Happy Birthday United States of America!

Meet the Adjuvancy, who provide high level strategic planning for emerging companies. They review and assess operational performance, and can therefore provide true strategic planning. Adjuvancy understands and has extensive experience in operations, finance, development, and management. Whether cost containment, turnaround, expansion efforts, mergers or growing pains they bring their expertise to bear.

Here they discuss the Seven Levels of Change; Effectiveness, Efficiency, Improving, Cutting, Copying, Different, Impossible, as these traits pertain to strategic planning for the period between now and next year. Read how this formula relates to the work which will be done to insure success. With every good success there is a measured amount of experience required to reach new levels. This experience either comes from within an organization or is sought out as needed.

Factoring companies frequently have to work in conjunction with banks to provide working capital to commercial borrowers. In most cases, the bank, or senior lender has
an existing facility in place and has filed the required UCC-1 on the business assets as the collateral for the loan. The financing statement on the accounts receivables holds the borrower from using their invoicing to access more working capital. In certain situations where the borrower has been current on their bank payments, may have additional assets, or are willing to make a substantial payment on the outstanding loan, a unique arrangement can be made between the bank and factoring company. This arrangement is called an “inter-creditor” agreement. It is negotiated between the two lenders for the purpose of bringing cash flow to the client. It essentially allows the factoring companies’ position on the receivables to prime the banks’. After the factoring company makes advances on creditworthy invoices, it can rest assured the collateral has been secured properly. Depending on the banks willingness to move forward with this arrangement, it can be a life saver to a struggling company in need of capital.

As factoring companies’ ramp up business as a result of the current credit climate, one scenario keeps playing out, unfortunately. Factoring companies require a first security position on the accounts receivables they are financing. Pre-existing loans or credit activities that have a secured position on collateral make funding invoices impossible.

Generally the problem stems from an old line of credit, which was used up over an extended period of time. Ideally, a line of credit from a bank should be properly managed and treated like a revolving loan. Money should be taken from the line, but regularly paid back into the line. Having the discipline to borrow and pay back on a line of credit will keep the financial condition of the company sound. This means certain expenditures must wait until profit or other investment is available.

Finally the result of mis-management is a line of credit that is used to the maximum credit limit. What is happening in today’s environment is the bank is unwilling to extend further credit and is changing the structure of the loan into a “term loan.” This means the total amount is due on a monthly installment payment plan. This leaves the company with their collateral spoken for and no ability to raise additional capital through the use of invoice factoring.

Factoring companies rely on performance in a big way when it comes to invoice factoring. The factor needs to know that whatever service their client provides or product it sells, the customer is 100% satisfied with the outcome. Prior to getting an advance against an invoice, factoring companies will verify directly with the customer that the work has been completed. Billing before work is done is called pre-billing, and billing incrementally is called progress billing. For the most part factoring companies cannot make advances until final billing. It is preferable to have a history of performance when seeking commercial financing. This enables factoring companies the ability to judge the riskiness of the transaction based on previous experience.

The other aspect regarding the importance of performance is related to the warranty directly tied to the sale. If the work was not done correctly, the performance is called into question and credits may be taken against a due and owing invoice. So not only do factoring companies require the work to be completed, they also seek to verify the satisfaction of the customer. Continuous problems related to performance will undoubtedly result in discontinued funding. More than enjoying a good show, excellent performance matters in the success of a growing company.

Most commercial financing, such as invoice factoring, normally require the leading shareholder of the company to sign a personal guarantee waiver. For a factoring company, using a personal guarantee is not a preferred method of repayment of outstanding invoices. From the factors point of view, the PG is used as a deterrent to outrageous fraudulent behavior.

When factoring invoices, the turnaround on repayment is normally 30 - 45 days. The process of recapturing funds from an advance by going after the owner personally could take a couple years by the time it goes to court and a judgment is rendered. It simply takes too long to be considered a viable option. Factoring companies generally require a personal guarantee for a couple of reasons; 1.) protection from a planned conspiracy to defraud, and 2.) the factoring company has its own line of credit, and its own lender requires that all factoring clients sign one.

