Anda di halaman 1dari 10

The Thirteen

Biggest Mistakes
Associated With
Account Receivable
Factoring
…and how to avoid them
The 13 Biggest Mistakes Associated With
Account Receivable Factoring
… and how to avoid them

Account Receivable Financing, also known as Invoice Factoring offers


growing businesses a quick, easy way to
finance unlimited growth without incurring debt. However, to avoid ex-
pensive mistakes, it’s vitally important to understand how account re-
ceivable factoring really works.

T o grow and prosper, every business


needs a lot of “green energy” or money.
However, a SunTrust Bank 2005 survey of


Carefully read your proposed fac-
toring agreement.
Ensure that you don’t commit the
530 business owners found that because 69% common mistakes.
relied on existing cash flow or profits to fund
their growth, these businesses failed to real-
“Caveat emptor (buyer beware)
ize their full potential.
clearly applies to the invoice factoring
Factoring, a practice dating back to Roman industry because it’s unregulated with
times, is a proven way for small and some- few constraints on the people who
times larger businesses to alleviate cash flow work in the industry. “
problems caused by delays in receiving pay-
ments. This white paper will educate business own-
ers about the biggest mistakes commonly
Accounts Receivable Funding (Invoice Fac- made when factoring invoices … and how to
toring) involves the purchase and sale of ac- avoid them.
counts receivables (invoices) at a discount for
immediate cash.

Seann Maxwell, President


Unlike a loan, factoring involves no debt, no Stonehenge Capital Group
liabilities, no personal guarantees, and no 4324 Ridgemoor Drive North
long-term commitments. Palm Harbor, Fl 34685-3171
Toll Free: (866) 274-8185
Email: info@stonehengecapital.net
It sounds great, doesn’t it, and it can be -- http://stonehengecapital.net
provided you:
 Fully understand how factoring
works.
 Know who you are dealing with.

Financing Delivered! Quickly with Integrity. Page 1


Copyright © 2008 Stonehenge Capital Group
Mistake #1 – Working with a Mistake #2 – Giving the
Factor Who You Don’t Know, Factor Too Much Control
Like and Trust Over Your Business

W hen you enter into an agreement to


factor your invoices, you are in es-
sence inviting a new partner into your busi-
S ome factoring companies insist on con-
trolling all communications with your
customers concerning your invoices. This
ness – one that you may not know very well gives the factor too much influence over how
at all. your customer ends up viewing your com-
pany.
As with any partnership, it’s better to be in-
volved with people with whom you share Most larger companies today are accustomed
similar business and personal goals and val- to working with factoring companies, but
ues. Otherwise, you may be engaged with they don’t like to be badly treated in the proc-
people that you don’t like, don’t want to ess.
know, and can’t trust, but who have much
potential to harm your business and your cus- A factor’s behavior can put at risk your hard-
tomer relationships. won relationship with your customer.

Successful users of account receivable factor- In some instances, unethical factoring compa-
ing take the time to check out the credentials, nies have delayed payments to their clients,
the business and personal ethics, and the thereby causing financial strain and jeopard-
business practices of their potential factoring izing the company.
partner, and thereby minimize the potential
for considerable frustration, unhappiness and In another instance, a factoring company pur-
financial hurt. portedly even tried to gain ownership of its
client’s business through unsavory business
Since you are entering into a three-party deal practices.
that involves you, your customers and the
factoring company, taking enough time to To avoid this mistake ensure that language in
carry out appropriate “due diligence” is criti- your agreement doesn’t unnecessarily and
inappropriately constrain you from communi-
cal. Don’t be shy about asking for customer
cating with your all-important customers.
references and then be sure to talk with 3-5 of
the factor’s customers. A good question to “Thirty percent of business owners worry
ask is, “Knowing what you now know about about cash flow—and for good reasons.
Most businesses will only go as far as their
Company X, would you use them again to cash flow will take them because they are
factor your invoices?” Listen carefully to the self-funded.”
response, and you learn much about your pro- The Business Owner’s Playbook
published by SunTrust Bank
spective business partner.

