Financing by jizhen1947

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									WHEN BANKS SAY“NO!”


Much has been written about entrepreneurs
and their unique characteristics.
A common fallacy regarding small
business entrepreneurs is that they
are driven to build immense empires.
That is generally not the case.

The fact is, most true entrepreneurs start
their businesses simply to generate a "living"
and a steady stream of income. As true
entrepreneurs, however, they must also be
their own person, make their own decisions,
and the business must run their way.

Among their many characteristics,

• are risk takers and believe in themselves,
  their ideas, and their hunches. True
  entrepreneurs seldom give up and will
  never quit seeking a successful venture.

• are competitive and strive to earn respect
  from both customers and competitors. They
  compete with themselves and believe they
  control their own destiny.

• tend to be loners and thinkers who are
often attracted to home-based businesses.
They spend serious amounts of
"alone time" analyzing problems
and theorizing solutions and
are always thinking up new
ideas for beginning some
new venture.

• are goal oriented and once a goal is
  achieved, they may well replace it with an
  even loftier goal.

• are multi-taskers. Once a new idea is
  envisioned, they will then quickly develop a
  sense of urgency towards its fruition.

• tend to have a never ending sense of
  urgency to develop their new ideas. In fact,
  it is most often only their inability to finance
  their many ideas and projects that truly
  limits an entrepreneur's
  potential for success.

This presentation and its accompanying
booklet, When Banks Say “No!”, is designed
to assist small business entrepreneurs in
understanding the world of Early Stage
Financing Alternatives and in particular...
• commercial accounts factoring
• asset based lending
• purchase order finance

The U.S. Office of Advocacy defines a small
business as an independent for-profit
business with fewer than 500
employees. When attempting to qualify for
government contracts, the U.S. Small
Business Administration furthers that
definition by defining size requirements by
business type. The complete listing is
available at

According to the most recent census data,
the U.S. Department of Commerce estimates
there were 27.2 million businesses in the
United States of which 6 million had
employees. Of those with employees, 99.9%
were defined as "small business" (those firms
with fewer than 500 employees).
                NEED FOR FINANCE

Unfortunately, data also reveals that one third
of all these small businesses started end up
failing within the first two years of operation
and less than 50% survive four years. One
of the greatest causes of small business
failure is their inability to secure adequate
financing in their early stages of existence.
              ENGINE OF GROWTH

Throughout the world, small business is
recognized as the true engine of economic
growth. According to the U.S. Small
Business Administration (SBA), small
business ventures make up nearly 99% of all
known businesses in America with numbers
now totaling over 22 million.

Most small business ventures are initially
launched with the personal savings or other
assets of the founder. Sources of startup
capital are most often bank savings
accounts, investment accounts (stocks and
bonds), loans collateralized by the family
home or other real estate, credit cards, or
personal loans from friends and family.
               STARTUP FINANCING

Few new companies are ever started with
funds from true "angel investors" or formal
venture capital.

Typically, entrepreneurs will
actually be faced with the
task of raising capital in
two generic rounds, with...
                RAISING CAPITAL

• round "A" being an initial start up round
  where savings and funds from friends and
  family are utilized. And...

• round "B" being more traditional
  financing from banks and more formalized
                  RAISING CAPITAL

While the understanding of rounds "A" and
"B" financing is acceptable, it paints the true
picture of entrepreneurial finance with a
much too simplistic brush. For a better
understanding of the actual stages
associated with types of business finance,
the definitions commonly utilized in the
professional venture capital industry are
much more appropriate. Among these are:
               STAGES OF FINANCE

• Seed: the concept or idea stage of a
  business where money is needed to
  research feasibility.

• Startup: financing prior
  to initial operation.
                STAGES OF FINANCE

• First Stage: an operating business with
  capital needs for equipment, payroll, and

• Second Stage: growth capital now
  required with good First Stage results.

