Factoring: An alternative source of financing during a crisis

By Chris Lehnes, Factoring Specialist

A primer for commercial finance brokers

• A challenge each commercial loan broker faces is understanding the options available to their clients.
• As the commercial lending markets enter unprecedented conditions, these options are changing and the onus is on the broker to stay informed.
• You have all see seen that the COVID-19 pandemic has caused many commercial lenders to tighten their lending standards or put an outright freeze on new loans as they assess its impact
• The initial funding allocated to Small Businesses under the CARES Act have been exhausted
• While some businesses may be able to wait for the next round of government funds, B2B businesses with strong customer bases have an alternative: Accounts Receivable Factoring
• Factoring Definition: Sale of a company’s accounts receivable  in order to obtain working capital
• Types of factoring include recourse/non-recourse, full notification/non-notification
• With recourse, if a customer is unable to pay, the client is responsible. Under non-recourse, the factor takes on the customer’s credit risk
• Some will underwrite both the business and the quality of the accounts receivable (resource)
• Non-recourse factors are usually more focused on the receivables and put less (to no) weight on the performance of the business
• Your client must be a B2B business with a strong customer base to qualify
  • Manufacturers, food producers, distributors, wholesalers, service business – staffing, trucking
  • Most factors exclude construction & third-party medical accounts receivable (insurance company, Medicare, Medicaid) but there are specialists which are focused on these niches
• Focus of this piece will be on full-notification, non-recourse factoring which is best positioned for today’s credit environment.
• Typical terms:
  • Usually consists of an initial advance of 75 – 90% against accounts receivable
  • Factoring fees range from 1 – 3% of the invoice for each month the invoice is outstanding
  • Lower rates are typically reserved for recourse factors with a greater focus on business performance
  • Some factors charge both a factoring fee (aka discount) as well as an interest rate on funds advanced
  • Be careful to “read the fine print” as there may be other charges from many factors
  • Term: 6-24 months
  • Size: $10k – $10 Million+ per month in factoring volume
    • Different factors are focused on the low and high end of this range.
  • Some factors set no cap on their facility and will allow fundings to grow as the client’s business grows as long as they keep selling to creditworthy companies
  • 1^St lien on AR will be required – Ask your client early in the process if they have any outstanding liens on their AR
• The approval process:
  • For a non-recourse factor, little information over and above a recent Account Receivable Aging and Customer list should be necessary to obtain a proposal.
  • Factors which perform more of a hybrid analysis may also require a standard commercial financing package including current and historic financials.
• The funding process:
  • Can differ from factor-to-factor
  • Your client does what they do…ship products, complete services, invoice customer
    • Factoring is very different from PO financing.
      • With Factoring the goods must be delivered or service completed.
  • Notification: Invoice will include payment instructions to factoring company
  • Invoice is sent to factor
  • They will verify the invoice by contacting the customer (also known as the account debtor)
  • Upon verification, they advance your client 75 – 90% of the invoice – often the same day the invoice is issues
  • When the factor receives payment from the customer, your client will be sent the “rebate” The remaining 10  – 25% less the factoring fee.
  • Most factors will fund their clients as often as daily, or less frequently as needed by the client
  • If an invoices goes over 90 days
• Client Profile:
  • Small to mid-sized B2B companies with annual revenues from $100k to $100 Million
  • Businesses which need liquidity and can’t afford to wait 30-90 days for their customers to  make payment
  • Declined by traditional lender for reasons such as:
    • Start-up/Insufficient operating history
    • Fast-growing – needs more credit than a lender is comfortable extending based upon the history of the company
    • Seasonal businesses – erratic revenue
    • Companies with historic, current or projected losses
  • Client’s customers are large corporations, municipalities or other government agencies
• Use of factoring proceeds:

Most factors put no restrictions on how funds may be used, but can include:

• Project Financing
• Business Growth Financing
• Business Acquisition Financing
• Bridge Financing
• Financing Working Capital Needs
• Realization of Supplier Discounts
• Preparation for High Season
• Crisis Management
• Debtor-In-Possession (DIP) Financing

• Choosing your factor:
  • Reputation matters
    • Google the company
    • Ask about their funding source
      • Many rely on lenders or other factors for funding
        • Will those funding sources continue to fund their business if markets continue to deteriorate?
    • Ask about industry expertise
    •  
      • The right factor for your manufacturer client may not be the best suited for your staffing client.
    • Ask for references
  • To learn if your client could benefit from factoring, contact Chris Lehnes at 203-664-1535 or clehnes@chrislehnes.com Connect on LinkedIn
  • Request a Proposal

Factoring Program Overview
$100,000 to $30 Million
Competitive Advance Rates
No Audits. No Financial Covenants.
Most businesses with strong customers are eligible.

We specialize in difficult deals :
Start-ups
Turnarounds
Historic Losses
Customer Concentrations
Poor Personal Credit
Character Issues  

We focus on the quality of your client’s accounts receivable, ignoring their financial condition.

This enables us to move quickly and fund qualified businesses including Manufacturers, Distributors and a wide variety of Service Businesses in as few as 3-5 days.

Contact me today to learn if your client is a fit.