Whether factoring invoices or offering a signature loan, funders and lenders – as well as you as a buyer of goods and services – should do some homework or be prepared for a rude awakening if things aren’t in good order with whom you do business with.

IMAGINE THIS ONE … You buy that new Ipod or the like and a few days later the police knock on the door and demand it back because it was from a shipment that was stolen … or someone registered a judgement against the store that sold it … or the IRS decided to liquidate the seller.

“They can’t do that!” you say? Actually they can and often times go back as long as 90 days after the actual transaction was executed …

Long since do I remember the supplier of a $40K (+) copying machine that sold it to a company having 941 issues and two months later the IRS put their foot down and unraveled the transaction and he had to take back the machine and give back the $40K so that IRS could take it. Oh … one other thing: He couldn’t send the machine back to his supplier and had to eat it. It happens …

The point herein? Did you ever give thought to whether what you buy is free and clear of encumbrances and that nothing will disrupt the transaction further down the road? For the most part I don’t … not unless I’m buying an invoice or lending.

That said: Learn from what invoice factors and lenders ask what they do and do so in an ongoing manner i.e. they need to ensure that the invoice and collateral is real, not pledged to someone else, and not in jeopardy of a third party swooping in and causing a problem. You too should be aware of this during these times or that “deal” may not be such a deal after all. It seems like it’s a pain but the reality is that this awareness actually makes you a better and more secure business … tough though it may seem at times.

Did you ever give thought as to why banks go to the lengths they do to ensure your assets and records are in good order before they will lend you money … and then race to the courthouse to register their UCC’s and/or liens? There’s a reason for it …

Along that line? I recently came across a borrower who had a lender they walked away from for millions because the lender had not secured themselves properly … and it was 100% legal.

Why do we ask what we do, when we buy invoices, and ask what we do about invoices when we buy them and shudder when we look at what companies such as the Receivables Exchange do? It’s simple: We don’t want to “get the invoice home” and hear a knock at the door because something is wrong such as the invoice isn’t real and/or the customer didn’t get the product they were promised. Face it: Factoring Fraud is a big problem!

That said: If you ever consider buying an invoice? Make sure …

■The invoice is free and clear of all encumbrances
■There are no covenants governing it
■Whom you are buying the invoice from has no liens, encumbrances, and/or whose assets are not controlled by an agreement and/or covenant
Why do lenders ask what they ask? They need to do all that they can to ensure that the payment stream a borrower says they have is free and clear i.e. are their 941′s and/or other obligations paid etc.?

This is why …

■Factors only buy invoices for work that is completed and can be shown to be complete … oh: And why they contact your customer!
■Invoices must be free of liens and not being used as collateral for other loans and/or cash advances
■The company must have their 941′s (Payroll trust money) in good standing as well as their taxes filed
■The company must be registered in good standing with their respective state
■If a companie’s net worth is negative and there are large payables these must be worked through
The same should apply for all lenders … as well as companies transacting business with other companies … and not just funders! To boot: Keep this in mind if you are buying something from a distressed company or you could lose your money and the property!

Seem unreasonable? It’s not … asking the questions that most of us take for granted and probably shouldn’t can keep us from owning that infamous bridge in Brooklyn!

Yours in business … and the best to you and yours in Health, Happiness, and Prosperity!

Ernie

A necessary ‘evil’ in all contracts are called COVENANTS. These little devils, sometimes inserted in a seemingly harmless manner, can have the teeth of a piranha and the aggression of a female bear protecting her cubs.

Many a borrower can tell you about these if they’ve violated them … so what is to be done? As negative as these sound the reality is that covenants create warning signs and/or limits as indicators that a borrower/client’s financial position is changing and whose intention is to allow the lender/funder to begin corrective action early on … if they choose to. Sadly … a lender/funder can also come down hard on their client if they choose to.

Covenants are also put in there to ensure that a borrower doesn’t run amock and jeopardize being able to pay back a lender/funder … but some will say that they are there to entrap a borrower and nothing less!

Most of us are familiar with what credit card covenants i.e. if you pay a few days late or a day late twice in six months and your rate can go from 9% to 29% … plus late fees. These are covenants … therefore …

RULE NO. 1: NEVER SIGN A CONTRACT WITHOUT READING IT AND UNDERSTANDING IT!

