In order to effectively consider receivables factoring as a commercial finance option there are two elements that must be in place. The first is the creditworthiness of the customers. A factoring company calls your customers, “account debtors” or payers of an obligation. A factor’s criteria would be that these account debtors have some sort of reasonable public credit history. Meaning that by checking a credit agency like Dun & Bradstreet, the customer has been given credit terms in the past, and pays their bills fairly on time. So invoice factoring needs to have good customers.

The second element in this discussion will be, will the customer acknowledge to the factor that they have received the invoice, the obligation to pay, and they accept responsibility to pay this invoice in a timely manner. The threshold for determining this “verification” varies from factor to factor, client to client, customer to customer. Meaning, if there is a troublesome quality to the transaction, the verification process, or sign off on the invoice will be more involved, conversely in situations where there is a customer who is billed on a regular basis, the verification can be somewhat routine; like a simple email checking on the status of an invoice.

Having good customers who are willing to sign off on your invoices will be a well done recipe for invoice factoring.

The Federal Register was created to provide access to a wide range of Federal government contractor benefits and opportunities for funding. Each day agencies release hundreds of proposed rules and regulations, meeting notices, final rules, and changes to existing rules in the form of the Federal Register. However in their current format these new regulations and opportunities are very difficult to find and process in meaningful ways. One reason this is important is, staying on top of the latest developments within the government opens up the doors unlimited opportunities. One of the biggest problems agency procurement offices face is finding qualified contractors to bid on new contracts. By following what the government is doing, smart contractors can step in and fill the void by addressing changes or requests.

A small band of open source programmers built a site called govpulse.us. The purpose was to address the unyielding amount of data that is poured daily into the Federal Register. Creating the ability to have the Register usable is a bold achievement. By making such documents as the Federal Register searchable, more accessible and easier to digest, govpulse seeks to encourage every citizen to become more involved in the workings of their government and make their voice heard on the things that matter to them, from the smallest to the largest issues.

Given the right set of circumstances, a factoring company can provide operational capital using accounts receivables as collateral. This can be incredibly useful to assist in labor intensive contracts with strong creditworthy customers. Once securing an award for a large contract, new employees have to be brought on to do the work and they need to be paid regularly. A typical scenario would have the company putting on new staff to begin the work and over the next 30 days payroll will be paid from company reserves. When an invoice is produced, the factoring company wires funds directly to the company to help replenish their checking account. If the contract is going well, more staff is being placed and the elastic band that is the bank account gets stretched to the breaking point.

This scenario is also relevant where products are sold by manufacturers. Replace employees and payroll with suppliers and raw material. The point is, if the company funds can get to the first invoice, the factoring company can assist the rest of the way. Each succeeding invoice can be financed as it is submitted to the customer, providing the cash flow to operate. Invoice factoring may be a useful tool. Not a crutch. It is a bridge to a better future.

With today’s economic market landscape, invoice factoring companies are working hard on many new accounts. Having decided to be an active participant in the small business recovery, a factoring company can quickly provide funding to keep a struggling cash flow challenged company solvent. Because accounts receivable financing is so easy to set up, and quick to deliver, businesses are beginning to hear more about this commercial financing option. But if a business is considering invoice factoring, they need to be accessible. Both by phone and email, the factor can only work as fast as the client is available to answer a question or produce a needed document. Unfortunately, once the phone goes unanswered a few times and the potential client is unresponsive, the factoring company will move on, because there are other companies who are ready and willing to get started with receivables factoring.

Great blog post by Greg Satell discusses the problem of turning around a challenged company. Start with identifying those individuals in the company who are driven to see change come to turn around a bad situation. Then, rather than try and fix everything at once, pick small incremental steps that have a high degree of positive outcomes. Loose the dead wood, if someone is not contributing, don’t carry them. In the same vein, start re-organizing and placing competent workers in key positions. And finally, planning ahead is critical. Get some baseline assumptions and build a road to get out of a current challenged financial condition. The old business adage applies, if the company does not grow, it will die. Read the entire post and study Greg’s writing, you will definitely learn something about business.

Mike Clough is currently a volunteer business counselor with SCORE and penned a very helpful post on his blog BestBizPractices.org. The article, “Why Many Small Business are Struggling,” deals with the reluctance of small businesses to incorporate change. By sticking with the old traditional mechanical marketing model, a company will loose valuable time and opportunities for landing new business. In this current economic climate any company that hopes to survive must embrace every tool available to reach new clients. Not only embrace but master these tools in order to succeed.  Calling these tools - the emerging organic marketing model, Mike focuses on 5 key actions to begin;

1. Start Now - develop an effective strategy
2. Learn about Web 2.0 - more than LinkedIn, Facebook, Twitter
3. Work the strategy - how will these tools build each other
4. Commit the time - the strategy won’t work by itself
5. Use tracking - create a baseline and watch improvements

Read the entire post and get a definitive plan to use organic marketing to stay in the game.

