Factoring Lines of Credit
Presented by Robyn Barrett
Managing Member - FSW Funding
What is Factoring?
• Factoring is a line of credit based on your accounts receivable.
• Advance Rate: A factors will advance between 80-95% of the face amount
of an invoice when goods are shipped to your customer.
• Fee: The factor charges a fee instead of an interest rate. The typical
factoring fee is 1% to 3% a month depending on the credit quality of your
customers.
• Cash Flow: Factoring can increase your cash flow by 30, 60, or 90 days in
an effort to fulfill upcoming orders, stay current on payables, fund payroll,
and meet other obligations.
• Credit Analysis: Factors spend a lot of time analyzing the credit of your
customers since this is the primary source of repayment. Thus, factors can
be your credit department.
Why Choose Factoring?
• Factors underwrite the line of credit based on the
future of your business and the financial strength of
your customers. Underwriting future sales equates to
a larger line of credit.
• Factoring lines of credit can be approved and funded
in as little as 5 business days.
• Factors can accommodate companies with customer
concentrations, rapid growth, tax issues and limited
time in business.
Factor versus Bank:
What is the difference?
• Loan Underwriting: Factors underwrite the future. Banks
underwrite the past.
• Credit Facility: Factors can often offer larger lines of credit and
more availability.
• Loan Approval: Factors can approve the line of credit and any
subsequent changes in a matter of hours or days.
• Credit Analysis: Factors can assist in the credit approval of
new customers as well as managing some or all of the
accounts receivable function. This can equate to reduced or
re-allocated headcount for a company and better vetting of
prospects.
Cash Flow Problem: Losing Money
Current lender had asked Company A to find new financing due to losses.
Pros
• Company A had operated for over 30 years.
• The customer base consisted of strong military subcontractors located
throughout the US.
• The owner was a US Veteran who was obtaining Federal Contracts.
• Invoices would pay on average of 52 days.
Cons
• Company A had losses in excess of $1M and negative equity of $1.2M
• Over 71% of accounts payable was in excess of 90 days.
• Company A had 75% concentration with 1 customer.
Solution: Factoring
• Current lender had ceased funding and the company
was in need a quick solution.
• Factor was able to provide a $1.5M line of credit
within 2 weeks.
• Company A factored for one year and significantly
paid down vendors and was able to be profitable.
• The improved financial state allowed the owner to
sell the business for a sizeable profit.
Cash Flow Problem: Rapid Growth
Company B had no financing in place and was experiencing extensive growth.
Pros
• Customer base was very strong Fortune 500 businesses.
• Owner was very sales driven thus increasing business by over 50% year to
year.
• High gross margins.
Cons
• Company B had no financial statements that could be considered useful or
verifiable.
• High rates of return on products, in some cases in excess of 30%.
• Very seasonal, majority of business is between September-November.
• Some customers require terms of N60-N90.
Solution: Factoring
• The cash flow provided by factoring current and new
invoices, enabled Company B to pay suppliers within
terms in order to fulfill upcoming large orders for
holiday season.
• By keeping current with suppliers and having
excellent relationships with customers, Company B
expects continued growth throughout this year and
beyond.
Cash Flow Problem:
Customer Concentration
Company C, A start-up, was fortunate to gain a very large customer
immediately but did not have the cash flow to fulfill the orders.
Pros
• The large customer was very strong multi-billion dollar company.
• Products sold on high margin with virtually no return rights.
• Owner had strong character and several years in the industry.
Cons
• Customer was located in Canada and sold on Net 90 terms.
• Company C had no operating history to review.
• Primary customer made up over 90% of all sales.
Solution: Factoring
• Factoring the invoices with longer payment terms
created enough cash flow so Company C could stay
current with all suppliers.
• Company C was able to grow the business with
domestic customers who paid in Net 30 and not
factor those invoices to save money on fees.
• By utilizing factoring, Company C was able to operate
for two years showing profitability and able to get a
$1M line of credit from a bank.
Conclusion
• Alternative to banks: Factoring is a great option if you are
not “bankable”. This doesn’t mean your business is
bankrupt. It means the bank can’t underwrite a loan for
your company at this time.
• Flexibility: Factors can offer flexibility – no long term
contracts, no monthly minimums, no hidden fees.
• More access to cash: Factoring will allow your line of
credit to grow as sales grow. Thus, you can go after larger
contracts or orders without fear.
• Credit Analysis: Factoring can help you evaluate the
credit of prospects and ongoing customers.
Robyn Barrett
FSW Funding
robyn@fswfunding.com
602-535-5984