Aspects of AR Factoring Term Sheets You Need To Check

One of the great things about account receivable factoring is that you may be offered a term sheet (a document listing all the details involved in the financing) in as little as 24 hours. It’s a welcome departure from the slow loan application process normally used by banks.

Duration of the Financing

Even the most ardent advocate of factoring admits that this method of financing should be only temporary. It’s to be used only as needed. However, some lenders may ask for an extended period of time for factoring so that they actually get a decent return on their investment.

This is called a lock up period, and it can be devastating if you’re required to use factoring for a year or two when you only need it for a few months.

But with some companies, spot factoring which only involves a one-time deal and a single invoice may also be possible.

Advance Rates and Fees

In factoring, you get an advance as a percentage (more or less 80%) and then the rest is forwarded to you minus the factor’s fees when the customer finally pays in full. So to have a viable budget plan, you’ll need a definite idea of the advance rates and the fees. The AR factoring term sheets must explicitly state how much you’ll be getting.

The problem here is when advance rates differ depending on the credit-worthiness of your customers. If advance rates are different each time, what determines the final advance rate?

The fees may also be affected if your customers don’t pay on time. You may have to shoulder the penalties as well, so you’ll need to know the fees involved.

And you also need to know what will happen if your customer refuses to pay. Usually, you may have to return the advance money you received along with additional interest. In non-recourse factoring, the factor doesn’t hold you accountable if the customer declares bankruptcy. But it’s usually a different matter if the customer refuses to pay because of a dispute with your company.

Collection Methods

Factors are usually in charge of collecting fees from your customers. While this may be regarded as a convenient service, it may also be an area of concern. Some factors may employ collection methods which may not sit well with your customers.

Some term sheets specify the kind of letters factors send out to customers when collecting payments, and the frequency of sending out these letters are specified as well. Sometimes the factor may even incorporate your own letterhead or logo on the collection letters so that your customers are unaware that you’re using a factor as a collection agency.

Conclusion

AR factoring term sheets specify every important detail so that you avoid disagreements and confusion later on. The best term sheets try to anticipate every possible contingency so that there’s a planned response for every scenario. Having a factor as backup is often great, but to forge a lasting relationship you need to come up with AR factoring term sheets that are fair to all parties involved.

 

The Appeal of Government Purchase Order Funding

Landing a purchase order from the government is one way of growing your business. You have a customer that will surely pay you
Landing a purchase order from the government is one way of growing your business. You have a customer that will surely pay you

If you’re running your own company, you’re usually required to put up some of your assets as security when applying for a bank loan. The security gives the bank peace of mind, because the collateral acts as an alternative form of payment if you’re unable to pay back the loan.

But you may have other assets you can use to secure additional funding. If you’re having cash flow problems, you may find yourself having to walk away from a lucrative government contract simply because you don’t have the capital to pay for supplies necessary to fulfill the contract. But with purchase order funding, the purchase order itself is enough to get you the funding you need.

Here are some reasons why a government purchase order can easily be used to obtain funding:

  • Approval for purchase order funding depends on the ability of the customer to make payments. And that’s why government purchase orders are so attractive. Lenders know for a fact that the government will pay up. There is virtually no chance at all that the customer will declare bankruptcy and become unable to pay.
  • Government purchase order funding provides greater amounts of capital than purchase orders made by private companies. In purchase order funding, you get a percentage of the value of the purchase order in advance, which you use to pay suppliers so that you can fulfill the contract. The more reputable and secure the customer is, the higher the percentage of the funding.

And there’s nothing as secure and reputable as the government (in the US, at least). That’s why PO funding lenders can offer as much as 85% of the value of the purchase order. When the PO is issued by a private firm or by a lesser-known public firm, the funding may only be 50% of the value of the contract.

  • PO funders with experience dealing with the government can lend you their expertise. These funding institutions can even help you land a government contract in the first place. They also know how governments define certain terms in the purchase order, so you can be sure of what’s expected from you.
  • Purchase order funding providers can also help in dealing with payment collection later on through factoring. With factoring, you get an advance on the payment instead of having to wait for days for the government to pay up. You also have your funder bear the burden of collection the payment from the government. They’re the ones who have to deal with government red tape regarding payment collections, not you.

Landing a purchase order from the government is one way of growing your business. You have a customer that will surely pay you, and there’s also the prestige of landing a government contract which you can use to attract more business in the private sector.

And if you fulfill your obligations properly, you also increase your chances of getting more government contracts in the future. You’ve already proven yourself, and the government may be more likely to direct more business your way because you’ve already demonstrated a proven ability to fulfill orders promptly and efficiently.

