Presentation in Engineering Management: Engr. Eleonor F. Dilidili

PRESENTATION IN
ENGINEERING
MANAGEMENT
Presented to:
Engr. Eleonor F. Dilidili
Presented by:
Lenidee F. San Jose
FACTORING
EXPLAINED
 Say you’re a startup -- growing
fast, but with little-to-zero
positive cash flow – and you’re
straining to reach the next level or
just to get through the end of the
month. The bank – financing
drought is showing no sign of
letting up, and of course credit
lines are reeled in tight.
 What’s the answer? For a growing
number of startups, it is factoring.
The practice involves a financing
company, or “factor”, advancing you
money based on its buying your
receivables at a discount; your
customers pay the factor the full
value later, when the bill is due.
Factoring gets you cash in hand
immediately – but at a steep price.
 Factoring fess are much higher
than interest rates charged by a
commercial bank. Fees are
quoted by the month, so a typical
3-percent fee is actually the
equivalent of a 36-percent annual
interest rate.
 Dealing with a factor can also be much
more difficult than with a commercial
bank. Banks are highly regulated, offer
competitive rates and commoditized
lending services, so entrepreneurs can,
with few exceptions, easily anticipate the
cost and terms of their loan. But factoring
is very fragmented. Most factor financing
is provided by smaller, unconventional
lenders. It is much less regulated and the
quality, reliability and integrity of factors
vary widely.
 The reason more startups are turning to this
more expensive, risky alternative is simple: It is
often the only way to get cash. And if it is the
route you decide to pursue, due diligence is the
single most important step. Investigate how
long the factor has been in business, where its
offices and headquarters are and the
background of its management team. Ask for
referrals from current clients, and research
complaints or lawsuits using Web searches,
and government offices. Also, trust your gut: If
you feel you can’t build trust with the factor,
don’t pursue the loan.
If you go forward, review your contract with a magnifying
glass, particularly these points:
What is the duration of the
contract?
 The shorter the better – ideally,
month to month. You want to switch
to less expensive financing as soon
as possible.
Will the factor negotiate?
 Some factors allow contract

negotiations while others offer only
take-it-or-leave-it documents.
Must you provide a personal
guarantee?
 This allows the factor to go after you
and your assets to be repaid. Some
factors will lend without a personal
guarantee or a “non-recourse” basis.
Will the factor take possession of
your receivables if they are
uncollected?
 Probably not, which means you’ll need to

collect on your own. Be prepared: If
receivables are uncollected, you’ll need to
repay the factor’s advance or you may lose
financing altogether.
How will the factor notify
your customers?
 Ideally, the factor will create a lockbox
to accept payments in care of your
company. You maintain day-to-day
contact with your clients so that
everything appears seamless and they
are not aware of your financial
situation.
Will you be required to factor 100 percent
of your receivables?
Cash flow and collections patterns

fluctuate, and some weeks you must not
need financing. If your factor require you
to finance all receivables, you will pay
dearly for financing even when you don’t
need it. Single-invoice or spot factoring
allows you to opt out.
Is there a minimum or maximum
sales requirement?
 Some factors require a certain sales
volume. If you are not within the
limits, you may lose your financing-
so the fewer restrictions, the better.
 Finally, always keep the end in sight.
The real goal with factoring is to
improve your cash flow, increase
liquidity and rebuild net worth to
qualify for commercial bank
financing. Commercial bankers can
help you figure out the financial
targets that can help you re-qualify,
but it is up to you to create the plan.
THANK YOU
for
LISTENING…! 

Presentation in Engineering Management: Engr. Eleonor F. Dilidili

Uploaded by

Presentation in Engineering Management: Engr. Eleonor F. Dilidili

Uploaded by

PRESENTATION IN

 Some factors allow contract

 Probably not, which means you’ll need to

Cash flow and collections patterns

You might also like