By signing a personal guarantee the factor will not be looking for you to repay an unpaid invoice out of your pocket. It is more expedient to take the lost amount out of the reserve or set up a repayment plan by reducing the advance rate. Make sure you understand the true liability of signing a personal guarantee for accounts receivable financing before making a blanket statement like you refuse to sign one.

For invoice factoring to be realistic as an ongoing working capital solution, you must know the effective profit margin for the work being done. It’s always important to know what activities in a business yield the best margins, but for accounts receivable financing to be of any help the gross profit margin has to be greater than 20%. This does not mean to expect invoice factoring to cost this much, it is only a concern of the factoring company to insure that beyond the costs associated with factoring, the client will still be making a profit. The margin will allow for incidental problem accounts or extended payment terms. In some cases a client will offer 90 day payment terms. The funds in use interest rate will eat up part of the profit. Unless the factoring company feels confident the client will still be making a healthy profit, the factor will pass on the transaction. So invoice factoring will usually not work for very low margin high volume sales.

The function of invoice factoring is to provide funds through the advances on creditworthy accounts receivable. This means the customers who order the product or service must have a positive credit history. The factoring company checks the credit on every account debtor or customer prior to accepting the invoice for funding. Factoring companies rely on public information like Dun & Bradstreet and Experian or in cases of publically traded companies, their quarterly reports, in order to independently verify the customer credit. In this way, the factoring company offers, as an added benefit, a layer of credit management protection to their clients, protecting them from extending credit to poor performing businesses. Just one of the many features built into the invoice factoring experience.

Our good friend over at Design To Delivery, Diana Dibble Kurcfeld, has been helping commercial organizations successfully navigate the US Government procurement process. Her 7 year old company helps get you through the paperwork and ensure compliance with all the latest rules and regulations. When we are factoring invoices for government contractors, it is good to know our clients fully understand how to be successful in the market. So it makes sense companies interested in getting into government contracting need help with the learning curve.

Here is a post Diana did recently on this very subject;

“With the recent passage of the Stimulus package, a lot of companies previously uninterested in federal government contracting are now looking to get in, particularly since the commercial market is still slow. But are you ready to be a government contractor? It is a time consuming endeavor that needs proper preparation and an understanding of the environment.

Steering a company into a new market always requires careful consideration and the government sector is no different. Companies who want to enter into government contracting or ways to expand current business lines should examine the qualities they bring to the table. Think of your clients and services in four quadrants:

Quadrant 1: providing current products/services to existing clients/customers
Quadrant 2: providing current products/services to new clients/customers — a good way to expand your client base.
Quadrant 3: providing new products/services to existing clients/customers — a good way to expand your business lines.
Quadrant 4: providing new products/services to new clients/customers — high risk because you have an unproven product/serice that you are marketing to potential clients you have never worked with. You do not want to be in the fourth quadrant.”

Read the remainder of this post here and visit their website for more info on how you can get started selling to the government.

If your company uses MSA’s (Master Service Agreement) and SOW’s (Statement of Work) it is important to specify conditions that make invoice factoring possible. Factoring relies on important considerations concerning your business model that might make it easier to get funding. How the SOW is structured with customers is more important than you might think. Just a slight change on how you detail your services in a SOW could alter whether or not you may get accounts receivable financing.

For example when initially setting up your SOW with the customer, specifically outline the work to create milestones or deliverables of completed work that allow you to invoice. This is preferable to billing “along the way” also known as progress billing. By completing a milestone the customer is obligated to pay for something that they received.

Pre-billing for services is always a problem for invoice factoring. Make sure the SOW has tight guidelines on payments for work that has yet to be completed. When it comes to factoring you are assigning the proceeds of an obligation of payment to a third party (the factoring company). If the work has not been completed and accepted the customer may have legal “outs” when it comes to paying the bill. Invoice factoring at a base level requires an “agreement to pay” without conditions by the account debtor.