The Rewards of Apparel PO Financing

The Rewards of Apparel PO FinancingApparel businesses belong to a giant industry. In fact, the US apparel market is actually worth $225 billion, so there’s a lot of money to be made.

But it’s not always smooth sailing in the apparel industry these days. The entire industry needs to face new challenges head on, while traditional problems must also be faced. And one of these problems in this industry is the need for financing.

Uses for Additional Apparel Financing

There are many possible reasons why a company may need additional financing. A manufacturer has to deal with rising labor costs. A wholesaler needs to pay off manufacturers and suppliers while waiting for their retailer customers to pay up. Retailers need to deal with the volatile fashion industry in which a popular fashion item can suddenly become unpopular within a short time.

Companies can also use the money to expand their range of products, boost their advertising and marketing, increase their inventory, and pay for operating expenses such as payroll.

The money can also be spent fulfilling a large contract. Sometimes, a large contract may not be doable given the limited cash flow of a wholesaler or a manufacturer. There’s not enough money to produce the number of apparel items specified in the contract.

Obtaining Addition Financing

While banks are often the first choice when it comes to financing an apparel company, often they’re not the best option. That’s because the chances of getting a loan approved isn’t good. In addition, the entire loan application process takes a great deal of time to complete, even if the loan application is eventually approved.

This interminable loan application process can prevent a company from taking advantage of any sales opportunity in the meantime. And that’s why apparel purchase order financing may be the better option.

How Apparel PO Financing Works

With apparel PO financing, the purchase order is used as a means of getting the money needed to fulfill the purchase order.

Let’s say that a retailer customer asks for 1,000 pairs of jeans from a wholesaler, and promises to buy each pair of jeans for $100. That’s a great opportunity for a wholesaler who knows where to get them for $50 each.

But the problem is that the wholesaler doesn’t quite have enough money to buy 1,000 jeans from suppliers. And that’s where the apparel PO financing comes in.

The lender takes into account the size of the order, the trust-worthiness of the retailer, and your ability to deliver the order quantity. If everything checks out, the lender will pay your suppliers while it also does collection duty with your retailer customers. When your retailer customer pays in full, the lender then gets the payment and gives it to you, minus a small fee for the services they provided.

As you can see, with this arrangement you can boost your reputation among large retailer customers, and you don’t have to miss out on profitable opportunities.

 

The Benefits of Factoring Maintenance Companies Can Enjoy

imagesJanitorial and maintenance companies are one of the mainstay services in any type of business. Find any type of company, and there’s always a need for a janitor or someone similar to clean up after the workers have left.

It’s obviously a growing industry, as the Bureau of Labor predicts that there will be a 12% increase in the employment of janitors and building cleaners from 2012 to 2022. In 2012 there were about 2.34 million janitors and cleaners (not counting maids and housekeeping cleaners). By 2022, there will be more than 2.6 million of them.

Commercial customers for cleaning services include office buildings, hospitals and other healthcare facilities, industrial plants, schools, retail stores, shopping malls, and restaurants. More companies are also outsourcing their cleaning services, so maintenance companies are likely to benefit more from this growth.

Payment Delays

With such a favorable outlook, what’s wrong with the maintenance industry? That’s simple enough to answer: their customers take 30 to 90 days to pay up. That means a maintenance company has its money tied up, so they don’t have money to use for various necessary expenses. And with maintenance companies, the expenses are plenty.

  • Maintenance companies must meet payroll requirements. This is absolute, because not being able to meet payroll can be disastrous for any type of business. There are legal consequences, and the bad PR can destroy a company’s reputation.
  • You’ll need to hire new workers on a regular basis. You’ll need to hire new workers when you get a new contract. Without the cash reserves ready, you won’t be able to go after new contracts.

What’s more, you may even fail to meet the demands of your current contracts. That’s because the turnover rate for personnel in this industry exceeds 50%. Too many workers quit, are hired by other firms (or hired directly by a client), or open their own small-scale maintenance business.

The continuous search for new workers can be very expensive. Advertisements must continuously be posted, and you need a department to interview applicants and choose among them. You may even have to provide additional training as well.

  • Cleaning supplies must be bought at regular intervals. Wash cloths, paper towels, cleaning solutions, and other similar items are consumed regularly, and they must be replaced. Cleaning appliances must also be bought, and they must be maintained properly as well.

How Factoring Helps

If you’re running a maintenance company, then the factor advances you about 80% of the value of the invoice that your clients pay after 30 days or so. You get the rest (minus the factor’s fees) once your client finally pays you in full.

Because you get your money immediately, you can then spend it on whatever expenses you deem vital for your maintenance company.

