Can A Factoring Company Help My Business?

Can A Factoring Company Help My Business?

Blog articles discussing factoring companies, factoring loans, invoice factoring and all things related.

Most of the small business owners we speak to would love to be approved for a bank loan or partner up with the coveted “equity investor” and ride off into the sunset. The reality of it, however, is that very few small businesses qualify for traditional bank financing and do not meet the requirements equity investors look for.

There is a gap in expectations between what small business owners want and what private investors and banks want. What are they? Summarized below:

Small Business Owner – “I wish to become wealthy by using someone else’s money at a very low rate of interest and prefer not to personally guaranty the loan.”

Investor/Bank – “I want to lend money in a nearly risk free scenario and gain a handsome return on the capital invested.”

The end result is the “Golden Rule” or those the rule that states those with the gold make the rules. It is not uncommon to reach a stale mate after months of negotiations as a result of the gap created by these polar opposite ideals.

What we have found is that the conversation (if the business owner is looking to fund variable expenses) usually migrates to factoring company solutions or an asset based loan. Why? Because factoring companies provide easier access to capital and focus on your customer’s credit. Does that mean they aren’t concerned with their borrower? Not exactly. Both borrower credit and customer credit are important in the factoring companies eyes, but not to the same degree. If you sell on net 30 terms and invoice your customers, chances are you can obtain the funding you need with a factoring company.

The profile of an average business that is approved for factoring has some of the following challenging characteristics:

  • losses and/or negative equity
  • business owner not willing to provide a personal guaranty
  • start up or under two years in business
  • internal financial statements
  • contractors
  • tax liens or past due tax payments
  • contractors
  • poor record keeping

This is not a complete list, but shown to demonstrate the flexibility of factoring companies over traditional lenders. As your business grows, your factoring charges will decrease as the factor’s main interest is to grow with your business. We have some clients that choose to stay in their factoring relationship for the ease of use and minimal financial reporting requirements.

Factoring companies finance your operating capital needs, manage your accounts receivable and stay out of the way and let you run your business.

If you have questions regarding whether or not factoring is right for you, please call us for a free consultation 714-719-8966.

To your success!

Patrick Zazueta | Founder | Huntington Coast Capital, Inc.| 714-719-8966

What Is Your Invoice Factoring Rate?

What Is Your Invoice Factoring Rate?

What is Your Rate?

This is the main question when searching for a commodity finance product such as a commercial or home mortgage. Let’s face it, if I am refinancing my home mortgage, I do not care about the customer service of the mortgage company because I expect them to competently manage my mortgage needs. Further, I would not pay more for a perceived better customer service experience. My main concern, as with all of us when shopping for a mortgage, is rate.

However, in the entrepreneurial lending world, things are much different. For example, as a business owner looking to deliver on a sizeable purchase order you have been pursuing for months, cost is not the primary concern. Availability of cash is. This is because if you fail to deliver on your first purchase order, you will likely never receive another one from the same customer. Your reputation on being able to deliver is what keeps the orders coming in.

Asset based loans, such as invoice factoring, solve most liquidity problems for B2B business owners. We deal with business owners on a daily basis that are under extreme timeline and performance pressure from a customer they have been pursuing for months. Once the opportunity finally comes, they simply must deliver! They view their invoice factoring partner as a team member versus just an asset based lender. Because without the factoring company, they would not be able to deliver on their customer orders.

Our asset based lending sources need to earn a return that is commensurate with the risk they are taking. It is a return that will both assist the borrower in their growth goals and earn the lender enough to justify the risk of capital. A flexible invoice factoring loan that allows the borrower a chance to expand their top line revenue where one did not exist before through traditional financing avenues.

So, the rate discussion is obviously something that is covered, but not nearly as important as it is with commodity lending. Opportunity cost, or the cost required to earn higher profits for the company, is of primary importance in asset based lending. Invoice factoring is the most commonly used forms of asset based loans.

Asset based loans can also be secured against equipment. Click here to learn more about our sister company, EquipmentFinanceQuotes.com.

If your business could use a flexible invoice factoring company to grow and meet your full potential, we would like to speak with you!

To your success!

Patrick Zazueta | Founder
Huntington Coast Capital, Inc.

Invoice Factoring and the Lock Box

Invoice Factoring and the Lock Box

Our calls with clients always involve providing them with improved working capital for the growth of their business. This almost always involves a conversation on invoice factoring also know as accounts receivable factoring.

An invoice factoring agreement is a buy/sell agreement whereby the factoring company purchases a company’s accounts receivable for a period of time. This time period is usually up to 90 days with some exceptions out to 120 days.

The invoice factoring company will advance between 75-90% of the face amount of the invoice on day 1. The factoring company will then wait for the customer to pay. This alleviates the cash burden sometimes felt while waiting for customers to pay.

A key requirement in an invoice factoring arrangement is the lock box. A lock box is a dedicated address where all customer payments are to be made. Customer payments pay down the advance the invoice factoring company made against the invoice. The lock box provides the factoring company with a certain level of control when managing repayment.

Some clients have hesitancy with using a lock box. They are concerned with how factoring their invoices will look to their customers. Specifically, they are concerned with the customer thinking they are in financial trouble. This is not always the case. In fact, rarely is it the case. Fast growing companies use invoice factoring to fund the growth of their business. Not having the cash to fulfill orders makes the negative impression.

Combining invoice factoring with purchase order funding and/or supply chain finance will provide even greater cash flow options for the company. More on that in the next blog.

