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1M/1M: Receivables Financing

Posted on Friday, Apr 2nd 2010

My Forbes column today is Financial Instruments To End The Recession. It addresses two key issues that we have been discussing recently: working capital financing and receivables financing.

In this discussion, I invite comments from the receivables financing world on how you see the risks and returns of receivables financing. What checks and balances do/should you put in to prevent fraud, and an implosion like the mortgage industry.

I am also interested in hearing from entrepreneurs who have been successfully using receivables financing to bootstrap their companies.

As always, I will synthesize, and do a follow-up piece for Forbes once we’ve collected our thoughts and debated and discussed them here.

This segment is a part in the series : 1M/1M


. An Interview With Wayne Hurlbert
. Ambassador Program
. Ambassadors Finalized
. Internships
. Does It Need A Bank?
. Receivables Financing
. Entrepreneurs, What Do You Need?
. Entrepreneur Grant Harris On CNN
. Facebook Cause
. Need Twitter Help
. Rural America's Outsourcing Potential
. Local E-business Joins Global Effort To Boost Economy
. Oct 6 Video Conference
. Alternative Financing For Startups Using A Sales Channel Partner
. A Policy Suggestion To President Obama
. How We Differ From YCombinator
. VCs, Angels, Incubators, Accelerators - What Are You Doing With Your Rejects?
. VCs, Angels, Incubators, Accelerators - What WE Do With Your Rejects
. Outsourcing Module Of The Curriculum Is Ready
. Cloud Computing Module Of The Curriculum Is Ready
. Web 3.0 & E-Commerce Module Of The Curriculum Is Ready
. Vision India 2020 Module Of The Curriculum Is Ready
. Mobile and Social Apps Module Of The Curriculum Is Ready
. Healthcare IT Module Of The Curriculum Is Ready
. Online Education Module Of The Curriculum Is Ready
. The Entrepreneurship Curriculum
. How We Will Interface With AngelList
. Video Message Based On Recent Talks
. Affiliate Network For Entrepreneurship Blogs
. Corporate Sponsors, Affiliates, Incubators - Business Models for Partnerships
. OrangeScape Wins TiE50
. Message To Incubators
. Self-Assessment Tool
. Premium Member FreshDesk Wins Microsoft India Startup Challenge
. Kimbra Studios, Littleton, Colorado
. Partnership Overview
. Insane Logic, United Kingdom
. MMIS, Portsmouth, New Hampshire
. Zuznow, Israel
. Live Well! Philadelphia, Pennsylvania

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I invited Terry Jaramillo, Managing Director or
Capital Interfunding, in Miami, Florida, to comment here. Accounts receivable funding and asset-based lending are some his firm’s specialties.

Irina Patterson Friday, April 2, 2010 at 2:58 PM PT

Sramana,

I’m honored by the mention, thank YOU, and hope this helps bring some new things to the surface in the financing arena !!!

I too will see if I can’t get some contributors to the table to share their views.

Sincerely with the best regards,
David Bookout

EFFETTI Friday, April 2, 2010 at 4:46 PM PT

Receivables financing is often made inefficient ,expensive and complex by the layers of brokers and ‘middle men’ . When you consider the typical remittance term of 48 days, or as much as 180 days there is considerable scope for leveraging the power of the internet to create online exchanges that bring funders and businesses together in a trusted and secure environment. Clearly there are a number of security measures and due diligence that has to be integrated into an exchange but this can be easily achieved.

Justin Floyd Sunday, April 4, 2010 at 8:55 AM PT

Please explore A/R insurance. Banks may be willing to lend if the A/R is insured in case of customer default.

HM Sunday, April 4, 2010 at 9:01 AM PT

Something to remember and for many “new” entrepreneurs out there, your business has many assets to use as collateral when seeking financing, such as physical items, maybe your building, equipment, items you stock, key employees, your customers and your credit functions. Many business owners don’t look at their credit functions as an asset, but your credit functions are one of the most important assets your business has.

Assets are economic resources owned by a business. Anything tangible or intangible that your business owns is an asset, assets are things of value that can be easily converted into cash and cash is considered an asset.

To seek financing from a bank using your receivables be sure to have documentation to back it up. Signed contracts or agreements from the client, existing PO’s and/or payments on past orders. Having customers that have agreed to monthly orders that will add stability to your receivables or business helps the bank with their decision and shows you will have incoming orders and payments available to pay them back.

In my experience it is also very helpful to have a set credit policy in place to show the financier how and when you get paid and what steps you take when someone becomes past due or doesn’t pay.

Michelle Dunn Monday, April 5, 2010 at 6:37 AM PT

My company offers receivables funding, but what sets us apart is that we offer to help the business owner restructure their finances so that they are not stuck in a cycle that they can never get out of.

