Business Banking

Why is Factoring with a Bank Better?

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What is Bank Factoring?

Factoring is a transaction between a business and a third-party (the factor) which provides quick cash flow in exchange for accounts receivable and/or other assets. A business can use its invoices (accounts receivable) as leverage or sell off accounts receivable to the factor to obtain cash. Depending on the arrangement, the cash is either discounted or reduced by fees charged by the factor. A bank factoring company uses the same steps as a traditional factoring company, but requires the factor to be a regulated bank. There are many nuances and differences across traditional factoring companies, bank factoring companies and independent financing companies. Each factoring company has its own way of defining the types of factoring available.

With altLINE we break out our accounts receivable-based products into three structures:

  1. The first is asset based lending which is a loan secured by business assets. The collateral is either the inventory, accounts receivable or balance sheet assets. Since asset lending is similar to a revolving line of credit, the business can borrow from assets on a continual basis to cover expenses as needed.
  2. In accounts receivable financing, a business sells the value of its invoices to a third-party factor (ie. independent factoring company or a factoring bank) at a discount. The third-party processes the invoices and the business receives funds based on the expected money due from their client (the debtor). This structure operates similarly to a line of line of credit.
  3. Invoice factoring is the third method, in which a business sells invoices to the third-party (the factor). The factor gives the business a percentage of the total value of invoices and collects invoice payments from the business’ client. After the client pays the invoice, the factor pays the business the remainder of the money collected and keeps back a transaction fee.

As a bank factoring company, altLINE offers various accounts receivable financing structures to fit the varying needs of a business.

Benefits of Factoring

Factoring is not a loan thereby no liability is reflected on the balance sheet. It establishes steady cash flow and eliminates the 30, 60, 90-day waiting period for the accounts receivable of a business. The factoring company manages invoices and implements credit reviews of the clients for the business. The factor advances funds against invoices and collects money owed by the business clients. Time management is optimized and the business can direct its energy towards sales, market expansion, and other endeavors.

Why factor?

1. Funds are advanced to the business before clients pay the invoice for goods received.
2. Factors provide credit control – the collection of funds is managed by the factoring entity.
3. Factoring provides capital while the business has open invoices.
4. Factoring is not a loan since the invoices/accounts are purchased by the factoring entity. They do not show on the books as a liability so this reduces balance sheet debt.
5. Businesses which experience seasonal fluctuations in their business have periods of insolvency; factoring is a means of acquiring cash flow based on money owed by clients.
6. Quick access to funds with invoice factoring – funds available within 48 hours after an invoice is generated.
7. Relief from debt collection.
8. No debt to repay.

Factoring Companies –Many Choices

Since there are limited barriers to entry anyone can start a factoring company. As you would expect, some factoring companies are better than others. Take the time to research and get comfortable with your factoring partner. The two types of factoring companies compared here are independent factoring companies and bank factoring companies (also known as a factoring bank). Check out this infographic for more information:

Invoice Factoring with a Bank

Independent factoring company

Independent factoring companies work with businesses who need to accelerate cash flow and may have been turned down by a bank. A business with creditworthy customers may be eligible to factor even if it can’t qualify for a loan. In factoring, the factoring company is concerned with the creditworthiness of the client versus the business.

Bank factoring company

A bank factoring company provides the same flexibility and benefits as an independent factoring company, but also offers additional advantages.

A bank factoring company works with many businesses who are considered outside of the traditional credit box. Many of these businesses have been told “no” by a bank for a commercial loan, but they are still very strong candidates for working with a bank owned factoring company. Businesses that work with a bank owned factoring company may also have an easier time transitioning to a commercial loan at a later date.

Banks are more secure and provide a sense of financial stability for the business. A business’s clients are very valuable relationships and a bank owned factoring company offers a level of comfort not found in independent financing companies. Clients feel better about interacting with a bank than an unfamiliar or unknown business entity.

In addition, since the bank has its own funds a bank owned factoring company can offer the business very competitive rates. Unlike many independent factoring companies who work with multiple funding sources, a bank owned factoring company acts as a direct source of funds and eliminates the middleman.

Factoring is a common solution to cash flow and is best used during growth periods or when the account receivables are large. The business benefits since the time between delivery of goods and funds realized is short. The business is relieved of the burden of chasing debt and can focus on other pertinent issues.

Contact us today to see how factoring with a bank can help your business grow.

Facing a Cash Crunch?

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Cash Crunch Survival: 3 Key Steps

Most small businesses experience a cash crunch at some point. A cash crunch can put the future of a business in jeopardy if not handled correctly. The old adage “cash is king” resonates with all business owners and perhaps most strongly with those whose cash is locked up in receivables. Forecasting cash flow can be difficult and unexpected financial surprises pop up too. In a previous post, we outlined common causes of a cash crunch. Regardless of the cause, business owners experiencing a cash flow shortage should take the following steps to help their business get through it:

1) Acknowledge the Issue

As a business owner, you’re focused on running the business and are pulled in many directions in addition to finance decisions. As soon as you realize you may be facing a cash flow shortfall, personally and closely monitor your business’s financials. This should be your primary area of focus.

