Non-Recourse Factoring: What is It, Exactly?

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Factoring is fast becoming a very popular funding option for small businesses today. In factoring, you sell your invoice to a factor and in return you get a cash advance, which is typically about 80% the value of the invoice sold. When the customer pays in full, the factor then sends you the rest of the payment after deducting its fees. But sometimes a customer doesn’t pay at all, and that’s where recourse and non-recourse factoring comes in.

The Typical Factoring Agreement

Most of the time (79% of the time, according to a 2009 International Factoring Association survey), the factoring service you get is the recourse type. Part of the agreement states that after a given time (from 60 to 120 days), you are contractually obligated to buy back the invoice from the factor. To prevent or minimize this from happening, factors always investigate the credit history of your customers. But the factor will be paid its money, one way or another.

Since this type of factoring agreement offers the least risk to your funder, the fees involved are much lower compared to the fees involved in non-recourse factoring.

Clarifying the Meaning of “Non-Recourse”

At some point in history, factoring was essentially a sale of invoices and factors took all the risk. Factors accepted the loss when the customers didn’t pay, which is why credit investigation and payment collection are integral aspects of the services they provide.

Today, that’s no longer the case, but non-recourse factoring is still offered. But the definition of “non-recourse” may vary depending on the factor. It is very rare for a factor to define non-recourse as assuming the risk of nonpayment for whatever reason. It’s much more common to define it as not forcing you to buy back the invoice if the customer becomes unable to pay because of bankruptcy.

Drawbacks of Non-Recourse

Because there’s an additional level of risk for your factor for the non-recourse option, you’re obliged to pay higher fees for the factoring service. But that’s not all the disadvantages. The factor may also limit your sales only to well-established customers, yet require higher minimum volume commitments. And the factor may be much more intrusive in its payment collection methods.

And you also need to keep in mind that bankruptcy is hardly the most common reason for nonpayment. Your factor may demand recompense when your customer fails to pay due to financial difficulties, because they didn’t technically go bankrupt.

The customer may have also failed to pay because of a dispute with you regarding the terms of the agreement. For example, they may declare that the goods you delivered were not in the quality or quantity specified in the contract. They may claim that the goods sent them were damaged or not good enough. If that’s the case, then the factor reserves the right to demand that you buy back the invoice of that customer.

So when is non-recourse factoring appropriate? It can act as insurance for you when the vast majority of your business comes from a handful of large companies. Since non-payment from one customer can have a very damaging effect on your business, it may be better for you to transfer the risk to the factor.

Your Staffing Accounts Receivable are Very Valuable Assets

When you’re running a staffing agency, your accounts receivable can be a source of frustration. Staffing companies have a constant need for working capital because of how staffing accounts receivables are set up.

How Accounts Receivables Lead to Working Capital Drain

So let’s say you have a customer (a company) who needs at least 6 workers from you working for 6 hours a day. Sometimes they may ask for more workers, and sometimes the workers may work for up to 10 hours.

Once the work week is complete, your task as the staffing agency is to make sure that the workers are paid. When you pay your workers late your business will fold up in no time. Even doing it once can have catastrophic results.

Meanwhile, at the end of each week, your customer generates an invoice that requires them to pay you for the work done after 30 days. That means you need to have enough money on hand to pay your workers, while you twiddle your thumbs waiting to get paid.

Companies tend to take a long time to pay because they also have their own red tape to deal with. They will need to verify the man-hours they got, and the payment may come from another office or location of the company.

Accounts Receivables and Working Capital

Nowadays you don’t have to wait to get paid. Factoring is a funding method that gets you about 80% of the value of the accounts receivable right away. So that means no more waiting!

In fact, this method of funding is also very easy to secure, in stark contrast to trying to get a bank loan which can take several weeks. In factoring, you will know if you will get your funding quickly (which is more likely, by the way) in a few days or even in 24 hours.

Additional Benefits of Factoring

With factoring, you can even fuel your own growth as a staffing agency. Growth opportunities such as greater demands for more workers can be accommodated because you have the working capital needed to hire and pay more workers.

In addition, you also won’t have to deal with red tape shenanigans when collecting payment. The factor does the collection for you, but you’re updated on the progress. So finding the contact person in the company you do business with and dealing with the payment collections and notifications become the tasks of the factor.

Factors can even investigate the trustworthiness of new customers. Factors review their credit instead of yours, and in doing so they can help you avoid those with poor credit.

