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Sarsha Adrian Senior Consultant Graber Associates TMANE Annual Meeting May 5th 10:45- 12:00 Session 505 Founded in 2002 Financial Services and Technology Markets Experienced subject matter experts Research, Marketing Strategy & Execution, and Public Relations Offices in Boston, Burlington, London, New York (C) Graber Associates LLC 2011 Part of the trillion-dollar Cash Flow Industry A simple, untapped channel of wealth Factoring involves the buying and brokering of a company's accounts receivables In today’s credit-restricted market, factoring is mainstream. (C) Graber Associates LLC 2011 Practiced for centuries Romans sold promissory notes at a discount Factors financed the new world Today, $150 billion dollar industry Better known in Europe than in U.S. (C) Graber Associates LLC 2011 Businesses sell accounts receivable (invoices) to Factors for cash ◦ discounted price, based on level of risk Effective management of receivables Boosts company profitability (C) Graber Associates LLC 2011 Merchants who accept credit cards Payday loans Both have different “clients” and “customers” but concept the same (C) Graber Associates LLC 2011 Factors rates of return far superior to those of traditional investment vehicles ◦ Unregulated business, can charge market rates ◦ Assume the risk of collection ◦ Factors must be aware of the creditworthiness of their clients’ customers ◦ Those customers become the factors’ debtors (C) Graber Associates LLC 2011 Client (seller) Customers (debtors) Account receivable (invoices) Advance (% of invoice paid to client) Reserve (% of invoice held by Factor) Discount Rate (% amount charged by funding source for use of money) Recourse / Non-recourse Contract period Fees (services, credit) (C) Graber Associates LLC 2011 Need immediate cash flow to fund growth, make payroll, etc. Smooth out cash gaps Want to build up company cash reserves Eliminate collection hassles Don’t want more debt on balance sheet Don’t want to dilute company equity Can’t get or wait for bank financing (C) Graber Associates LLC 2011 Flexible and powerful strategy to improve cash flow ◦ Remember the Time Value of Money Receivables can be monetized 60% of business’ cash is tied up in accounts receivable (Payments) Average days sales outstanding (DSO) across all industries is 65 days (C) Graber Associates LLC 2011 Time Value of Money Ø Given the choice between receiving $100 today or $100 next year, the obvious choice is Today. Why? Ø Inflation – “eats away” at purchasing power Ø Delay - you can’t put the money to work earning interest or a return on investment (C) Graber Associates LLC 2011 Base discount for the first few days ◦ Initial 3% Incremental discount for following days 1% for every additional 10 days Large factors also require application or due diligence fees 1% up front Also billing fees (C) Graber Associates LLC 2011 Fees and Rates Calculation Present Value of a Payment (C) Graber Associates LLC 2011 Factor 1 Factor 2 Advance 80% Advance 85% Discount 3% for first 30 days Discount 2% for first 15 days 1% for every 10 additional days 1.5% for every 15 additional Annual return = 3% x 365/30 = days 36.5% 30 day discount 3.5% = $3,500 Monthly commitment for 1 year of 30 Day Return % $100,000 = $3,000 per month $3,500/$85,000 = 4.1177% Discount / Advance = Monthly Return on Advance amount ($80K) = 3.75% APR: 4.1177% x 365 /30 = APR: 3.75% x 365/30 = 45.625% 50.00987% (C) Graber Associates LLC 2011 Large Corporate and 130,000 Middle Market $10+ Million High End Small Business 121,000 $5 - 10 Million Small Business $1 - 5 Million 1.4 MM Micro Business 6.2 MM $50,000 - $1 Million SOHO/ Self-Employed 16.8 MM Revenues vary (C) Graber Associates LLC 2011 Many large factors service large corporate clients ◦ Metro areas: check the Yellow Pages ◦ Minimum commitment of $100,000 + per month ◦ GE Capital, CIT Regional factors ◦ Riviera, Millennium, LSQ, Gateway, Bibby Small local factors ◦ Independent investment