Finding The Perfect Factoring Deal

By reading the title of this article I bet many of you would think I am about to unleash some wonderful pearls of wisdom about how to find the perfect factoring deal and what is the best industry in which to focus your marketing efforts. If I had the answer to that question I would probably be sitting on a tropical beach every day enjoying the beverage of my choice.

All kidding aside, every company that provides financing whether it’s in real estate, consumer products or asset based lending knows there isn’t a full proof method to find the perfect deal. If you go back just a few short years ago to the Great Recession of 2008 we are easily reminded of how the perfect deals went south in a very short period of time. Today we are still feeling the effects of overvalued properties and poorly underwritten mortgages that allowed for a chain of mistakes that led to a global financial crisis. Conventional wisdom at the time was that homeowners, whether they were first time buyers or looking to refinance, would be qualified on credit and collateral. The credit determination was usually based on an applicant’s individual credit score and income while the collateral was based on the value of the property. As large investment banks began packaging mortgages in securities (and started making a healthy profit in the process) more buyers of these instruments sprung up and the mortgage boom was created. As the appetite for mortgages grew, newly formed originators and lenders followed suit. Unfortunately when demand exceeds supply corners get cut. In the case of the mortgage boom, credit guidelines were loosened and values of homes were over inflated. Many homeowners saw this as an opportunity to tap their equity or even buy new properties and flip them at a higher price. The demand for real estate was so high leading up to 2008 that values would increase every few weeks. The envelope was pushed so far that the credit quality of borrowers got worse, homeowners were overextended and eventually defaults became inevitable. The downward spiral got even worse as property values declined and those large investment bankers that were so enamored with purchasing mortgages suddenly went away. The bubble had finally burst and the fallout was really ugly.

What does this example have to do with our original quest in trying to find the perfect deal? First and foremost we all know that there really is no secret place to find the perfect deal. Granted, there are industries that are preferred by invoice factoring companies but it doesn’t make them bullet proof. During the height of the mortgage boom it was widely believed they had found the perfect deals or at least perfected a way to evaluate them. As long as the borrower had a credit score of “x” and the value of the property was “y” lenders could fit you into a rate sheet and make the deal work. Conventional thinking in factoring is that the transportation, staffing, apparel and a few other selected industries are the most suitable to fund. Our take with this line of thinking is that you always take the good with the bad no matter which industry you are planning to fund. Experience has taught us to weigh every deal equally. No matter the client, account debtor or industry, we need to understand the deal before we can even entertain accepting an application. This includes checking off the boxes on due diligence procedures, constantly monitoring credit quality and engaging with the client whenever necessary. I realize this may sound foolish, but I cannot tell you how many times there are conflicts between what the applicants say and the paperwork gathered with the application. If you cannot understand the deal flow, run it by a colleague or professional in that field who may have more experience and continue to ask questions. Sure, the concept and mechanics of invoice factoring are very straightforward but each deal is unique. Pure vanilla factoring deals are rare. In other words almost every deal has a “but” in it. How often do you come across the perfect client with stellar account debtors but they have a recent tax lien that has not been addressed? What about the well known account debtor that the prospect just landed but refuses to verify invoices? For those of you new to the factoring game you will find that much of closing new deals depends on your ability to work around the obstacles while protecting your security interest in the transaction.

Our industry comes with a very high risk reward factor attached to it. What drew me into this line of work is that you really have an opportunity to work with businesses to help them grow. What makes our industry unique is that each funder has discretion in the amount of due diligence they apply when evaluating a new deal. It’s a classic case of one company’s trash may be another ones treasure. Your company’s mentality should focus on bringing in new clients to get a return on your capital but more importantly concentrating on the preservation of your capital. You may not always find the perfect deal but a bunch of good ones will do just fine.

Posted in Commercial Finance, Economics, Factoring, General Interest, Small Business | Leave a comment

Bending But Not Breaking in Factoring?

The factoring industry is unique. If we had to write a mission statement for what we do it would read something like –

“To provide cash flow to businesses to sustain and expand their operations”.

The cash flow that factoring companies provide is through the purchase of clients receivables at a discount which allows the client to utilize the capital for expansion, take advantage of vendor discounts or any other reason they may have to keep their business an on-going concern.