Financing Delivered! Quickly with Integrity. Page 2


Copyright © 2008 Stonehenge Capital Group
Mistake #3 – Agreeing To voices during the month for factoring, you
still end up paying the minimum monthly fee.
Factor All Your Invoices
This is a good deal for the factor, but not for
you.
S ome factoring companies insist that all
accounts be factored as a way to gener-
ate extra fees, or that all of your accounts be To minimize your factoring fees, do not ac-
run through them even if they are not fac- cept an agreement with a minimal monthly
tored. fee component. Ensure that your factoring fee
is calculated on the actual amount of your
By acceding to this, you face the following factored invoices.
possible consequences:
 Delayed use of your funds of up to 5
to 10 days. Mistake #5 – Accepting
 You place too much control over your
Excessive Clearing Days
business in the factor’s hands.
 Invoices going through a factor can
bother your customer for no good rea-
son.
C learing days, you might say … what are
they?
 You add an extra step to your collec-
Essentially, clearing days are those days a
tions process.
factoring company needs to actually receive
and clear invoice payments from your cus-
Ideally, you should work with a factoring
tomers. A usual part of a factoring agree-
company that offers you flexibility on which
ment, fees apply during a clearing period.
invoices you want to factor.
However, clearing periods can vary, and this
is what you watch for.
Mistake #4 – Paying A
Monthly Minimum Fee
A usual clearing period is 5-7 days, some-
times as much as 10 days. You should avoid
anything longer than that.

C ertain factoring companies require that


you pay them a specific monthly mini-
mum fee, regardless of the amount you in-
Some factors use the clearing days period as
a way to extend the factoring period into the
voice to customers.
next “per days period” so they can get more
money from you.
For example, if your monthly minimum
amount is $50,000, and your actual factored
invoices amount to, say $35,000, you would
end up paying fees on $15,000 for which you
receive no value. Or, if you submit no in-
Financing Delivered! Quickly with Integrity. Page 3
Copyright © 2008 Stonehenge Capital Group
In your agreement, seek the fewest number of Pitfall #7 – Not Understand-
clearing days, since the shorter the period, the
ing The Factoring Fee
fewer fees you pay.
Structure.

Mistake #6 – Not Knowing


What Services Attract Extra T his is a major mistake since understand-
ing a factoring fee requires that you
know about percentages, appropriate terms,
Fees how the fee is applied and the time/value of
money.

C ertain accounts receivable factors


charge extra fees such as: a line of
credit fee (1-2% of total amount of available
This section and the next will help enlighten
you, so you can understand how the fee is
credit), a management fee (1-2% of total determined, and how then to compare differ-
amount available for factoring), a new ac- ing fees and structures.
count setup fee, wire transfer fee, per invoice
transaction fee, due diligence fee, termination By not understanding how a factoring fee is
fee, and anything else they can include. determined, you open yourself up to paying
excessive fees. So, please take the time to
Most factors charge a wire transfer fee, but study this section, and then work through the
the other incidentals are simply attempts to examples given below.
pry more money from your hands.
The fee structure usually has two components
Since these incidental fees can add up, pay – advanced funding and factoring fee.
careful attention to your agreement to ensure These are usually determined by the amount
that you are not agreeing to pay fees for nor- you intend to factor and the financial strength
mal and customary business expenses that and creditworthiness of your customers:
should be part of the factor’s general over-
head. Advanced Funding: When you submit an
invoice for factoring, you will typically re-
Some factoring companies charge no extra ceive between 80% and 90% of the invoice
fees other than for wire transfers. amount by wire transfer to your bank ac-
count within 24 hours after invoice verifi-
cation. This is your money to use as you
wish.

Factoring Fee: Many factoring companies


impose factoring fees based on a “per 30
days rate” (such as 2.25% per 30 days).
This carries some obvious negatives.

Financing Delivered! Quickly with Integrity. Page 4


Copyright © 2008 Stonehenge Capital Group
Should your customer pay the factor in nario where you are led to believe your cus-
33 days, your fee would be: two 30-day tomers are going to pay your invoices on an
periods x 2.25% = 4.5% of the invoiced exact day and strictly according to your
amount even though your invoice was terms. You know this just doesn’t happen and
outstanding for only 33 days. This can so do many factoring companies. They bank
prove to be quite expensive. on companies taking longer to render pay-
ments.
By contrast, a “per 5-days rate” of .45%
on the above example delivers you a Further information on fee determination is
factoring fee of: 7 periods x .45% = given below under Mistake #8
3.15% of the invoiced amount. Gener-
ally, the shorter the “per days” pe- Also, please see below Mistake #11 - the sec-
riod, the more attractive is the rate. tion on Reserve Funds - to learn how all the
money is accounted for.
Don’t be misled by a “perfect world” sce-

Mistake #8 – Accepting An Initial “Teaser” Rate

S ome factoring companies promote a loss leader initial “teaser” rate, counting on the fact
that many people don’t understand how factoring fees work and the time/value of money.
Depending on the number of days your customer takes to pay your invoices and this typically
varies, you may end up actually paying a higher rate than might be the case under a higher ini-
tial rate and a different rate structure.