So don’t let your staffing accounts receivable frustrate you. They can give you the working capital you need with the right factoring company.

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6 Indicators of a Top Factoring Company

A top factoring company can be of immeasurable assistance to a small business, and many businesses in fact get their financing from these kinds of lenders than from banks.

Factoring in itself is a really viable option. You simply exchange invoices for advance payouts. For example, the factor gives you an 80% advance for the invoice, which you can then use to pay suppliers, payroll, and utilities. You get the rest of the payment when the customer pays, and the factor deducts its fees from the amount.

But the quality of the factoring company is crucial for this alternative to work. That said, here are some signs that the factor you are dealing with is a top factoring company:

  1. Easy and fast application process. The very short time it takes for you to get your funding is one of the more obvious advantages of factoring, but some factors are faster than others. Most factoring companies take a week to determine if your invoices meet their standards. Others only need a day or two. If you’re getting antsy because the payroll date is fast approaching, even the difference of a few days can be crucial.
  2. Bigger cash advance. This is the bulk of the financing, so its importance cannot be understated. Some companies offer 80% of the value of an invoice, and that’s usually considered the industry average. But others may offer up to 90% of the value, and some even offer 95%.
  3. Competitive rates. While factoring is not technically a loan (which means you don’t pay interest), you’ll still need to pay certain fees. Many factoring companies charge setup fees, and it can reach as high as 6% of the value of the invoice. Then there are also fees that need to be paid when your customers don’t pay promptly.

These fees can eat up your profit margins, so less is always better.

  1. Extensive experience in your industry. The best factoring company may not be the best for you if they have no clue as to how your particular industry operates. But experienced factoring companies are already up to speed about who the major players are and how the supply line works. They know about your unique needs, and they already have the basic plans in place to help you.
  2. Wide range of services. The services you get aren’t limited to just the financing. For example, factoring includes debt collection. The factor takes up this task itself. Other services which you may need include credit investigation for your new customers, invoice and payment processing, accounts receivable bookkeeping, and web-based reporting.
  3. Few contractual obligations. Some factors require a lockup contract with them for a year or even two years, which may not be exactly what your company needs. But other factors are more flexible and will only provide their services as needed.

When selecting the top factoring company, you should get an accountant involved on the matter who will help negotiate the terms and ensure you are not missing any important details. You also need a lawyer to make sure you understand the terms of the factoring contract.

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Key Reasons Why Toronto Accounts Receivables Factoring is Better than Bank Loans

Many Toronto businesses today have realized that getting a loan from a bank is a truly excruciating process, and often the result can be a spectacular failure. But now alternatives such as Toronto accounts receivables factoring are beginning to look more and more attractive to many SMBs.

The Problem with Bank Loans

Trying to borrow money from a bank, especially in Canada, is a process that’s fraught with many challenges. One immediate problem is the comparatively limited number of funding sources. This is the reason why many Canadian companies are advised to seek financing from US banks and financial institutions. Many US financial institutions are searching for earning opportunities abroad, and Canada is an attractive option.

Yet borrowing from a bank is very difficult regardless of whether it’s in Canada or the US. Sometimes banks have rules that apply to your business in particular. For example, some banks today simply refuse to offer financing to restaurants. What’s worse is that this may be the reason for the refusal to finance your deli, even after the loan application process has gone on for months.

And the time needed for the loan application process can truly test your patience. Banks need to know a lot about your company before they decide to finance it. You have to explain who you are and why you and your company should be trusted. You need to demonstrate your understanding of the market by differentiating yourself from your competitors. You’ll need to explain how you intend to use the funding you will receive, and what your revenue expectations are. And the list goes on and on.

How Factoring is Different

In contrast, numerous Toronto accounts receivables factoring services have sprung up and they offer a better alternative than banks. Factoring is one of the more popular options. In this scenario, you exchange your account receivables for instant cash that’s about 80% of the value of your invoices. Once your customer pays the factor in full, the factor takes its fees and then gives you the rest of the payment.

With factoring, you don’t need months to see whether you will get the loan you need. Instead, you get an answer in a week, maybe less. What’s more, your chance of getting approved for financing is much higher.

The reason is simple. Factors don’t really need to understand the minute details of your business. They only need to determine the trustworthiness of your customers. So if your customers have good credit, then they will give you the funding you need.

Conclusion

The most obvious advantage of traditional loans is that they generally levy lower interest rates than what factors charge. But low interest rates don’t mean a thing when you can’t get the funding you need.

