NeeBo Capital Blogs – Page 5 – The Best Info For Factoring…

Learn New Business Finance Terms Used by Factoring Companies

Choosing a factoring company to help you finance your small business can be a rather intricate process, but the best factoring companies tend to make everything clear and concise. Sadly, not all factors are the same, and some may have some details in the fine print that clearly negates the promises of their promotions or advertisement.

Take the promise of high advances, for example. A factor may boast that they advance as much as 90% of the value of an invoice and that’s better than getting 80% or even less. You now have more money to pay for overhead expenses and payroll.

But in the fine print, you encounter several unfamiliar business finance terms that may limit the amount of money you get in advance. So let’s take a look at these terms and clarify some common issues. To explain things better, let’s assume that you took up an offer of 90% cash advance on the value of the invoices you want to be factored.

Recourse Period

This is the period after which the factor takes its cash advance back. It’s usually for 90 days, although it can be negotiated with the factor. If you’re just starting your financing with the factor, then any invoice you have that’s unpaid after 90 days won’t qualify.

Once the funding starts, if any customer of yours doesn’t pay within the recourse period, then the factor will take the value of the cash advance from your other invoices. In other words, if you have two invoices worth $20,000 each and you got your $18,000 advance from invoice #1, but your customer did not pay within the specified period, then the factor will need to take out the money he advanced to you from invoice #2.

Debtor Limit

The debtor limit is the maximum value of an invoice / invoices for a particular customer of yours. Let’s say that your factor will only approve of $10,000 per customer. So even if you only have 5 customers with accounts receivable of $20,000 each, you can only get an advance for $10,000 each. That means you will receive a $9,000 cash advance per invoice, so you get $45,000 total.

Concentration Limit

This is another limit on how much debt will be funded for a single customer, but in this case the limit is a percentage of the total funding. So if the concentration is a generous 100% then it’s ok with your factor that you only have 1 customer. But if the concentration limit is 20% and you have only 2 customers owing you $50,000 each, then you can only get a cash advance for $20,000 each. And that means even if you are supposed to receive a 90% cash advance, you won’t get $90,000 from the $100,000 value of your two invoices. You only get a total of $18,000.

Look for these business finance terms in the fine print before signing your name on the dotted line. The best factoring companies will explain it thoroughly for you, but you can’t expect all factors to be clear and upfront.

Questions to Ask If You Want to Find the Best Factoring Company for You

In 2014, GE Capital was named the best factoring company by Global Trade Review. GE Capital lent $250 million a day to mid-market firms and offered across the border financing to help their customers achieve global growth.

But that doesn’t mean GE Capital is the best factoring company for you. After all, you may not have global aspirations, and you may even be too small to be considered a mid-market firm. Even other highly recommended factoring services may not suit your circumstances.

To find the best factoring company for you, you’ll need to ask factoring companies some important questions, and you better pay attention to their answers.

How Long Have You Been in the Factoring Business?

You’ll likely get the most efficient services from the factors that have been in business for a long time. Experience counts, because too many things can go wrong and it’s too risky to just wing it.

But you also need to ask a prospective factor about their experience in your particular industry. That’s because each industry has its own SOPs. For example, factoring medical receivables involves dealing with insurance companies or credit card payments from patients, while export factoring involves dealing with foreign customers and foreign commercial codes.

You need a factor who already knows their way around your industry so that they can help you navigate the business terrain. You don’t want to waste time having to explain to a factor how things work in your business.

What Are the Terms of the Financing?

In general, if you can get flexible terms that let you get as much funding as possible, you’re in good hands. Most factoring contracts last for a single year, but some may be longer. You need to ask how much you’ll have to pay if you terminate the funding.

You’ll also need to know how much you can get in advance (along with any conditions), the fees you need to pay, and the penalties should your customer pay late (or not at all).

It’s up to you to compare the rates, although you can get better terms with increased factoring volume. You can also ask about any other services they can provide, aside from collecting the payments and evaluating the credit of your customers.

But the rule here is that the best factoring companies will be upfront about their conditions and fees. There should be no hidden fees, so clarify every scenario that may cost you money.

Can You Handle My Business Growth?

One of the reasons why you may agree to factor your receivables is so that your company can grow. So if your AR volume per month may total $100,000 now, in the future it may increase to $200,000 a month. Can your current factor handle that kind of volume?

Ask a potential factor about the size of their typical account, and inquire about the factoring volume of their largest client. That should give you an idea whether they can handle a possible business growth.

When you find the factor that gives the best answers to the above questions, you’ve found the best factoring company for your needs.

