Factoring Receivablesan Alternative to Institutional Lending

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Factoring Receivablesan Alternative to
Institutional Lending

• January 10, 2005
• JTM Funding Solutions
• Tom Vyskocil
• www.jtmfundingsolutions.com

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Agenda
JTM Funding Solutions

• Introduction
• History Definition of Factoring
• How Factoring Differs from Bank Financing
• Benefits of Factoring
• Cost of Factoring
• The Factoring Process
• Simple Example
• Common Objections
• Questions
• Next Steps

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A Few Simple Questions
JTM Funding Solutions

• What could you accomplish if all of your
  customers paid you today?
• Have your loan applications ever been turned down
  by your bank?
• Do you already have a line of credit but have
  reached your limit?

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History of Factoring
JTM Funding Solutions

• One of the worlds oldest methods of finance
• Factorings start in America
• The Industrial Revolution
• The early 1900s
• The garment, transportation and furniture
  industries
• Today

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Factoring Statistics
JTM Funding Solutions

• Large institutionally owned factoring companies
• Smaller, independent factoring companies
• Today400 to 500 factoring companies in the U.S.
  alone

• 1976 20 billion
• 1986 40 billion
• 1996 80 billion
• 1998 88 billion
• 2000 98 billion
• 2003 200 billion

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Why Do Companies Factor Their Receivables?

• Growthmany companies experiencing increased
  growth also experience a lack of working capital
  to maintain or accelerate their growth. Working
  capital (cash) is needed to increase production,
  fulfill larger orders, create new markets or
  offer volume discounts to customers.
• Survivalother companies simply need the working
  capital to meet payroll, fulfill purchase orders,
  pay taxes or maintain their credit rating.

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What is Factoring?
JTM Funding Solutions

• The purchase of business to business or business
  to government accounts receivable (invoices) at a
  discount.
• Goods or services must have been already
  delivered/provided and accepted by your customer.
• Factor must be able to perfect a first security
  interest in the receivables factored.

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How Factoring Differs from Bank Financing
JTM Funding Solutions

• Banks make loansfactors purchase receivables
• Banks charge interestfactors discount purchased
  receivables
• Banks require a given level of capital or
  equityfactoring does not
• Banks must consider the amount of assets a
  business has to secure a loan and the period a
  business has been in existencefactoring depends
  on the strength of your customers credit
• Banks set limits to the amount of cash they are
  willing to lendfactoring has no limit, the more
  sales you make, the more you can factoryour
  funding capacity grows as your business grows

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Benefits of Factoring
JTM Funding Solutions

• Factoring stimulates cash flow
• Factoring relies on the strength of your
  customers

• Selling accounts receivable can increase cash
  flow and working capital without the negative
  impact loans have on your balance sheet.
• Because factoring relies on the strength of your
  customers more than the strength of your
  business, it provides a great source of capital
  for start-ups or companies that do not have long
  histories as well as those who simply wish to
  grow their business.

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Benefits of Factoring
JTM Funding Solutions

• Factoring is accessible
• Factoring gets quick results

• Businesses that have not been operating for very
  long or have insufficient hard assets have a
  difficult time qualifying for a bank loan.
  Factoring is open to any business which produces
  invoices.
• Qualifying for bank loans can take
  monthsfactoring can raise your level of
  available funds usually within 7-10 business days.

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Benefits of Factoring
JTM Funding Solutions

• Factoring is flexible
• There are rarely any penalties

• Your business is not required to factor invoices
  from all customers, only those which will provide
  the funds you need.
• When ending the factoring relationship, there are
  rarely lump sum payments required or penalties
  assessed.

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Benefits of Factoring
JTM Funding Solutions

• Factors offer help with accounts receivable
  administration

• You have a choice to maintain control of your
  accounts receivable or hand it over to the factor
  to maintain. Many times the factor can provide
  better management reports, credit information,
  etc. than what is currently generated in-house.

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What Factoring Provides
An opportunity to

• Make discount purchases
• Meet payroll obligations timely
• Increase advertising budget
• Purchase new equipment
• Add personnel to help build business
• Make new acquisitions for expansion

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Cost of Factoring
JTM Funding Solutions

• Sample Discount
• Rate
• 3
• 4
• 5
• 6

• Length of Time
• For Invoice Payment
• 0-30 Days
• 31-40 Days
• 41-50 Days
• 51-60 Days

The rates above are also dependent on the credit
quality of the accounts purchased, plus there is
a one-time due diligence fee that averages
between 250-500.
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The Factoring Process

• You submit an initial application, a copy of your
  most current A/R aging report and a copy of your
  Articles of Incorporation or DBA filing
• When your application is accepted, the factor
  will contact you and ask for additional
  information that varies between factors (the most
  common are complete list of customers with
  addresses and phone numbers, corporate financial
  statement, most recent bank statement, proof of
  payment of payroll taxes, detailed description of
  what company does, personal financial statement).
  This is only done once when initially factoring
• At this time, the due diligence fee will be due
  and payable to the factor
• If everything is in order, the factor forwards
  70-90 of the face amount of the receivables you
  wish to fund (7-10 business days when first
  factoring)
• As the factor collects on the receivables, they
  remit the remainder of the invoice amount less
  their fee (the discount)
• After this, you are free to submit additional
  invoices for factoring in which cash is usually
  received by your company within 24-48 hours

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Invoice Funding Example
Invoice submitted for funding and
verified 1,000 First Payment
(advance) (700) Customer pays in 30
days 1,000 Fee for 30 days (assume 3)
(30) Advance already paid (700) Balance due
client 270 (270) Total Amount Received for
Invoice 970
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Simple Example of PL Impact
JTM Funding Solutions
1Cost of goods sold computed at 60 of sales
2Overhead is 35 of gross revenue without
factoring but reduced to 22 with factoring
(assumes that accounts receivable collections now
handled by factor) 3Factoring fee assumed to be
3 of increased sales (fees normally average
between 3-6)
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Recourse or Non-recourse?

• Recourse factorsif a receivable becomes
  uncollectible you must pay the factor or
  substitute another invoice of like amount
• Non-recourse factorsfactor assumes total
  responsibility for collection of all receivables
  factored, but usually requires some form of
  credit insurance from you

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Common Objections

• It costs too much
• Why must I pay a due diligence fee?

• Consider the internal cost savings, sales
  increment, added supplier discounts
• UCC filings, credit checks, document review,
  factor cost usually exceeds fee

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Common Objections

• I dont want my customers have to know I am
  selling their invoices
• How will I know what invoices are paid, I do not
  want to lose control

• Preference not to borrow, improved service, keeps
  costs under control
• Factors provide detailed management reports,
  early warning system on customer credit ratings

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Common Objections

• We already have bank financing
• Factoring is only for fast growth companies

• Receiving adequate funding, bank restrictions,
  possible to subordinate bank liens
• Run the numbers first, consider cost savings

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Questions

• If you think of any questions after todays
  presentation, please feel free to email me at
• jtmfunding_at_ameritech.net or call
  708-387-9261

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Your Next Steps
JTM Funding Solutions

• Determine what your working capital needs are
• Determine whether factoring is your best choice
• Submit an application to a factor
• Receive your cashgrow your business
• Continually reassess your working capital needs

Call or contact me Tom Vyskocil, President, JTM
Funding Solutions jtmfunding_at_ameritech.net (708)
387-9261