• Bridge: temporary financing between
  other financing rounds.
               STAGES OF FINANCE

• Mezzanine: equity financing that is prior to
  an initial public offering (IPO).

• Franchise Funding: financing for the
  purchase of a franchise.

• Leveraged Buyout: financing to purchase
  another established company using the
  combined assets for purchase.
               STAGES OF FINANCE

• Recapitalization: financing revolving
  around the restructuring of a company's
  balance sheet and increasing or decreasing
  the company's debt.

• Bankruptcy: financing to acquire another
  company operating under a filing of
  bankruptcy in Federal Court

In order to grow their businesses, it is crucial
for all entrepreneurs to have access to
"ready" capital. Commercial banks and other
depository institutions have historically been
the largest providers of financing for small
business, accounting for approximately 65%
of all financing through commercial loans
(including those for non-residential
mortgages, vehicles, equipment, and leases).

Though a variety of resources for commercial
financing are available worldwide, actual
providers of business capital can be broken
down into two very broad categories. Those
that provide equity investment alternatives,
and those that financing through debt.
               EQUITY FINANCING

Equity Financing...can be described as the
exchange of money for a percentage of
ownership in a business. Equity financing
allows a business owner to acquire funds
without the expense of servicing debt. It
typically does not encumber assets such as
equipment, inventory, and accounts
receivable and is normally accessed through
venture capital companies.
                 DEBT FINANCING

Debt Financing...refers to borrowed money
that is paid back over time. Debt financing is
flexible and can be for varied periods of time
(short term or long term). The lender does
not gain an ownership interest and the
obligation of the business owner is simply to
repay the loan as set forth in the lending
                  DEBT vs. EQUITY

Debt and equity financing offer significantly
different opportunities / responsibilities
when raising capital.
Some of the many
advantages and
disadvantages of
both methods
                 DEBT FINANCING

• Does not dilute an owner's interest in the
• Other than variable rate loans, repayment
  is fixed.
• Interest expense is deductible on tax
• No shareholder servicing requirements.
                EQUITY FINANCING

• Requires no periodic payment of interest.
• Will not affect a
  company's cash flow.
• Does not encumber assets.
• Does not require
  budgeting for principal
              ACCESS to FINANCING

A common source of frustration to virtually all
small business entrepreneurs is their inability
to access credit through the traditional
banking system as they attempt to grow their
businesses. Banks and traditional lenders
are severely regulated and covenant
restricted when attempting to provide truly
accessible financing and small business
loans to startup entrepreneurs.
              ACCESS to FINANCING

For most small business entrepreneurs, it is
when their business is initially successful
through its start up and first stage operation
that the entrepreneur is confronted with
his/her first cash flow problems. It is at this
stage that the initial cash grub stake from
savings, credit cards, and friends and family
is "burned through" and immediate additional
financing becomes necessary.
             ACCESS to FINANCING

This is also when an understanding of the
many financing options offered by such
federal agencies as the Small Business
Administration and the United States
Export-Import Bank become highly important
and when an in-depth understanding of the
alternative commercial finance (ACF)
industry may become critical.
            The SBA and EX-IM BANK

The U.S. Small Business Administration
(SBA) and the Export-Import Bank of the
United States (Ex-Im Bank) are two
independent federal agencies with powerful
financing options for small business
entrepreneurs. The SBA was created in
1953 for the purpose of aiding, counseling,
assisting, and protecting the interest of small
business concerns and free enterprise.
           The SBA and EX-IM BANK

Export-Import Bank of the Unites States was
empowered in 1934 as the official export
credit agency of America. Both
government agencies provide
extensive financial services to
small and mid-size businesses
with a broad range of programs.
               FACTORING and ACF

The global community of factoring and
alternative commercial finance providers offer
an extensive and powerful source of
financing options for start up / first stage
companies struggling in their early, formative
years of operation as well as larger,
seasoned companies in the various growth,
expansion and operational stages of their
              FACTORING and ACF

The spectrum of factoring and ACF products
directly addresses the problems faced by
those entrepreneurs which, for a variety of
reasons, are unable to
access traditional bank
financing and lines of credit
and the early stage capital
required to grow their ventures.
Worldwide, there are literally dozens of
unique financial product areas that join to
make up the entirety of what is termed the
alternative commercial finance community
with some being more favorable than others
in particular economies and geographic
For their ability to provide ready access of
capital to entrepreneurs and to generally
meet the working capital and cash flow
problems of start up and early stage small
business, several areas clearly stand out
among the rest. These areas include...

