Invoice factoring?

[Sportin' Wood]

Anyone have experience with invoice factoring?
My AR is fricking through the roof. Sure sounds like a good option to free up cash flow. Looks like I can make up a small portion of the costs with the 2% discount I can get, paying my suppliers in the 30 day. Never heard of anyone using factoring so lets hear your horror stories or other.

[ChumpChange]

If the invoice takes longer to collect, that 2% can increase in time. 2% is not too bad as a lot of the companies that I knowof generally want 3% of each invoice. I only refer to factoring if it is something that I cannot do myself. I have a couple guys who work for me that came from factoring companies. They can tell you all the horror stories you ever want to hear. Of course, some companies need factoring which is why they are in business.
A line of credit would be much better for cash flow purposes than factoring. If you have any questions, give me a call regarding your company.
______________________________
Matthew Roberson
Vice President
Business Financing Officer
US Bank
2020 E. Financial Way, Suite 200
Glendora, CA 91741
626.914.7390 phone
626.236.9302 fax

[Just Tool'n]

This goes back over 25 years ago, early 1980's.
I worked selling construction supplies for a company.
We grew to fast, A/R got to big, went to a company for factoring. What a nightmare that became. I did not know of all of the details, but being I ran the front counter of sales, & the bosses right-hand man, I heard some of the problems doing this. It seemed as the recession of the early 80's hit, intrest rates sored to all time levels, construction industry took a dive, A/R now became more diffcult to collect, & bad debit mounted the factoring got worse.
Come into work on monday morning, boss was there before me which was a rarity, dressed in a suit. He pulls me into his office explains to me that at 10:00am that day the company was filing chapter 11 bankruptcy. That the Factoring company might come in, try to takeover receivership of the company.
He handed me my paycheck, said go strait to the bank @ 10:am & cash it, said come back, you will still have a job. Also told me to lock-up my personal Snap-on tool box, & if that factoring company comes in to roll my box out ASAP & load them up in my truck, because they would try to seize everything for assets.
Well the factoring company did try to do a fast on some things, but the bankruptcy judge allways stopped them.
Company contuinued on, came out of chapter 11 after 5 years, paid off all creditors 100% of what was owed. I stayed on until 1985.
Then I took my Snap-on tools, home & started selling snap-on. 20years of being with Snap-On, never a regret.
So the moral of the story is to make sure you know what you are doing, plus try to put some type of cap on how much of the factoring you are going to use. Plus make sure they are reputable company, & allways use a lawyer to look out for your legal intrest first before you sign anything.

[Sportin' Wood]

If the invoice takes longer to collect, that 2% can increase in time. 2% is not too bad as a lot of the companies that I knowof generally want 3% of each invoice. I only refer to factoring if it is something that I cannot do myself. I have a couple guys who work for me that came from factoring companies. They can tell you all the horror stories you ever want to hear. Of course, some companies need factoring which is why they are in business.
A line of credit would be much better for cash flow purposes than factoring. If you have any questions, give me a call regarding your company.
______________________________
Matthew Roberson
Vice President
Business Financing Officer
US Bank
2020 E. Financial Way, Suite 200
Glendora, CA 91741
626.914.7390 phone
626.236.9302 fax
thanks for the reply. Anyone else? I know some of you big boat players have an opinion for this little old jetboater. :)

[Rock-A-Bye-Baby]

My banker who gave me my business line indicated that factoring is not good. Only in certain circumstances is it a viable alternative, but it can get very expensive. i was also told by an attorney who buys and sells businesses that it looks weak (if you plan on selling). And if your customers find out you are factoring they may not give you return business in fear that you don't have the liquidity to handle any revenue increases.
Like ChumpChange said, a line of credit will help out tremendously.

[Sportin' Wood]

My banker who gave me my business line indicated that factoring is not good. Only in certain circumstances is it a viable alternative, but it can get very expensive. i was also told by an attorney who buys and sells businesses that it looks weak (if you plan on selling). And if your customers find out you are factoring they may not give you return business in fear that you don't have the liquidity to handle any revenue increases.
Like ChumpChange said, a line of credit will help out tremendously.
Thanks guys, More imput if anyone has any...

