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Factoring and Purchase Order Financing

Pennington Consulting Group | Factoring & Purchase Order Financing

Why is it necessary?

As an example, my company manufactures $1,000,000 in widgets every month. The orders come in and I am able to fill each order. However, one of my customers calls me and states that he/she is looking for $1,000,000 in widgets for the next month. Obviously I want to fill this order and basically double my production and profit for that month. This is an important customer and will move their orders to one of my competitors if I am unable to meet their needs.

My problem is that I am geared for $1,000,000 per month and my financial position allows for that level of production and very little more. My line workers are currently working at their maximum capacity and any additional production would entail hiring additional workers and/or paying the current staff overtime to meet this order. If I work my employees beyond their normal working hours this will increase my utility costs also. More raw materials will be required to fill the order. All of this requires an influx of capital to keep on top of these additional costs. I have already pledged all my assets for other lending that my company has received and am just at the end of my borrowing capacity. What can I do?

Solution for Lack of Capital

Requirement for Funding:

1) The minimum gross profit margin will be 50%.

2) Order to delivery time to be no more than 6 weeks.

3) The order is to be shipped all at one time so that entire amount of the invoice generated will be due and payable.

4) PO Financer will perform due diligence on both my customer and my company to determine:
a.My ability to produce and deliver the goods.
b.My customer’s ability and willingness to pay for the goods upon delivery.

5) PO Financer charges 4.5% interest per month until total advance is paid back.

Benefit to client

I have the ability to meet the order from my customer thereby retaining the customer and substantially increasing my profit for that time period.

What happens while client waits to be paid by customer?

The PO financer is charging me 4.5%. This is a huge financial burden and can be offset very easily. When I deliver the widgets I generate an invoice to my clients which is all due and payable as all goods have been delivered. My customer passed the due diligence investigation of the PO financer because they always pay their bills. My problem is that the customer takes 60-90 days to pay. This would cost me 13.5% on the money borrowed from the PO financer. So what can I do? Factor the invoice. Once I have sold the invoice to the factor I receive 70-90% of the invoice value as an advance and can easily pay back to PO financer as they have only advanced based upon a gross profit of 50% so I will be 20-40% ahead after paying the PO financer. When my customer pays the invoice I will receive the balance of my reserve account after paying the discount fee to the factor.

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Steps in the Process

  • Purchase Order from customer for $1,000,000
  • Request for $500,000 from PO Financer resulting in 50% gross profit as required by them
  • Due diligence in both manufacturer and customer
  • Advance against PO
  • Manufacture of goods
  • Delivery of goods and invoice generated
  • Invoice offered to Factor
  • Due diligence by Factor
  • Sale of invoice to Factor and advance to manufacturer

Once I have sold the invoice to the factor I receive 70-90% of the invoice value as an advance and can easily pay back to PO Financer as they have only advanced based upon a gross profit of 50% so I will be 20-40% ahead after paying the PO Financer. When my customer pays the invoice I will receive the balance of my reserve account after paying the discount fee to the factor.

Account Receivable Financing

This is a popular method of financing working capital requirements for a growing business.

This financing enables a somewhat illiquid asset (e.g. accounts receivables) to be converted into cash immediately.

This financing is not intended to supplement capital for grossly under-capitalized firms in a rapid growth period.

Purpose of Accounts Receivable Financing

Accounts Receivable Financing Benefits

Loan is secured by accounts receivable through a UCC-1 filing, perfecting the lender’s security interest. It is normal to take a filing on both inventory and accounts receivable for this form of financing. Percentage advanced against accounts receivable ranges from 65{240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} to 80{240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} of eligible collateral less than 90 days old. Financing is done on a “Non-notification” basis to the borrower’s customers. The amount of the line expands as the collateral base and sales volume increase. Interest is charged on a daily average of the outstanding loan balance. There are no discounts or fees. The minimum charge for most financing arrangements approximates $750 to $1,000 per month. Interest rates are established on a sliding scale, with the rate becoming cheaper as the amount of the credit increase

Qualifications and Considerations for A/R Financing

1. The company must have a positive net worth and retained earnings. 2. A historical trend of continued profitability is mandatory. 3. Reasonable leverage on the balance sheet ranging from three to five times is acceptable depending on industry considerations. 4. Sales volume of at least $50,000 per month with a potential to significantly increase is desirable. 5. Management must prove to be astute capable. 6. Most financial institutions will not accept account receivable financing for consigned merchandise, progress, progress billings or other forms of conditional sales where large returns are allowed.

Interests Rate on Accounts Receivable Financing with a major bank

Balance Outstanding Loan Rates: (+/-) $50,000 and Under P + 5 ½ {240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} $50,000 — 100,000 P + 4 ¾ {240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} $100,000 — 250,000 P + 4{240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} $250,000 – 500,000 P + 3{240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} $500,000 – 1,000,000 P + 2 ¾{240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} $1,000,000– P + 2 ½

Factoring

Accounts receivable can be purchased outright from the borrower or advanced against on a formula basis on a maturity-factoring basis. Factors have a capability of performing credit department functions as requested by the borrower and can preapprove all accounts receivable purchased. The factor can absorb all losses on accounts receivable purchased on an outright basis. The cost of factoring is usually higher than that of conventional banks’ accounts receivable financing. Factoring discount rates range from 1.50{240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} to 10{240dab3b42cee03bff15e8ed9c2f0851a7047a00dd8ba441998816dc94f5326d} of the total amount factored. Generally, the factoring is done on a notification basis with the client’s customers since all payments are remitted directly to the factor for control purposes. However, financing can be done on a non-notification basis.

Who needs Factoring?

Small and medium-size businesses, including new businesses that cannot get conventional financing. Any business needing additional operating capital. The factor can absorb all losses on accounts receivable purchased on an outright basis. Businesses that want to expand or need a cash flow injection. Businesses with tax liens (or problems trying to work out a situation with the tax authority (ies). Businesses that are working through a Chapter 11 or a Bankruptcy.

Reasons for Factoring

With the advantage of a positive cash flow, factoring clients can: Increase working capital by establishing an additional, ongoing source of cash. Increase cash turnover to pay bills, taxes, etc on time. Get cash for operating expenses when you need it. Get cash when you cannot get financing elsewhere. Avoid giving up equity or control, as you would in conventional financing. Protect and / or improve your credit rating. Avoid repayment of a debt in an inopportune time. Take advantage of trade discounts by having the cash available to pay upfront for supplies, equipment, or other spur–of-the-moment opportunities requiring cash.

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Call Us Today

Call us today and schedule a consultation 800-910-3570

Apply Now

Fill out our contact form and a representative will contact you within 24 hours.

Apply Now