Commercial of the oldest
known forms of commercial finance, factoring
is also characterized by its simplicity. It
directly addresses those cash flow problems
associated with accounts receivable of a
business, slow paying customers upon those
accounts, and the granting of terms of
payment to customers in order to become
more competitive and to secure more

Asset-Based Lending...similar to factoring
in some ways, asset-based lending solutions
can be employed in a
multitude of industries
where financing of accounts
receivable, inventories,
and equipment is essential
for growth.

Purchase Order Finance...simply put,
purchase order finance involves the process
of providing capital to business owners
needing to purchase or to actually
manufacture goods to fill large orders prior
to shipment. It is often necessary to facilitate
handling transactions involving major

Merchant Cash Advances...a relatively new
area of small business finance but with broad
availability, MCAs provide
cash advances on future,
anticipated credit card
receipts of retailers
which can be used for
growth and expansion.
                   BANKS vs. ACF

For entrepreneurs in the early high-growth
period of developing their business, ACF
offers some significant advantages to
traditional financing. One such advantage is
the ability to finance each asset of a
company separately. When banks provide
financing, they will typically require all
assets of the company as collateral and file a
"blanket lien" when perfecting their loan.
                   BANKS vs. ACF

With such a blanket lien filing, the single loan
will be secured (collateralized) by inventory,
accounts receivable, machinery, equipment,
patents, rents, and any other asset of the
company. In such cases, bank loans are
often significantly over collateralized.
With ACF, collateral is typically taken
                  ACF EVOLUTION

Alternative commercial finance is a
community rich in history and legend.
Factoring, for example, may well be the
oldest form of commercial finance known to
man though most know little of its extensive
history and remarkable problem solving
capabilities when compared to more
traditional business financing methods.
                  ACF EVOLUTION

Factoring is literally centuries older than
modern day banking and some of history's
earliest recorded commercial
transactions of both the
ancient Egyptians and
Phoenicians reference
features similar to
modern day factoring.
                  ACF EVOLUTION

Asset-Based Lending's earliest beginnings
can be traced to a pair of encyclopedia
salesman, Arthur Jones and John Little who
started the first finance company, Mercantile
Credit Company, in 1904 which offered
accounts receivable financing. Asset-based
lending has grown steadily since and now
accounts for over 20% of all short term
business credit in the U.S.

Overall, today's alternative commercial
finance industry is enormous with asset-
based lending transactions alone
accounting for over $545 billion in terms of
outstanding loans annually. Factoring,
known affectionately as the industry's "crown
jewel", has grown to an annual volume of
roughly $135 billion domestically.

But as far as factoring is concerned, that is
only the tip of the iceberg. Recent statistics
compiled by the international factoring
organization, Factors Chain International,
quotes total global factoring now reaching an
epic annual volume of nearly $1.3 trillion.
              TODAY’S ACF INDUSTRY

Other areas are expanding just as rapidly.
According to ELFA, the Equipment Leasing
and Finance Association, the $650 billion
leasing industry is adding nearly $6 billion in
new equipment leases every month.

