Case Study #1
Are You Offering Interest-Free Financing to Your Customers?
Businesses lose money this way every day. We encounter this situation daily and in each case the owners are surprised to find out how much money they are losing this way. As an example, let's take Web2000 Consulting, an Internet consulting firm that owns an average of $500,000 in receivables at any given time. Web2000's A/R aging report shows that almost all of their clients pay in 30 to 45 days, with many more waiting with payments until day 60. The company is financially secure, but constantly works on between $100,000 and $200,000 in various projects. They have little cash to none immediate funds available at any given time and are unable to buy equipment, inventory or to hire additional staff to increase their project "turn" ratio.

Now, think about the lost income based on the "interest-free financing" that Web2000 unknowingly grants its clients: 12% annual interest on $500,000 for 30 days would be $5000. ($500,000 in accounts receivable x 12% annual interest = $60,000 /12 months = $5,000 monthly interest lost.)

Surprised? Take it over 1 year ($5,000 x 12) and you are looking at $60,000 in interest that never gets billed, and never is received. Then consider the cost of lost business on top of that. It's been proven that contracts or purchase orders not immediately filled or completed are lost at a rate of 20-25%. Often the client simply decides not to wait and go with another company. (Don't forget, a purchase order is not a guarantee or final commitment.) The company is losing 25% of $150,000 in orders every 30 days!

That is $30,000 a month annually, resulting in $360,000 a year. Also, if those cancelled orders were produced during that same period, the income on those orders, after considering the cost of inventory and labor, would have directly affected the bottom line. This is "opportunity revenue", lost only because the business is forced into granting no-interest loans for 30, 45 or even 60 days or more to many of its clients. This, as unfortunate as it is to business owners, is the way of business in America today. Bill-paying cycles (how fast businesses pay their payables) has been waning constantly throughout the last 15 years, and shows no turnaround from this unfortunate trend.

Many companies are known to stretch out payments for 30, 60 or even 90 days on all bills, with the exact goal of calculating expenses and maximizing proceeds. There is no uncertainty that it works for them, but their cost-saving approach is your loss if it's your company expecting that payment.

Case Study #2
They Always Pay-But It Takes 45 Days!
To further demonstrate this position, let me tell you about a business in the construction utilities business. The proprietor (let's call him Carl) did a lot of work for the county. Carl's company would put in the playground equipment, parking lot and park fixtures, athletic field equipment, etc. Carl's problem was that he'd do the work and bill the county, but have to wait about 45 days to be paid. The county was an excellent customer; helpful on location, worked well with his staff, and overall it was a good affiliation, except: THE COUNTY TOOK 45 DAYS TO PAY!!!

Carl was okay with this in the beginning, but it soon was clear that he would need extra financing or he'd have to close shop. You as a fellow business owner understand, he needed to have funds available to make payroll each week. Even changing his routine to paying bi-weekly didn't help. Furthermore, he also is required to stock a number of rather costly inventory items, not to forget the whole operating cost related to his line of work.

His initial decision was an easy one: he requested the county to pay him sooner. Carl did not expect a response like this: "After they were done smiling, they told him that it was not their decision to make, and that it was the counties system causing the delay in payment.

Carl also knew that he wasn't qualified for conventional financing (his business was less than 2 years old), but he was clever enough to notice, after having spoken to a professional factoring broker, that invoice funding was the solution he was hoping & waiting for.

The outcome of the above story is that factoring saved Carl's company. The business has now successfully grown older which now made him eligible for conventional bank financing.

Case Study #3
Pass Your Factoring Costs On To You Vendors
Think about a manufacturer of parts used on heavy construction machinery. To manufacture, this business needs a lot of essential raw materials: electronic parts, metal & aluminum, screws, nuts & bolts, etc. At present they have 30-day payment terms with most of their vendors, but rarely, do they have the funds available to take advantage of the 2% discount offered to them for swift payment (2% discount within 10 days, net 20).

Newly exposed to factoring, this manufacturer used the money to pay vendors/suppliers in 10 days, saving approximately 50% in factoring fees. Even more exciting, businesses in this situation would be well advised calling the credit managers of their vendors, negotiating immediate payment on delivery for even deeper discounts. If the suppliers need funds rather sooner than later (and most of them do!), then the mark down for COD terms can be as much as 4 or 5%, which could totally counterbalance the whole fee of factoring.

When our manufacturer realized the ability to make up for the cost of factoring combined with the boost in fabrication, enabled by purchasing more inventory, the proceeds realized from this added business immediately added to the bottom line.

While there are many rewards to factoring, many businesses are drawn to it above all for the reason that factoring can represent an end to the troubles of bad debts. As part of the procedure, factors will check the credit of your customers, reducing your fixed cost for credit management. Invoices of those clients considered to be of good credit are often sold on a "non-recourse" basis. This simply means: the factor buys the invoice from the company owning the account receivable. If the client required to pay the invoice, is financially unable to pay, the factor cannot ask you to return the advance. But, should there be an issue with the product or service provided, you may return the advance, or substitute for another invoice of equal value.

Most likely, though, this invoice will never have been funded due to the factor "checking" the invoice prior to funding. This means that the factor will be ensuring that your customer is satisfied with the product or services delivered, almost guaranteeing the intent to pay, requesting that the payment will be sent to the factor directly.

While this part of the procedure is necessary to guard the factor from purchasing false invoices, it is also helpful to the client. If the factor learns that your buyer is not pleased, for whatever reason (wrong size, wrong model, etc.), the factor will instantly pass on this information on to you, enabling you to fix the issue. It operates as an "early warning system" that avoids problems caused by wrong shipments, delaying compensation and hurting the client-customer liaison.

On how our Factoring program works, please CONTACT an ICA professional.