Run an accounts receivable aging report (or meet with a bookkeeper or accountant if you’re not sure how to) to understand how long your invoices are outstanding. In other words, how long are you customers taking to pay you? What can you do to increase your collections efforts to get slow paying customers to pay sooner? Make some calls and get time commitments for payments.

Take a close look at your accounts payable to see where you may find some flexibility. Tighten spending and only pay what is absolutely necessary. If you have business credit terms, keep open lines of communication with vendors and see if you can have fees waived or negotiate longer terms.

2) Financing to Fit

In a perfect scenario, you’d have a cash emergency plan in place such as a rainy day fund or reserves. However, a cash flow crunch can sneak up on you and you may not have a financing plan in place.

Start with your banker. While traditional bank lending options such as a line of credit are one option, your banker can also point you in the right direction if other financial products might be a better fit. Even if your bank has turned you down, a banker remains a good starting point for knowledgeable and trustworthy advice. Your bank has a vested interest in helping your business succeed, so your banker can be a solid resource for providing a referral to a trusted secondary lending partner.

If you choose to go out on your own to evaluate lenders, be cautious when considering independent financing companies and online lenders. These lenders are not regulated and don’t provide the same safety and stability as working with a FDIC insured and regulated partner. Transparency can also be a challenge when comparing pricing structure and rates, as many cost components are buried and are incurred later as hidden fees. Make sure you thoroughly research your lending partner, they have expertise in your industry and they provide flexible borrowing options as your circumstances change.

3) Make Changes

Understanding how you got into a cash crunch can help prevent it from happening again and improve your long term viability. This previous post goes into more detail about five common causes of a cash flow crunch. Additionally, a few points to consider:

  • Take a look at your pricing structure. Do you have enough profit built in?
  • Does seasonality affect your business? If so, are there additional products or services you can offer during slow times?
  • Evaluate your customer base and identify the high value customers who consistently pay quickly. You may want to seek out new customers with similar characteristics.

While a cash crunch causes a great deal of stress for any business owner, this temporary liquidity challenge can be overcome. Don’t panic and follow the three steps above to get through both the immediate and long-term concerns of a cash crunch.

We help businesses facing cash flow crunches every day. The Southern Bank’s altLINE platform specializes in providing flexible working capital in circumstances where traditional lines may not be a fit. For more information, contact us today.

Accounts Receivable Financing Buyer’s Guide

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If you are like most small business owners, securing financing often involves emotions ranging from uncertainty to frustration as you navigate the alternatives. In addition to your daily job responsibilities, the demands of evaluating borrowing options can be stressful and overwhelming. This straightforward buyer’s guide serves as a starting point to help you with the decision making process around choosing an accounts receivable financing partner.

What is Accounts Receivable Financing?

A/R financing allows a business to receive cash in advance of the payments due from its customers on open invoices. Rather than waiting 30, 60 or 90 days to be paid, the business can present open A/R to its financing partner and receive money within hours. By utilizing Accounts Receivable financing, businesses can accelerate their cash flow helping them make payroll, purchase new inventory, take on new contracts, and generally grow more sustainably.

Accounts Receivable financing is a term that is often used interchangeably with invoice discounting, factoring, and even asset based lending in some instances. With each lender using different terminology and different practices, selecting an A/R financing provider can be confusing. This guide will help you ask the right questions and select the best A/R financing solution for your business.

If you’re interested in learning more about the different types of lenders take a look at Exploring Your Options for Business Financing.

12 Questions to Ask an A/R Financing Partner

  1. How is my credit line established?

    Desired Answer: In A/R financing, your credit limit should be based on the credit strength of your customer and your business’s projected revenue.
    Red Flags: Traditional underwriting criteria like operating history, profitability, ratios, etc. don’t allow your business to benefit from the flexibility of A/R financing.

  2. Where do you get your funds?

    Desired Answer: The financier has a direct source of funds and lends those funds to you (banks or established financiers lending their funds to you).
    Red Flags: The financier borrows money making them a middleman. Whether they’re borrowing from a bank or private investors these costs are passed on to you. Even worse, the availability of these funds is not guaranteed.

  3. How quickly is my funding available?

    Desired Answer: A best in class A/R financing provider will ensure funds are in your account 12 – 24 hours after you’ve financed your receivables.
    Red Flags: Two to three days. If you’re funding with an independent financing company as opposed to a bank, these funds can take longer to clear. Don’t forget, any wire fees will be passed on to you, so ask about ACH fund transmission.