When engaged with a factoring company to factor your accounts receivables, one form that must be filed with the Internal Revenue Service is the Form 8821. From the form;

“authorizes any corporation you designate to inspect and receive your confidential information in any office of the IRS for the type of tax and the years or periods listed. It does not authorize your appointee to advocate your position with respect to the federal tax laws; to execute waivers, consents, or closing agreements; or to otherwise represent you before the IRS.”

What the Form 8821 does, is allow for any correspondence coming from the IRS to be also sent to the factoring company. Invoice factoring requires being in first position on all accounts receivable, and failure to pay taxes may result in the IRS putting a first lien on those invoices which have been previously funded. By having filed the 8821, the factoring company will be kept informed of any delinquent or failure to pay taxes. The form only notifies the factor, which then has to make a decision regarding any further advances on accounts receivables. Usually a factoring company will assist in developing a workout plan with the IRS to mitigate any disturbance.

In a Univ. Of North FL post;
“The parts of the federal government’s stimulus program aimed at small-business owners aren’t working as they should, say local owners and small-business experts who are trying to figure out what to do about the problem.

The American Recovery and Reinvestment Act of 2009, also known as the stimulus bill, included several provisions aimed at loosening up lending for small businesses. The law includes money to temporarily eliminate fees on loans backed by the U.S. Small Business Administration, as well as a provision to that allows the SBA to guarantee as much as 90 percent of a small-business loan.

At a meeting Wednesday between area lenders and the local small-business community, banks said the new programs have issues that prevent them from handing out loans. Lawmakers hoped to solve that problem in part by offering enhanced loan guarantees, which were supposed to reduce the risk for financial institutions and encourage renewed lending.

But some banks said they fear the SBA will subsequently deny claims for repayment of loans made to businesses that are already losing money because of the recession. Others lenders said an interest-rate cap on guaranteed loans — based on a prime rate that is currently extremely low — results in margins that are too thin to justify the risk of lending to small businesses and startup companies.”

Read the complete story here.

Here is a guest post by Edward Jamison, Esq. of CreditCRM

“Last month I wrote about the newest version of the FICO score to be installed and available via TransUnion; FICO 08. Since I wrote that article FICO has announced three more new scores to be released some time this month. These new scores and details about those score are; 1. The FICO Mortgage Score, 2. The FICO Auto Score, 3. The FICO Bankcard Score.”

Continue reading the remainder of this informative post as well as the regular CreditCRM Blog here.

The current economic climate has caused a financing bottleneck when it comes to pursuing invoice factoring. The issue becomes what to do with existing bank financing. A typical scenario we are seeing involves a business that has a line of credit from a bank and needs more capital to grow. By the time they get around to asking for an increased credit limit and the bank figures out whether to approve it, the financial condition of the company begins to decline and with it the offer for increased credit.

Lately bankers are suggesting the company contact a factoring company for additional capital. Unfortunately invoice factoring is available only to companies with a clear U.C.C. (see UCC) The bank has secured all the business assets as collateral for their loan. Now the bank loan must be paid off to free up the collateral in order for the invoice factoring to commence. Here lies the problem, the business is growing but starving for cash, it cannot afford to pay off the old loan, and cannot gain access to more capital.

One of the best kept secrets of business financing is invoice factoring. With all the financing available the concept of factoring accounts receivables for operational cash flow is still not widely considered. The transaction is very easy to relate, simple to set up, flexible to use, and becomes critical to the many companies who stumble onto it.

While there are so many types of financing available; bank term loans, revolving lines of credit, loans with warrants, asset based loans, direct public offerings, mezzanine financing, private placements, all sorts of equity participation, a company looking for outside capital has to be aware of, and have some basic understanding of the benefits and drawbacks of all forms of financing before choosing one method.

