The Drawbacks of Non-Recourse Factoring

In regular factoring, you receive an average of 80% of the value of the invoices you submit in advance. You get the rest when the customer pays in full, and only after the factoring company takes its percentage off the top. The factoring company has the recourse to get its advance back from you if your customer doesn’t pay within a specified time period, which is usually 90 days. But in non-recourse factoring, the factoring company doesn’t have that option.

This looks like a better deal for you, because you won’t have to return the advance if your customer suddenly declares bankruptcy. But looks can be deceiving, and your non-recourse options may not look so attractive when you realize the consequences.

Limited Invoices for Factoring

The first disadvantage is that some of the invoices that may have been factored would now be rejected. In factoring, the factoring company always investigates the creditworthiness of your customers. If they think that the customer is too risky to extend credit to, then they may refuse to provide an advance or demand higher fees with lower advances.

But with non-recourse, the definition of “risky” becomes broader. Some invoices that would have been factored in the regular recourse factoring method will now be rejected if they pose any kind of risk that they may become bankrupt.

Lower Advances and Higher Fees

Even if a customer is now approved for factoring, the advance you get from the value of the invoice will be lower. In regular factoring you get an 80% advance on average. Now 80% probably represents the highest possible advance you can get. In general you’ll get a lower amount than that, and some small business factoring companies may even just offer 40% of the invoice value.

And yet, while the factoring companies try to minimize their financial risk, the fees they ask for will increase because of the inherently higher risks with non-recourse factoring. The average 3% in fees that factoring companies ask in regular factoring may jump to as high as 6% per 30 days. That’s in addition to other standard fees that your factoring company may charge you with that are part of the non-recourse option.

Affected Customer Relations

When you’re engaged in non-recourse factoring and you have a new customer, your factoring company plays a greater role in how you deal with that customer if you want the resulting invoice factored. The factoring company can determine which customers should be offered credit, and they may even insist on a credit limit for certain customers.

The factoring company may also have a different approach to collections as well. In regular factoring, they can remain friendly when sending reminders, because they know that if the customer doesn’t pay up then you have to send back the advance you got. But now the factoring company may become firmer in insisting that your customer pays on time so they can be sure of getting their advance back from the customer.

All in all, there may be some instances when non-recourse factoring may work very well for you. But in general, you may want to stick to regular factoring so that you can maximize your funding and limit the fees you pay.

How a Staffing Factor Helps a Security Agency

A staffing factor is company that specializes in providing staffing agency funding. They offer an advance based on their customer’s accounts receivable, so that staffing agencies can cover urgent expenses such as payroll. Here’s one possible scenario in which factoring really helped a staffing agency grow.

XYZ Security Company

XYZ Security Company offers security guards for malls and for gated communities. The company often has cash flow problems, because their customers tend to pay only after 60 days. That means they have to cover payroll for 8 weeks before they get paid.

The company considered getting a bank loan, but they were rejected because they don’t have enough assets to use as collateral. So the company always strives to keep some money in the bank so that they can cover the costs of new clients.

Growth Opportunity

XYZ Company’s reputation has grown over the last decade, and now they have been approached for a lucrative contract. A property company has asked that XYZ provide security guards for their 25 gated communities. However, the property company only pays invoices in 75 days. That means the XYZ Company has to cover the payroll for 11 weeks before they get their first payment.

Each community has two gates, which means they need 50 guards at any given time. Since the guards have to be there constantly, XYZ had to provide three shifts of 8 hours each per day, and that means every day will require 150 guards total. Each security guard earns $600 a week on average, so every week the XYZ Company spends $90,000 on payroll. But the contract says that each week the security company gets paid $117,000, which represents a 30% profit margin.

The Factoring Solution

XYZ Company only has $100,000 in its bank account, but they need $90,000 for 11 weeks before they get any money from the property company. So without a loan, they couldn’t accept the contract.

But here’s where factoring helped. A typical factoring company charges 1% for every 10-day cash advance, and provides 80% of the value of the invoice as an advance. That means XYZ gets an advance of $93,600 for each week, which is more than enough to cover the weekly payroll for the guards.

After 75 days, the factor is paid in full by the property company for the first week of the security job. The factoring company then subtracts 7.5% of the value of the invoice. That’s $8,775 and so the factor sends back $14,625 to XYZ.