Factoring Companies Can Help With Exporting

Out of the 30 million companies that are based in the US, less than 1% actually export their products or services. That means our country has the lowest percentage of exporters in the world.

Of the companies that do export, they’re mostly (97.6%) small and medium sized businesses, but the amount they represent is less than a third of the value of the US export goods. So in other words, the huge conglomerates that make up only 2.4% of the exporting business in the country actually account for two thirds of the export value.

In 2012, the value of US export was estimated at $2.2 trillion. So that means the large exporting companies (2.4%) made $1.47 trillion, while the bulk (close to 98%) of the exporters which is comprised of small and medium sized exporters made only $733 billion.

Clearly, there’s a lot of room for expansion in this industry, and more companies should participate in the export business.

And it’s here where factoring companies can actually help. They offer their basic financing assistance, but they can also provide services and products that can help ease the worries of US companies who are new to exporting.

There are 5 ways in which factoring companies can help:

They can offer working capital financing. This is the main advantage of working with factoring companies. The application process is fast, and the requirements are less stringent than what banks ask for. There’s even no need for collateral.
Clients can get credit protection. If you’re going into business by exporting overseas, you’re protected even if your foreign buyer is unable to pay. It’s a version of non-recourse factoring.

You get this protection because the factor is normally in charge of investigating your buyers. They investigate your foreign buyers, so if they give their approval then that means the foreign buyer does have the capacity to pay.

The factoring company takes care of collecting your accounts receivable. Again, this is a standard service offered by factoring firms. The factor collects the payment and then forwards to you the rest of your money after it has deducted the cash they advanced to you and corresponding fees.
They help you in understanding the foreign commercial code. They do things differently in other countries, so you may not have a clear idea of their rules that govern commercial transactions. But your factor can help you comply with all these rules so that you’re not bogged down by the details.

This is a crucial feature or service offered by the factor, because complying with unfamiliar commercial guidelines may not be easy. But now you can stop worrying about it because your factor can guide you through the process.

You get complete records for your bookkeeping. That goes for all stages of the transaction.

So if you’re having nightmares because of your newly established exporting business, see if you can find factoring companies willing to help.

What Affects the Costs of Accounts Receivable Factoring?

When you apply for a credit card, usually the rates are stated quite clearly, so you don’t actually have to negotiate with the credit card company unless you’re having trouble paying your monthly dues. But in accounts receivable factoring, the cost of the funding depends on several things.

The Factoring Company

Like any other shops, banks, or medical clinics, factoring companies set their own rates and charge fees as they see fit. The best factoring companies will be honest in what they will charge you, and they may take some time to explain what it will cost you for various scenarios. For example, there may be a penalty involved if you break a factoring contract early or if your customer pays late.

So now compare the costs of factoring offered by different companies. Check all the fees your factor charges so you won’t have to deal with unwanted surprises later on.

The Industry

Some industries may charge more when you use factoring because of the inherent nature of the business. For example, in many cases medical receivable factoring can be more expensive because insurance companies are involved. On the other hand, factoring for trucking fleets tend to be simpler with higher cash advances because the job is not complicated at all.

The strength and stability of your customers is also a crucial consideration. When you deal with profitable and stable businesses as customers, then the costs/fees would be less.

Also, some factoring companies may charge less when they specialize in a particular industry, because their resources and services are already geared for that industry. A factoring company that specializes in the trucking industry will charge less than a generic factoring company if you’re in the trucking business.

The Aging Report

The aging report indicates the amounts owed to you by your customer, and it also says the length of time you give them to pay up on what they owe. Factoring companies will charge less if the customers regularly pay in 30 days than if you give them a 90-day term.

The Total Volume

If the total volume of your invoices is worth $500,000 a month, the rate will be lower than if the volume was just $30,000 a month. In fact, the factor would prefer to get all your invoices for funding. There’s an option where you can pick and choose which invoices would be factored (called spot factoring), but then the rate is higher. The rate may be as low as 2% of the value, or as high as 5%.

Like other lenders such as banks, factors prefer that you have fewer invoices with larger amounts involved when your customers are stable. That’s because they do the same work for each invoice, but get a percentage of the value of the invoice.

Negotiate

Finally, talk to more than one factor and negotiate with them. They may be inclined to offer generous terms if they know they have competition for your business. The costs of accounts receivable factoring aren’t set in stone until you sign your name on the dotted line.