Be advised, invoice factoring is a tool that is perfect only for certain situations. Capital intensive requirements like labor costs and product purchases are ideal for growing companies seeking to use the factoring model.

Learn more about it here

If you are a technology entrepreneur you may have heard of Guy Kawasaki. He’s been around the block quite a few times and has seen pretty much all there is as far as cutting edge ideas. Here he distills what he knows in a speech he calls The Art of the Start. It may not pertain to all industries but it’s relative to anyone who is starting a business. So put away about 40 minutes and take notes while you check out Guy Kawasaki as he gives you his top ten things to think about when you set out to be an entrepreneur. Watch The Art of the Start

When invoice factoring companies purchase your accounts receivable for cash flow it is extremely critical customer payments of the invoices must go directly to the factor. The payments should never be sent to you, to be forwarded to the factoring company.

After setting up accounts receivable financing, a lockbox bank address is put in place to receive customer payments. Because invoice financing is largely based on paper exchanging hands, the invoice factoring company must have control of incoming payments. There is no transparency; the customer will be made aware that their remit to address for the invoice is the factoring company’s lockbox address. Even with ACH payments, they must go directly to the factor’s bank.

Failure to comply with this requirement could result in the default of the factoring agreement and usually an immediate “collect out” of outstanding unpaid invoices with dismissal of the factoring arrangement. By far the single most unsatisfactory action a borrower can do to a factoring company is mis-direct customer payments.

April 2009

Asset-based lenders continue to fill the void for businesses in need of capital in the US.

The Commercial Finance Association (CFA) has released its Quarterly Asset-Based Lending Index, Q4 2008, revealing a 1.9% decrease in total credit commitments in the fourth quarter. According to the CFA, this slight decrease is not surprising considering the explosive and unprecedented growth the industry experienced in the two previous quarters. Furthermore, given the current economic climate, a virtually neutral change in loan volume confirms the unique stability of asset-based lending.

With regard to portfolio performance, results of the quarterly index indicate that the current economic slowdown finally caught up with reporting lenders in the fourth quarter. Lenders non-accruing loans as a percentage of their total asset-based loans outstanding were 34 basis points higher in the fourth quarter of 2008 and 50% of lenders reported an increase in non-accruals in the fourth quarter compared to the previous quarter. With respect to gross write-offs, 60% of lenders reported an increase in the fourth-quarter compared to 35% in the third-quarter but for all four quarters of 2008, total gross write-offs as a percentage of total asset-based loans outstanding at year end were still below 50 basis points, the asset-based lending industry’s median for the past 15 years.

“As other lending disciplines are literally in crisis mode, asset-based lending has remained a strong, steady and viable option for businesses struggling for working capital,” said Andrej Suskavcevic, CEO, Commercial Finance Association.

Read more here.

Here is a very good guest blog post by Mr. Ren Carlton from the Business Reality Blog:

“I met with a prospect last week that is in serious trouble. Due to increased competition and reduced demand, they have sustained significant losses over the past few years. They have a turn-around plan. They have a good team of employees. They have the inventory to sell. They have clients to sell to. There is only one thing they don’t have, cash.

I would argue that running out of cash is the most common reason businesses fail, regardless of the size or industry of the company. Securing financing during this recession has become increasingly difficult. However, it is not impossible. In order to play the game, you need to understand the rules. The rules are the 5 C’s of Credit (Collateral, Capacity, Capital, Conditions, and Character). If you are reading this article, chances are your business is struggling in one or more of these areas. Here are three techniques we use to overcome problems with The 5 C’s of Credit.”

Read the remainder of this informative post at Ren’s site.

Norm Brodsky in his long running column “Street Smarts” writes about how businesses that offer terms to their customers are essentially bankers. We have covered this previously at The Art Of Factoring (Free Money). But Mr. Brodsky in his own way illuminates the issues of extending credit to customers. Read his article here - “What Are You, A Bank?”