RULE NO. 2: MANY THINGS IN A CONTRACT ARE NEGOTIABLE UNLESS IT JEOPARDIZES THE FUNDER’S OR LENDER’S COLLATERAL POSITION. REMEMBER: THEY WITH THE GOLD MAKE THE RULES …

RULE NO. 3: IF YOU DON’T ASK YOU WON’T GET … AND WHAT YOU DON’T KNOW CAN – OR MIGHT – HURT YOU.

That said we offer invoice factoring so I asked the owners of the company I was working with what they had learned thus far.  They had a minimal handle on the process as in only what they had been told … so I referred them to some materials and information so they could educate themselves fully. Why? The success of their company depends on this … and then came their feedback … and perceptions … and where the confusion was coming from.

Terms such as …

• Advance Rates … were these guaranteed or conditional?
• Concentration Limits … was any one customer too powerful?
• Return of Reserves … what was the obligation of the funder to send monies back when an invoice was paid?
• Late payment schedule … were there penalties if a customer paid late?
• And others …

were in all of the contracts but described differently and even appeared multiple times … so what does one do? Read carefully … and get it explained to your satisfaction!!!

The contract ? In reality a contract should be simple in format and easy to read so that most anyone can comprehend what it says or doesn’t say. It should also have things flow together so that you don’t have to chase information in several parts of the contract either. If it’s more complicated than that the odds are someone is trying to hide something so buyer beware! This is never to say that there won’t be a few terms or conditions that need to be clarified but it does mean that a document should not be written in a way that is confusing, misleading, or worst of all: Hiding something!

A good guideline is that anything in a contract that pertains to collateral, timeliness of payments, and/or process is a great opportunity for a covenant to tie back to it. In executing any agreement ensure that … 

• The operating relationship is clearly defined as in “Here is what we’ll do and here is what you are going to do until we (the lender/funder) are paid back” … Works for me!
• If the borrower gets cute (I use this terminology vs. saying: INTENTIONALLY VIOLATES THE TERMS OF THE AGREEMENT as in tries to cheat the lender/funder etc.) the contract should spell out what the lender/funder can and/or cannot do to protect their position.
• If something changes with the financial status of the borrower/client the actions and/or limits of the actions a lender/funder can make needs to be clearly stated.
• A lender/funder should be happy, if not proud, to go over the terms of their agreements … and if they aren’t then our advice is to watch out!

In closing: Remember that your business depends on you making the right decision and the devil may be in the details but make sure you understand what you are signing and if not make sure it’s explained thoroughly!

My best to you in Health, Happiness, and Prosperity!

Ernie Brown    Ph: 1-978-256-8634

www.finance-manager.com

You can if you’ve been in business quite a while and have a credit line … but that’s not for everyone now is it?

I compare receivables often times to the life of a butterfly:

• The egg to caterpillar stage is the work part
• Then we wrap it up in an invoice and get to the crysallis stage
• Now we wait for the butterfly to appear … but until it appears we haven’t got much AND there is no guarantee that that butterfly is going to appear either!

Let’s get back to the business thing: When does the cash “emerge” from the invoice?

Imagine this: You’re going to have to declare a profit to the IRS and yet you can’t pay your taxes because all you have is receivables … and your real money is tied up in them.

How about this one: You’re going to get paid by your customer in 45 days BUT you have to pay your staff and employees in 14 days and your suppliers in 30 otherwise your employees will quit and in addition to paying a service fee and interest your supplier is going to put you on COD … BUT!!! … we have receivables … good old receivables!!!

Readers: Let’s strike a balance here … Receivables are necessary thing and they are a good thing BUT we need to have a handle on how we get to the “CASH STATE” of being.

How do we do this if we have weak collateral? Marginal Credit? Minimal operating history … OOPS: These sound like those nasty questions the banks ask now don’t they? Reality: This is where we want to be going … The Bank!!!

Meanwhile:

• How do we get to become bankable when we can’t borrow?
• How do we fill orders when we only have receivables?
• How do we pay our employees when we only have receivables?
• How do we grow and take on larger customers when all we can do is generate receivables?

NO BRAINER … Eliminate offering open terms with your customers (they’ll love that now won’t they?) and go Cash On Delivery … or find a source to convert our receivables to cash until we’re big enough to go into an asset based loan or until we have enough history to become bankable.

Most importantly: The sooner a business owner admits that this is the best way the sooner they can stop turning away business and stop impacting their profits.

Why wait? All business owners search for the lowest cost of funds … and well they should … but why not sustain your growth until you find it? Invoice factoring is flexible as in you can opt in and out of agreements with relative ease … promise!