Factoring can be a great solution to a cash flow problem, but without a recovery plan, it could become a permanent solution where the business owner is simply keeping less of their earned money because they get stuck on the “hamster wheel” of factoring. A better approach is to work on the cash flow problem by finding ways to reduce costs as well as employ the “Infinite Banking Concept” which allows the business owner to create a “bank” from which they can borrow and pay themselves back with interest. This is accomplished by leveraging specific insurance products.

Anthony Kirlew Monday, April 5, 2010 at 8:33 AM PT

Anthony, Do you fund seed / pre-seed stage entrepreneurs? If yes, how do you decide on whom to finance?

Sramana Mitra Monday, April 5, 2010 at 8:55 AM PT

Accounts Receivable Financing was created centuries ago by the rich and for the rich, as they understand in order to start, grow and survive any economy you must have a short term cash flow solution that doesn’t create a debt.

Name one company that has filed bankruptcy because they weren’t in debt?

Now name a company that went bankrupt within the past 12 months?

There were close to a 100,000 companies big and small last year that filed and we are on pace this year to having over a 100,000 more companies file bankruptcy.

For the past 30 plus years our entire system has been educating people and leading people to believe the way in which to start and build lasting wealth and prosperity is by using a debt creation system that always has been and always will be a failed system.

From banks, lawyers, to accountants, CEO’s and boards and VCs they are all big time supporters of this create a debt system for a reason as they have been raking the small business to midsize companies over the coals for decades.

The way to get off of this debt addiction system is to become educated in how to use accounts receivable financing and use the proven solution that has out lasted every debt creation system ever invented.

One of the biggest untruths or misinformation surrounding accounts receivable financing is ths…people believe it is expensive.

Putting to rest this untruth!

Let’s look at credit cards, the interest rates are now over 20% and climbing and yet we do not see a huge outcry calling them Loan Sharks and yet often we will hear that accounts receivable financing costs are close to if not a form of loan sharking.

Accounts receivable financing in general for a start-up will cost 3% per invoice on the traditional 30 day term.

Example take a $100 invoice that is paid within in the 30 day term. The cost of that invoice is $3.00

Once that invoice is paid that is it, no long term interest rates apply and the actual cost is only $3.00!

Go to any ATM machine that is not connected to your bank and you will be charged a $2.00 or more service fee just to withdraw your own money.

So to say accounts receivable financing is expensive is just not true.

There are two areas though that can raise the costs of this form of financing, such as added on services and slow paying clients.

When your client goes beyond the 30 days it does become more costly the longer your client goes out from the 30 day terms.

A good accounts receivable financing company will do a credit check on your client before you take on that client to help you avoid on taking on slow paying clients that will drive the costs of a/r financing up.

Remember there are two reasons why a client is a slow paying client, they either have cash flow problems, or the client is super big and believe they can get away with not paying a smaller company on time because they know that they can get away with it.

Why accounts receivable financing should be considered and used by start-ups?

Start-ups begin with zero credit and thus it makes it difficult to get financing in any shape or form. With accounts receivable financing it is not based on the credit of a start-up and is based on the clients credit of the start-up. This form of financing allows a start-up with zero credit to quickly establish and build their credit rating because as each invoice that gets paid it boosts the credit of the start-up.

As for the down side of accounts receivable financing people become addicted to having the liquidity and positive cash flow.

One other down side is the business or company must use a B2B (budiness to business) model and cannot be applied to a B2C (business to consumer) model.

If you would like to contact me and learn more about making the case of why accounts receivable financing is the solution to this recession you can contact me at 978-266-1562

Sharon Evans
Founder Trillion Dollar Funding
No Debt Financing Solutions Your Company Can Bank On!

Sharon Evans Monday, April 5, 2010 at 11:35 AM PT

We were able to get a line of credit based on A/R by using A/R insurance. We were able to overcome the customer concerntration issue as well since the bank knew they would be paid by the insurance company in case of customer default.

HM Monday, April 5, 2010 at 12:07 PM PT

HM, Pls tell us more about A/R Insurance. Who are the providers, how does it work, etc. so that our entrepreneurs can leverage this instrument.

I know we have many entrepreneurs who need the A/R financing solution.

Sramana Mitra Monday, April 5, 2010 at 12:19 PM PT

Sramana,

We don’t personally fund start ups, but we do give them the resources to obtain business credit. Resources that most entrepreneurs are not aware of. This can give them the ability to use & establish business credit as opposed to personal credit. It will generally take the companies a few months to establish this credit so it is not a solution for immediate financial needs.

For accounts receivables financing (lending), the business has to be established and have clients that are established as well to ensure the investors that they will get paid for the notes (invoices) that they are purchasing.