Thus, XYZ still earns a profit of $18,225 a week on the contract! That’s a yearly profit of $947,700. Can you imagine that XYZ almost said “no” to almost a million dollars a year?

That’s how factoring companies can really help staffing agencies. Unlike other types of businesses, staffing agencies must meet its considerable payroll responsibilities. Now thanks to a staffing factor, XYZ Company was able to meet payroll and still earn substantial profits. The 7.5% in fees was truly worth it!

Are You Always In Search of Staffing Direct Lenders? Maybe You Need To Be A Better Manager

Running a staffing agency can be a complicated business, and it seems like you always need more cash to cover payroll, supplies, and advertising. If you’re always looking for staffing direct lenders because your customer stopped using your agency or refused to pay for shoddy services, your problem may not be in your choice of workers. Maybe you just need to be a better manager.

How do you know that you’re not quite the staffing agency manager you ought to be? Here are some signs you need to watch out for:

  • You don’t really have in-depth knowledge of every aspect of your business. Just because you took some business classes in your local college and you think that you know the “ins and outs” of staffing companies doesn’t automatically make you a great manager. And it surely doesn’t help if you don’t know about the service side of things.

So you have to know what your people know, or at the very least you learn some things about the work. If your staffing agency hires IT people, then you have to be conversant in IT topics as well. If you’re offering office cleaning services or lawn care services, then you should be aware of basic cleaning or lawn care methods.

  • You’re exempted from your own rules. You need to be part of the team, so the rules that apply to your own people have to apply to you. If you require your janitorial services to wear a uniform while on duty, then when you visit the cleaning sites you have to wear the uniform as well. If you insist that your IT people wear shirts and ties and have short haircuts, then you should also wear a shirt and a tie and have short hair as well.

You’re a manager and not a parent. You can’t just tell your people to do as you say. You have to lead by example.

  • You don’t treat everyone equally. You may think that having favorites is a good thing, but for a staffing company that can really poison the entire workforce. Having obvious favorites (and it will be obvious) can really damage company morale. It makes you look unprofessional and resentment can build up that can discourage your workers from doing their best.

So avoid having favorites and don’t treat people differently because of their gender or skin color. You can like some people more than others, which is only natural, but you have to act professionally and treat everyone fairly.

  • You like to manage everything. Such a tendency is called micromanagement, and it can send everyone working for you on the edge. You have to trust your people to do their work, and it’s best to just leave them if they’re doing their job ably enough.
  • You keep having useless meetings. Make sure that your meetings are actually useful. Often meetings are a big waste of time, so don’t schedule too many meetings just for the sake of having meetings.

Improve you managerial skills, and you may find yourself holding on to your customers because of the improved work quality of your people. Then perhaps your customers will pay on time, and you won’t need staffing direct lenders as often.

What’s Not Covered in a Typical Non-Recourse Factoring?

In factoring, you get an advance on the value of an invoice so you won’t have to wait 30 days or more to get the money you can use as capital for your business. Small business factoring companies may advance you as much as 75 to 85 percent of the value specified in your accounts receivable. If your customer doesn’t pay, then eventually you’ll have to give back that advance. But in non-recourse factoring, you don’t have to.

Of course, it depends on the reason why your customer doesn’t pay. The typical non-recourse factoring may only cover non-payment due to bankruptcy. And that may even have a time frame involved—if bankruptcy occurs after 90 days from when the factoring company buys the invoice then it may not be covered by the factoring agreement at all.

Obviously, there are many other possible reasons why a customer won’t pay up:

  • You breached the contract. Usually, you have an agreement with your customer about what you’re supposed to provide. Perhaps you were contracted to provide 100 doodads at a specific date. But maybe you only delivered 90 doodads, or perhaps you provided the service or products a few days later than what was specified in your agreement.

Now the person you dealt with may have grudgingly accepted your products, but afterwards someone higher up in the company hierarchy may have decided not to pay you at all because you breached the contract.

  • Your customer doesn’t think that you provided the quality of service they expected. This situation is a bit more problematic. When quality is at the heart of the issue, it can be very difficult to quantify, which is why you really need to have a clear and concise contract with your customers so they cannot claim this sort of thing.

This usually happens when you provide a service. For example, if you provide janitorial services a customer may be unhappy with how dirty their office remains even after your janitors did their work. The customer may be so unhappy that not only will they stop hiring you, but they may also refuse to pay for the work your janitors renderred.

