Factoring, Receivables Funding
Inventory Financing and Asset-Based Lending

Commercial loans involving receivable funding and factoring are important and complicated. Many accountants will tell their clients that both are simplistic and pretty much the same thing, but nothing can be further from the truth. In fact, using factoring or accounts receivable funding improperly or choosing the wrong funding source could literally “hamstring” your company’s business success as well as adversely affect its reputation. Picking the wrong company to act as your funding source can also add large costs affecting your company’s bottom line.

Finally, there are many situations and industries for which receivables funding and factoring are either unavailable, or are available only under tremendously adverse conditions!

Speaking simply, receivables are created when you sell on terms, which means that you have offered your customers and clients credit. In effect, you have become their “banker”. You may have gained a sale, but at the cost of not getting cash immediately that you could have invested back into your company. Worse, you may now not get paid in the agreed time or even at all. However, many companies and industries have no choice but to put themselves into such a cash deficit position. You might even have other customers waiting with orders to give you, but you need the cash to pay your suppliers and vendors so that you can fulfill new potential orders. Hence, the need for this type of finance.

Receivable financing occurs when you get money from either a factor or receivable lender as soon as you ship and bill or invoice your client. This can be very positive for your business because the faster your business grows and the more that you ship, the more financing you should get. Since it depends on your invoicing to trigger this type of funding, it automatically adjusts to your company’s rate of growth. The difference between factors and receivable lenders is important. Factors are lenders that actually buy your receivables. You sell them to a factor at a discount of face value and he generally assumes the credit risk and collection responsibilities. This can be a tremendous help in establishing your company’s credit program. Furthermore, having the factor handle the many expensive and time-consuming tasks affiliated with customer credit and collections can save you a lot of money. On the other hand, receivable lending involves using your receivables as collateral for you to borrow money. Whereas factors are usually more interested in your clients' credit and ability to pay, receivable lenders are more interested in your ability to repay the loan (rather than selling off the receivables if you cannot). No receivable lender wants to have the expense of liquidating any type of collateral (i.e. your receivables). This type of lending obviously credits debt for your company on the balance sheet while factoring (where the goods were sold to a finance company) does not.

These types of debt funding cause other major concerns while they solve problems. There are major impacts to consider from both recourse and notification issues (ask your accountant about these). Your company’s return of goods policy can be another important factor to consider. Without these two types of funding, however, many businesses would simply wither and die or not reach their full potential. They might even be considered “necessary evils” at a certain stage of your business.

But finding a factor or receivables lender can be difficult. Furthermore, watch out if you form the wrong alliance or use the wrong finance company!

CAPS Interactive Corp. can help you in your search to find the right funding source and conditions that meet your unique needs. CAPS does this by considering:

• What is your unique situation that requires factoring or receivable lending and how might it change in the near future?
• What type of funding is better for you and which specific factors/lenders might be best approached?
• What special situations might be involved. Funding for some industries or financial situations is MUCH tougher to achieve than others and requires networking connections to “open the doors”. Special situations and needs might be spot financing (where only certain of your receivables are financed), inventory financing (using flooring or warehouse financing), foreign receivables and letters of credit, and loans to companies in bankruptcy.
• How your firm can be best presented to the funding companies. This is of paramount importance! How can you be made more interesting to them so that you can get better terms? How can you “sweeten the pot “in ways that do not hurt you?

If your company would like our help, please click here to fill out and submit our Funding Information Sheet.