That said: Why not show growth and sales successes vs. sitting there like  a lump of mud hoping the rains don’t come along and wash you away? I can’t figure it out … but I see it at least once a week.

Think on these things … and may your monies come to you on welcome wings!

Factors love account receivables - but so do collection companies. Asset based lenders are all over the place with them and banks can be anywhere from warm to ice cold … so why is there a difference in perception?

Account Receivable as an asset: When are accounts receivables a desired asset?

• Account Receivables - backed by an invoice - must clearly define a completed transaction
• The invoice must clearly define payment terms … and collection terms if the buyer doesn’t pay
• Smartly: The invoice is backed by a purchase order that is signed by the buyer of the goods and services

Anything else?

• A buyer/receiver of goods must be happy with the goods and acknowledges receipt of the goods
• A buyer/receiver of the goods must be able to pay for the goods

Account Receivable as a liability: What makes an account receivable a liability?

• If, when you create an account receivable, you have taken on debt or obligations that you will have to pay in the future – it can be a liability. How about vendors? Payroll? Shipping? Installation?Utilities? Etc.
• If problems with the product/service delivery may motivate the customer to hold back payment or force you to incur additional costs
• If the customer cannot pay or has incurred an event to keep them from paying … whose holding the bag now?

So … how do we make sure that an account receivable is an asset  and not a liability so we don’t end up like our pennilless buddy here? 

• Clearly define purchase orders/contracts
• Ensure products and services were received and customers are happy
• Credit check your customers … even the “old reliable” ones
• Watch for changes in customer payment habits …
• Maintain solid quality control … and know your product intimately

What do companies do that create account receivable and incur a liability … ?

• Poor documentation of sales and/or terms of sales
• Selling to anyone that wants to buy with no credit checks
• Not following up sales or ensuring quality control

Why do factors love account receivable that fit the ‘asset’ definition? They are great collateral and they’ll capitalize your company if they are good.

Why do factors pall at the thought of accepting account receivable that fall into the ‘liability’ definition? They know the odds are that these will end up in collection.

My questions to you:

• Why should you set yourself up to receive sixty or seventy cents on the dollar for a slow paying account receivable when you can get full value because you didn’t do that little extra?
• Why should you risk your business for the sake of selling to someone that won’t pay you?
• Why would you not document your dealings or provide good quality control with your customers?

Why do I write this? I consult with companies on how to factor nationwide and the above principles are what helps small companies grow if they are followed and sometimes bring large companies come to their knees if they don’t. That said here are “Ten questions you should ask about factoring” if ever you’re considering factoring or call me @ 1-877-813-2923 and let’s talk.

That said one of my favorite questions to ask some business owners I meet? “Why are you investing in your own demise?”

Sound harsh? It’s not as harsh as someone losing their business … or worse!

Take a step back and look at how you’re doing business and then be smart and build your company on assets using practices that keep them from becoming liabilities … because we all know where the wrong road will lead you!

That said here are five practices or habits that can help you to qualify for financing so let’s prepare you … and help you join the ranks of the smart business owners vs. being a victim of your own undoing – or lack there of.

No. 1: Organization and Documentation … If you don’t have good records you’re a disaster looking for a place to go. Lenders don’t want surprises and in fact you can be a weak borrower but if you have your paper trail together a good lender can often times figure out a way to help you because: There should be no surprises.

No. 2: Control and Direction … This shows that you are a solid manager and that you know where your ship is headed and can explain it. When a lender has confidence in an owner they’ll fight to help them but if you can’t show this you’re at your own mercy – end!

No. 3: Cash Flow and Account Balances … If Cash Flow is the life blood of business then second to that are our Bank Account Balances. These should always be kept as high as possible. If you can’t do it without help then get it because it will save you a bundle in the end. Of note: Lenders (banks, leasing companies, suppliers etc.) as a rule of thumb like to see three times the amount that a monthly payment is going to be to them as an average daily balance … Why? It shows that you can pay them if you borrow from them. Of note: A suggestion is to use an invoice factoring service to fill in these gaps as well as to take on more business and not miss out on sales as this will pay off and then some in the long run! Face it: We all want to borrow “cheap money” but not all of us are willing to do the work and/or pay the price to access it … but it is hard work that pays off handsomely!

