Factoring Business Studies: What Do They Reveal?

Nowadays, quite a few mainstream finance publications and websites have finally accepted the fact that invoice factoring can be hugely beneficial for small businesses. For example, the Fox Business website has published an article that discusses the loan programs available through the Small Business Administration, and it suggests that invoice factoring may be your better alternative if you need the cash quickly.

Click here for our factoring case study.
Click here for our factoring case study.

But how do you know if a particular factoring company can be the best fit for your company? One way of doing this is to ask for references so you can use the experience of their former clients as your factoring business studies.

  • Choose references that are involved in your own industry. Different industries have different needs and business processes, so it doesn’t really make sense to study a factoring service for a janitorial company when you’re a distributor in the apparel industry. Those are two wildly different industries.

Instead, make sure that the references you get are in your own industry. If you can’t get these references, then at least you know that the factor you’ve approached to help you has no or very little experience in your industry.

By getting these references, you can then gauge the level of experience the factoring company has, and you’ll have a better sense of how they can set up an efficient arrangement for you.

  • Analyze the entire process. Since you’re using these references for your very own factoring business studies, take note of the particulars of each case. How much advance payment did the other companies get, and how quickly did they get it? Were the clients forced to assign factoring for certain invoices, or could you pick and choose what you can put up for factoring? Were there any lock down contracts in place, which required you to use factoring for a certain amount of time? Get the answers for all these questions, because they could apply to you too.
  • How much will the arrangement cost you? Everyone says that invoice factoring can cost you a whole lot more than a traditional loan from a bank. But the question you need to ask is precisely how much more? The references you get can give you a clearer idea of what you’ll be paying for the opportunity to get the funding you need much more quickly.
  • Are there any extra services available for your company? Some factoring services offer additional benefits than just simple funding. For example, they can handle the job of collecting payments for you, which then saves you the burden of having to set up a department dedicated to collecting payments from your customers. Others may give you detailed reports on the reputation of potential customers, so you’ll know which ones you can offer credit to. Some factoring companies even offer to shoulder the risk if your customer doesn’t pay the invoice.

Like any other business studies, factoring business studies can clearly illustrate the details you can expect, as well as the potential benefits and liabilities. Study them well, and you can get the right arrangement with the right factoring company that can fit your needs to a T.

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Why Janitorial Factoring Services are Different—and Better

factoring-Janitor Services

Factoring services can come in many different forms, but the essence remains the same for the most part. Instead of having to wait 30 days (or sometimes even more) to receive payment for the goods and services you’ve provided, you can get your money (or at least most of it) immediately. How quickly you get the money, the amount of money you get in advance, as well as the fees that the factoring company gets, will depend a lot on the particular situations unique to your industry. So if you are running a company that provides janitorial services, you need to look for janitorial factoring services.

While there are many factoring companies that offer financing to a wide range of industries, janitorial factoring services may be a better fit for your company because they already know details about the industry that other factoring companies don’t.

  1. You don’t have to explain your need for working capital. You know why you need the money and why you need it quickly. But does your factoring provider know? If they don’t, then they may take too long to provide you with the money you need and the advance may not be sufficient for your needs. Having to explain that you need the money to buy cleaning supplies and to meet the weekly payroll is a chore that you’re spared from, when you deal with a factoring service that’s already familiar with the janitorial service industry.
  2. Setting the factoring arrangement is a breeze. Every industry has its own way of doing things. But there can be some misunderstandings and screw-ups if the factoring service is unfamiliar with the business processes you work with. With an experienced factor, the setup is much quicker and more efficient. You don’t have to educate them, and they may even give you a tip or two on how to do things more efficiently.
  3. Experienced factors have realistic expectations. Some factoring services don’t understand why some clients of yours insist on paying in 60 days or more instead of the usual 30 days. They may then penalize you for their “lateness” in paying when in fact it’s just business as usual for these people.
  4. These factors can provide additional services. Janitorial services involve workers’ compensation. Generic factoring services have to be educated about this particular element of the janitorial industry. But janitorial factoring services not only know all about it—they may even know more about it than you do. You can then take advantage of their help when this particular issue comes up.