businesses interested in short- term financing Web ◦ New exchanges (C) Graber Associates LLC 2011 Ø Spot Factoring Ø Auction Sites Ø Single invoices Ø Receivables Exchange Ø Online Factoring Ø DebtX Ø Lower rates Ø Business-to- Ø No minimums Business Ø 100% cash upfront Ø TradePay Ø Easy signup Ø Bank Solutions Ø No non-payment Ø Asset-based lending insurance Ø Small invoice amounts Ø INZAP Factoring Ø Facteon (C) Graber Associates LLC 2011 Security Guard Company Oil Well Service Company Electronics Importer Provides security guards for large retailers that have parking lots (Home Depot, e.g.) Locations in NY, NJ, PA, and MD Closely held $20 million in annual revenue (approximately) Business challenges: ◦ Started small - $20,000/month in sales ◦ HUGE initial growth curve – payroll was main problem ◦ Could not access “traditional” financing (i.e., bank) to handle growth ◦ Inexperienced management ◦ No administrative infrastructure Factoring Provided: ◦ Straightforward and fast underwriting approval – 5-10 business days at most ◦ Ability to fuel extreme growth curves – in this case 2,500% in year one ◦ Mailing and collection of invoices ◦ Cash posting of factored invoices ◦ Online, real-time reporting on account metrics (turn, credit limits, ledger, etc.) Results: ◦ Cost of factoring started at about 4% of sales and is currently at 2% of sales ◦ Cemented client’s reputation with large customers ◦ Fewer resources expended on unnecessary infrastructure (employees, larger office space) Provides process for capturing more oil from the well during production Family owned business Operates in TX, LA, AR and PA Annual revenue growing to about $30 million Business Challenges: ◦ Need to capture business by “being ready” when called ◦ DSO runs approx 65 days – extreme cash flow pressure ◦ Capital equipment intensive business ◦ Lack of good documentation for completion of service Factoring Provided: ◦ Access to instant cash - zero down time between jobs ◦ Solution to long DSO of 65 days ◦ Cash reserves to rent or purchase capital equipment needed to complete jobs ◦ Streamlined document signoffs and invoice submission ◦ Very positive unanticipated effect! Results: ◦ Cost of factoring started at 7% of sales and decreased to 5% of sales ◦ Better relationship with customers resulted in additional business ◦ Can focus on what they do best, rather than what they hate doing – chasing invoices Imports consumer electronics goods from China Ownership diluted among approximately 100 investors Customers are big-box retailers Annual sales unpredictable – seasonal and based on current market needs Business Challenges: ◦ Unpredictable sales cycle ◦ One PO could range from $100K to $3M ◦ PO financing and factoring needed to complete on- time delivery ◦ Desk, phone, and laptop the only “infrastructure” in the U.S. ◦ Concentrated credit exposure Factoring Provided: ◦ Flexibility to accommodate wild sales fluctuations ◦ A partner with a PO finance company to complete order ◦ Outsourced A/R management ◦ Credit approval ◦ Credit risk of customers Results: ◦ Cost of factoring ranged between 3% and 5% of sales (depending mostly on DSO) ◦ Now able to execute on POs without PO financing and factoring (“OPM”) ◦ Better assessment of credit risk ◦ Protection from credit risk Factoring is a financial tool – and like all tools it has its place Cost of factoring includes more than just capital – there are other services involved Risk tolerant (underwriting of client) Quick Limited asset filing Short-term (6-12 months usually) http://www.factoringresources.org http://www.factoringcompanies.org http://www.americanfactoring.org/Links.asp (C) Graber Associates LLC 2011 Many more options Increased competition has lowered rates More flexible, shorter term contracts More mainstream thinking (C) Graber Associates LLC 2011 Questions? (C) Graber Associates LLC 2011 Thank you! Sarsha Adrian Senior Consultant Sarsha@graberassociates.net (C) Graber Associates LLC 2011
"Presentation Title - Graber Associates"