When you additionally begin to include the
many unique niche product areas such as
forfaiting, purchase order finance, merchant
cash advances, etc., the overall dollar
volume of specialized, non-traditional bank
financing done throughout the world is many
trillions of dollars each and every year.
                 ACCESSING ACF

While many of the product areas, associated
with the alternative commercial finance
industry are well established throughout the
world, some are relatively new. What has
changed markedly in the past 10-15 years
is the broad access to knowledge of
alternative commercial finance products.
This has occurred primarily due to two major
                  ACCESS TO ACF

• The Internet....without question, the
information superhighway now offers and
imparts a broad array of knowledge to those
who know where to look.

• Industry Brokers....a unique vocation
practiced by a select group of individuals that
share their industry knowledge with small
business entrepreneurs.
                THIS PRESENTATION

With such an expansive and rich array of
industry product areas, it is clearly well
beyond the scope of any basic presentation
(or most university courses for that matter) to
provide a complete education in all of the
fascinating areas of entrepreneurial and
alternative commercial finance practiced
throughout the world.
               THIS PRESENTATION

The objective of this booklet, When Banks
Say NO...the Small Business Guide to
Factoring, is to impart an introductory
knowledge of two of the most practiced and
accessible areas of alternative commercial
finance available to small and mid-size early
stage business entrepreneurs....Factoring
and Purchase Order Finance.

In simple terms, factoring or accounts
receivable factoring is the sale of the
accounts receivable of a business at a
discount to a finance company known as the
factor. Factoring is commonly employed by
businesses that grant extended terms of
payment to their customers for goods or
services purchased, allowing those
customers to delay payment upon invoices
for 30, 45, 60 days or longer.

Factoring is commonly employed by
businesses that grant extended terms of
payment to their customers for goods or
services purchased, allowing those
customers to delay payment upon invoices
for 30, 45, 60 days or longer. It is probably
the oldest form of commercial finance known
to man.

It is important to keep in mind as you develop
your knowledge of this powerful financial tool,
factoring differs dramatically from most other
forms of commercial finance in that true
factoring is never in the form of a loan.
Factors actually purchase the accounts
receivable of a business, a trait that
sometimes gives factors certain advantages
over more common commercial lenders.
For entrepreneurs in the early stages of
developing their businesses, factoring
represents one of the most powerful
financial tools available. Factoring...

• is available to businesses in the earliest
  "start up" stage of their existence.

• requires little or no credit history for either
  the business or its owner.

• provides a financing facility that
  automatically increases as your business
• provides substantial operational support in
  addition to providing capital.
• allows other business assets to be
  financed separately from accounts

Most factoring arrangements are sought out
simply to provide a readily accessible method
of financing a company’s terms of payment
policy and to remedy the cash-flow problems
a business often experiences by granting
such attractive terms of payment to its

At some point in time, as companies grow,
they are almost required to initiate a terms of
payment policy. Terms of payment are
granted by sellers as an accommodation for
a singular purpose…that is to attract more
purchases from large (and sometimes not so
large) creditworthy customers.

Many large, creditworthy customers, on the
other hand, demand terms of payment for a
singular purpose…..that is to benefit from the
payment delay provided under the terms of
payment policy and to allow time to sell
products or provide their own services and to
generate enough additional cash to
subsequently pay their supplier's invoice
within the normal payment terms.

For large corporations, the benefits of
demanding extended terms of payment from
vendors are very significant. When one
business grants terms of payment to another,
it is in effect, creating a short-term
non-interest bearing business loan to that
company. (See example page 18)

Because of the attractiveness to large
companies of delayed invoice payments,
it is not unusual to see contracts and large
purchase orders granted to those vendors
and suppliers that offer the most attractive
payment terms, even if the prices for goods
or services are slightly higher than from

In a typical factoring transaction, a business
owner (known as the client) will enter into a
relationship with a commercial financing
source (the factor) to which it periodically
sells its invoices payable by its customers.
In most modern factoring transactions, the
invoices are initially purchased by the factor
with an advance of cash (usually 75-85% of
the invoice face value).