Over the past several years many new factors have entered into the asset based industry, as traditional lenders constricted credit to new and existing businesses. The aftershocks of the great recession had a rippling effect that was felt from Wall Street all the way to Main Street, U.S.A.

The Need For Factoring Due Diligence

As more factors entered in the arena the rules for funding new deals seemed to loosen as more funders attempted to get their money out on the street. I found that many deals we passed on for very good reasons were picked up by a new crop of factors. Some worked out while others failed miserably.

I’ve written a ton of articles about adequate due diligence and the need for factors to perfect their security interest in the receivables they are purchasing. Having a strong factoring and security agreement, executing the notice of assignment, performing thorough credit checking and verification are good starts. There really is no one boilerplate template for factoring due diligence as every client and industry carries its own set of procedures. The method in which you fund a construction client will greatly vary than that of an apparel manufacturer. However, the basics of underwriting should apply on all deals.

Bending The Factoring Underwriting Rules

But what happens when the rules for a particular client and his customer may need to be adjusted to get the deal done?

As much as you want to check every box off your funding checklist sometimes it’s just not feasible. For example, several years ago we had a client that worked with a very large well known apparel manufacturer with outstanding credit. However, when we called their 800 number to verify the invoice they would only confirm they received the goods at their warehouse and they would not be inspecting them for another few weeks. In the meantime, the client has just sent us his invoice for 100k and wants to be funded yesterday. He already has three new purchase orders from the same customer and needs to buy material and cover payroll for the work.

What would you do?

There are options like credit insurance or lowering the advance rate but no matter what you choose the client is not going to be happy. We were able to figure out a solution but I will save that for a future post. The point being made here is that factoring deals force your hand.

Experience has taught us that one of the biggest challenges in funding invoices is verification.

I can actually empathize with the account debtors paying the invoice. Prior to factoring they never had to deal with some strange third party calling their office to verify the goods have been delivered or the services performed. Remember, they have bad days as well, so exercise professional courtesy when engaging with your clients customers. More importantly, look for ways to make the deal work by thinking out of the box for both your client and the account debtor. You may not always succeed but providing the effort will go a long way in the future.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com

Posted in Factoring, General Interest | Tagged , , , , | Leave a comment

Creating Relationships

If you are a regular member of a gym or fitness club as they refer to it today, I always find January to be the most interesting month of the year to be a member. At the beginning of every year the place is so crowded that you usually have to wait in line to use the equipment. Then, within a few weeks the crush subsides and the facility is back to normal.

I kind of look at business from the same point view. Just like at the gym, this time of year my mailbox is usually full of emails, blogs and pings from contacts wanting to reconnect to see how we can “align our strategies in a mutually beneficial relationship”. Sound familiar? I’m always amazed by the emails I receive from people who do not know what factoring is and what our industry does to help businesses with cash flow. A few days ago I received a call from a mortgage broker asking what the rates were on our 15 and 30 year mortgage loans. Really? Is it that difficult to do an internet search on our company or just go directly to oxygenfunding.com and check us out? I cannot tell you how many emails I delete on a given day and that nothing is more annoying than having to “safely unsubscribe” from a newsletter or blog that I never wanted to receive in the first place.

Unfortunately what many “sales people” tend to forget is that business is about relationships. When we first started our company we made it a point to venture out to almost every networking event imaginable. You name an event we were there – chambers of commerce events, association chapter meetings, business start-up meet and greets and a whole gambit of others. It looked great as our sales database would grow every week. At the end of the day we would come back to our office with a bunch of business cards from people that we really didn’t know at all. First a few dozen contacts were in, then a few hundred and finally we just stopped counting. Many contacts would ask us to refer clients to them and they would reciprocate by sending business our way. But often I would think to myself, is it right for me to refer one of my clients to someone I just met over some appetizers and a drink? What do I really know about his business? Is he really as good as he says? On the other side of the coin what does he really know about my business? From our perspective the initial introduction is just step one. The next step is to reach out to your newly found contact(s) and learn more about their business.