With Toronto accounts receivables factoring, you get your funding right away, and it can continue for months. And as the volume of your account receivables grow, your financing increases to meet your needs.

The Pros and Cons of Staffing Direct Lenders

A staffing company can be a very profitable business, especially now that the demand for temporary workers is increasing in North America. In Canada, more than 2 million people comprised the temporary workforce in 2012; temporary work grew by 14.2% from 2009 to 2012 while permanent work only grew by 3.8% during that same period.

In the US, the percentage of temporary workers grew from a1.3% in 2009 to 2.1% in October of 2014, representing 2.9 million workers.

But this increase in demand for temporary workers is also increasing the need for more staffing company funding. Staffing agencies need to keep on recruiting new workers and they also need to pay them on time.

And here’s where staffing direct lenders can help.

Pros of Direct Lenders

A direct lender is a funding source that lends its own money to you directly. There are no middlemen or brokers involved in the deal. For example, you can approach a bank for a loan, or hammer a deal with a factor for factoring services which can get you the money you need faster.

There are several advantages to this approach. For one, direct lenders offer a sort of a one-stop shop for your funding. You negotiate the terms of the loan or the funding directly with the funding provider. You therefore can also gauge the reliability of the source. Banks, for example, are regulated by government agencies, while you also have personal connections to family and friends who are willing to loan you money for your business.

Without any middlemen, you may also get the funding you need for a lower fee.

Disadvantages of Direct Lenders

There are also several problems that you will encounter when dealing with direct lenders. One is that you have to judge the suitability of the arrangements yourself. You will need to approach several lenders to find the best services and terms, and you may not have a wide selection of options to choose from. In contrast, a broker can help you find the best source of funding that matches your needs, and they know a whole lot more financing programs and sources.

The time you will save when dealing with a broker is also something you need to consider. The broker can lead you to lenders which are more likely to grant you your funding instead of having to waste weeks or months on an application that is likely to get rejected anyway.

Finally, the broker can also help you get a more favorable loan rate from a bank or negotiate to lower a factor’s fees.

It’s all up to you whether or not you should approach staffing direct lenders on your own. Just bear in mind that for a staffing company, time is of the essence, and payroll needs are waiting at the end of each week. A broker may be worth their fees if they can arrange for the funding you need ASAP and save you all the hassle of looking for financiers on your own.

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How to Choose a Staffing Factor

Factoring today is one of the most popular forms of financing. It’s essentially a very effective way to make use of your accounts receivable (AR) to get the funding you need much more quickly. But a staffing factor needs to bring more to the table than just what a generic factor offers.

Factoring involves the sale of invoices for hard cash (or for a line of credit). You get about 80% of the value of the invoice right away instead of waiting for the invoice to mature in 30 days or more. The rest of the value of the invoice is sent to you (minus the fees of the factor) once the customer pays in full.

Here are some ways for you to find the most suitable staffing factor for your company:

  1. Lower fees. Regardless of what industry you’re in, this consideration is crucial. The fees may range anywhere from 2% to 6% of the value of the invoice, and this can seriously cut into your profit margins.

Then you also have to consider additional fees, such as startup fees along with penalties should your customers fail to pay their accounts on time. A staffing factor should make allowances for the time needed for your customers to pay, so you don’t pay additional fees unnecessarily.

  1. Higher advances. The factoring advances usually come to about 75 or 80 percent of the value of the invoices. But for a staffing company like yours, a higher percentage for the advance can be very useful.

You need a lot of working capital to run your business, and the payment model with your customers usually becomes a hindrance. For example, it’s not unusual for your customers to take 60 days to pay up, and that means you’re going to have to use up your cash reserves paying your employees for 8 weeks. The weekly payment schedule for your employees, versus the 60 days needed by your customers, is the most common cause of working capital shortage.

Then there are also the growing difficulties in getting more workers due to low unemployment. You’ll have to spend more money in advertising to get more workers, because so many workers prefer working full-time for a company.

Add the various taxes and insurance payments you have to meet, and the need for ready cash becomes apparent.

  1. Faster services. Factoring companies are famous for the speed in which they approve (or decline) funding applications. But some factors are truly faster than others. While some may take a week to approve an application, others only need 24 hours. For a staffing company in desperate need of cash to cover payroll by the end of the week, even a few days’ delay can have terrible consequences.

It’s the same problem when the factoring line is in place and you need to get your advance quickly. Some factors need a few days before they can give you the advance. But others offer same-day financing.

