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