  4. How quickly are payments from my customers applied to my balance?

    Desired Answer: Immediately upon receipt.
    Red Flags: Any clearance days cost you time and money. Again, funding with a bank or with a provider that has a close relationship with a bank reduces holding periods and interest.

  5. What are all the fees associated with your financing?

    Desired Answer: Interest and/or discount fees only. The more straightforward the pricing structure, the more predictable the financing costs and cash flows.
    Red Flags: Any additional transaction fees, ACH fees, lockbox fees, service fees should be red flags. Origination fees and termination fees can sometimes be negotiated.

  6. What’s the term on your typical contract?

    Desired Answer: One year or less. If the financier requires a two-year commitment, keep looking.
    Red Flags: Two years or more. Flexibility is the name of the game. Don’t lock yourself in needlessly.

  7. How long has the financing company been in business?

    Desired Answer: While the length of time a financing company has been in business is not always a barometer for quality, it’s important to find a financier that has a proven and stable operating history.
    Red Flags: Start Ups. There are few barriers to entry for accounts receivable financing providers which unfortunately means a number of under-qualified partners. You don’t want your financing partner to go out of business and put you out of business in the process.

  8. What are your funding or lending limits?

    Desired Answer: Whether it’s one hundred thousand dollars or one hundred million dollars, all financing companies have a limit. If your company grows past that limit, there is likely a contingency plan, but at this point you simply want the financing company to be open and honest with you.
    Red Flags: “We don’t have a limit. We can do it all.” This is simply untrue. Everyone has a limit and you should push on sales people that try and state otherwise

  9. What are your funding limits for each company’s customer?

    Desired Answer: Similar to the answer above, you want your funding provider to outline how credit limits are established for your business’s clients.
    Red Flags: Ambiguity. Are they unclear? Is there no process in place? If so, ask to speak with their underwriter or the person making credit decisions.

  10. How will you interact with my customers?

    Desired Answer: In A/R financing relationships, there is interaction between the financier and the company’s customer at some level. Clarity, justification, and confidence in a funding provider’s process is crucial.
    Red Flags: Heavy handed responses and unclear responses are equally troublesome. If the financier is avoiding the question or claims there is no interaction, watch out. Similarly, good financiers understand it’s a partnership and not an adversarial relationship.

  11. Is any part of your operations outsourced to third parties?

    Desired Answer: No. Everything from sales, to credit, to accounts receivable management is in house.
    Red Flags: Yes. Some funding providers, may utilize lending “platforms” that are really a third party servicer (i.e. BusinessManager). Ideally, most companies prefer to work with full-service shops rather than those that may outsource crucial practices and processes.

  12. What reporting will I have access to?

    Desired Answer: Direct access to your account statements and open invoices via an online platform is a must.
    Red Flags: Reports are provided on demand and as needed. This leaves the financing party in a position of power and more often than not leaves customers in the dark.

Tips for Improving Customer Payment

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For many companies Accounts Receivable collection can at best be described as a chore and at worst as an anxiety-inducing experience where one large delinquent customer can put their own business in jeopardy.

As a bank that offers factoring, or Accounts Receivable financing, The Southern Bank has a wealth of experience optimizing accounts receivable collection and in turn cash conversion for our customers. As such, we quizzed our Accounts Receivable collection team here to garner some advice in improving customer payment.

Develop the habit:

All too often, business owners ship product or provide the service and hope for the best. Like developing any other healthy habit, it’s necessary to block off time either every day or week to collection, so that it becomes second nature. Consistent, respectful, and friendly communication is key to ensuring a strong working relationship with your customer’s payable department.

Invoice accuracy

Check, double-check, and confirm invoice accuracy. Make sure payment terms, remit to addresses, and invoice destinations are correct. Maintain a system that ensures your invoice and payment doesn’t get lost. In A/R collection, time is truly money so don’t cause the delay with an invoice error.

Manage expectations and train your customers:

Be consistent with your customers. Calling haphazardly and collecting aggressively based on your own cash needs will only cause confusion and strain. Companies like to buy from suppliers that make them easy to buy from. By sticking to your contract and internal process, your customer will be better prepared and willing to remit payment on time and with less effort.

Smile and dial:

Not just a phrase for sales, collecting payment can at times be difficult no matter how solid your process. Your customers likely have other vendors, their own delinquent customers, and their own cash balance to work with – smiling, maintaining a positive attitude, and listening goes a long way in facilitating payment.

Don’t be blind

It’s easy to ignore and hope for the best when faced with delayed payments. While no one likes to face the likelihood of a write-off, the sooner you communicate concerns with a delinquent customer, the sooner you will resolve the issue. Don’t let a bad customer put you out of business, monitor all your customers’ payment behaviors and be prepared to respond to any negative trends.