If you would like to discuss having me write about these topics for your audience, I would be happy to. As an entrepreneur myself, I am passionate about seeing small business owners succeed.

Anthony

Anthony Kirlew Monday, April 5, 2010 at 2:19 PM PT

There are several companies that offer A/R insurance. We used a company called Euler Hermes.

We started the company in 2000 and in 2001 had one customer representing 30% of our sales. We used the A/R insurance to give the bank the comfort to establish a line of credit. Initially the insurance program was just to mitigate the customer concentration issue. The cost of insuring was about .50% of the sales value each year. The bank allowed us 85% advance rate for insured customers. The interest rate on the overall line of credit was prime+.50% since the risk for the bank was much lower than factoring. Over the years, we used the A/R insurance for all customers ranging from $10,000 in sales per year to over $1 million.

The A/R insurance not only helped the bank but also allowed us to have a peace of mind in case any of the customers defaulted. The insurance covered 90% of the value of the invoice with $2,500 deductible per customer. With the economic crisis many of the customers that were previously insured were no longer covered by the insurance plan. I would use the A/R insurance again for personal peace of mind even without a lending facility.

I hope this helps and happy to answer any other questions regarding this program!

HM Monday, April 5, 2010 at 4:02 PM PT

So if the customer who represented 30% of your sales defaulted, then the insurance company would pay the defaulted amount against invoices? Is that what the deal is?

Also, can you tell us more about your company, please? How big is it? What do you do? Are you still in business? Still using A/R insurance?

Sramana Mitra Monday, April 5, 2010 at 4:16 PM PT

As a Certified Master Turnaround Consultant as well as a Certified Master Financial Consultant any business that services another business should engage in receivable financing.

With 28 years of experience in saving companies, receivable financing was always one of my fondest applications in turning businesses around.

First, it gave my clients the cash flow needed to paying bills, secondly it laid a foundation for us to grow without being held back by limited bank lines, third it got us out of any current and future debt, fourth we used the cash flow to create other streams of income (such as turning payables into income streams as well as turning financing into an income stream too), fifth we simplified taxing & accounting measures, six it offered self-discipline in the payouts that the client never had, seventh the receivables were insured by the funding source, eigth our funding source did all of our credit checks, ninth every receivable financed and completed improved the client’s credit rating, tenth our clients always maintained full autonomy of business ownership & management rights, eleventh our top-rated funding sources always protected the sovereignty of our clients, twelth our funding sources were always there to offer other needed services such as: PO funding, inventory funding, equipment funding, commercial loans, do I need to go on?

In essence, accounts receivable financing is a “NO DEBT” solution that offers a cash flow solution that no other tradional institution including government loans: can’t do, won’t do, refuse to do and never even thought to do.

Accounts receivable financing when done by the right company offers mega saftey nets that others can’t afford to do. In the 28 years in helping my clients to engage in such practices, I have accummulated the best in the business!!! (Oh by the way, are you aware that Forbes is affiliated with a company that does receivable financing?).

As for cost; because of the saftey measures and my expertise to showing my clients that “CASH IS KING” accounts receivable financing usually ends up becoming an income stream and really is: ” A ZERO BASED-COST PROJECT”.

Another thing to think about. How can you even measure the impact of accounts receivable financing when you are able to grow and expand sales exponentially when tradionial financing kept that from happening? The cost of “TRADITIONAL NO GROWTH” far exceeds what receivable financing can offer.

One more thing to think about. Any company who is growing under any financial economic climate that is “DEBT FREE” what do you think the net worth of that company is? Maybe 1.5 to 2 times its net sales or maybe more?

Before I leave you think of this: If you had an unlimited amount of money you can use to grow your business and it didn’t create one dime of debt, how fast and how far do you think you can grow your business?

Just a perspective from an expert who knows the value of receivable financing and the impact it has on a business, an industry, a city, municipality, county, state, country and you. Privatized receivable financing is the true stimulus package that doesn’t cost one dime of tax payers money…THANK YOU!!!

Kevin S. Pappert Monday, April 5, 2010 at 4:55 PM PT

Kevin,

As someone who provides these services, I have to disagree with this statement of yours “any business that services another business should engage in receivable financing”. Perhaps you meant to add a qualifier (such as if they have cash flow issues), or perhaps you really mean it, but if a company has developed solid business relationships and has performing (paying) accounts, what is the advantage to giving up the money the factoring company would require?

Anthony Kirlew Monday, April 5, 2010 at 5:42 PM PT

Correct, insurance would pay in case of default by any of the covered customers.

Real case – a customer with about $38,000 in invoices went bankrupt and we simply turned over the invoices to the insurance company and received a check for about $35,000 after their deductions. Since we had already borrowed against that invoice, we used the funds to pay down the line of credit. It took about 4 months but the bank knew they were going to collect from the insurance company at some point.