No. 4: Collections and Credit Extensions … If you are selling to slow paying customers and can’t explain it and/or can’t show that you are in control and going to get paid lenders will all but run from you. All too often business owners literally “sell to anyone that will buy” and this is dangerous. Think about what you are doing here because you are vulnerable beyond belief. Of note: In No. 3 it was suggested to consider using a factor to fill in the voids? FYI They’ll also do your credit work too and in many situations insure your accounts receivables. See ‘Ten Questions you should ask about factoring’ for more!

No. 5: Paydex Scores and Business Ratings … Know what these are and fight to pay your bills on time both for your business as well as yourself. If you are going to have to slow pay call your creditors as they are less harsh on you if you are showing that you are committed to communicating. Of note: If you can’t protect both credit bases (and no one here is recommending that you let your personal or business credit score slip to protect the other) you might actually consider as a strategy that you at least protect one and get that as high as you can. The best way of course is putting mechanisms in place to protect your cash flow and keep yourself solvent with that bank account balances as high as you can keep them.

Too tough to handle?

All so many times when I talk to someone on this very subject and they look me in the eye they’ll say “I can’t afford to do this” but once we talk and they think about it they’ll almost always agree “I can’t afford NOT to do this” and move forward.

That said we’d love to hear your thoughts!

Ernie Brown www.finance-manager.com Phone: 1-978-256-8634

Working Capital for Small Business needs to be organized whenever a company has evolved on a shoestring and the owner has “patched” their business capitalization needs together using anything they can get their hands on.

In saying this we also need to respect that this happens more often out of necessity than choice … but it happens every day and it will keep happening!

FIRST: My hat is off to these entrepeneurs! They are the true spirit and driver of our national economy and when I get to meet them I often times sit in awe of them as they tell me how they ‘put it together.’

SECOND: Nothing will make a loan officer’s eyes roll in two directions at the same time than when they hear the following:

• “I am not sure where my records are.”
• “My business money is mixed with personal money.”
• “I really didn’t keep any records.”

Face it: It’s not easy being human but some of us have to do it … Right? Think your bsuiness capitalization out carefully or like our friend here you will “finance’ your way into a corner!

Best off? If you are selling via open invoice terms you have a lot of choices to find a way out so why not use it? Selling accounts reeivable is a simple solution that let’s you run your company almost on a COD status: So why not use it?

One of the great factoring questions we get asked is “What are the value added outcomes of factoring?” and one of the benefits of the factoring process is sorting out records regaring how a business is capitalized.

A second value added is that often times credit card loans and/or small unsecured loans either get paid off or at least the payments get made on time. Worth while? Paying on time and reducing debt are two things banks love to see so this is definitely a good move!

Want more? Give me a call @ 1-978-256-8634 or contact me via this blog. I have clients nationwide that i have helped capitalize their business and become bankable and if i can help you I’d be happy to!

The term “debtor factoring” refers to your selling accounts receivable of companies that bought your product and in so doing are obligated to pay you … and in no short terms: They are now a debtor to your company. This is not a negative and face it we all want to make the sun shine and call them a customer but the reality is that if you sold them goods or services on open terms and you are waiting to get paid then they are a debtor too.  If you disagree then please tell me what you are going to do if they don’t pay you and if you are going to tell me that you are not going to send them to collection and/or sue them please let me know your name, your company, and what you sell because I know some people that will buy as much of your product as they can get their hands on!

Along that line an often over looked value added service the factoring company brings to the table is credit protection and credit insurance … as well as in some cases a broad depth of business advisory experience. After all: Who else know more about growing a business without borrowing than a factor?

The real beauty here is that with the factor providing the credit work a business owner can sell on an unlimited basis and still run their business on nearly a COD basis. How? As fast as the owner sells the factor, if the credit of the customers is solid, will convert invoices to cash in days if not hours.

Does this cost? Compared to a bank loan yes but I want to ask: What happens when your sales grow past the capacity of your bank line? Most likely the sales stop and now you are losing profits as in “leaving them in the street” … So I ask: How much does that cost?

Smart owners compare the two and if they’re in business to maximize their profits vs. borrow cheap money guess what they do? They make the appropriate decision!

Explore selling your accounts receivable:

• It doesn’t require you to have good credit because this function is based on the credit of who you sell to and not your company nor your personal credit
• Selling Accounts Receivable grows as you sell … how powerful is that when you don’t have to wait foryour money and can access when you want it vs. when your customer “feels” like paying you?
• Using this process does not require you to borrow nor does it require you to give away equity in your company

Think on the above: The process of “debtor factoring” was used by the Egyptians and it still works for the Fortune 500′s of today … so why not you or someone you know?