Another advantage of factoring is the speed in which you can set up the agreement with a factor. Unlike bank loans which take so much time to process, getting approval for factoring can take only a day or so. And what’s more, the approval rate for factoring is much higher than the approval rate for traditional bank loans.

 

Should You Use a Factoring Service That Charges a Factoring Broker Commission?

It’s not always easy to find the best factoring company to cater to your financing needs. There are so many of them online, and taking the effort to choose the best one among them may take a bit of time. But one alternative is to contact a factoring broker who can enable you to choose a factoring company very quickly.

Pros of Factoring Brokers

There are several advantages of using the services of professional factoring brokers.

  • Brokers can help you find a factoring company very quickly. You won’t have to go through a long list of factoring companies to deal with.
  • Factoring brokers can explain the factoring process used by a factoring company in great detail. Brokers can describe what you can expect from the factoring service, and the factoring company can start setting up the deal more quickly.
  • As the recipient of the funding, you don’t have to pay the factoring broker commission. The payment comes from the factor instead. Usually, this is 10 percent of the amount you pay to the factor in fees.
  • Factoring brokers know which factors deal fairly with them. Some factoring companies take some money off the top of the fees first before they pay the percentage first. And if a factoring company deals unfairly with people who bring in clients, then they may also be more likely to deal with you unfairly as well.

Cons of Using Factoring Brokers

Factoring brokers want to make money, and sometimes this may be to your detriment. For example, typically a broker is paid the 10% as long as the factoring agreement is in place. So that may mean that the broker may want to find a factoring company that can serve you over a two year period (via a lock in contract), even though you only need the factoring for a few months.

The factoring broker also earns more in commission when the factor charges a bigger fee for their financing services. As such, they may get a factor that charges extravagant fees for your company, instead of a factor which offers more reasonable fees for its services.

Because brokers may want to earn more money from their clients, they may have minimum requirements for factoring services. For example, they may only lead you to factoring companies that require a 2-year locked-in period. The brokers may also only recommend factoring companies that charge 6% of the value of the accounts receivables as the fee, even though some factoring companies only charge 2% as a fee.

Conclusion

The quality of the factoring company chosen for you by a broker depends on what kind of broker you have in the first place. Some brokers prioritize offering the best service for their customers, so they pick the factors which offer the best services or the lowest rates. These brokers hope that by providing superior picks, clients may recommend their services to their other business contacts.

The other type of broker operates by trying to get the most money out of each deal. They prioritize their own profits and your needs come in second. This is the type of broker you should avoid.

A Working Capital Loan Will Generally Not Affect Working Capital

What is working capital? There are several definitions and explanations being bandied about it online, but it’s actually very straightforward. “Working capital” usually refers the money you have right now minus the debts you need to pay right now or in the near future.

In short, working capital = immediate assets – immediate liabilities.

Your immediate assets include the money you have in your bank accounts, your inventory, and your accounts receivable. Your immediate liabilities include payroll, utility bills, supply expenses, office expenses, and short term debts.

For your business to operate smoothly, your working capital has to be a positive figure—you need to have more current assets than current liabilities.

If your current assets are less than your current liabilities, then you have a problem, because you don’t have to means to pay for your debts and obligations. You will then need a working capital loan.

How a Working Capital Loan Affects Your Working Capital

When you get a standard long term loan, it usually means you boost your working capital. For example, if you get a $100,000 loan payable in 3 years, then that means you increase your working capital by $100,000 because your immediate liabilities have not increased as well.

But with a short term working capital loan, you don’t boost your working capital. That’s because while you get the $100,000 to use right away, you also add $100,000 to your short term debts. That means there’s really no net difference to your working capital.

For example, let’s say you get an 80% advance on your accounts receivable now, with the rest coming to you when your customer pays up in full. You get more money now, but essentially you reduce the value of your accounts receivable. You basically end up not increasing your working capital at all. But you did improve your cash flow.

So What Increases Working Capital?

There are several ways to increase your working capital.

  • You can get a long term loan. This is one of the main reasons why small businesses borrow money from banks on the first place. You get more money to use, but you don’t incur any immediate debts.
  • You can boost your net income. Your net income is the money you earn minus the money you spend. This is the normal way of boosting working capital, since these profits can then be used to pay for current liabilities.
  • You can sell a fixed asset, such a building or an expensive piece of machinery. This can really boost your working capital, especially if you sell something that you don’t really use.

Proper Use of Working Capital

Working capital, by definition, should be used to your benefit. Now having enough working capital is a problem, but so is having too much working capital. That means you’re not putting that money to good use. For example, you can use some of your excess working capital to buy useful fixed assets such as equipment or real estate.