The Benefits of Factoring Medical Receivables for Medical and Dental Clinics

The medical profession is a noble calling, and there’s not much doubt of that when you consider how difficult it is to maintain a clinic. Nowadays, many clinics close down because following an insurance-based reimbursement model is full of problems, and because expenses can outpace gross profits considerably. Even free health clinics are closing down because donors mistakenly believe that universal coverage is in play.

In any case, many clinics need steady funding to survive, and banks aren’t providing enough. This is why many clinics are turning to factoring medical receivables instead. In medical factoring, invoices are turned over to the factor which advances about 80% of the value of the invoices to the clinic. The factor also takes responsibility in dealing with the paying customers, which are often medical insurance companies along with Medicare and Medicaid. Once the payment is sent in full, the rest of the money is forwarded to the clinic after the factor has deducted its fees.

This arrangement offers several key advantages for medical and dental clinics.

They are likely to receive financing. The most obvious drawback to applying for a bank loan is that banks today are extremely picky in approving loans. In addition, even if they do approve a loan application in the end they take a very long time to process an application.

In contrast, applying for medical factoring is very easy. It doesn’t take more than a few days to know if you get approved or not, and approval is also more probable. Setting up a factoring line takes about a week, and then you’re set. Once you submit your medical receivables to the factor, you get the advance in a day or two.

The factor deals with the insurance companies. First of all, this is a headache that many doctors would rather not bother with, and the fact that factors take on this responsibility is a true benefit. This frees up clinic personnel from having to deal with insurance companies themselves, which are also notorious for never paying completely or on time.

Because of this service, clinic staff can concentrate on actually providing health care to patients instead of worrying about getting paid.

The clinic can improve its cash flow situation significantly. Many insurance companies can take 90 or even 120 days before they pay up, and many clinics can’t wait that long. It’s for that reason why the advances from the factors are so important. They can be used for many crucial purposes.

For example, they can be used to buy new medical equipment that can improve the clinic’s ability to provide quality care (and also to compete with other clinics in the area). It can also be used to cover the payroll, buy common medical supplies and pay for utility and rental bills.

Running a medical clinic is hard enough without funding, and many health care professionals realize this. At least by factoring medical receivables, they have a chance of continuing their efforts.

What Are Business to Business Loans?

Whenever we think about getting a sizeable loan to fund our business, we often think about approaching a bank. Of course, for many of us this is largely a futile endeavor, which is why business to business loans are becoming more “mainstream.”

Why Banks Are Not Ideal for Small and Medium-Sized Businesses

Big banks only approve 21.6% of small business loan applications, and simple math tells us that this means virtually 4 out of 5 loan applications from small businesses are denied. Big banks don’t really like to grant loans to small businesses because they take up too much of their time, it’s hard to automate them, and costly to underwrite.

But what about small community banks? It’s true that they are more reliable “small business-friendly” compared to big banks, which is why half of all business loans are provided by community banks. The problem is that many community banks are getting out of the business as a result of new regulatory restrictions. A report from the Federal Reserve Bank of Richmond revealed that the number of community banks dropped by a whopping 41% from 2007 to 2013.

B2B Lending Options

The scarcity of lenders has left small business owners no choice but to use their personal credit cards to get cash advances, but this is a dangerous move. Credit cards often don’t have transparent pricing, and the rates for cash advances are rather exorbitant.

But with business to business loans, small business owners now have another option. These B2B lenders may have different procedures, but they all have something in common. They can loan small amounts to businesses that are too risky or new for banks and traditional lenders to consider lending to.

Advantages of B2B Lending

As many small business owners are discovering, B2B lending offers several distinct advantages.

It’s very easy. You don’t need to jump through as many hoops as you would when you apply to a bank for a loan. In fact, you only need to go online. You find a platform that offers B2B lending, apply for a loan by sending your personal and work info as well as the amount you need, and then you also include your deposit info.

Once you’ve completed the application, you immediately get funding offers from a number of lenders willing to provide the financing. You can check out each lender’s term and then pick the most suitable one for your situation. Once you’ve done this, you immediately get your money in your bank account.

It takes very little time. Not only are you spared the effort of having to go from one bank to another, but you’re also exempted from wasting too much time looking for a loan. B2B loans only take a few minutes to complete. It’s easy enough that you can get the money you need in a day or even less when you get B2B loans.

Of course, the amount may not be all that much, as some may limit you to just $1,000 or $2,500 per transaction. The rates can be rather high as well. But for some entrepreneurs, business to business loans are better than using credit cards and it’s certainly better than wasting weeks applying for a bank loan only to be rejected in the end.

