Factoring Study Guide – A Primer

Quiz

Instructions: Answer the following questions in 2-3 sentences each.

1. What is the core function of factoring, and how does it provide working capital for businesses?
2. Describe the difference between recourse and non-recourse factoring, and what impact does it have on risk for the client and the factor?
3. How do notification and non-notification factoring differ, and which method is more commonly associated with businesses in weaker financial condition?
4. What are some common reasons a business might choose to use a factoring facility?
5. What is Versant’s typical advance rate, and what happens with the remaining percentage of the invoice when it’s paid?
6. What is Versant’s typical factoring fee structure?
7. What are the key differences in Versant’s approach compared to other factoring companies?
8. What types of businesses are a good fit for factoring with Versant Funding?
9. What are the steps Versant takes when underwriting a potential new client?
10. What are two industries Versant does not typically factor?

Factoring Study Guide – A Primer

Answer Key

1. Factoring is the sale of a company’s accounts receivable to a third party (the factor) in order to obtain immediate working capital. This provides businesses with cash flow by turning their invoices into cash, rather than waiting for customer payments.
2. In recourse factoring, the client is responsible for repaying the advance if their customer does not pay. In non-recourse factoring, the factor assumes the credit risk of non-payment. Non-recourse factoring generally allows businesses in weaker financial situations to be accommodated.
3. Notification factoring means the client’s customers are notified to pay the factor directly, often with instructions on the invoice. Non-notification factoring allows payments to be made to the client through a lockbox controlled by the factor. Notification factoring is generally better suited for businesses in weaker financial condition.
4. Businesses might use factoring for project financing, business growth, acquisition financing, bridge financing, meeting working capital needs, taking advantage of supplier discounts, navigating a crisis, or as debtor-in-possession financing.
5. Versant typically advances up to 75% of the face value of approved receivables. The remaining 25% of the invoice, minus fees, is paid to the client when the receivable is collected.
6. Versant’s fee is typically 2.5% of the invoice amount for each month (or portion thereof) the receivable is outstanding.
7. Versant focuses on larger and more complex deals, provides fast service (funding within a week), and assigns an Account Executive to each client. They focus more on the credit quality of the client’s customers, and less on the overall financial strength of the business itself.
8. Versant is suitable for small to medium-sized businesses with $1-$50 million in annual revenue that need liquidity and may not qualify for traditional bank financing, particularly those with strong customers, even with a weak financial history.
9. Versant reviews client’s accounts receivable aging, performs a public records search for UCC filings and liens, conducts a credit review of client’s customers, and verifies receivables by calling customers directly.
10. Versant does not typically factor for the medical and construction industries.

Essay Questions

Factoring Study Guide – A Primer

Instructions: Write a well-organized essay for each question. Your essays should demonstrate your understanding of factoring concepts and your ability to connect these concepts to the source materials.

1. Discuss the role of factoring as a financing tool for small to medium-sized businesses, comparing and contrasting it with traditional bank financing. Consider factors such as eligibility criteria, speed of funding, and cost.
2. Explain the benefits of a non-recourse, full-notification factoring facility for a business that is experiencing financial difficulties and how this model operates from initial referral to final payment of the factored invoices.
3. Analyze the competitive landscape of the factoring industry, discussing the differences between smaller and larger factors and Versant’s unique positioning within that landscape.
4. Chris Lehnes emphasizes the importance of educating financial intermediaries rather than business owners about factoring. Discuss the reasoning behind this marketing strategy and how it contributes to Versant’s success.
5. Assess how Versant’s factoring product and approach has proven beneficial for businesses facing various challenging scenarios (including the impacts of COVID-19) and the impact it has on improving their overall profitability.

Factoring Study Guide – A Primer