If your business is growing and invoice factoring could help eliminate your cash flow concerns, give us a call 714-719-8966.

To your success!

Working Capital. Every Business Needs It!

Working Capital. Every Business Needs It!

How long would your business last without enough money to cover expenses? Most businesses fail within the first three years due to lack of enough working capital, and even well established operations can experience cash crunches. Competitors are a constant. How financially strong your business is, will determine how well you can compete.

The frustration for many business owners is this – traditional lending sources either require you to be financially solid before they lend you money to grow or are conservative in the amount of credit they extend to the seasoned business operator.

So where do most business owners obtain the financing they need to grow their business? In short, asset based lenders. There is a 2nd tier of lenders below bank financing that finance purchase orders, equipment needs, inventory, real estate and accounts receivable. Essentially any asset listed on a given company’s balance sheet can be eligible for financing. Their focus is either on the quality of the asset they are financing or the financial strength of the customer placing the order (in the case of purchase order and accounts receivable financing). This approach makes financing growth much more obtainable for business owners.

What about financing for the established companies? A challenge remains here as well. Financing available for the established business owners is often inadequate to meet growth needs. Banks are most typically conservative and provide small lines of credit, even to companies with strong net worth and income. Companies need creative solutions when seeking additional capital and this creativity comes from the non-regulated, more entreprenuerial thinking, capital sources in the market. Could your business benefit from knowing a partner like this?

About Huntington Coast Capital.

Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.

We consult on a wide range of funding options for business owners throughout the United States in the following areas:

  • Supply chain financing
  • Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
  • Lines of credit for working capital needs
  • Term loans for marketing, hiring staff and general expansion needs
  • Factoring services for accounts receivable financing that also provides for back office credit and collection functions
  • Purchase order financing
  • Asset based loans
  • Business acquisition financing
  • Inventory financing
  • Private commercial real estate bridge loans
  • SBA loans for business and real estate needs

Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. To your success!

Asset Based Loans. The Difference Between A Factoring Loan and a Line of Credit

Asset Based Loans. The Difference Between A Factoring Loan and a Line of Credit

Huntington Beach, CA Asset based loans cover loans secured by any assets on a company balance sheet. For example, a loan secured against accounts receivable, inventory, equipment and real estate are all generally considered asset based. There are asset based term loans and asset based revolving loans. Term loans would cover real estate and equipment while revolving loans would be secured against inventory and/or accounts receivable. For more information on asset based loans secured by equipment, please visit our sister company Equipment Finance Quotes at www.equipmentfinancequotes.com.

For discussion purposes today, we will be focusing on asset based loans secured by accounts receivable. These loans are commonly referred to as factoring loans or accounts receivable factoring. Let’s get started.

What is accounts receivable factoring?

When a company factors their accounts receivable they are taking an advance on the invoice that was created when they sold on open terms to their customer. The transaction is almost always between two commercial entities versus sales made directly to the consumer.

These factoring loans are taken to improve company cash flow by speeding up the collection cycle. Without accounts receivable factoring, many companies would go out of business waiting on customers to pay them. Companies have daily cash needs and if you have slow paying customers, it can seriously impact your cash flow and your ability to meet your overhead burdens.

Factoring loans are an advance on an invoice to a customer. While this form of financing is popular across many industries you may be surprised to hear that a factoring loan is not loan at all. From a legal perspective it is a Buy and Sell Agreement. This is because the factoring is purchasing the invoice from the customer for a period typically up to 90 days.

The loan is paid back when the customer pays. The customer payments are directed to a separate lock box controlled by the factoring company. The customer payment is applied first the advance made against the invoice which, is typically around 80 percent, and the remaining 20 percent is remitted to the client minus the fee for the factoring service. The fee will be based on the amount of days it took to collect the payment on that particular invoice.

Aside from the improvement in cash flow realized by using a factoring company, there is another benefit. Because factoring companies manage the collections on accounts receivable, they are able to maintain accurate and reliable records of payments from customers. Factoring companies essentially outsource this function of the back office management. This is a big savings for the company and savings get larger the larger the company factoring their invoices gets. Credit and collections is a big part of back office responsibilities for any business selling on terms to their customers. Factoring companies completely outsource these functions saving the company salaries, benefits and down time from sick days you would expect with hiring an employee direct.

What is a Line of Credit?

A line of credit against accounts receivable is a revolving loan against the balance of accounts receivable. Typically the advances are made bi-weekly or monthly depending on the cash needs of the business. Unlike a factoring loan a revolving line of credit only provides for financing against the accounts receivable without the back office management associated with factoring loans.

Which is better for my business? The decision on whether to select a factoring loan or a revolving line of credit depends on many variable. The argument in favor of factoring companies is that they provide both capital and back office management to the company. A line of credit is typically lower in interest expense, but harder to qualify for.

Qualifying for a line of credit is a more thorough process. The balance sheet of the company is checked for things like positive working capital, income and retained earnings. A company that is deficient in any of these areas is rarely approved for a line of credit. When applying for a similar line through a factoring company, the process mainly focuses on the financial strength of the customer.

Conclusion

Both a line of credit and a factoring loan can benefit your business by improving available cash flow to meet overhead requirements. The option you choose will rely on what is most important to your business.

Could your business benefit from either a line of credit or factoring loan? If so, we would like to hear from you.

To Your Success!

Patrick Zazueta
Founder | Huntington Coast Capital
714-719-8966