Ideal Circumstance: You have open terms with your supplier and possibly a bank line to support covering labor, etc. Hopefully the customer pays before the bank line is drained and/or the supplier’s open terms run out with you. Otherwise, your credit and availability for the next contract can be jeopardized!

Collateral or Credit Backed: You have assets or excellent credit that can be leveraged or transformed into cash so that you can fulfill the need and complete the contract. What types of collateral are used here?
- Credit History is solid and can sign for a loan
- Property is owned that has a low LTV
- Equipment is owned that is not encumbered by a loan
- Account Receivables are available that are current and there is no loan in place

Non-Collateral Backed Circumstance: In this situation you lack all of the pieces to access cash or working capital. HOWEVER, you have the contract or purchase order in hand. What is important here?
- The customer is very credit worthy
- Your company has no liens and/or encumbrances
- The product does not need a significant amount of alteration to be delivered
- The order is contracted to be uncancellable if delivered within terms

Consider the above, particularly before you make a commitment. The clock starts ticking once you make a commitment – if you are not prepared to fulfill your contract, you are in trouble.

Here are the two “F Words” of banking: FDIC and the “Five C’s”

What is FDIC?

Federal Depositors Insurance Corporation (www.fdic.gov). Simply put, it is you and I as taxpayers that oversee and guarantee the backing of our federal banks.

This corporation monitors (or is supposed to) our banks to make sure they are not doing anything foolish that could cause situations such as the bail out. The FDIC in turn, creates the foundation for market and/or lending criteria that the banks adhere to.  If they step outside of the FDIC regulations, it’s not pretty.  The tighter the FDIC is on the banks then the tighter the lending criteria are on us as borrowers.

What affects this?  The “Five C’s.”  This begins with Conditions: Employment (or lack thereof).  As do other large scale economic indicators drive this and then it trickles down to the application information of the borrower.  When lending, the bank wants to ensure how they will get paid back.  It’s not complicated.  This is what the “Five C’s” are about.

The “Five C’s” are:

• Character: Credit, History, and Management (especially relevant experience in the market!)
• Cash Flow: Can you show that you can pay the loan back?
• Collateral: If paying the loan back fails are there adequate assets to be liquidated (Yes! Read that and weep!) to pay back the loan?
• Capitalization: Can the owner show enough liquid equity to balance out the equation?
• Conditions: Competition, market trends, and other factors that can sway this one way or another.

More often than not, people can’t understand why getting a retail operation financed is so tough. Think about it: What do you have left over if (worst case) it fails? Typically it’s racks of inventory that you couldn’t sell the first time around so, why is it going to sell now?

What if it’s a restaurant? What is left other than some food, chairs, and cooking equipment? Think along these lines when you are approaching a bank because they want to help you but it has to make sense if they are going to.

The reality is that our banks are a resource to be utilized and paid attention to. They see what the economy is doing and they are tremendous indicators of shaky ground. All in all, if your need passes musters with a bank then the odds are that it is pretty solid.  Although, failed loans are not uncommon. Why?

Making a loan is a ‘snap shot’ in time.  If things change once that snap shot is taken, then it’s anyone’s guess what the future will bring.

And if a bank says no please, call us: We’re here for you at: www.finance-manager.com.

We’d love your feedback.  Please let us know what you think!

If you’ve had this happen please share what you did via our blogs as we are sure others would like to know!

Of note: This was the first of eight $90,000 shipments to a large customer and there would be more business to follow … unless these goods didn’t ship and ship on time.

To make this even more complicated this was occurring right before the Christmas Holiday and the receiving customer would be shutting down for two weeks so this shipment had to go and had to go on time. The loss of a day wouldn’t cost a day: It would cost over two weeks because of the shutdown!

That said: We were called and after working through the weekend and communicating with the supplier’s office all day Saturday by the Monday morning we had negotiated with the supplier a way to get the supplier comfortable and the product released in time to avoid late delivery penalties. How?

First off we tried to understand why this was happening but could not so we needed to deal with the issues and sort out the facts later.

Enter the Letter of Credit: A Conditional Letter of Credit that is. How does this work?

A funder/lender deposits money to cover a requirement and so long as the supplier completes the work and meets the terms and conditions defined in the Letter of Credit then the money is theirs and there is nothing the buyer can do. It’s not ‘Cash Up Front’ … but it’s close. What this does is eliminate a buyer from playing any games … and too the supplier in most cases.