Whenever a business offers payment terms to their customers - they become a sort of “lender.” The customer owes for the work, and the business is waiting for payment, essentially a business loan. There are things a business should note when offering terms that may bring beneficial results in the future. If a company has a strategic capital plan and the intent to raise outside capital, then knowing what makes the transaction attractive may make all the difference in securing capital. Certainly with invoice factoring, this holds true.

A contract for payment might include one of the following terms; milestone payments or progress payments. For a factoring company, these distinctions are critical to securing accounts receivable financing. Milestone Payments in a contract means, very specific deliverables are outlined in the agreement whereby when the milestone has been reached, the customer will pay an agreed amount. Progress Payments, on the other hand, only allow for regular percentage payments of the entire contract. For example, on a million dollar contract the customer agrees to pay the business $100,000 a month. The difficulty with this arrangement, for a factoring company is, for whatever reason if the customer is dissatisfied with the work they will stop making payments. This puts the factor in jeopardy trying to recover payments. Many factors will not finance a progress billing contract.

By specifying very tangible work events, once the customer has verified that they indeed receive the product or service outlined in the contract, the customer will have to pay the invoice as per the agreement. A factoring company who must rely on winning in a collection dispute will be able to advance on a milestone payment.

Knowing this distinction ahead of time, and making the necessary changes to the contract will better guarantee access to outside capital further down the line.

When talking about finding capital for a business, the pitch can be simplified to three very basic points. Everything else moves from these central questions;

1. How Much/What For? The more specific the better, how much is the capital requirement and for what exactly will the capital be utilized. All accompanying documentation is helpful, but this answer needs to be well thought out and defended in any discussions with investors or lenders.
2. Repayment? Again, what is the plan? After all is said and done how will the capital be repaid? What are the fall back positions? Best case/worst case? What collateral is involved? Where is the value of the proposition?
3. Who Will Make It Happen? Certainly one of the most critical questions to be answered. Who has the previous experience to make the idea succeed? Is there a team, how well do they work together, how well do they know each other?

With a fully qualified explanation to these three questions, the road to understanding the business concept will be much easier. It will create the foundation that any capital provider is seeking to engage in further in depth negotiations.

Jill Hamburg Coplan wrote an excellent article recently about small businesses raising capital. The lack of understanding concerning the basics of debt financing versus equity investment is troublesome. Astute business owners should know these basic concepts along with the benefits and problems of each type. The issue goes goes beyond the simplistic reasoning that early stage companies are better suited for equity and later stage mature companies should borrow money. It is critical to build a finance strategy that allows for a) getting in and out of a particular deal b) ability to raise additional capital c) doesn’t alter the core mission of the founders. Knowing what the providers of capital are doing at any given moment in a struggling economy is key to not wasting precious time looking for capital in the wrong places. Reading “Raising Capital: Equity vs Debt” should help.

In business, access to capital at all times is crucial. Being locked out of obtaining working capital can break a company. Today, in this current economic climate, qualifying for credit from an institutional bank is tricky. There is no uniform credit culture among banks anymore, at least for the time being. Some banks are lending others are not. But in some cases securing a line of credit can become an insurmountable hurdle blocking the way of explosive growth.

A company that has been slogging along and is finally poised to double its revenue will be ill served with an insufficient line of credit. When a bank line of credit hits its limit, in most cases, that credit line has to be retired before any new funds will be available. This is happening all over the country. Companies have been caught short with their expansion plans by a lack of a sound capital strategy. Meaning that all forms of working capital should be considered, and a good game plan implemented to utilize the best sources at the right time to keep the business humming. By not planning ahead countless hours, weeks and months are wasted getting out from a line of credit that is no longer serving its purpose.

what are you thankful for today?

Thankfulfor.com was conceived and developed by Shiny Heart Ventures, a small technology company with heart and soul, focused on creating community powered products and services that remind us of the joys of life. It’s your personal gratitude journal. It’s also a collective gratitude journal, for all of us. Because the more gratitude floating around this universe, the better. Just sign up and enter what you’re thankful for today. You can keep it private or tell the world. Remember to be thankful.

It should be noted there is a distinction to be made regarding equity investors. Knowing the difference between Angel investors and Venture Capital is critical to working with and marketing to them.

With Angel investors the first very important attribute should be – are they truly professional accredited investors. Only work with professional investors who properly know how to manage the transaction so that it does not encumber further investment down the road. Angel investors have various motives and drivers that will get them to become a partner in a company. A good book that goes into this is Finding Your Wings.