[rivercrazy]

Factoring involves a lot of work for both parties. A factor will generally want to check credit for every order and invoice. Their credit standards may be tighter than yours. They will not purchase receivables unless they approve the credit. Every single purchase order and invoice will need approval from the factor before you ship. In many cases the factor will also try and obtain financial statements and other information from your client. It can cause issues between your company and your client.
Payments made by your client will go directly to the factor for processing. They will have complete control of your incoming proceeds from collections.
The best you can expect is they purchase your A/R and give you 80% of the total. Then will remit the remaining amount due to you when the funds have cleared the bank. But in many circumstances, they will not go as high as 80%. The purchase amount or advance rate will be determined based on a number of items such as your dilution factor (how much the A/R is impacted by credits, chargebacks, discounts, returns, etc).
Factoring also typically involves an intensive bank audit of your books and records. They will charge you for the audit.
And the cost per invoice plus all the other charges typically equate to an annual interest rate of between 18-30%.
Try and obtain a revolving line from a commercial bank. Depending on what size facility your looking for, I can probably refer you to a few loan officers that will take good care of you.

[INSman]

Anyone have experience with invoice factoring?
My AR is fricking through the roof. Sure sounds like a good option to free up cash flow. Looks like I can make up a small portion of the costs with the 2% discount I can get, paying my suppliers in the 30 day. Never heard of anyone using factoring so lets hear your horror stories or other.
Is the AR concentrated in 1 or 2 very large accounts ??

[ChumpChange]

Try and obtain a revolving line from a commercial bank. Depending on what size facility your looking for, I can probably refer you to a few loan officers that will take good care of you.
Of course this is spamming my own business but I am now writing lines of credit at Prime or lower. If your bank is currently taking a spread of prime + anything, I will beat it for members of this forum. I am a direct lender and employee of US Bank, the sixth largest bank in the nation. I am not a broker. My contact information is above.

[rivercrazy]

Prime? LIBOR is where its at! But generally pricing is a function of credit risk and the size of the line. The safer the inherent risk and the larger the credit facility, the lower the pricing.

[C-2]

They must call them ‘bottom feeders” for a reason!
Two things come to mind which I recall about factoring:
If your receivables are routinely 60-90 days out and depending upon the industry, factoring might not work for you since many factors turn those invoices back over to you for collection (and dinging your account).
Whether or not they will require a personal guaranty. In addition and beyond the personal guaranty, giving a factor a security interest in your biz is RISKY. Most security agreements allow your assets to be attached on an immediate (ex parte) basis – meaning they go to court and on the same day, gain control of your assets (as opposed to being sued in a traditional collection manner), and possibly even your business.
If you are carrying AR in the construction industry, you need to be sure of the reason for the delay in payment. Your client might be in an unrecoverable cash crunch and stretching out all their receivables, forestalling an inevitable bankruptcy filing. Or the amount gets so large they can’t repay you and you are forced to sue them. I can’t tell you how many times I work cases where it’s too late; the vendor should have been cut off, or alternative security guarantees put in place (get personal guarantees from the principals – that usually lights fires under their arses).
95% of my clients are lawyers and municipalities. I too am always cash crunching and chasing money (90-180 days out). However, I really tightened up my AR’s by identifying the AP clerks, or whoever is responsible for processing invoices, and establishing good relationships with them. Killing them with kindness, humble joking, and even a little reward like a gift certificate to Claim Jumper has proved to be the most affective manner for getting my invoices paid. Females are better at this cuz they can bs about tons of things. A $40 gift certificate goes a long way to an AR clerk who “helped” you get your invoice processed (even though they owe you the money and it’s past due in the first place). You better believe she’ll remember that gift certificte the next time an invoice from your company comes across her desk.
I used to send the collection letters, faxes, phone calls, but the problem really got better when I identified who was responsible for payment. Most of the time and as it turns out, they were just too busy or the invoice slipped thru the cracks.
If you are able, there are several small business banks in So Cal which make loans for AR problems (not straight factoring, but traditional financing products), such as Alliance Bank in Culver City. I know Alliance even makes loans to pay off judgments and tax liens.
Be very careful with any security interests or personal guarantees you give – they will bring you down in a heartbeat.