By periodically purchasing a business's
invoices, the factor provides immediate
working capital for normal
operations including
timely payment of
its bills due to suppliers
 and its periodic payroll

With a factoring arrangement in place, the
customers of the seller still get to enjoy their
30, 45 or even 60 day credit terms while the
factor, not the seller, patiently waits for the
agreed payment. The factor will make
collection calls on behalf of the seller, provide
weekly accounting of all collections and fees
charged, and provide monthly statements of
account to the seller's customers.
               FACTORING BNEFITS

When payments upon purchased invoices
are ultimately received from the customers,
the factor deducts its fee for services (the
factoring fee), repays itself for the earlier
advance, and then rebates the balance to the
seller (client). In most modern factoring
arrangements, clients will sell their invoices
to the factor on at least a weekly basis but
sometimes as often as daily.

Though the circumstances that can trigger
the critical need for a factoring arrangement
can vary considerably, the common thread is
always a need to speed up the payment from
invoiced sales so the cash can be used for
some immediate purpose. Such needs
typically include…

• making timely payroll.
• paying suppliers for parts or merchandise
  early to obtain volume discounts.
• paying overdue
  tax obligations.
• purchasing machinery
  and equipment.

• funding retirement plans and programs.
• providing funds for acquisitions or
• increasing sales and
  marketing operations.
• buying out business
The list of reasons for establishing a factoring
arrangement go on and on. In most cases,
the need for factoring is the result of the
inability of a business to access bank lines of
credit, a trait that is of even greater
importance in today's credit impaired
markets. It is no surprise that factoring is
enjoying an increasing awareness by
business owners today as more traditional
methods of business finance prove difficult to
Business-to-Business Invoiced Sales
      As a method of providing commercial
finance, factoring only involves the purchase
of invoices due for payment for goods
delivered and for services performed on a
business-to-business basis. Factors are not
lenders and do not loan money regardless of
Ability to Verify Invoiced Amounts Due
      Unlike banks that may lend against hard
assets such as real estate and equipment,
factors purchase a piece of paper (an
invoice). Such invoices clearly must be
Unencumbered Invoices for Purchase
      Invoices purchased by a factor must be
unencumbered. This means that the
business owner selling the invoices cannot
have a pre-existing loan from a bank or other
lender that claims the invoices (accounts) as
collateral for that loan.
If such a pre-existing loan exists, the lender
will be required to subordinate the collateral
Assignable Invoices
      Factors require the ability to "notice" the
customers of a client and to redirect
payments from the client's address to that of
the factor. While this is not an issue in most
cases, some debtors, such as the Federal
government, may refuse to pay the factor
directly and will not recognize such
notification, thus adding a level of risk that
may be unacceptable to the factor.
Acceptable Profit Margins From Sales
      Factors will look at the profit margin of a
prospective client to make certain that
enough profit exists to absorb the overall
costs of factoring. Companies with15% profit
margins or higher can easily absorb the fees
of a factor.
Federal Tax Liens
      Prospective factoring clients must have
their payroll and corporate taxes current and
cannot have a federal tax lien for delinquency
in place. It is important to note however,
factoring can be an important tool in dealing
with tax liens, freeing up cash from invoices
which can be used to satisfy liens In some
Continuous Need /Ongoing Basis
     As a prospective client for factoring, the
business should exhibit a need for the
service on an ongoing basis. Those
entrepreneurs that only need additional
working capital on an occasional or one time
basis will find it much more difficult to interest
a factor in accepting the arrangement.
                ELIGIBLE INVOICES

For purposes of financing, factors and
lenders will purchase normal trade invoices
reflecting sales "without condition". Certain
types of invoices and / or conditions of sale
can disqualify invoices from factoring or other
forms of accounts finance. Some of the most
common of these characteristics include…
                ELIGIBLE INVOICES

•   Over 90-day receivables
•   Consignment invoices
•   Invoices Subject to Lien
•   Contras
•   Government / Foreign Accounts
•   Bill and Hold
•   Inter-Company Receivables
•   Contingent Invoices
•   Poor Credit Quality

