Video: What is the structure of a factoring facility?

Terms vary by factor.

Most usually consist of an initial advance of 75% to 90% against accounts receivable.

Factoring fees (aka discount rates) range from 1% to 3% of the invoice for each month the invoice is outstanding (this may be broken down into five, 10 or 15-day increments).

Lower rates are typically reserved for recourse factors with a greater focus on business performance. Some factors charge both a factoring fee as well as an interest rate on funds advanced. Be careful to read the fine print as some factors may include other charges.

Most factoring facility terms range from zero to 24 months and range in size from $10,000 to more than $10 million per month in factoring volume. Different factors are focused on the low and high end of this range. Many factors require a client to commit to factor a certain volume each month. Some factors set no cap on their facility and will allow fundings to grow as the client’s business grows if they keep selling to creditworthy companies.

First lien on accounts receivable will be required (at a minimum), so ask your client early in the process if they have any outstanding liens on their AR. It may be possible to have an incumbent lender subordinate its lien on AR to allow factoring, but success rates are usually low. Most factoring facility terms range from zero to 24 months and range in size from $10,000 to more than $10 million per month in factoring volume.

Different factors are focused on the low and high end of this range. Many factors require a client to commit to factor a certain volume each month. Some factors set no cap on their facility and will allow fundings to grow as the client’s business grows if they keep selling to creditworthy companies.

First lien on accounts receivable will be required (at a minimum), so ask your client early in the process if they have any outstanding liens on their AR. It may be possible to have an incumbent lender subordinate its lien on AR to allow factoring, but success rates are usually low. The Approval Process For a non-recourse factor, little information over and above a recent accounts receivable aging and customer list may be necessary to obtain a proposal. The factor will use this information to assess the quality of the customer base.

Recourse factors, which perform more of a hybrid analysis, will likely require a standard commercial financing package, including current and historic financials, so they can underwrite the business performance as well as the accounts receivable. Term sheets issued in hours to a few days are common.

The Funding Process Your client will continue to do business as they always have: shipping products, completing services and invoicing their customers. From there, the invoices will be sent to the factor. For a notification factor, the invoice will include payment instructions to the factoring company. The factor will verify the invoice by contacting the customer.

Upon verification, the factor will advance your client 75% to 90% of the invoice — often the same day the invoice is issued. When the factor receives payment from the customer, your client will be sent the “rebate” (the remaining 10% to 25%, less the factoring fee). Most factors will fund their clients as often as daily, or less frequently as needed by the client. Initial funding under a factoring facility is often in less than a week. Once a facility is in place, funding usually takes place the same day a new invoice is issued.

Advantage – Speed Most factors put no restrictions on how funds may be used, but a few uses can include:

• Project financing • Business growth financing • Business acquisition financing • Bridge financing • Financing working capital needs • Realization of supplier discounts • Preparation for high season • Crisis management • Debtor-in-possession (DIP) financing Approvals in hours/days not weeks Flexible use of proceeds Non-recourse – It reduces the credit risk of the seller.

The working capital cycle runs smoothly as the factor immediately provides funds on the invoice. Non- recourse – can reduce collection staff/AR tracking Improves liquidity and cash flow in the organization. It leads to improvement of cash in hand.

This helps the business to pay its creditors in a timely manner which helps in negotiating better discount terms. It reduces the need for the introduction of new capital in the business. Elastic credit facility

Many factors will not put a firm cap on facility size, but will allow the facility to grow as AR base grows Can be helpful with rapidly growing businesses

Disadvantages: Cost – Factoring fees (aka discount rates) range from 1% to 3% of the invoice for each month the invoice is outstanding Inability to leverage other assets An ABL facility may allow advances against Inventory, Equipment and CRE A true factor will only advance against AR Providing factor access to customer base

Contact me to learn more:

Chris Lehnes | 203-664-1535 | clehnes@chrislehnes.com

Versant Funding funded a $4 million non-recourse factoring facility for an aerospace machining and engineering company. The facility enabled the company to pay off an asset-based lender while also providing liquidity to meet pent-up demand.

Versant Funding is a provider of non-recourse factoring solutions to businesses in need of liquidity. Versant Funding’s custom non-recourse factoring facilities focus exclusively on the credit quality of a company’s accounts receivable. Versant Funding offers non-recourse factoring solutions to companies with B2B sales. 

About Versant Funding

Versant Funding’s custom Non-Recourse Factoring Facilities have been designed to fill a void in the market by focusing exclusively on the credit quality of a company’s accounts receivable. Versant Funding offers non-recourse factoring solutions to companies with B2B sales from $100,000 to up to $10 Million per month. All we care about is the credit quality of the A/R.

For more information, contact Chris Lehnes at 203-664-1535 or clehnes@chrislehnes.com

Press Release – $4 Million – Non Recourse – Aerospace Machining

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Versant Funding worked with a software company in the Midwest to provide a non-recourse spot factoring transaction in support of the company’s sale to a private equity group. Chris Lehnes, a business development officer for Versant Funding, explained the intricacies of the deal as well as the benefits of and uses for spot factoring more generally.

How was this financing opportunity originated? Was it through organic business development or referral? 

The investment banker representing this business on a pending sale to a private equity group was first introduced to me several years ago. He’s been in my marketing database ever since and called after receiving one of my email marketing campaigns with what he thought was a “crazy idea” of using factoring to meet his client’s urgent working capital needs.