Moreover, the factor can also help you identify problematic clients. For example, if you have a new client then the factor can tell you about whether this new client pays their bills on time or not. You can also avoid new clients that already have a reputation of defaulting on their payments.

Working with a factoring service is a partnership, so make sure that the factor brings knowledge and experience to the table.

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The 3 Benefits of Maintenance Factoring

If you are running a maintenance company, it’s not surprising if you find yourself needing short-term loans every now and then . One of your options is maintenance factoring, which is offered by financial companies specializing in the maintenance industry.

Instead of having to wait weeks and months for a company to pay for the services you’ve rendered to them, you can receive the bulk of the payment in advance from a factoring provider. You can get anywhere from 70% to 90% of the value of the invoice right away. Then when your client pays in full, you get the remainder of the money after the factor deducts their fees.

In some cases, maintenance factoring may be a better deal for you than a traditional bank loan. Here are some reasons why:

  1. You will get the funding you need. Regardless of news reports saying that banks today are becoming less tight-fisted, the awful truth is that their approval rate is very low. You’ll need to have a stellar credit rating, your maintenance business should be well-established, and you’ll need a significant asset as collateral. In fact, the US SBA has a very long list of requirements for you to consider.

On the other hand, the approval rate for maintenance factoringis quite high. Your bigger clients may be able to demand that they can pay in 60 days or more, but you can use their excellent credit to negotiate a good deal in the factoring agreement.

  1. You get your money much more quickly. A bank loan application can take weeks or months, with a lot of bureaucratic red tape to navigate. This can be terribly frustrating, since your needs are often immediate.

You may need the money because you need to buy new equipment and cleaning supplies, or you need to hire new workers to service new contracts. You may also be involved in some workers’ compensation issue, which can put a dent on your working capital. If you run out of working capital to pay for cleaning supplies or to meet payroll, you’ll have a serious problem on your hands.

With a factoring provider, it may take only two weeks or so to set up a factoring arrangement. After that, you can get your money within days of providing the service. That gives you a lot of leeway in terms of working capital for operational needs and for business growth.

  1. You can outsource invoice management and collection. Some factoring companies can manage your invoices for you and furnish you with reports. They can even do the collecting for you, which spares you the trouble of setting up a department and hiring new personnel.

This provides you with the clear opportunity to focus on what you do best, which is to provide for the maintenance needs of your clients. It’s always a good idea to stick to your strengths, so you should just let the experienced pros do these tasks for you.

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Asset Based Lending Metrics that Factors Will Consider

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If you are a small business owner, then it’s easy to find out which factoring company or asset-based lender offers the most attractive arrangement for you. The asset based lending metrics you need to look at includes the advance rate (the money you get right away in relation to the value of your accounts receivable), the costs and fees, and the number of days you’ll need in order to get the money you need.

But the financial institutions which provide you with the funding you need have asset based lending metrics of their own. These metrics determine how much money you get as an advance, and also affect the costs of the financing.

  • Accounts Receivable Turnover Ratio. This refers to the net credit sales in a particular period of time, divided by the average accounts receivable. The net credit sales are used instead of net sales because your cash sales aren’t your accounts receivable. You get the average accounts receivable by adding the beginning and ending receivables for the year and then dividing the number by two.

When you have a high ratio, then it means you have an effective system of extending credit and collecting accounts.

  • Sales Dilution Rate. Sometimes your gross sales and your net sales have different figures. You may have $100,000 a month in gross sales, but your net sales is only $90,000 for some reason or another (your customer returned your merchandise or they were unable to pay). So in this case, you have $10,000 sales dilution divided by the total gross sales of $100,000, which gives you a 10% dilution rate.

You will want to keep this rate low, as this is one of the crucial metrics looked at by lenders to determine how much money you can get in advance.

  • Asset Turnover Ratio. By taking your net sales and dividing it by the value of your total assets you will know your asset turnover ratio. So if you have a .5 ratio, then that means you get 50¢ for every dollar you invest in your business. This ratio sheds light on the efficiency of your company in generating revenue from its assets.

In some variations of this ratio, the lender may want to check and see how you use your fixed assets, and how you use your working capital.