One of the biggest challenges with networking is trying to whittle down which people you should reach out to for a second call or meeting. Let me use our company as an example. As we are a pure invoice factoring firm our company only accepts business to business transactions. Therefore when we come across companies that are dealing directly with consumers such as home repair contractors or mortgage companies we know to refer them to a colleague. This is not to say that we do not retain and reach out to these folks but rather put them in a second tier classification for contact at a later date. Once you’ve put your contacts in the appropriate “buckets” it’s time to reach out and see if your new contact would entertain a second call or meeting. Some of the best relationships we’ve started are where both parties benefit. For example, some of our best contacts are with local banks, brokers, tax accountants and attorneys. In many cases we have referred our clients to them and vice versa. But again, these relationships didn’t happen overnight. We take the time to learn about what these people do and how they can help our clients. A crucial mistake would be referring your client to someone who is not superb in their profession and damage your relationship. The very same is true when we talk to new prospects about factoring. We constantly warn them that factoring is so much more than advancing cash on invoices. Because factoring is so competitive today many businesses are looking for the cheapest rate they will have to pay to factor their invoices. What prospects tend to forget is that the factor (assuming they do their due diligence properly) will be contacting the client’s customer to get the invoices verified and to get updates on past due amounts. If the factor treats that customer in a negative way, all of the goodwill between the client and the customer is out the window.

Creating and cultivating relationships is not easy. We like to look at relationship building as planting a garden where you are sowing seeds. Some may germinate in a few months where others may take years. I cannot tell you how many times we have received calls from people that we met years ago at some convention or networking event. The key is to get away from the “What’s in it for me” attitude. It’s been long said that a key component of integrity is how you treat those who can do nothing for you. Much of our success has come from not only helping businesses that need our services but also finding a home for those needing financing, out of our specialty.
The key is to stay focused and don’t get discouraged if you do not achieve immediate results for your efforts. As they say, Rome wasn’t built in a day and those few extra holiday pounds will usually take more than a month to lose. Now if I can only find a open treadmill.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com

Posted in General Interest, Small Business | Tagged , , , , | Leave a comment

The Balancing Act of managing Your Factoring Portfolio

If you talk to ten different factoring companies about how they manage their factoring portfolio, there’s a good chance you’ll get a variety of different answers. We funders know that factoring is not an exact science, by any means.

Although most factoring companies do adhere to non-mandatory industry guidelines in their due diligence and portfolio management processes, each company has its own unique threshold, which is largely dependent on their tolerance for risk. For example, some factors will fund the construction industry or medical receivables, while others may prefer staffing or transportation. Some funders will exclusively work within a certain niche, while others fund all industries, based on a predetermined credit limit.

As a direct funder, I can tell you from personal experience that every client is unique and must be approached with that mindset. The International Factoring Association (IFA) and many other industry experts have produced materials available for new factors that can be utilized as guidelines from approving, funding, and servicing factoring clients. Unlike other finance industries, factors do not adhere to mandatory compliance regulations such as those for mortgage lending and banking. Therefore, any factoring guidelines serve as exactly that – a guide to conduct your business. For example, one key industry standard for most factoring companies is that they have a first lien position on their client’s assets. This is accomplished by performing a UCC Search and publicly filing a UCC-1 financing statement. By having a first lien position on your client’s assets, you are protecting your company in the event of a dispute or bankruptcy. To illustrate my point, we have been approached by several factors that were willing to fund prospects in a second lien position. We don’t recommend it, but there is always a niche that some company will fulfill in the finance industry. From our standpoint, we look at factoring guidelines as a tool that allows us to mitigate the risk associated with any new client. It’s up to us to use the applicable tools to either fund or decline a deal.

If this is starting to sound like a bunch of factoring doubletalk, let me give you some real examples to illustrate how managing your factoring portfolio can fall into some real gray areas, depending on which side of the risk fence you reside. Let’s say you have been factoring with John Doe Manufacturing for several years, and he has the same customer. The client’s invoices generally pay on time and the verification process has never been an issue. However, when trying to verify the current funding schedule it turns out the accounts payable person that provides the approval is on vacation and there is no other person available to help you. Your client’s payroll is due tomorrow, and without this funding, his employees will not get paid. So, what do you do? Remember, factoring 101 says to never fund a deal without proper verification from the account debtor. You can take the hard line and reject the schedule, which will put your client in a difficult predicament and possibly damage his business. Our position was the client had enough good history with our company and his customer for us to proceed. Although the schedule was funded, it was under the condition that we would not move forward with any future advances until this schedule was approved. We could have taken it one step further and given the client a smaller advance or withheld future rebates contingent upon verification. In the end, it worked out for all parties with the client’s invoices approved and eventually verified. Here’s another example. You have a small client that just landed a purchase order with a national apparel retailer with extremely good credit. The customer, however, will acknowledge receipt of the goods but will not inspect them until several weeks later. Obviously, your client wants his advance so he can start paying overhead and vendors for both the prior and new orders. This a tough one. Some of you may suggest credit insurance to cover any losses, but in reality, the issue is not with the account debtor’s ability to pay. Trying to get any insurance claim paid is difficult enough, and in this case, it would be a breach of contract, which is usually not covered in a credit insurance policy. In this example, we passed on the advance since we were not comfortable with the large gap between the receipt and inspection of the goods. As it turned out, some of the goods were not up to specifications, and the retailer rejected the entire shipment. The client was able to remedy the goods to specification (which took another four weeks) and reship them to the retailer for full payment. This is just a classic example of where you had a partial versus a full verification which led to a potential loss for the factor. Many funders would have chosen to move forward on this deal since the debtor was a nationally known corporation.