We are in the home furnishings business. Still in business but moved from wholesale which required offering terms to retail which does not. Thanks!

HM Monday, April 5, 2010 at 6:47 PM PT

Anthony,

It is obvious you’ve never rubbed elbows with the upper 5% elite who use receivable financing religiously as a stepping stone to prosperity & wealth building techniques.

Not only do they keep themselve liquid, but they use receivable financing as a wealth building system to create additional income streams in payables and financing opportunities.

What you believe Anthony is that receivable financing is only for those companies in financial destitude. This again is another myth and failed policy of losers and I MUST PROTEST SUCH THOUGHTS!!! To insist or instill that receivable financing is for companies in hardship or losers is a slap in the face for those needing help and those willing to provide it.

Sure there are companies out there stuggling to make ends meat but they are entitled to the knowledge and action plans that make bad companies good, good companies great, and great companies industry leaders. Everything I offer to any company no matter who they are.

The wealthy get wealthy and stay that way because they know the secrets of feeding money more money with results in that it craps money.

First of Anthony the rich recognize a receivable as a debt. Once a receivable is created you are in debt to a customer who owes you money for goods and/or services rendured. That customer has used your assets and is forcing you to carry them on the books as a debt for a period of time “INTEREST FREE”.

Instead of reinventing the wheel, the wealthy use receivable financing as an add-on cost to doing business and pass that cost on to their clients. Quite ingenious I must say. Benjamin Franklin as rich as he was used receivable financing to staying liquid.

What I do is install the idealism’s of the wealthy and apply them to those not as fortunate. The results are: my clients are able to join the ranks of the 5% elite.

Building wealth is a mindset not a debate. If you truely worked for a reputable funding source who funded companies throughout the entire financial spectrum Anthony, you would fully understand how OFF-BALANCE SHEET FINANCING really works. I am one of those experts who truely understands the miracles of Off-Balance Sheet Financing and how it builds wealth to any kind of b2b entity.

So back to your orginal question Anthony, what do they give up? Absolutely nothing….the client gains in new revenue streams, eliminates another debt, avoids other debts, avoids carrying clients at zero percent interest, has more cash flow to build more clients, is in better position to grow through Mergers & Acquisitions over anybody else, they stay constantly liquid, company value continues to grow, they beat up the competition more readily and I’m just getting warmed up.

In other words, receivable financing is for any business who services other businesses and offer terms 90 days or less no matter where you’re at in the financial spectrum of business.

If you truely want to expand without going into further debt or eliminate debt all together, look at receivable financing as your choice, NO MATTER HOW LARGE YOU ARE!!!

Kevin S. Pappert Monday, April 5, 2010 at 9:46 PM PT

Accounts Receivable Financing and Factoring are different “animals” entirely. In the case of true A/R financing, say from a bank or commercial finance company (“Secured Lender”), the Secured Lender places a lien on the borrower’s accounts receivable, at a minimum. True asset-based lenders, and I was formerly Head of Asset-Based Financed in Florida for CITIBANK, N.A. in a former life, will tend to take a lien on the A/Rs, inventory and proceeds thereof as evidenced by a UCC-1 filing in the appropriate jurisdiction. The facility has a “set” amount as a maximum advance, a maximum advance percentage, e.g., 75%-80% if eligible receivables and 50% of inventory; and is typically governed by a “borrowing base certificate” signed by an officer of the borrower. The accounts receivable and inventory remain on the books of the borrower as an asset, and advances are books as loans or liabilities.

True Factoring, however, is a bit different. The factoring company (“Factor”) will “buy” the entire amount of the receivable, but will only “advance” so much, say 80%. The obligor, or the compay’s customer, will be advised that the obligation now belongs to the Factor and that funds should be remitted directly to them. The entire receivable is removed from the books of the company and is now an asset of the Factor, unlike in the case of A/R financing.

The “friendly” Factor (that’s an oxymoron ;-) may actually assign a credit limited to your individual customers/obligors when providing their own form of credit insurance. This is similar to that available from Euler Hermes, f/k/a American Credit Indemnity, COFACE, etc. The obligor will pay the Factor the face amount of the invoice, reimburse itself for any advance plus an agreed upon commission (1%-4%), then remit the balance to the company, completing the transaction.

The nice feature of factoring is the normal lack of an overall limit on the amount of invoices factored, unlike a bank or commercial finance company which has established a line of credit. This provides the flexibility for a company to grow without constantly going back for line increases. Bankers simply do not like it when you come back and have the audacity to ask for an increase six months after your last approval. How dare you grow your business like that, or something like that. The drawback – it is more expensive, but worth it.

E. Terry Jaramillo Monday, April 12, 2010 at 10:00 AM PT

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