Here are several examples that you can follow to calculate your actual factoring fee on an in-
voiced amount of $100,000:

Factoring Fee Offer #1—1.65% for first 25 days and 1.5% each fifteen days thereafter.

Days to Clear Invoice Amount Rate Calculation Actual Fee


31 $100,000 1.65%+1.5% = 3.15% 3.15% x $100,000 = $3,150
46 $100,000 1.65%+1.5% +1.5% = 4.65% 4.65% x $100,000 = $4,650
58 $100,000 1.65%+1.5% +1.5%+1.5% = 6.15% 6.15% x $100,000 = $6,500

Factoring Fee Offer #2—0.45% per each five-day period

Days to Clear Invoice Amount Rate Calculation Actual Fee


31 $100,000 .45% x 6 = 2.7% $2,750

46 $100,000 .45% x 10 = 4.5% $4,500


58 $100,000 .45% x 12 = 5.4% $5,400

Financing Delivered! Quickly with Integrity. Page 5


Copyright © 2008 Stonehenge Capital Group
You can readily see from the above examples collection.
that what appears at first glance to be an at-
tractive rate is actually more expensive when Once the first 30-day period has passed, the
factoring company wants to collect the out-
you actually apply the rates for the various
standing account as quickly as possible to
“per-days” periods. maximize their own rate of return on the
funds advanced.

Mistake #9 – Not Knowing For example, if they can collect on your in-
voice on day 33, you still are charged fees for
When Your Customers Usu- 60 days, while they have freed up funds to
ally Pay Your Invoices generate additional fees during the same pe-
riod.

F actoring your accounts receivables in-


volves a significant uncontrollable vari-
able—the usual time period your customers
Whether the factor does this aggressively or
not, depends on the factoring company. How-
ever, it’s not an unknown practice in the in-
take to pay your invoices. As you can see dustry. While good for the factor, a “hard-
from the above examples, the shorter the pe- nosed collections” approach can negatively
riod, the lower your factoring fee. affect, even perhaps ruin your relationship
with your customer.
For example, if your customer customarily
pays your invoices in say, 15 days or 35 days,
This is another good reason to seek a shorter
you don’t want to agree to a “per 30 days
rate”. You will pay lower fees by working “per days rate”, and to check out how your
with a shorter “per days rate”, as outlined proposed factoring company typically han-
above. dles this situation.

Be sure to either calculate your actual rate as


it applies to your situation or seek absolute Mistake #11 – Reserve
clarity about this from your intended factor-
ing company. You will reduce your hassles
Accounts Are Abused
and keep more money in your hands.

R eserve accounts are common to the fac-


toring industry. They serve as a security
Mistake #10 – Not Realizing deposit to protect the factor against incom-
plete or non payment of invoices.
How Aggressively Some
Some factors hold a certain percentage of
Factoring Companies Pursue each invoiced amount in their Special Re-
Account Collection serve Fund for just this purpose.

However, reserve funds are really your

A nother reason to avoid the “per 30 days


rate” is that it gives the factor a finan-
cial incentive to pursue aggressive account
money. But being under the factor’s control,
they are sometimes misused.

Financing Delivered! Quickly with Integrity. Page 6


Copyright © 2008 Stonehenge Capital Group
Therefore, it’s important that you know how serve?
your intended factoring company will handle  And if so, what terms and conditions
your Reserve account. govern how they disburse funds from
the Reserve Account during the rela-
Mistake #7 above outlined the structure of a tionship and at its termination.
factoring fee. The Reserve fund is the re-
maining part to this discussion. Again, carefully read your proposed agree-
ment to understand fully how the Reserve
To review, let’s say the factor advances you account is treated. This will tell you a great
80% of your invoiced amount immediately deal about the business practices of the fac-
upon receiving your invoice. When your cus- toring company, and also possibly save you
tomer clears your invoice, the factor places much grief if the relationship proceeds.
the remaining 20% into the Special Reserve
account. Once the payments clear, the factor Finally, you are better off working with a fac-
subtracts his fee and remits to you the differ- toring company that does not maintain a per-
ence. At least that’s how it can work. manent reserve fund.