The Need for Factoring When It Comes to Commercial Industrial Refrigeration

If your business is in the food industry, either as a supplier, supermarket, or a restaurant, then in all likelihood you’ll need commercial industrial refrigeration. It’s virtually mandatory, because without it, food inventory will spoil. And of course, you may also be held liable if people suffer because you served them spoiled food.

But commercial industrial refrigeration is not exactly a minor purchase. It’s a major expense. If you need a new industrial refrigeration system then you may need additional financing to cover the expenses.

Paying for Industrial Refrigerators

Buying an industrial refrigerator does not entail a visit to your neighborhood appliance store. You’ll need to look at sellers which have a nearby warehouse where they store these equipment. You can pay straight cash which may deplete your cash reserves, or pay in monthly installments.

Either way, these refrigerator units represent a major drain in your cash flow. And the expense doesn’t stop at the initial cost. Your electricity consumption will also rise dramatically. A commercial refrigerator used in a grocery store can consume up to 17,000 kilowatts per year. A larger commercial freezer may use up to 38,000 kilowatts per year. If you maintain a warehouse full of perishable goods, your refrigeration costs can be sky high.

If you’re having cash flow problems, you may be able to swing a bank loan to cover the expense. If not, then perhaps alternative forms of financing such as factoring may be able to help cover your monthly expenses.

Choosing the Right Type of Refrigerator

There are several types of refrigerators, and you’ll need the right one to maximize the benefits you get. First of all, you’ll need one that’s suitable for the products you deal with. Some are for food items while others are for beverages.

You may also decide whether to get a refrigerator unit that’s out of sight or a unit designed to display the items for the customer. These units cool the items inside while they allow customers to choose the items they want from within.

You’ll need the right size to accommodate the type and quantity of the items inside. You also need to make sure that the proper temperature is achieved. Some food items need only to be cooled, while others need to be frozen.

Refrigeration Maintenance

The first thing you need to do is to make sure you have power generators in case of a power outage. This is a must, because the best refrigerators in the world are useless if you’re totally reliant on steady power output from your local electric company.

After that, you need a contingency plan should any unit fail. Some businesses use a series of refrigerators, and they make sure that if a refrigerator unit fails then the others have enough space to accommodate the extra items transferred from the defective unit.

But regular maintenance must also be performed so that the unit can last for a very long time.

Whether you own a supermarket, restaurant, hotel or food distribution company; or you have a commercial industrial refrigeration business, factoring can help ensure operations without any hiccups.

 

The Top 5 Benefits of AR Factoring

With banks not exactly in a generous mood when it comes to financing new companies, many startups and small businesses have turned to alternative ways of boosting cash flow. But of all alternative financing methods available, accounts receivable or AR financing has become one of the more viable means of acquiring funds.

There are several types of AR financing. But the premise remains the same. You use your accounts receivable to get an advance on the money owed to you, so that you can use that money immediately instead of having to wait months for you to get paid by your customer.

The benefits of AR factoring are numerous and substantial:

  1. You don’t need excellent credit. In fact, your credit score is irrelevant.

What’s relevant is the credit history of your customers from whom the money will eventually come. If they have an excellent record of paying invoices fully and on time, then you can get your financing request approved.

  1. It doesn’t take a lot of time. Asking a bank for a loan is a time-consuming procedure. You have to wait weeks, which can be frustrating since the loan application often ends in a rejection. But with AR factoring, the approval may be granted in as little as 24 hours. What’s more, setting up the factoring doesn’t take more than a week.
  2. You can use the factor’s credit department to determine the credit-worthiness of new customers. Granting credit to new customers is always an iffy proposition. You just don’t know whether or not they’ll actually pay up. But with your factor’s credit investigation, you’ll know which customers will most likely pay up on time.
  3. You can also use the factor to collect the payments on your behalf. You don’t have to hire your own collectors or use a third party collector. The factor collects the payments for you. They then take their fees from the payments, and then forward the rest of your money to you.

For example, let’s say that your factor gives you 80% of the value of the AR. When the customer pays in full in 30 days, you then get the rest of your money from the factor after the factor has already deducted its fees.

  1. Factoring boosts your cash flow for various needs. You can use the advance in any number of ways. You can use it to meet payroll, pay utility bills and office rent, or pay for supplies or inventory.

In addition, usually the factor doesn’t interfere on how you want to use the advance money you get. This is in contrast to how banks would want to know just how you want to use the loan they provide.

Some say that AR factoring can be expensive, and that’s probably true when compared to the interest rates banks collect from borrowers. But without factoring, it’s probably much more expensive not to get the financing in the first place.