This example brings us back to the point that all decisions are based on the risk tolerance of each factoring company. I can continue with other examples where servicing your factoring portfolio isn’t always crystal clear. Unfortunately, in many cases, your decision to move forward on a deal will fall into a gray area that requires a real gut check. Manage your clients wisely, thoroughly check your new prospects, and most importantly, mitigate as much risk as possible.

This article was written by our president, Don D’Ambrosio. Oxygen Funding is an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or don.dambrosio@oxygenfunding.com.

Posted in General Interest | Tagged , , , | Leave a comment

Projecting Your Success in Factoring

By reading the headline of this article one would assume that I will be expressing pearls of wisdom about how to become an instant success in the factoring industry.

It’s really easy, right?

All you need to do is to acquire some capital either through a bank or investor, fund some invoices and walk your way to fame and fortune.

Whether it’s a new factoring company or any startup, one of the easiest things to do is to create an excel spreadsheet with some basic assumptions and just double and triple income for the next few years. We recently had a recent startup visit our office looking for capital. Although they had been in business for less than a year I requested a set of projected financial statements including a profit and loss statement, balance sheet and a statement of cash flows. Although the information was only a projection, it gives you a good idea on how the management team thinks about the company’s future success. Despite having a great product with some reputable customers, they were still very new in their industry.

Unfortunately, like most new companies they had projected their growth to be over 400% in just two years.

Was this a little aggressive yes, realistic, not really.

The problem with over projecting your success without any empirical data is that you lose credibility with potential investors and lenders. It’s a difficult decision to make. You want to show how great your future company will be without sounding overly optimistic.

The same holds true with new factoring companies.

So often when I meet with new factors they have ideas about the industry they plan on marketing to along with some general statistics about the scope of that industry.

Next, a penetration factor of “x” percentage is multiplied against the overall targeted industry along with an assumed discount fee and you now have projected revenues.

Obviously this is a very simplistic model but you get the point.

When we first started our company the business plan had many lofty assumptions including only factoring one industry. Although we had done our research we never realized how tough it was to compete with well established factors offering deals at extremely low margins.

It didn’t take us too long to figure out that that we needed to quickly adjust our model and cast a wider net more suitable for our business model. After funding a few deals we then adjusted our plan even further to include more realistic data based on our experience.

So often I tell new companies that acquiring financing is like a slow climb up a ladder.

Take small steps first and put yourself in the lender’s shoes. Would you really want to lend large sums of money to a company with little or no experience or one with some experience and realistic goals?

The answer to that question may sound a little over simplistic but so too are many of the expectations we see from new companies.

Good luck and keep it real.

This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on September 22, 2014.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or don.dambrosio@oxygenfunding.com.

Posted in Factoring, General Interest, Small Business | Tagged , , , , | Leave a comment

NBC Smart Money Talk Radio

Listen to our EVP and COO Adam Lomax talk about how Oxygen Funding helps small businesses with their cash flow and business growth.

NBC’s Smart Money Talk Radio

Posted in Factoring, General Interest, Small Business | Tagged , , | Leave a comment

Fighting An Uphill Battle

Have you ever heard the saying that perception is reality? Although I’ve written tons of articles, spoken at numerous SBA and financing workshops while preaching the benefits of invoice factoring, I’m still amazed about how our industry is perceived in the finance industry.