Why You Need Medical Receivables Factoring

Medical receivables factoring is a special type of financing that can help businesses in the health care industry. Whether you’re a medical or dental clinic serving residents in your community or a business that caters to health care centers, with factoring you can get the funding you need more readily than if you apply for a bank loan.

How It Works

Factoring is simple. Instead of waiting for an interminable length of time for your customer or insurance company to pay the invoice, you simply submit the accounts receivable to the factor instead. The factor offers about 80% of the value of the accounts receivable in advance, which you can then use for your own purposes. Once the customer finally pays the factor in full, you then can receive the rest of the money once the factor has deducted its fees.

Purpose of Medical Factoring

There are many possible reasons why a business in the health care industry will want an infusion of cash. One very common reason is to boost the cash flow to help pay for employees such as receptionists and nurses. It’s not really a good idea to miss a weekly salary payment when you’re running your own business and you rely on dedicated staff to help you out.

The cash flow can also help buy supplies that medical clinics need, such as bandages and gloves. These supplies need to be replenished on a regular basis, and that means you need to have your cash flow ready to cover the expenses.

Another good reason is to procure more equipment. Even if you buy used medical equipment, the expense can be very high and can really put a dent on your cash flow. But more sophisticated equipment can put you at an advantage over your competitors.

So how can you get the funding you need? Banks are not as reliable a lender as they once were, and that means you need alternative sources of funding. For many clinics and other businesses in the health care, medical factoring stands as a reliable source of funding that’s unmatched in the benefits it provides.

Special Concerns

Medical receivables factoring is much like other types of factoring in other industries. However, some aspects of it are unique to the medical profession.

For example, there is the matter of dealing with medical insurance companies. Collecting payments is a common task delegated to factors, and in this case it is an extremely welcome relief for a lot of doctors. But medical factors must be experienced in dealing with these insurance companies to avoid any surprises.

Medical insurance companies often contest medical bills, so as a result they do not pay for the whole amount stated in the accounts receivable. As such the factor must expect this.

Another common occurrence is the slow payment of invoices. It’s not terribly unusual for insurance companies to pay only after 90 or even 120 days. This means that medical factors shouldn’t charge exorbitant rates for payments that go past 30 days.

Medical receivables factoring can be very helpful for clinics. But you need to make sure that you get an experienced medical factor so that you can maximize the benefits.

Find Out Why the Demand for Business Loans USA Has Gone Down

Federal Reserve Chair Janet Yellen last month revealed to Congress that the demand for small business loans in the USA has not been very high and she said this phenomenon may be attributed to the financial crisis and the fact that home values have dropped significantly.

Such comments have stirred the world of small business where optimism is pretty high. Many small business owners are projecting better financial outlook in the near future in spite a 12% decrease in loan demand

But perhaps we are looking at it from the wrong perspective. The demand for business loans from traditional lenders has dropped and it may not have anything to do with the financial crisis at all. It could be because business owners nowadays have the option to seek capital online.

Solving the Small Business Capital Crisis

The country’s economy is on the rebound and job creation rate has reached an all time high in nearly 20 years. But although the decreased appetite for risk is evident across financial institutions in the US, startups now have another alternative: online lenders.

These lenders give out loans anywhere from $5,000 to $1,000,000 or even more. Some of these lenders require daily payouts, while there are those that agree to bi-monthly and monthly payments. Loan terms are usually anywhere from 3 months to 3 years.

Business Loans USA vs. Online Financing

For startup businesses, online lenders are especially more attractive than traditional lenders because they offer something that bank loans can’t. These include:

Fast approval

Bank loan applications take an average of 2 weeks to get approved (or rejected) and it will take another 15-60 days before they will release the loan. Online loans, on the other hand, can approve (or reject) an application within a day and release your finds within 48 hours. Any business person worth his salt would see this as a great benefit. After all, time is money.

Less stringent requirements

While banks and other financial institutions that offer business loans will have a long list of requirements that you need to comply, online lenders only require you to fill out an application form and send your bank statements to them via email or as an attachment to your application.

Better loan terms

There’s no denying the fact that online creditors levy higher interest rates compared to traditional lenders. However, online platforms have lower overhead, fewer middlemen and lower expenses operate so they are able to pass significant savings to the borrowers. They can afford to offer better loan terms than banks.

Many small business owners are now turning to online lenders which collectively, has become a $3.2 trillion industry in the US alone. Sure, banks are still the ideal option for large companies looking for capital financing but for small businesses and startups, alternative lending is clearly the more practical option.

