New Podcast Episode – Factoring – A Vital Source of Capital for Small Businesses

Small Businesses face numerous challenges, among them is the ability to have access to sufficient working capital to meet the ongoing cash obligations of the business. While this need can be met by a traditional line of credit for businesses which meet all traditional bank lending criteria, many businesses do not meet those standards and require an alternative. One such option is accounts receivable factoring. With factoring, a B2B or B2G business can quickly convert their accounts receivable into cash. Many factoring companies focus exclusively on the credit quality of the customer base and ignore the financial condition of the business and the personal financial condition of the owners. This works well for businesses with traits such as: Losses Rapidly Growing Highly Leveraged Customer Concentrations Out-of-favor Industries Weak Personal Credit Character Issues Listen to this podcast to gain a greater understanding of the types of businesses which can benefit from this form of financing. To learn if you are a fit contact me today:

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Contact me to learn if your client is a factoring fit:

203-664-1535

clehnes@chrislehnes.com

Factoring Study Guide

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, and what impact does it have on risk for the client and the factor?
3. How do notification and non-notification 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 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 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?

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 , 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 generally allows businesses in weaker financial situations to be accommodated.
3. Notification means the client’s customers are notified to pay the factor directly, often with instructions on the invoice. Non-notification 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 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

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 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.

Glossary

Account Debtor: The customer of the factoring client who owes money for goods or services rendered; also sometimes referred to as a “customer client.”

Advance Rate: The percentage of the face value of an invoice that a factor provides to the client upfront.

Bridge Financing: Short-term financing used to cover immediate cash needs while a company transitions to another source of funding or a more stable state.

Client: In factoring, the business that is selling its accounts receivable to a factor; also referred to as “seller of receivables.”

Debtor-in-Possession (DIP) Financing: A type of financing provided to a company undergoing Chapter 11 bankruptcy, enabling them to continue operations.

Discount/Fee: The amount a factor charges for providing financing, often expressed as a percentage of the invoice amount, generally applied monthly (or part thereof) that the invoice is outstanding.

Factor: The financial company that purchases accounts receivable from businesses; also referred to as “purchaser of receivables.”

Factoring Agreement: The legal agreement between a factor and a client outlining the terms and conditions of their relationship, including the fees, term of the agreement, and other obligations.

Factoring Facility: The overall agreement and set-up for the sale of invoices between the client and the factor.

Factoring Volume: The total value of accounts receivable factored, usually expressed in monthly, quarterly, or annual terms.

Full Notification Factoring: A type of factoring where the client’s customers are notified to pay the factor directly.

Non-Notification Factoring: A type of factoring where the client’s customers are not notified of the factoring relationship and continue to pay the client, who in turn, settles with the factor.

Non-Recourse Factoring: A type of factoring where the factor assumes the credit risk of non-payment by the client’s customer.

Performance Guarantee: A guarantee provided by the client to the factor, assuring that the invoiced goods/services were provided correctly and as ordered, not a guarantee of payment for the underlying invoices.

Purchase and Sale Agreement: A contract that documents the sale of a batch of invoices from a client to the factor.

Recourse Factoring: A type of where the client is liable to the factor if their customer fails to pay the invoice.

Rebate: The remaining percentage of an invoice amount (after the initial advance) that is paid to the client by the factor after the customer has paid the invoice (less the factor’s fee).

Receivables: Invoices representing money owed to a company for goods or services delivered but not yet paid for; also referred to as “accounts receivable.”