  • Inventory Reliance. This is your liabilities that can’t be covered by your liquid assets, divided by your inventory. This is a ratio that shows how much of your inventory you would need to sell or convert into cash in order for you to cover your current liabilities. It’s best if you have a very low ratio here, or if you don’t have any current liabilities which you can’t cover with your liquid assets.

Keep in mind that the specific figures that factors are looking for in order to give you a good deal depends largely on the industry you’re in. Each industry has different standards. This is precisely why you will want to enter into a financing relationship with a factor who is very familiar with your industry. Such a factor knows the “norms” in your industry, so they will be able to evaluate your situation more accurately.

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Purchase Order Financing Glossary

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Click here to visit our glossary

If you’re trying to get more information about purchase order financing, you have probably realized that the terminologies aren’t explained properly. To help you along, here’s a purchase order financing glossary you can refer to:

  • Invoice factoring. In the purchase order, the buyer specifies how long they would need before they can completely pay the amount for the goods or services you’ve provided. You’ll then get an invoice instead of cash. The PO financier or another lender may then forward you a percentage of the value of the invoice, and you get the full amount only when the buyer pays you in full. You then get the rest of your money after the advance, minus the fees charged by the invoice factor.
  • Letter of credit. When you get financing through your purchase order, your funder doesn’t usually give you cash. Instead, it opens a letter of credit on your behalf. This letter of credit states a certain amount which is then used to pay your supplier when it delivers the goods you need.
  • Purchase order financing. You will get the working capital you need by using the purchase order as a form of collateral. Let’s say you get a purchase order for $100,000 and the cost of the supplies you need is just $60,000. But if you don’t have the ready working capital to cover the cost of the supplies (which you may have to pay immediately) then you may not be able to produce what’s asked of you in the purchase order. With PO financing, you get the money you need right away.
  • Purchase order. The P.O. is a legal document signed by a buyer requesting you as the vendor to provide the goods or services the buyer wants. Usually, it contains statements detailing the quantity and the description of the goods and services required of you, as well as a schedule as to when you should provide the goods. The price of the goods is also stated, including the terms of the payment.
  • Rapid growth rate. Most companies want to grow, of course, but sometimes the growth can be too rapid. If the demand for your goods far outweighs what you can get from your suppliers with your working capital and your available credit, then you may not be able to take advantage of the increased demand.
  • Sales volatility. This is a business situation in which the sales may have frequent ups and downs instead of a steady flow of sales. This is usually seen in highly seasonal industries, like flower shops and promotional item stores. When it’s a period of high sales opportunities, the orders for your goods may exceed what you can acquire with your current working capital.
  • Working capital constraints. These are the limits set by your available working capital. A limited cash flow means you will have limited stocks from your suppliers, which then limits the purchase orders you can fulfill. Purchase order financing is designed to enable you to get past these constraints.

 

 

Factoring Statistics that Disprove Myths

Factoring has grown by leaps and bounds all over the world, but in the US it’s still surprising to find so many small business owners who don’t really know much about it. In fact, some of these people think that they know a lot about the factoring industry, but what they supposedly “know” turns out to be untrue.

Industry experts recently compiled factoring statistics that shed light on the topic. These stats definitely disprove several commonly-held beliefs and myths among American small business owners.

Myth #1.Factoring offers an insignificant amount of money on a global scale.

Now this depends a lot on what you mean by “insignificant”. In the US, the factoring volume has reached more than $113.36 billion. Worldwide, the factoring volume exceeds $3 trillion, and that’s hardly what you’d classify as insignificant.

Myth #2.Factoring is a purely (or mostly) American practice.

Some hard-core “patriots” seem to believe that if something is a good thing, then it’s an American thing—like democracy, freedom, and football. But factoring is a worldwide practice, and it’s offered in every continent.

Perhaps the most striking example here is China, which many Americans regard as a backward communist country. Factoring in this country has grown to more than 378 billion euros (or almost $512 billion) according to one estimate. In fact, China is the largest factoring market in the whole world.

Myth #3.It’s only in Third World countries where factoring offers a definitive advantage.