Case Studies
 One of the best methods of understanding
factoring is sometimes through
examples or
"Case Studies".
See page 28.
                  FACTORING FEES
Fees Charged in Factoring
     Fees charged for factoring are usually
calculated per period of time that the invoice
remains outstanding and unpaid. Such
periods are referred to as "windows" and are
frequently either 10 or 15 days. Factoring
fees have dropped markedly over the last
twenty years with a typical 30 day factoring
rate now being about the same as a credit
card transaction (2%-3%). See page 32

      As international trade continues to grow,
so do the opportunities for international
factoring or import-export factoring. It is
becoming well established in many
developing nations (especially those that are
highly industrialized) and is often considered
the financing method of choice for export
trade between the United States and Europe.

There are four parties involved in an import-
export factoring transaction:

     ♦   the exporter
     ♦   the importer
     ♦   the export factor
     ♦   the import factor

In most typical international factoring
transactions, the export factor will be located
in the same country as the exporter of goods
and the import factor will be located in the
same country as the importer of goods. The
exporter will work with the export factor who
has a relationship with the import factor.
Usually, both will be members of
Factors-Chain International


Purchase Order Finance (PO Finance)
is a powerful financial tool commonly offered
through factors and asset-based lenders.
Though its capabilities are not limited to
export-import trade, its use is so common in
cross-border transactions that virtually any
entrepreneur with international commerce in
mind should become familiar with its

Simply put, purchase order finance answers
the needs of manufacturers and distributors
when capital is necessary to fulfill an order.
Whereas factoring is brought to bear after the
delivery of merchandise or performance of a
service, purchase order finance provides the
necessary capital to manufacture the goods
prior to delivery and invoicing.

Successful purchase order finance is based
on three criteria:

• a valid order from a creditworthy
• performance capability of the client
• is it a "firm" purchase order?

Purchase order finance is primarily utilized by
two types of companies... distributors and
manufacturers. It is generally not available
for the service sector. As a rule, distributors
do not manufacture or assemble their product
although many intoday's markets are
"contract manufacturers" and arrange for the
manufacturing of a product overseas

Purchase order finance companies work
directly with factors and asset-based lenders.
Once an order is filled and delivered to the
customer, the customer is invoiced by the
client and an account receivable is created.
At this point, the purchase order finance
company must be "taken out" by the factor or

As a general rule, most purchase order
finance companies dislike working directly
with lenders such as banks, much
preferring the flexibility of the factors and
asset-based community.

As mentioned, one of the most common
transactions requiring purchase order finance
is that of offshore contract manufacturing.
When a foreign factory, for example,
manufactures a product for a domestic
company, they generally require full payment
when the goods are delivered to the freight

To accommodate the foreign factory, the
domestic manufacturer will contact a
purchase order finance company to:
     A. post a letter of credit for payment
     B. inspect the goods
     C. pay for the goods when required
     D. arrange for shipment to the

Once the goods are delivered to the client's
customer, invoices can be generated which
will be factored. Instead of advancing funds
to the client, the factor first pays the purchase
order finance company satisfying their lien.
The balance of the advance is then given to
the client.

It is important to understand that purchase
order finance is a short-term transaction,
usually lasting less than 60 days. As with
factoring, it is never used to finance
inventory. Goods generally must be
delivered directly from the factory to the
customer, bypassing the client altogether.

If the goods must be modified or repackaged
by the client, this can often lead to a problem
with purchase order financing. When
purchase order finance is used to acquire
inventory, an asset-based lender must agree
to take out the purchase order finance
company when the goods are delivered.

 In most cases, a business owner requiring
purchase order finance will work directly with
their factoror asset-based lender to secure
such financing. In the cases where a direct
relationship is first established with the
purchase order finance company, that
company will refer the business owner to an
appropriate factor or asset-based lender.
          Alternative Commercial
             Finance Solutions

When Banks Say...


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