Those of you in the factoring industry know what I’m talking about.
It’s the negative stigma associated with invoice factoring. So often I’ll be attending a networking event where a CPA will tell me that he consistently advises his clients to stay away from factoring and that they should only use it as a last resort if they need cash. Then there are the small business owners who don’t even know what invoice factoring is or how it can benefit their cash flow.

Invoice factoring has made tremendous strides.
The factoring industry has made tremendous strides in the last few years especially in the wake of the global credit crisis which forced many businesses to seek alternative lending solutions. This opportunity has fueled an impressive growth for funders and brokers alike in the asset based lending community. Along with this growth we have also witnessed an array of new factoring companies, online business lenders and exchanges. Folks in the finance and personal investment community are learning that cash flow is king and many companies need our services. However, as part of this fine industry which I speak so highly of there are issues that need to be discussed as they relate to who we are, what we do and how to best service our clients.

Keeping factoring transactions transparent.
Having over twenty years combined experience in both the mortgage banking and insurance industries as well as reporting to the Securities and Exchange Commission for a publicly traded corporation, I have firsthand knowledge of government regulations and compliance. I also forgot to mention that I was responsible for all external audits required in quarterly annual reporting. Okay, this is starting to sound like my resume but I think you get the point.

The asset based industry on the other hand is highly unregulated and still a wide open frontier. My opinion is that our industry’s transactions are typically between two businesses rather than consumers. Our experience has been that nearly every one of our clients are well informed about their operating margins and appreciate how our services can have an immediate, positive impact to their bottom line. If they don’t understand the process and the costs associated with invoice factoring it is our job to educate our customer so they can determine whether or not our services are the correct fit for them. In some cases they may need purchase order financing, a bridge loan and in many cases a small business startup loan.

The reason why many industries are regulated is to protect the consumer, shareholder or any other invested party from inappropriate business practices and to create transparency. Our industry is fortunate enough where we are not under the scrutiny of many external regulatory agencies. Let’s keep it that way by practicing fair and fundamental lending and purchasing while continuing to educate our clients and colleagues about the fundamentals of our industry.

This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on June 21, 2014.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com

Posted in Commercial Finance, Factoring, General Interest, Small Business | Tagged , , , , , | Leave a comment

Invoice Factors and Banks

One of the most common slogans you’ll see on any factoring company’s website is how they are better than most banks in getting businesses working capital. Conventional thinking is that banks qualify prospective clients based on the financial stability of the company whereas invoice factoring companies focus more on the credit worthiness of a client’s customers. Therefore a prospect with little or no credit or one that has been in business for a short period of time can qualify for a factoring line assuming they have strong customers.

For example, many banks will ask for several years of tax returns, financial statements and sufficient collateral to offset the loan. When dealing with the SBA, new companies will have to submit a business plan and meet other specific underwriting requirements as it relates to the new owners experience in the industry. The entire process from application to the final credit decision can take anywhere from a few weeks to several months.

Although factors like to differentiate themselves from banks there are many ways where the two can meet in the middle to find solutions and provide working capital to businesses.

At our company we are fortunate to have partnered with many well known and local banks that refer business to us and we reciprocate as well.

Although the reasons may vary on why they decline an applicant or cannot extend further credit for an existing client the general focus is the risk factor associated with the business.

For example, we recently funded a long existing customer, with a local bank, that has been in business for over 15 years. The company had a 400k loan with the bank and was expanding rapidly in several new territories. The account debtors were very strong and since the company had been in business for some time, we had a wonderful long account history to verify pay histories with each of their customers.

So why wouldn’t the bank extend credit to such a strong client?

Unfortunately, due to the company’s rapid expansion, the company fell behind on their federal payroll tax payments and a lien was about to be placed upon the businesses assets. Upon receipt of the news, the bank suspended an additional increase to the company’s credit line. After meeting with the bank’s chief credit officer and the company’s president we were determined to find a solution to keep the flow of funds moving. The bank was eager for a solution since they were in a precarious position. They already had a sizable outstanding loan on their books and if the feds were to place a lien against their client they would most likely suspend the current loan and file a demand for payment. This would be a disastrous situation creating a downward spiral for both parties.