While the assumption that China is a “Third World” country is open to debate, that’s not exactly the case with many European countries. The largest regional factoring market is Europe with about 60% of the total global factoring volume. And according to the factoring statistics, numerous developed countries engage in factoring that completely dwarfs the US factoring volume. These countries include the UK, France, Germany, Spain, and Italy. Factoring is also going strong in Taiwan, Japan, and Australia.

Myth #4.The use of factoring in business is declining due to the increasing number of funding methods.

This isn’t true at all, as the global factoring volume has increased just recently. In the US, factoring growth is at 8%. In some countries, the growth of factoring has been phenomenal:

  • Peru. 253% growth rate
  • Colombia. 55%
  • Korea. 54%
  • Morocco. 49%
  • India. 44%
  • Croatia. 39%
  • Austria. 29%
  • Poland. 29%
  • Australia. 26%
  • UAE. 21%
  • Russia. 19%
  • Singapore. 15%
  • China. 10%

Conclusion

So what do all these factoring statistics mean? Essentially, it means that more and more companies globally are discovering the many advantages of using this kind of funding for operational expenses and for business growth. Despite government initiatives and “lenient” bank requirements. Many small businesses to day still can’t get adequate funding in a timely manner. The chances of getting the money you need are much better with factoring, and you get your money much more quickly.

In addition, you can also negotiate and transfer the responsibility of collecting to the factor who buys your accounts receivable. This saves you a lot of worry, and now the matter of late-paying and nonpaying customers won’t be your problem anymore too.

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Factoring in China: Why the Chinese Factoring Market is the Biggest in the World

China is still officially a communist nation, but you really wouldn’t know it from the rising number of multimillionaires living in the country. Theoretically, that’s not supposed to happen in a country where everyone’s supposed to be equal even financially, but times have changed in China. Now they even have billionaires. China has 152 billionaires in 2014, adding 30 more since 2013.

China now also has numerous SMEs (small and medium enterprises), and while these business owners may not become billionaires anytime soon, they do want to be richer. And factoring in China has paved the way for that to happen. The growth of factoring in the country has pushed factoring into a $3-trillion industry worldwide, and now factoring in China is the biggest in the world. Over the last 5 years, factoring in China has increased by 54% per annum.

So what accounts for this phenomenal growth?

  1. Capital flight. China is expanding its overseas investments, and now the country is investing more overseas. Its overseas investments are greater than what the foreign companies are investing in the country. In the first quarter of 2012, China had a $56.1 billion surplus. By the second quarter of 2012, there was a deficit of $71.4 billion.
  2. Lack of SME access to bank funding. According to an estimate made by a Chinese brokerage, only 3% of the 42 million SMEs in China are able to access traditional bank funding. Most traditional lending banks are only providing access to funds for the biggest and safest companies. The banks’ profit margin is protected by the Chinese government, so they lack the motivation to provide loans to SMEs which carry more risks.

As one Chinese banking officer puts it, banks make the same amount of money when they provide a single loan of a million yuan or when they provide 10 loans that total a million yuan. But the 10 loans come with higher costs and greater risks. That has made factoring the obvious go-to option for SMEs to get additional cash to fund operational costs and business growth.

  1. Increasing labor costs. Inflation is rising steadily in China at 1.8%, but the food prices inflation is at 2.4%. This has forced many employees to choose only the businesses which can provide the adequate salaries they need. That gives SMEs an additional problem for its daily operations. These SMEs have higher cash flow requirements.
  2. Slower payments. A business survey conducted by Peking University and Alibaba found that 30% of Chinese businesses were affected by late customer payments in 2011. In 2010, this was just 6%. There’s no central credit history monitoring system in China, so commercial debtors can dictate the terms of how they pay—if they pay at all.

With factoring, this problem is solved for SMEs. In one version of factoring that’s popular in China, the factor is the one collecting the payments from their client’s customers. When customers pay late, that’s the factor’s problem, not yours.

The Chinese government is extending its efforts to persuade banks to provide more funding for SMEs, but whether these efforts will work remains to be seen. Right now, factoring in China is still the way to go for SMEs.

Who Really Benefits from Apparel PO Funding?