[Sportin' Wood]

Satan called and said that since he all ready owned my soul I can't sell my AR to some other deity. :crossx: Thanks to Al Gore I recieved my free of charge education in just two short hours :) I love the internet!
Factoring apears to be a dangerous game unless you are working with a large profit margin... I am not.
Guess I will stick with the equity line.
Thanks for the heads up guys.. You can keep them coming if anyone else has an opinion, but I made up my mind to stay away at this time.

[rivercrazy]

The problem is most banks will require personal guarantees. Typically PG's are required for all but the strongest companies (companies that reflect a long term successful business history, borrowing that is well below available collateral base, lowly leveraged with a history of reinvesting significant profit back into the company, etc)

[Old Texan]

Anyone have experience with invoice factoring?
My AR is fricking through the roof. Sure sounds like a good option to free up cash flow. Looks like I can make up a small portion of the costs with the 2% discount I can get, paying my suppliers in the 30 day. Never heard of anyone using factoring so lets hear your horror stories or other.
Ever watch the Sopranos?
Unless you have big margins, you will be lucky to break even at BEST.

[Old Texan]

The mafia invented factoring, if that tells you anything. ;)
Is Tony Soprano in the mafia? Oh my............... :rolleyes:

[Big Warlock]

I can't really add much to this. It is not a good sign to either your clients or your vendors when you enter the factoring game. As some have mentioned above, get serious about collections. Call the biggest creditors and get commitments from them. Date and amount of check. I would use a collection agency before going to factoring. However, a proper credit line is most likely whaat you need if you are just being slow paid (cash flow). You need to meet with clients and get them to pay within terms. Also, it helps to understand their side of the business and why they have to slow pay.
Good luck. And I really appreciate knowing there are so many good people with brains on Hot Boat! Sometimes, you have to admit, we wonder!! :cool:

[jeepinscott]

Its been mentioned already, but let me reiterate, it looks bad to your clients. They will run credit on them, call them and ask details of the contract, etc. It will be a PITA for them, not you. The factor companies are like collection agencies and will hound the PO of your client.
I look at it like a payday loan, it's a hole that starts out with cashflow, but usually ends up in bk. I was given the same advice as you received here when I considered it. I chose not to do it and watched others flounder when they did.

[Cole]

I used to manufactor clothing in the early 90's and used a factor for a few years...They charged 3% for each invoice per month....now one thing you have to understand is that 2%-3% may sound reasonable.. but that is per month!!!! So 3% per month times 12 months is 36% per year!!!!!! MY highest credit cards are more reasonable than that!!!!!
If your are running tight margins and your A/R are consistantly 30-120 days late or longer you will have to consider either build that into the cost or other meathods....for some it is the only alternative for HIGH rISK businesses ie:construction, clothing, etc.
Call chumo change That might be a good start!!!!
heck I my might even call him for some advice!!!! :D

[Sportin' Wood]

I can't really add much to this. It is not a good sign to either your clients or your vendors when you enter the factoring game. As some have mentioned above, get serious about collections. Call the biggest creditors and get commitments from them. Date and amount of check. I would use a collection agency before going to factoring. However, a proper credit line is most likely whaat you need if you are just being slow paid (cash flow). You need to meet with clients and get them to pay within terms. Also, it helps to understand their side of the business and why they have to slow pay.
Good luck. And I really appreciate knowing there are so many good people with brains on Hot Boat! Sometimes, you have to admit, we wonder!! :cool:
Your right, there are a few people on here that have some great input on subjects like this. Been operating for 7 years with no equity line, and its time to implement some sort of credit line. I was not too hip on the idea of factoring but needed to find out more.
I wish I was talking about a few late payers but all my clients drag ther feet. Just looking to find a way to take advantage of an additional 2% in savings from my suppliers by paying in the 30 day. Most all pay in the 60-90 day, I'm hoping to optimize profits this year as opposed to insane growth. 2% adds up quick over the course of a year.