If long payment cycles or Accounts Receivable collection remains a challenge for your business, you might be a good candidate for The Southern Bank’s Cash Flow Management program. Contact us today and we’ll fill you in on how we help businesses accelerate payment and improve their financial health.

Five Causes of a Cash Crunch

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Healthy cash flow is the lifeblood of all businesses. Without adequate reserves of cash, owners stay awake at night thinking about debt coverage, meeting payroll, dwindling inventory levels, covering taxes, etc.

While The Southern Bank’s clients are each unique, there is typically one of five key causes for their liquidity concerns. These include:

1. Rapid Growth

On the surface, growth can hardly be viewed as a bad thing, but unanticipated or swift sales can potentially put a company out of business. More sales means more inventory, more people, and the need for more money. If your revenue is growing, but your working capital stays the same, that next big customer order you fill could leave you short on cash for your next supplier payment, tax bill, rent check, or loan payment.

2. Expanded Product Offerings

In addition to revenue growth, new projects and new products can require a substantial investment. Delays in launch, unsuccessful initial sales, and development related expenditures can devour a company’s cash balance. Diversifying your offering is a viable and often game-changing strategy, not having a cash safety net in place prior to doing so can be deadly.

3. Seasonality

Perhaps the most common cash crunch amongst customers, excessive seasonality can wreak havoc on a company’s balance sheet. Large cash needs followed by significant cash inflows followed by a quiet season can make planning difficult if not impossible to predict. Having a flexible financing and working capital solution in place can allow business owners to take advantage of seasonal sales rather than succumb to them.

4. Delayed Customer Payment

Customers extending their payment terms is quickly becoming the norm. As large multi-national businesses continue to stretch their suppliers, the smaller, regional suppliers of raw goods and services are now experiencing the ripple effect (read more about Longer Payment Trends here). Whether it’s a delinquent customer or a customer with buying power and long-terms, delayed customer payment can cause an enormous strain on your own cash conversion.

5. Unexpected Events

Abnormally large tax bills, law suits, customer bankruptcy, inventory obsolescence… there’s really no shortage of things that can simply go wrong. No matter how much preparation or cash reserves you have in place, there is always the potential for your cash position to be consumed by an unexpected event and for your business to go from healthy to distress.

Whatever the cause may be, The Southern Bank’s Cash Flow Management program works with companies to put their business back on stable ground. We fund working capital needs through a variety of traditional and non-traditional bank products and services.

Whether it be a traditional line of credit, an asset based line of credit, a factoring line, or some combination of the three, you can expect The Southern Bank to develop a cost-effective solution that relieves the cash crunch and gets you back to doing what you do best – running your business.

Contact us today and start funding your business.

Cash Flow Problems and Customer Payment

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What do ad agencies, staffing companies, manufacturers, and contract research organizations all have in common? In addition to supplying products and services to Fortune 500 companies, they’re all subject to the same strain caused by one of the latest trends in corporate finance – longer payment terms. More often than not, cash flow problems and extended payment terms go hand and hand.

While supplying large, credit-worthy customers can propel small businesses to great success, these same customers often maintain and leverage an enormous amount of power in negotiations with their smaller suppliers. In addition to price, suppliers are often forced to make concessions to their buyers in the form of longer payment terms.

By collecting cash from customers faster and withholding payment to suppliers longer, large companies are able to increase their own cash positions and redeploy that money for their own benefit (increase dividends, initiate stock buybacks, invest in their supply chain, hire new employees, etc.). Essentially, powerful buyers are utilizing their suppliers as a free form of debt. For example, Proctor & Gamble has moved from 45 day terms to 75 day terms, GlaxoSmithKline is shifting from 60 to 90 day terms, and Mondelez International is extending terms all the way to 120 days.

The strain this inflicts on the supplier is undeniable. Once healthy businesses find themselves with cash flow problems and the inability to pay their own suppliers, take on new orders, pay their employees, and in many cases – keep their doors open.

What can be done?

The business owner that finds him or herself on the wrong end of a one-sided buyer/supplier relationship with little hope to negotiate has a few options. Some of which include:

  • Firing the customer. This of course assumes dropping the customer will not cripple the business’s growth or long-term viability.
  • Growing their own cash reserves. Perhaps the cheapest and most difficult way to solve cash flow problems is to reduce cash outflows. Whether it be cutting costs, delaying payments, or collecting other receivables faster, companies must make difficult decisions in order to conserve cash.
  • Asking their supplier if they offer supply chain finance. Many large buyers are offering to finance their supplier’s working capital through prearranged agreements with 3rd party banks. These rates are typically much lower than what the small business could secure on its own.
  • Consulting a bank. By partnering with a small business lender like The Southern Bank, companies can increase their working capital through a variety of products and services that prevent dangerous cash crunches while continuing to supply their large strategic customers.

If your business is faced with cash flow problems or you’re interested in increasing your cash reserves through bank financing, please contact us today.