We were able to meet with the company’s legal team and advise them how to get a payment plan in place for the overdue taxes. After several weeks of conference calls between attorneys, tax agents and representatives from both the bank and client we were able to get the tax plan in place, file our lien and open the factoring line. As a note, the bank assured us that an approved payment plan would allow them to subordinate the receivables on their UCC-1 filing giving us the green light to open a much needed factoring line with the client. This is a classic example demonstrating that banks and invoice factoring companies can work really well together to find solutions for businesses. It also proves the factor’s due diligence does not rest solely on the approval of the client’s customers.

This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on May 26, 2014.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or don.dambrosio@oxygenfunding.com.

Posted in General Interest | Tagged , , , , , | Leave a comment

The Balancing Act of Factoring Invoices

In past articles I have addressed the need for understanding your client’s business as well as having a consistent set of policies and procedures to ensure you effectively manage the risk of factoring invoices.

However, what happens when you run across those out of the box deals that do not fit nicely into your company’s comfort zone?

Instead of immediately throwing these deals away you might want to consider some adjustments you can make to mitigate the risk.

Although we all like to fund deals that are in our sweet spot in terms of size and industry, I have found that some of our best success stories were with clients in industries that we never would have imagined funding. Some past examples include speech therapists, a startup that refurbishes calculators and sells them to school districts, specialized welders and a company that only cleans out storage space units. I didn’t read about any of these types of companies when I was writing our business plan several years ago.

So what step should you take before funding the out of the box type of client?

Before I get into any general methods that we employ at our company let me preface it by mentioning there are several fantastic factoring experts that will gladly assist you (typically for a fee) in your quest to become an invoice factoring company or broker. Before we opened our doors we worked with several seasoned factoring professionals and their input was worth their weight in gold.

First let’s start with clients who have only been in business for a short amount of time.

This is a very common occurrence in factoring since banks will not usually lend to startups unless they have a rock solid business plan and sufficient collateral to back the loan. Startups can be in well seasoned industries such as transportation or apparel or be in a unique industry like some of the ones I mentioned earlier. One of the biggest challenges with trying to fund a company that has been in business for only a few months is their lack of historical results. They typically do not have any financial statements yet alone an account receivable history with their customers.

Several questions need to be answered when trying to fund startups. Do they have any past experience in their industry? What are the typical payment speeds of their customer? If your client doesn’t have any past history in their current venture this should raise a red flag. Obviously you will need to thoroughly verify every invoice to ensure the product has been shipped or the services have been completed.

A note to new factors, verifying invoices is one of the most difficult jobs that any factor has to perform. In many cases you will have to interact with an accounts payable person who basically feels this is just extra work for them for which they get no real benefit. This isn’t always the case but be prepared.

Many times the verification process isn’t always black and white. Several years ago we funded a few invoices with an apparel manufacturer that sold to one of the largest clothing stores in the country. When you called the 800 number to verify the invoice the only thing they would tell you was that the goods were received in the warehouse and would be inspected in a week or two. You as the factor have a client looking to get their advance yesterday since they have several more orders and desperately need the cash. How do you handle this one? I’ll save that answer for a future article about the joys of invoice verification.

Back to startups, what options do you really have when there isn’t any account history to use during your evaluation? Here are a few suggestions:

Start with a lower credit limit. Since your client’s payment history with their customer is limited have your proposal start with a smaller credit line with the option to increase as conditions are satisfied. Typically you will want to see a clean payment history over a specified period of time to satisfy your risk tolerance. This is usually a tough sell since the client will want to fund every invoice they produce regardless of any contractual limit. In many cases you may lose the deal to another factor with a higher risk tolerance than yours. Experience has taught us that most startups have unrealistic revenue expectations and in most cases fund less than they originally forecasted.

Setup a separate reserve. Many factors call this a rainy day type fund to have in the event of some unforeseen occurrence. This can be accomplished several ways including withholding advances, rebates or simply having the client write a check for a specified amount. We have found the most effective way is to withhold a portion of the client’s rebates until they reach the agreed reserve amount. This method allows the client to fund their invoices in a normal day to day fashion without feeling the upfront hit to their cash flow.

These are just a few simple suggestions you can use when thinking about funding new clients. There are several other methods to perfect your security interest including estoppel letters, liens and specific contract language that experts in this industry can advise you in greater detail. At the end of the day it comes down to balancing your risk and selling it to the prospective client. You’ll win a few and lose a few but most important is that you stay in the game.