The top staffing factor may also provide additional services. But for a staffing company, the quickness and the amount of the advance they can get, along with the cost of the services are the most important considerations.

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Trade Receivables Financing Options

Numerous small and mid-sized businesses today are in need of financing, and banks aren’t exactly the best option. With banks, the loan application process can take a very long time. In addition, banks require collateral in the form of real estate or equipment. But with trade receivables financing, many SMEs have found a much more convenient way to increase their working capital and growth financing.

What are Trade Receivables?

In this type of financing, you can get the funding you need by using your trade receivables, which are essentially the commercial debts resulting from the sale of goods and services between your business and other companies.

These sometimes prove an attractive asset for your lender for several reasons. These receivables are self-liquidating, unlike other assets which may be more difficult to convert into cash. They are also generally short-dated, so lenders don’t have to wait long to get their money back. And finally, the volume of receivables can lead to revolving financing, while the range of receivables means you have a variety of ways to make use of them to get the money you need.

Types of Trade Receivables Financing

There are several kinds of trade receivables financing. The two most popular and well-known options are:

  • Factoring. This method involves a sale of the receivable at a discount, so it is not technically a loan. The way it works is simple. Usually, when you make a sale to another company, you deliver the goods and in return you issue an invoice which determines the length of time you need to wait before you will receive payment.

But with factoring, you don’t wait at all. The factor advances you about 80% of the value of the invoice immediately, so you can put that money to good use right away. Once your customer settles the account and pays for the goods in full, the factor then sends you the rest of your money, less the fees charged by the factor.

Factoring also has some variations as well. For example, you are usually obligated to pay back the advance if your customer doesn’t pay you because of bankruptcy. But in non-recourse factoring, that kind of nonpayment is a risk that the factor deals with, and you have no obligation at all in case of non-payment.

  • Invoice discounting. In many ways, invoice discounting is very similar to factoring. The main difference is in the collection process. In factoring, the factor usually takes over the collection process. They’re the ones who contact your customers and get the payment. This is an advantage to you if you don’t want to set up a collections department for your own company.

In invoice factoring, you’re still in charge of the collection process. This is an important point for some businesses where the relationships with customer-companies are extremely sensitive or delicate. You still deal with the customers directly and collect the payments yourself.

With trade receivables financing, the amount of funding you get depends on the quantity and quality of the receivables. Your own credit is not as important as the credit of your customers, so if you sell to established firms then you’re more likely to get the financing. And the more sales and invoices you generate, the more your funding grows to meet your needs.

What Is Sub-Debt Lending?

When your business files for bankruptcy, your debts fall into some sort of hierarchy. The tax people must be paid first, and then there is also the senior debt level. Only when your debts to these organizations have been fully paid can the subordinated debt (the lowest level) be paid. From this perspective, it’s easy to see why lending money to businesses is a very risky proposition for a lender. This is why many lenders offer subordinated lending, or just sub-debt lending.

Who Offers Sub-Debt Lending?

The most typical source of sub-debt loans are subordinated debt funds. Since the loan is much riskier for the lender, the interest can be considerably higher than with traditional bank loans. These lenders look for specific signs in your business before they will agree to provide sub-debt lending.

  • The loan is mostly short term and is given if you need it for growth.
  • Your business should have some type of asset which can be financed, such as valuable patents, popular intellectual property, or accounts receivables.
  • Your cash flow should be stable, or at the very least there’s a very strong possibility of more than sufficient cash flow.
  • You have a very profitable company.
  • Your records and financial controls are solid.
  • Your company is free from any performance obligations.
  • Modeling and forecasting are already in place.
  • You’re willing to accept reporting disciplines and financial covenants imposed by the lender, and you’re also willing to be a guarantor of the loan.

Basically, your company should have proven management and financial strength, along with a significant growth potential. The sub-debt lenders are willing to take the risk, but there should be a sizable return for everyone as well.

Benefits and Drawbacks of Sub-Debt Lending

In some ways, sub-debt loans may be more preferable than the alternatives. For example, while this form of funding may be more expensive than traditional loans, in the long run it’s still cheaper than if you sell a slice of your company to an investor. If your company grows to unprecedented heights, then the value of that slice you sold would be much more than what you got as a loan.

Usually, the interest payments on subordinated debts are also tax-deductible, and that reduces your taxable income. Your equity position may also improve, as a bank may consider it as part of your equity in service of the senior bank debt.