  • Your customer may simply have decided to breach their agreement with you and refuse to pay. These things do happen. You just have to deal with non-paying customers the best you can. You may start with a non-threatening letter, and then when that doesn’t work you will need to be firmer in your tone.

You may end up having to threaten them with the option of bringing in a collector. That may seriously damage your relationship with your customer, although you may argue that they started the damage by refusing to pay.

And if you bring in a collector or a debt buyer, you should be prepared for collecting less than what was owed to you. Collectors may ask up to 40% of what they collect, and they may collect less than the amount owed. Debt buyers take over your account completely, but they may only pay a small fraction of the amount owed.

If any of these situations occur, the typical result even with a non-recourse factoring agreement is that you’d need to return the money you got as an advance.

What Can You Do With the Money You Receive from Factoring Your Accounts Receivable?

For companies across numerous industries, they don’t get paid immediately for their products and services. Often, the client is another company, which is why you’re giving them a credit term. So you’re left with having to wait 30, 60, and in some cases even 90 days before you’re paid in full. But that’s the wait you avoid by factoring accounts receivable.

This is the main advantage of account receivable factoring. In factoring you get most of the money right away, and you get the rest when the customer pays in full.

Here are some ways which may want to use the money you get from factoring:

  • Cover payroll. This is a huge benefit, because many small businesses can really fail once they start missing payroll and fail to pay their people on time. Employees then start looking for work elsewhere, and work performance suffers because of morale issues.

In many cases, payroll could have been met had your clients paid right away. And that’s what factoring does. You can then cover payroll so you can keep your people satisfied and working at their best.

  • Pay bills. If you have a business, often you have to pay for a lot of things to keep your operations running. You have to cover the rent for the office, and you have to pay for utilities as well. Then of course there’s the monthly payment for all your expensive equipment. You may also need to buy some other equipment on a daily or weekly basis.

If you can’t pay your bills, your business may grind to an absolute standstill. You simply can’t allow that to happen which is often why you need money right away instead of waiting for 30 or 60 days. You have to pay all these bills on time, and with the advance money you get from the factoring companies you can do so with a huge sense of relief.

  • Invest in marketing. There’s no point in selling the best products and services in your industry if no one knows you exist at all. It’s not enough that you offer the best. You have to spread word about it, and you need to convince people that you do offer the best. That’s what marketing and advertising is all about.

Competing for customers can be tough, so you can’t relax. That’s why quite a lot of companies use a large chunk of their capital in marketing so that they can get more customers. The more customers you can bring in, the higher your revenue.

  • Take advantage of supplier discounts. This is math at its simplest. Sometimes the cost of factoring may be less than what you gain when you take advantage of supplier discounts when you pay them early.

There are many things you can do when you consider factoring accounts receivable. That’s the point of factoring—to help improve your business.

Considerations Before Signing a Contract with Factoring Companies

When you deal with factoring companies so you can get the funding you need, you’ll need to sign a contract. But before you sign on the dotted line, you should make sure you understand all the business finance terms. That way, you can anticipate what’s going to happen. You’ll know how much capitalization you’ll receive, and how much you have to pay.

The problem is that sometimes you may not be fully aware of what the business finance terms in the contract mean. Before you enter into an agreement with factoring companies, make sure you take note of the following considerations:

  • Advance rate. This is the money you get in advance, represented by a percentage of the value of the account receivable. Most of the time, The advance rate hovers around the 80% mark. Some of the more inherent industries may only have a 70% advance rate average. However, some specialist factoring companies in certain niches may promise an advance of up to 95%, although this rate depends on the credit history of your customers.
  • Discount rate. This is the fee represented by a percentage of the value of the account receivable. The discount rate similar to the interest charged by a bank when they give you a loan. When your customer finally pays up, the factor takes the percentage from the payment before they pass on the payment to you.

Usually, this rate ranges from 1 to 6 percent, but you also have to pay some attention to the period of time it covers. For example, a 1% discount rate may only apply for 10 days, so an invoice which sets 30 days for payment may actually have a 3% discount rate, and payment within 60 days would then cost you 6%.

  • Reserve amount. Usually, the factor holds back an amount of money from the payments to cover any instance of non-payment. The amount of money for the reserve differs with each factor, and obviously you want this to be as low as possible, so that you get more working capital.
  • Length of time. This is the specified time during which you make use of the factoring process. You’re usually locked in for a specified period, and in that time frame you’re required to submit some accounts receivable for factoring.