However, a factoring company sometimes


insists on maintaining a permanent Reserve
Mistake #12 – Inadequate
account of 5 to 10 percent of your monthly
invoiced amounts. This procedure is good for Reporting Procedures
the factor, but not necessarily for you be-
cause:
 The factor denies you full use of your S ince cash flow, and tracking it, is the life-
blood of any business, you would think
that all factoring companies would be set up
funds.
to provide proper, easily understood reports
 Funds may be extracted from the Per-
on your accounts receivable activities. How-
manent Reserve to pay monthly mini- ever, this is not always the case.
mums.
 The factor may delay returning your Therefore, you really need to check out a fac-
funds upon agreement termination, or toring company’s financial reporting proce-
sometimes only after a struggle. dures and processes to ensure that they will
give you the tracking information you need.
The better deal is to work with a factor that
In any relationship with a factoring company,
remits all of your funds less the agreed fac- you will benefit by having ready access to
toring fee upon invoice clearance. current, easily understood, verifiable finan-
cial reporting about your accounts receivable
We urge you to clarify with your prospective transactions. This allows you to operate your
factoring company: business successfully, while preserving your
peace of mind.
 How they set up a Reserve account?
 Do they require a Permanent Re-

Financing Delivered! Quickly with Integrity. Page 7


Copyright © 2008 Stonehenge Capital Group
Ideally, you want to have 24/7 access to your Your task is to locate one that’s appropriate
account information and to know that your to conduct your due diligence on.
reports are current all the time. In addition,
having a verifiable audit trail is also advanta- As always with financial matters, it’s better
geous. to have a relationship with a financial partner
in place before you really need financing.
This allows you to comfortably and confiden-
tially plan your growth and to avoid a scram-
Mistake #13 – Not Under- ble should an urgent need for financing every
standing Your Agreement aris.

Apart from what is presented above, some


A s you can see from the above, the future
of your business can hinge on how well
you understand the intent and language of the
useful guidelines are:
1. Work with an ethical factoring company
factoring agreement you are considering en- that has a verifiable track record.
tering into. A bad agreement can lead to an 2. Seek and check client references.
overly expensive or truly bad experience that 3. When talking to current or past clients,
could even end up costing you your business, ask them, “Knowing what you now know
as outlined in the examples above. about company X, would you use them
again to factor your invoices?” Then, lis-
Since factoring arrangements differ in their ten carefully to the response.
language and their intent, you want to read
4. Personally talk with the people at the fac-
your proposed contract very, very carefully
toring company who will administer your
and seek clarity from your intended factor
account, and have them confirm the infor-
and even from your legal and accounting ad-
mation the sales staff gave you.
visors.
5. Ensure the factor’s reporting system oper-
ates in real-time via the Internet to give
you current information on your accounts
SUMMARY ACTION LIST
receivables, etc.
6. Ensure that you fully understand how

H aving read this far, you now should


know what major mistakes you can
possibly make when entering into a factoring
each fee is determined to avoid possible
future fee nibbling.
agreement. 7. Read your proposed agreement very,
very carefully and seek clarity on any-
To be sure, ethical factoring companies do thing that you don’t understand.
exist who share your values and morals, and 8. Before signing on the dotted line, be cer-
who see themselves as a valuable partner in tain you really know the deal you are get-
the growth of your business. ting with all of its ramifications.

Financing Delivered! Quickly with Integrity. Page 8


Copyright © 2008 Stonehenge Capital Group
Have you made any of these mistakes? Meet Seann Maxwell

It’s difficult to avoid all errors associated


with factoring—even for business owners
who are experienced in factoring. That’s be-
cause many business owners and executives
simply don’t have the time to process all the
information they need to make a good deci-
sion about the factoring company they decide Seann Maxwell, the principal of
to work with and the terms and conditions Stonehenge Capital Group, is well
they accept. experienced with the various as-
pects of business financing. His
Now that you’ve learned about these 13 Big- experience includes:
 Personally developed sales of
gest Mistakes, your most critical decision
projects, products and services
centers on deciding who will become your
amounting to over $500 mil-
factoring partner.
lion.
 Prepared emerging growth
Stonehenge Capital Group is pleased to pro-
companies for IPOs.
vide you with this white paper. We trust the
 Raised capital for start-up
information contained therein helps you.
companies.
 Developed financing offers in
We know that businesses cannot survive and
excess of $2 billion to support
thrive without the right amount of “green en-
infrastructure projects around
ergy”. Our job is to help you get it.
the world.
 Facilitated commercial real
As a broker, our role is connecting you with
estate loans.
responsible, reliable and ethical financial
 Consulted in marketing and
partners, who will help you sustain and grow
management to over 400 busi-
your business.
nesses in 200 industries.

“Cash flow is the “lifeblood of a business, the You may contact Seann via
single most important measure of your busi- http://stonehengecapital.net or by
ness’s health, and the key ingredient to grow-
ing the value of your business assets. “ email Seann@stonehengecapital.net
The Business Owner’s Playbook or Toll Free to 866-274-8185. He
published by SunTrust Bank
will be pleased to hear from you.

Financing Delivered! Quickly with Integrity. Page 9


Copyright © 2008 Stonehenge Capital Group