Why did the company need financing and why was a non-recourse spot factoring facility the right option? 

The company was a couple of weeks from closing on the sale of their business, but one of the conditions of closing was the seller meeting certain obligations that the business did not have the cash on hand to accomplish. The deadline to meet one of these obligations was about a week away, so a speedy funding solution was essential.

With our non-recourse factoring program, we rely solely on the strength of our client’s customers. Therefore, we did not need to spend time underwriting the business and getting comfortable with their performance. They had an invoice outstanding from a large, multinational food business with a very strong credit rating which was expected to pay in a couple of weeks.  Factoring this one invoice would provide the business the cash they required to meet their obligation and our quick process was able to meet their very short time frame.

What were some of the unique elements of this deal, if any?

Versant Funding’s preference is to enter into ongoing factoring relationships with our clients, so the simple fact that we were providing “spot” factoring made the transaction somewhat unique for us. But, in addition, the company had a tax lien with a payment plan in place. Since there were insufficient proceeds to pay off this lien, we escrowed a few months of payments, which provided us protection against the company falling behind on their payments before we were paid by their account debtor.

The client in this deal was in the process of completing a sale to a private equity group. How did the ongoing sale process affect this deal, if at all?

The impending sale kept the client highly motivated to close the deal promptly and very responsive to our requests along the path to a quick funding.

How does non-recourse spot factoring differ from other types of factoring arrangements?

While many factors require an ongoing factoring commitment, our willingness to fund spot transactions enables us to also fund businesses which have a very short-term working capital need which can be met by factoring a single invoice.

The non-recourse aspect of our factoring program allows us to fund “tough” transactions that would be declined by most recourse factors. Since we are solely focused on the strength of our clients’ customers, the financial performance of our clients is not relevant to us. That enables us to fund businesses that are very new, growing rapidly or struggling as long as those businesses have strong customers and therefore good quality accounts receivable. Recourse factors are typically underwriting the performance of the business and the strength of management as well as the quality of the A/R. Many of our non-recourse factoring clients either would not pass that scrutiny or simply do not have the time to wait for the underwriting process to be completed.

What kind of demand has Versant Funding seen for spot factoring facilities like this during the first half of 2021? Are you expecting more or less activity on the spot factoring front as the year goes on?

Recently, I have seen an increase in spot factoring requests as compared to prior years.  However, in at least one case, while the initial request was for spot factoring, after further discussions of the benefits of an ongoing factoring arrangement, the client accepted our proposal for a 24-month factoring facility.

I am constantly marketing to my referral sources how Versant Funding’s non-recourse factoring program can be used as a bridge. Often, we are providing a bridge to an equity raise or a sale or just providing a company time to grow and stabilize to the point that they can qualify for bank financing, which could be years away. I expect that my messaging will continue to also source short-term bridge opportunities where a spot factoring arrangement may be a better fit.

Q&A – Chris Lehnes Discusses Spot Factoring

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Press Release: $5 Million – Non – Recourse – Tech Company

Versant Funding LLC is pleased to announce it has funded a $5 Million non-recourse factoring transaction to a tech company which sells hardware and software to major media companies.\

This private equity sponsored business required a rapid infusion of capital to meet its cash needs through the end of the year.  Versant was able to quickly put a factoring facility in place which will provide the company with the short-term liquidity they sought.

“Versant’s offering was an excellent match for this business in need of bridge financing,“ according to Chris Lehnes, Business Development Officer for Versant Funding, and originator of this financing opportunity. “Because our approach to factoring focuses solely on the quality of accounts receivable and does not require an underwriting of our client, we were able to fund this large, complexly organized business faster than any traditional funding source could.”

About Versant Funding

Versant Funding’s custom Non-Recourse Factoring Facilities have been designed to fill a void in the market by focusing exclusively on the credit quality of a company’s accounts receivable. Versant Funding offers non-recourse factoring solutions to companies with B2B or B2G sales from $100,000 to $10 Million per month. All we care about is the credit quality of the A/R.

For more information, contact Chris Lehnes at 203-664-1535 or clehnes@chrislehnes.com

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Press Release: $4.5 Million Non-Recourse – MedTech Company

Versant Funding LLC is pleased to announce it has funded a $4.5 Million non-recourse factoring transaction to a MedTech company which provides services to major hospitals and pharmaceutical  companies.

This venture capital funded business expects to receive an Employee Retention Credit (ERC) from the IRS in the coming months but was looking for a source of funding to bridge them to that payment.  Versant was able to quickly put a factoring facility in place which will provide the company with the short-term liquidity they sought.

“Versant’s offering was an excellent match for this business in need of bridge financing,“ according to Chris Lehnes, Business Development Officer for Versant Funding, and originator of this financing opportunity. “Because our approach to factoring focuses solely on the quality of accounts receivable and does not require an underwriting of our client, we were able to fund this business faster than any traditional funding source could.”

About Versant Funding

Versant Funding’s custom Non-Recourse Factoring Facilities have been designed to fill a void in the market by focusing exclusively on the credit quality of a company’s accounts receivable. Versant Funding offers non-recourse factoring solutions to companies with B2B or B2G sales from $100,000 to $10 Million per month. All we care about is the credit quality of the A/R. To learn more contact: Chris Lehnes, 203-664-1535, clehnes@chrislehnes.com

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