The contract may also define which account receivable should be factored. You may be given a choice, or there may be a minimum number of invoices involved.

  • Fixed fees. Many factors charge additional fees aside from the discount rate. For example, there may be a fee to set up a factoring line, while each particular account receivable may have a fixed factoring fee as well. There may also be a fee when you end the factoring agreement early.
  • Late fees. There may come a time when a customer pays late. Every instance of this entails a penalty because the factor didn’t get back their money on time.

Take note of all these considerations and you can use them to compare which contract is better when you’re trying to choose among several factoring companies.

Busting the Myths About Accounts Receivable Factoring

Accounts receivable factoring is a way to get funding for a business, and for a growing number of companies it is in fact the only way to get working capital. Quite a few banks these days aren’t in a very generous mood to lend money to small businesses, and so getting money from factoring companies is the only way to go.

In factoring, you exchange your accounts receivable for cash now, instead of waiting for 30 or 6o days to get paid. The factor gives you about 80% of the value of the invoice (take note that the actual percentage varies) and then you receive the rest of the value of the invoice (minus the fees of the factor) once your client pays up in full.

This method of obtaining capital has its fans and critics, and some of these people are responsible for some of the myths concerning factoring. So let’s tackle these misconceptions once and for all.

  1. It’s too expensive. Aside from paying a percentage of the value of the invoice, you may have to pay several types of fees to the factor. Add all these costs together, and it may very well turn out to be a more expensive method of capitalization than getting a simple bank loan.

But at the same time, you have to face reality. If the inability to get more capital will cost your business a lot of money, then factoring actually makes much more sense financially. It’s easier to get the capital you need this way. With a bank loan, you stand a very good chance of wasting a lot of time applying to get a loan only to have your application rejected in the end. When it comes to your business, you really can’t take that chance.

  1. Factoring will keep your business from failing. Actually, factoring is a great way for your business to foster growth. The money you get depends on your sales, so the more sales you bring in, the more money you can get in advance.

When your business is failing and your stakes are declining, then factoring may not be much of a help for your business at all. Remember, you get an advance on the value of your invoices with factoring. If the value of your invoices are falling by the wayside, then your advance money from the factors are reduced as well.

  1. Factoring could damage your relationship with your customers. This myth stems from the SOP that your client pays your factor directly. Some people seem to think that factors are likely to harass your clients to pay up (the way credit card collections people do). But that’s not the case at all. While the factor may send courteous reminders, getting your clients to pay will still be your job. When your clients are late in paying, you may even end up paying a penalty because of it.

Hopefully, we have clarified some issues that are muddying the waters, and you now have a clearer understanding of what accounts receivable factoring is all about.

What Are the Risks for the Factoring Business?

In the factoring business, factoring companies advances you a portion of your invoices. You don’t have to wait 30-60 days to get your funds, and so you can use it for emergency expenditures which can help keep your business stay afloat. But for this service, the factor will charge you a certain fee, just like a bank would charge interest for a loan.

In all honesty, your factor takes some risks when they offer you the advance money. This is why it’s justified when they charge you higher fees than what banks charge for loans. It’s not only that offer a faster application and setup process. It’s also to compensate them for the risk they are taking, or for the actions they take to minimize these risks.

Here are a few of the risks of factoring companies:

  • The invoice may not be real. These things happen. A business may have some invoices factored and so they receive 80% of the value of the invoices in advance. But perhaps no sale was made to that company, and the invoices are fake.

It’s for that reason the factor has to take steps to verify the authenticity of the invoices. The factor may have to confirm with the customer that your business did sell the volume of goods at the price specified in the invoice. They’ll also confirm when the invoice is due.

  • Are your customers creditworthy? Even if the invoices are authentic, the paying habits of your customers must also be investigated. They should have a good record of paying their debts in full and on time.

When your customers have a habit of not paying in full or on time, they represent a risk not just for you but for the factors as well. The factor may charge a higher fee for advancing you the money, or they may even refuse to advance you the money altogether.

Of course, your best option here is to not offer credit to these customers in the first place. But if you do, you may have to wait when they pay in full, or if they pay at all.

  • Do you have very few customers? The stability of your company matters to the factor, and that means they want you to have a large customer base to rely on. If you only have one or two customers, then your company’s future is in jeopardy. Your business can fail if even a single customer goes under or if they stop doing business with you.

