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Resources

Resources2018-08-06T09:34:04+00:00

  HOW TO FINANCE YOUR

  ACCOUNTS RECEIVABLE AND PURCHASE ORDERS

STEP BY STEP GUIDE

Choosing a non-bank commercial finance firm (finance partner) can often be confusing and cumbersome. It does not have to be that way. Answers to the following questions will help you make decisions that may streamline the process and will positively impact the growth of your business:

  • Are my customers credit worth?
  • Do my customers pay on a timely basis?
  • What if I could get cash now rather than wait to be paid?
  • Can I finance only what I need to?

KEY TERMS:NFE,LOC,AR,AP,
How large of a credit line will I need? This will depend on a number of factors including your existing sales, how long you may want to allow your customers to pay you, and how quickly you want to grow your sales going forward.
Here are some general rules of thumb in determining this important question:
  • Look at your accounts receivable totals out into the 60 day column.
  • Think about your open orders or unfilled Purchase Orders.
  • Add a reasonable percentage to this figure for growth.

AR AGING
 

Purchase Orders
 

Growth
=
  • A Word About Planning for Growth: Your customers will likely react positively to you informing them that you have financing in place that will help you grow. Plan your growth in a manner that will help you meet the needs of your customers in mind.

KEY TERMS:MSA,CBD,Suburban,

When choosing a finance partner, keep in mind that you will be building a relationship with a company that needs to have your interests first.

  • Local: Choosing a local finance partner is usually best as it helps to be able to meet face to face.
  • State: Sometimes there is not a fit locally and you may need to reach out to neighboring metropolitan areas to find a fit.
  • Regional: Same as above. Perhaps there is a specialized need that necessitate looking at a broader geographic area for help.

KEY TERMS:WIP,Services,MSP,GSA,SAS,Apparel,Oilfield Equipment,Transportation,Consulting,Staffing,

Industry Type is important to finance partners (lenders). Here are some examples, although not complete, of industries that may commonly finance receivables or purchase orders.

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Manufacturing

Business in the apparel, electronic, retail, industrial, and fabricated products, textiles, oil field equipment and transportation products, and others fall into this category.

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Services

Businesses that provide services such as auto, consulting, data processing and warehousing, education, engineering, health, repair service, security contracting and others fall into this category.

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Government

Businesses that provide products or services to local, state or federal government entities fall into this category.

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Staffing

Businesses that provide employees, temporary or full time, to other businesses fall into this category.

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Software

Businesses that provide software to other businesses fall into this category.

Manufacturing. Business in the apparel, electronic, retail, industrial, and fabricated products, textiles, oil field equipment and transportation products, and others fall into this category.

Services. Businesses that provide services such as auto, consulting, data processing and warehousing, education, engineering, health, repair service, security contracting and others fall into this category.

Government. Businesses that provide products or services to local, state or federal government entities fall into this category.

Staffing. Businesses that provide employees, temporary or full time, to other businesses fall into this category.

Software. Businesses that provide software to other businesses fall into this category.

  • A Word About Industry Type: Some industries such as medical (billing Medicare, Medicaid), construction, and agricultural products may be more difficult to finance. There are commercial finance firms that specialize in these industries. As a prospective client, your job is to select the right partner, keeping mind your location and industry.

KEY TERMS:Factoring,Purchase Order Funding,Merchant Cash Advance,Account Debtor,Account,Chattel Paper,General Intangible,

By the end of this process you should be able to fill in the blanks of the following sentence:

We are in the
industry and looking for
in working capital to finance our existing receivables and in-hand purchase orders.

KEY TERMS:Recourse,Non-Recourse,Term Commitment,Lock Box,
Agreements must be understood fully. It is important to understand what is in the agreement you sign, and you will likely need an attorney to review before closing.
A Word About Online Applications: The internet is a great tool for disintermediation and increased efficiency, however in the world of commercial finance it can also contribute to the problem. Be wary of lenders that want you to upload bank statements and offer to have cash in your bank account based on your monthly revenue. Look for lenders that want to look at both your financial condition as well as the health of your customers. While this may take a few days longer, it will be well worth the effort in the long run.

KEY TERMS:Fee Structure,Discount,Invoice,Interest Rate,APR,

Fee Structure can be confusing. Factors often describe their fees as “discounts”, but can also have interest calculations, and other hidden fees built in.

Discount = % of the invoice the factor keeps
Interest Rate = Interest Charged on Loan Balance
EXAMPLE
EXAMPLE
2.5% X $1,000 Invoice = $25
8.5% Annual Interest X $100,000 Loan Balance = $8,500
A Word About Fee Structure: It is also important to understand the time element of the discount. Some factors may break their fees down into 30 day buckets, while others charge a daily fee. Fees should begin when money is advanced and end when money is collected.

KEY TERMS:Client,Broker,Lending Partner,Factor,Working Capital,

Many small and medium sized businesses deal directly with lender, reducing costs by cutting out the middle men. Businesses can also choose to hire finance broker to help find lenders. Additionally, lenders typically have finance brokers of their own to help bring deals to the table. Referral Services market heavily to businesses looking for capital, then sell those leads to other brokers.

  • A Word About Finance Brokers: Brokers often tell their clients that the “Lender Pays” or that “There is no charge for their services”. Although the business may not write a check for the broker’s service, the money clearly comes from somewhere. Brokers make up 10% of the total cost of a typical factoring facility. Paying this fee may cause the lender to be less flexible on the fees, over-allowances and other credit sensitive matters when they are paying a broker a commission.

KEY TERMS:Application,Online,
Looking for a finance partner used to be like planning a vacation, except you would call a broker, or ask a colleague who they use. Today, there are many self-service online options that enable business owners to quickly gauge their options. Using the internet to find a finance partner is easy, inexpensive and can be done very quickly. While it is still recommended to meet your choice in person, this is the way to conduct a search today. Don’t forget that you should also speak with colleagues and other business associates that may already have a finance partner they like.
A Word About Online Applications: The internet is a great tool for disintermediation and increased efficiency, however in the world of commercial finance it can also contribute to the problem. Be wary of lenders that want you to upload bank statements and offer to have cash in your bank account based on your monthly revenue. Look for lenders that want to look at both your financial condition as well as the health of your customers. While this may take a few days longer, it will be well worth the effort in the long run.

Online: Quick and Easy
but can be misleading

Colleagues: Reliable but needs
can be different

Brokers: Costly but helpful
in complicated situations

KEY TERMS:Reserves,Account Ledger,

Time spent comparing offers from finance partners (lenders of any type) is time away from your core business. Compress the operation down to three steps, using a standardized approach.

Questions About:
The Agreement

Offer Agreement

  • What is the Initial Discount?
  • Are there other fees?
  • How do you cancel?

Questions About:
The Process

Offer Agreement

  • How do they fund?
  • Reserve release?
  • Access to Account?

Questions About:
The Company

Offer Agreement

  • How Long in Business?
  • What kind of clients?
  • Referrals?

When Comparing in Advance

  • Define Needs in Advance.
  • Skip Companies that just don’t fit.
  • Consider having an Attorney review.
  • Have a Standard Set of Questions.
  • Get Draft Agreements in Advance.
  • Speed counts; don’t drag it out.

KEY TERMS: Application,Term Sheet,Funding Software,
This section provides an outline of the steps involved in negotiating a lending agreement. In practice negotiating an agreement with a lender is not such a linear experience so expect to skip or take steps out of order.
1. Application
2. Discuss basic terms.
3. Agree on principal issues.
4. Set up a visit.
5. Term Sheet Issued.
6. Finalize key issues and execute documentation.
7. Train on Funding software.
8. Commence business.