

 

IT & Staffing Services - Factoring Case Study - Capstone Business Finance LLC

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