This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on April 28, 2014.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or don.dambrosio@oxygenfunding.com.

Posted in General Interest | Tagged , , , | Leave a comment

There Are No Shortcuts in the Factoring Business

By now most you have already heard about Facebook’s purchase of WhatsApp for 19 billion in stock, cash and incentives. Before this record purchase it was Instagram, YouTube and so forth down the line. Just a few months ago, another company called Snapchat turned down a three billion all cash offer from Facebook saying they feel their company deserves a higher valuation based on interest from other parties. Wow, have times changed from when I was a young accountant a few years ago. Back then valuations were based on multiples of earning ratios, revenues, and operating margins. What’s funny now is that many of these companies have never generated a profit or been in business for more than a few years before they were acquired. These are the kind of rags to riches headlines we all love to read about since the majority of these companies are startups typically founded by a few guys under the age of thirty. I guess the old saying holds true that your company is worth as much as someone is willing to pay. Unfortunately, for those of us in the factoring industry there are no quick shortcuts to success. I can’t remember the last time I heard about a factoring app going viral or a new asset based startup being purchased for billions. In our industry, it’s kind of the opposite of these quick hit startups.

First, unlike most new businesses, an invoice factor’s goal is to decrease cash. Factors make money by purchasing invoices and getting their funds “out on the street”. The objective is to earn a high enough rate of return on purchased invoices to offset borrowing costs and general administrative expenses. Therefore, an adverse position for a typical factoring company is to have large amounts of idle capital not earning a return. It’s kind of ironic that factoring companies in too strong of a cash position sometimes get themselves in trouble by funding less than perfect applicants in order to cash out the door.

Secondly, most factors do not want to fund every transaction. I know that may sound crazy but you need to look at this from a risk reward perspective. Unlike typical businesses whose goal is to sell as many of their products and services as possible, factors know that every deal has a certain amount of risk whether it be with the client, customer or both. One of the biggest misconceptions about this industry is that factoring companies will fund almost anyone as long as their customers have good credit. Our position has always been a strong account debtor is a great starting point but not enough to close the deal on its own. So often I see new factors getting in this business and do not take the time to really understand the entire picture of the factoring deal. This business is so much more than just checking boxes off on an underwriting list. Understand what your client does, the relationship they have with their customer and why they are utilizing factoring for their business. Our closing ratio hovers somewhere between ten and twenty percent depending upon the industry. We advise our sales staff and brokers of what is important when looking for new prospects. However, at the end of the day it all comes down to proper due diligence, a thorough understanding of the client’s business model and a feel of what the client is trying to accomplish by using invoice factoring.

Finally and most importantly, understand the business. It’s ironic that although our industry is very easy to understand so few take the time to really understand it well. All too often we come across deals that others have passed on because there was an issue that was rubber stamped as a deal breaker. For example, if the company is in a growth phase where they need additional cash flow to keep up with orders then it’s probably a good reason to move forward. However, temper this by looking at the company’s profit and operating margins. We have come across several companies that are growing but not making a profit because they have either expanded too quickly or agreed to produce a higher volume at too low a margin. Conversely, if a company is scaling back then you should know why they are taking this course of action. Is it because sales are declining or are they just tightening their belt as a result of being bloated from accelerated growth? We have found that no two deals are exactly alike even if they are producing goods or services within the same industry. In one example we have funded two clients in the apparel industry with the same customer. It was clear that the one client, who was labeled a “preferred vendor” received preferential treatment through shorter payment terms and greater flexibility in getting the purchase order fulfilled. It’s almost equivalent to a person with a higher credit score getting a better rate on a mortgage loan than someone with less than perfect credit.

At the end of the day factoring takes time. It takes time to find out where the deals are and more importantly, the kind of deals you want to fund. Factoring takes patience. So often you come across great companies with great customers but the pieces of the puzzle do not connect. The account debtor may not want to work with a factoring company or the client may have a loan and the bank refuses to subordinate their position. These are just a few of the reasons why factoring business requires planning, understanding and most important, patience. If you follow the correct path, it can be a rewarding business and career.

This article was written by our President, Don D’Ambrosio and was originally published in the March/April 2014 issue of The Commercial Factor.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or don.dambrosio@oxygenfunding.com.

Posted in General Interest | Tagged , , , | Leave a comment