The main drawbacks to sub-debt loans is that you will have meet the interest and principal payments as part of the contract, no matter what your current finances may be like. You may also have to deal with some imposed restrictions on what the company and the management can do. And you may also have to put up some collateral for the loan, and this may include your personal guarantee.

But if you have the “signs” that sub-debt lenders are looking for, then perhaps sub-debt lending can be the answer to your capital problems.

How to Find the Best 2015 Purchase Order Finance Company

The lack of sufficient working capital can greatly affect any small business. If a contingency occurs, then the lack of working capital can prevent a business from fulfilling their usual services. And even if working capital is sufficient for the current level of business then new opportunities for growth may not come to pass because the working capital is not enough to fulfill bigger orders.

What is Purchase Order Finance?

With purchase order finance, these disasters can be prevented. Essentially, this is a type of loan which is contingent upon the purchase order. The lender checks that the purchase order is authentic and the customer is qualified for the transaction. Then the lender assesses the suppliers to see if they can deliver the supplies to your company. Of course, the lender also evaluates your own company’s ability to fulfill the terms of the purchase order.

Then the lender issues a letter of credit to your suppliers. Your suppliers then get paid when they’ve delivered the goods according to the terms of the agreement.

The lender gets paid when your customer gets the goods. Since usually you issue an invoice, you may have to get the assistance of a factor that advances about 80% of the value of the invoice to you. The purchase order lender then gets paid for the advance when you get paid.

Choosing the Right Purchase Order Financing

Basically, what you need is a purchase order lender who can work with you, your customer, and your suppliers. But this can get very tricky sometimes. For example, you may have suppliers which are based in a foreign country. If your lender has no experience with these suppliers, then issuing a letter of credit can be problematic.

You also need to be able to comply with the specific requirements of the purchase order lenders. Some lenders require you to prove that you have at least 30% profit margin. But others only require a 20% profit margin.

You’ll also need to check their funding levels. Some can offer millions of dollars for purchase order finance. Others may have minimum finding levels which may be much more than what you need.

The lender’s fees and interest rates must also be noted. Some lenders are more reasonable than others, while others charge high fees because of the inherent risks to purchase order finance. Your customer may cancel an order, or your supplier may be unable to deliver an order within the terms of the purchase order.

Finally, choose a lender who can give you what you need fast. There is a window of opportunity here which limits the time you have. Your lender must be able to quickly evaluate the situation to see if they will provide for the financing or not. Taking too much time may lead the customer to cancel the order and go with another company.

All these considerations must be reviewed carefully before picking a purchase order finance company to work with.

 

Medical A/R Loan

When you’re a small business owner and you apply for a loan, in general the bank will be asking if you have anything that can serve as collateral. If you run a medical clinic, you don’t usually have much when it comes to the usual assets. You don’t have any real estate and you usually don’t even own the medical equipment in your clinic. But you do have accounts receivable, and you can use that to get a loan. With a medical A/R loan, you can then get the money you need much more quickly.

Medical A/R Loans

So how does a loan like this work? Essentially, you get a loan depending on the value of the invoices you issue. If you sell medical equipment, then the value of the loan is limited by the value of the invoices you issue to hospitals and clinics. This kind of funding is called invoice discounting.

In a typical case, the loan is actually a line of credit so you can use it like a credit card. The limit is a percentage of the value of the accounts receivable you use as collateral, such as 80%. You can withdraw from the line of credit as you need the money, and you pay interest on that money. The interest depends on the lender and the agreement you draw up—basically it depends on your company’s stability and financial health as well as the creditworthiness of your patients or customers.

As this is a loan, you may be required to collect the money owed to your clinic yourself. But your lender may insist that when you get paid the money must first come to them right away. The fact that this is a loan will also influence your credit rating, and may also affect how you get a bank loan in the future.

Factoring as an Alternative

Medical factoring is not a loan at all. Factoring is the sale of the accounts receivable instead of using them as collateral. You get an advance of perhaps 80% of the value of the accounts receivable, and then you get the rest when the customer or patient pays up in full. The factor gets their fee from this payment before they send you the rest of your money.

With factoring, the application process is much quicker. That’s because your financial health isn’t really much of a concern at all for the factor. That cuts down on the paperwork, and in many cases the approval for the funding can come in only a few days.

What’s truly relevant is the trustworthiness of the customers. For medical factors with extensive experience in the industry, usually they already have a list of insurance companies with whom they have a cordial business relationship. That simplifies the collection process because the factors are usually responsible for the collections. So with medical factoring, you won’t have to bother setting up a collection department of your own.