Unlike angels who work independently, Venture Capital Funds are managed by a team of people who answer to shareholders. The VC group goes out and raises a Fund themselves, targeting a specific mission. By the time a potential client is being considered, there is a council of voices that must be attended to and reasoned with. So the experience is much more institutional, with layers of process. Obviously smaller VC funds are more streamlined, but for the purposes of this discussion the difference between working with an Angel and a Venture Capitalist is generally individual versus group.

This article, Are You Overleveraged But Too Undervalued to Sell?, is a good introduction of mezzanine debt structure and terms by John Hammett with Corporate Finance Associates. Due to the ebb and flow of the economic recovery many companies find themselves in the margins when it comes to ongoing financing.

Mezzanine debt gets the name because it’s half way between senior bank debt and equity. Because it’s kind of both, it serves really well in the right situation. Mezzanine is semi-permanent capital, like equity, so the company does not have to make monthly or quarterly payments of principal. It usually has a 5 to 7 year term.

A new investment of mezz into your company can pay off some of the burdensome bank debt with more patient capital without giving up a percentage of ownership that would come with selling equity.

Read the entire article here.

This is an excerpt from an article about choosing between debt and equity financing;

“At various times in the life of a company there are going to be requirements for outside capital in order to grow the business. Choosing which type financing vehicle is best for your company is very important. Deciding whether to seek equity capital or debt financing is the first step. Usually companies trying to get equity capital are very early stage with little or no real assets, while companies on their way to a steady growth curve use debt financing.”

For a business owner, seeking to work with a factoring company, particular attention should be paid to their specific industry. Factoring companies tend to target unique vertical markets. There are some factors that fund specialized markets like; construction related, 3rd party healthcare receivables (medicare, insurance company payors), trucking, and small ticket invoices. Each of these distinguishing markets has niche qualities to them that require extra knowledge and responsibilities. Over time, groups of accounts receivable finance companies have developed who fund clients operating in those special industries. When calling on a factoring company, if what the company does is specialized to a particular industry, let the factor know at the top of the conversation. Usually if the factor does not fund that particular industry they will have a good referral.

Often I hear about the perception by business owners who have never used invoice factoring that accounts receivable financing will somehow have a negative reflection on their business. Unfortunately this is a misconception based on having never utilized factoring to finance a company. The apprehension remains sometimes because plenty of companies seek to use factoring but cannot qualify. Either their financial condition is so extremely poor or the customers they work for have a credit rating that does not qualify for term payments. The fact of the matter is, succeeding in securing invoice factoring is a step in the right direction for an emerging company.

When an account debtor (customer) receives notice that a vendor is using invoice financing, they might be concerned depending on how the introduction is made. If the introduction is properly done, the customer should realize the future success of the vendor, depends on securing financial backing to enable steady growth without loss of consistency, responsibility and warranty. Once invoice factoring has settled into the daily operations of a company, very little changes from the customers’ viewpoint. A smooth transition into a seamless process is the critical key to satisfactory implementation.

International factoring of foreign receivables is a specialty. The purchase of invoices due from foreign companies or governments is done by factoring companies having the ability to do the documentation, underwriting and follow up on a transaction. The factoring company doing the work usually concentrates solely on this sort of funding.

Unfortunately there are significant barriers for this type of invoice financing. One is historical experience, has the transaction been handled successfully already? Another is country of origin, not all foreign countries can qualify for this type of financing. Invoice factoring companies financing foreign receivables will only work with a business producing a minimum of $500K of invoices monthly. In order for it to be worthwhile, this amount of billing is a starting point to getting funded. The degree of effort involved makes it unlikely that smaller monthly amounts will be worthwhile. So companies needing to do invoice factoring internationally might need to search elsewhere for other resources when just starting out.

From a practical standpoint, invoice factoring requires business revenue to be based on net profit of 15% or greater. Due to the fact that accounts receivable financing charges for monies advanced for the period the invoice is unpaid, the discount rate may start to add up while the advance is outstanding. This is especially true with problem accounts. For this reason, factoring companies focus attention on the profit margins generated from sales. The notion of losing money on a sale due to financing is a non-starter. Rarely does this actually happen because early due diligence by the factoring company should capture the financial conditions before the factoring begins. So high volume low margin companies might have to consider other methods to secure the commercial financing they need for growth.

Whenever factoring companies consider working with a new client to factor their receivables, there is particular attention paid to how dynamically the client operates their business. To properly benefit from invoice factoring the client must show they can manage their financial affairs. Ted Rose of Rose Financial Services has written a report: “How Can I Strengthen My Company’s Financials in Challenging Times?” Paying particular attention to strengthening the company balance sheet and managing the income statement a company can weather the current financial storm. It is becoming increasingly apparent that businesses need to take extraordinary measures to insure success. Without fundamental monetary structure, access to capital through accounts receivable financing will not be available nor necessary.