Alternative lending is also not just limited to business loans. There are other types of online platforms that also specialize in factoring, which is not technically a loan but a cash advance.

Top 10 Reasons Why Small Business Factoring is Increasing

Small businesses are now turning to factoring as a more viable way of getting funding. While there are several drawbacks (it seems more expensive than getting a traditional bank loan), small business factoring offers numerous advantages. Here are 10 of them:

You’re more like to get the funding you need from a factor than from a bank. Community banks are becoming fewer, while big banks deny almost 80% of all loan applications from small businesses. Meanwhile, it’s very easy to find a factoring service online that’s willing to provide you with the financing you need. This is true even if you’re a new company or you have bad credit.
The loan application doesn’t need a lot of effort. With banks, you need to prepare a lot of paperwork to prove that you’re a good business to lend to. But factors only investigate creditworthiness of your customers.
The loan application only takes a short time. In fact, some factors may only take as long as 48 hours to decide if they will be financing your company. That’s a vast improvement over the months it takes to complete a bank loan application.
You’re not required to personally guarantee the loan. Some banks even require you to put up your personal assets for your business loan, but this is not necessary for small business factoring. You only need to guarantee against disputes or fraud.
The financing is not considered a loan. This makes your balance sheet look more attractive, which will be important if you’re selling equity or trying to obtain other sources of funding.
The factor takes care of monitoring the invoices and collecting the payments. This frees you up from the overhead costs of maintaining a department for such a purpose, and you can concentrate on running your company. The factor can usually collect the payments in a professional manner.
You can get credit info on your customers. As have been mentioned, the factor investigates your customers, so you will find out which of your new customers are likely to pay within 30 or 60 days. This may prevent you from offering terms to customers with a history of not paying in full or on time.
Your financing grows as your sales increase. This means you can easily fund your business growth. Factoring involves getting an advance based on your invoices, so the more money involved in the invoices the more money you can get in advance.
You can pay off your suppliers early and get discounts in exchange. Also, your improved cash flow can allow you to buy greater volumes of supplies which can get a discount as well.
Your customers may be encouraged to pay on time. That’s because some factors report to credit agencies. And if your customers are aware of this, they may wish to pay on time to improve their credit rating.

These are just some of the advantages of small business factoring. So if you’re running your own business, you may want to consider factoring if your local bank is making it difficult for you to get the financing you need.

How Attractive are Business Finance Terms These Days?

Financing is one of the most difficult barriers that small business owners have to overcome if they want to stay operational. Nearly every startup will require at least some seed money so they can get their business off the ground so if you don’t have capital, you would have no other choice but to borrow money.

Borrowing Money from a Bank

Commercial loans are the standard choice of many small business owners and they are often used to finance a major investment. These loans usually have fixed interest rates and are often paid monthly or quarterly until the loan matures.

There are two types of loans offered by banks to business owners and entrepreneurs: long term loans and intermediate loans. Long term loans can go for as long as 20 years, and they are best suited for the more established businesses. That’s because these loans require collateral and getting approved can be next to impossible, for startup companies. Intermediate loans, on the other hand, are short term loans that can run as short as a few months to a couple of years. Banks do not require collateral for intermediate loans but the amount of money you can borrow is minimal compared to long term loans.

Business Finance Repayment Terms

When applying for a business loan from traditional lenders, you must prepare a detailed and comprehensive business plan. You have to fully explain your proposed venture as this will help the lender determine the right kind of financing to offer you.

But before approaching a lender, you need to decide how much money you need to borrow, the type of loan you need, for how long you should pay it, and if you can actually afford to repay with interest.

Business finance terms may be different for each lender but generally speaking, the lender will require a portion of the loan together with the interest to be paid to them at regular intervals. The amount you need to pay each month (or quarter) will depend on the term set by the bank and the duration of payment. Be aware that the longer the term of the loan, the more (total) interest you will need to pay.

Business Financing Challenges

Most startup companies do not realize the challenges they would face when they try to raise some capital. Although there are definitely many options out there, getting the financing they need is actually not easy. You can seek the help of venture capitalists and other kinds of investors, or go to banks and traditional lenders but none of them will part with their money easily. You have to go through a very stringent evaluation process with very little chance of success. That’s because many startup small businesses do not meet the criteria that lenders set – such as stellar credit history, sound financial background, and length of business.

The business finance terms offered by banks are attractive – low interest rates and longer repayment periods – but very few small business owners can really take advantage of the financing they offer. And that is why many have turned to alternative lending. Faster processing time and higher approval rating make these cash advance platforms suitable for businesses that need capital, now.