In the apparel business, getting paid involves a lot of waiting. You get a purchase order, so you need time to arrange a delivery from your suppliers to your customers. Then when the goods are delivered, the customer then makes you wait at least 30 days after delivery before you get paid. Sometimes this is 45 days or even as long as 90 days.

But instead of waiting while all these days pass, the apparel PO funding method gets you your money right away. You don’t even have to wait to arrange for the delivery before you get your money. That method is called factoring, which involves using the account receivable to get a cash advance. In the apparel PO funding method, you use that purchase order to get you the money you need.

So would you benefit from apparel PO funding? It depends. See if you can answer yes to any of the following questions:

  • Do you need the working capital? If you don’t have the money to pay for the material and labor required to fulfill the order or to pay your supplier, then you may have to pass on the order as “too big” for you. But with the PO funding, you use that purchase order to leverage funds.
  • Are you a newbie at trying to generate financing? If so, you’re not alone. It’s not always easy to get the money you need. Getting a business loan can be very complicated, and banks and other lenders don’t always make it easy on you.

In general, you’ll have to explain why you need the money. Your credit (not just your company’s but your personal credit too) must be really good, and you need to show some form of collateral.

  • Does the order require a quick response from you? Even experienced borrowers will need some time to arrange financing from traditional lenders like banks. By the time you get your money, your potential customer may have moved on to another company who has the capability to provide what they are asking for.

But PO financing moves very quickly indeed. You can get your money in a couple of weeks, and perhaps in less time than that.

  • Do you want to avoid shouldering risk to your credit? That’s not a problem with PO funding, because it’s not technically a loan. It’s more of a cash advance, so your credit is not affected at all.
  • Do you wish to keep your customers separate from your suppliers? If you’re a distributor, then this is probably the case. The entire process, however, will help separate your suppliers from your customers.

If you can answer yes to any of these questions, then at the very least you need to keep your options open when it comes to PO funding.

But all in all, it’s just a question of whether or not you want to take advantage of a profitable opportunity. If your profit margin is quite low, then perhaps it’s not for you. But if the purchase order represents a significant profit, then PO funding can help you get the lion’s share of the profits.

How PO Funding International Lenders Can Solve Your Worries

Exporting can be a somewhat daunting endeavor, even though the foreign markets represent a great opportunity for tremendous growth. It can increase your sales and profits. It can offer you an expanded and diversified customer base. And it even offers some sort of stability to help you deal with the US economic situation. But you can only get these benefits if you know how to do it properly.

Nonetheless, more businesses in the US are taking the chance. In a 2010 small business survey, 52% of the respondents had sold goods or services outside the US. In 2013, it grew to 64%.

But it is not without its challenges. There are always some concerns, and for companies who export goods and services abroad here are a few of the more common problems which PO funding international lenders can help resolve:

  1. You’re not sure about getting paid. This is crucial, especially if you are relying on that payment to cover operational costs. While 69% of exporters ship their goods when they receive the full payment in advance, only 43% ship on a 30-day open account. Only 17% offer extended payment terms to customers overseas. Only 2% of exporters report that their banks would advance funds to them upon shipping the goods.

Accepting only advance payments can make sure you get the money you need to use as working capital, but this can severely limit the number of customers you get abroad. There aren’t that many overseas companies that can pay in advance, outside huge multinationals.

But with PO funding international, you can get the money right away. The funding company provides you with the working capital you need, so that you can cover the expenses involved in the deal. You get a percentage of the amount of the purchase order up front. This process is very quick, as it may only take two weeks or so.

  1. You’re not entirely sure what to do. Some people ask their embassy personnel for some guidance, but that doesn’t always work out well. But a PO funding international company will have the experience to guide you through the process. They’ll know all about the rules and regulations involved. They can offer you the advice you need to make sure that you do everything right, because after all this transaction involves their money too.
  2. You don’t want to carry more debt. More debt means your credit may be at risk. But this doesn’t apply to purchase order funding, because technically it’s not a loan at all. It’s not a loan, but rather a cash advance.

Selling abroad is really one way of making sure that your business growth is steady and assured. It can be a very confusing process, but with the purchase order funding you’ll get the cash flow you need to make it work.

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