There are several other risks, such as your own company’s credit history. It’s for all these reasons that the factoring business charges its fees.

Key Aspects That Determine Factoring Business Fees

Just as the banking industry charges interest for their loans, there is no reason for any factoring business not to do the same. After all, how else can they make a profit? Factoring companies will provide you with the cash you need to meet payroll or pay equipment fees, but they also expect to be compensated for their services. They’re not in it just out of the goodness of their hearts.

So how do AR factoring companies determine how much they will charge you? Each company has its own ways of charging you, but in general the fees will depend on the following factors:

  1. Value of account receivables. While the more invoices you involve in the factoring process will help lower the cost of the factoring, the most important is the value of each invoice. Having just ten invoices factored will cost you less if each one is worth $100,000. Having a thousand invoices worth a thousand each will cost you a lot more. That’s because the factor invests time and manpower for each invoice given to them so dealing with one large invoice is a lot more cost-efficient for them than working on a hundred small invoices.

Of course, the most ideal scenario is if you have lots of accounts receivables and each one is worth a lot of money.

  1. The state of the industry. From the point of view of a factoring company, not all industries offer the same level of risk. Some industries are notoriously difficult for a small business to survive. The restaurant business is a good example. Medical clinics, clothing stores, and construction firms are also considered high risk. With these industries, factors usually charge a higher rate, and the advance they offer on the value of the invoices are usually lower than average.
  2. Types of customers. The factoring company will also take note of the kind of clients and customers you have. The factoring company prefers to deal with companies who engage in B2B (business to business) transactions rather than B2C (business to customer). Businesses are more streamlined in their payments, and they usually have enough funds to pay what they owe.

On the other hand, individuals are more erratic. Also, they tend to deal with lower volumes and values, which as what we’ve already mentioned, are not agreeable with factoring companies.

  1. Customer credit. Factors take a very close look at the credit history of your clients. They check to see if they pay their debts in full and on time. They also check on the stability of these customers, because obviously, if they’re on the brink of bankruptcy they won’t be very attractive to factoring companies.

Here your best bet is to have customers with an established credit history, and who have a stellar reputation when it comes to paying their debts. With a roster of such reputable companies, factors will probably be inclined to charge you less in interest and fees. That’s because there’s a low probability that the factor won’t be able to recoup the money they advanced to you.

Why You Need to Pay Your Employees on Time

There are many uses for accounts receivable factoring. The most crucial of them all is probably meeting payroll. Of all the expenses that any small business owner needs to take care of, it is payroll. Your employees are the lifeblood of your company, and not being able to pay them on time is a nightmare waiting to happen.

What Happens When You Don’t Meet Payroll?

The first thing that happens is that everyone in the company now knows that your business is failing. It’s not just a temporary setback. Your business is seen as a ship that’s sinking… rapidly. And that means many of your employees will jump ship and seek new employment elsewhere.

This is a death knell for your business, because even if you resume paying them the next time with back pay, they now know that you let it happen. And that means there a very good chance that it will happen again because there’s already a precedent.

Then there are legal consequences. Every unpaid employee can file a state wage claim against you. The Department of Labor may impose penalties against you for violating labor laws regarding fair payment of employees. You may also be falling behind on your quarterly payroll taxes, and now you have the IRS on your tail with their own fines and penalties.

Or you can close up shop and declare bankruptcy.

How Do You Avert This Disaster?

The first thing is to check if you have the money in your accounts receivable. If you do and you predict that you won’t be able to meet payroll in a month, then you can still be saved from a potential disaster. That’s because you can still use accounts receivable factoring.

In factoring, you get your money from your invoices (around 80% of the value), except you won’t have to wait for the 30 or 60 days that your customer has to pay in full. You can contact a factor and apply for factoring, and then the factoring line can then be set up. That should take only a week or two, and then you can get your money from your accounts receivables. And other incoming accounts receivable can be turned to cash in a day or two.

Other Methods of Meeting Payroll

There are other things you can do to make sure your employees are paid on time. Go on Facebook and borrow from your friends and family. Use your credit card. Sell things you don’t need. Don’t even think about paying yourself a salary. You can even sell surplus company equipment.

As you can see, you need to do everything in your power to pay your employees. And once you do, you may have to consider cutting down on manpower.

What you don’t do for payroll is to go to a bank get a loan. Even if by some miracle you meet their business loan qualifications, it will simply take too long for you to get the financing you need and by that time it will already be too late.