Factoring Lines of Credit

1. Factoring Lines of Credit Presented by Robyn Barrett Managing Member - FSW Funding

2. What is Factoring? • Factoring is a line of credit based on your accounts receivable. • Advance Rate: A factors will advance between 80-95% of the face amount of an invoice when goods are shipped to your customer. • Fee: The factor charges a fee instead of an interest rate. The typical factoring fee is 1% to 3% a month depending on the credit quality of your customers. • Cash Flow: Factoring can increase your cash flow by 30, 60, or 90 days in an effort to fulfill upcoming orders, stay current on payables, fund payroll, and meet other obligations. • Credit Analysis: Factors spend a lot of time analyzing the credit of your customers since this is the primary source of repayment. Thus, factors can be your credit department.

3. Why Choose Factoring? • Factors underwrite the line of credit based on the future of your business and the financial strength of your customers. Underwriting future sales equates to a larger line of credit. • Factoring lines of credit can be approved and funded in as little as 5 business days. • Factors can accommodate companies with customer concentrations, rapid growth, tax issues and limited time in business.

4. Factor versus Bank: What is the difference? • Loan Underwriting: Factors underwrite the future. Banks underwrite the past. • Credit Facility: Factors can often offer larger lines of credit and more availability. • Loan Approval: Factors can approve the line of credit and any subsequent changes in a matter of hours or days. • Credit Analysis: Factors can assist in the credit approval of new customers as well as managing some or all of the accounts receivable function. This can equate to reduced or re-allocated headcount for a company and better vetting of prospects.

5. Cash Flow Problem: Losing Money Current lender had asked Company Ato find new financing due to losses. Pros • Company Ahad operated for over 30 years. • The customer base consisted of strong military subcontractors located throughout the US. • The owner was a US Veteran who was obtaining Federal Contracts. • Invoices would pay on average of 52 days. Cons • Company A had losses in excess of $1M and negative equity of $1.2M • Over 71% of accounts payable was in excess of 90 days. • Company A had 75% concentration with 1 customer.

6. Solution: Factoring • Current lender had ceased funding and the company was in need a quick solution. • Factor was able to provide a $1.5M line of credit within 2 weeks. • Company Afactored for one year and significantly paid down vendors and was able to be profitable. • The improved financial state allowed the owner to sell the business for a sizeable profit.

7. Cash Flow Problem: Rapid Growth Company Bhad no financing in place and was experiencing extensive growth. Pros • Customer base was very strong Fortune 500 businesses. • Owner was very sales driven thus increasing business by over 50% year to year. • High gross margins. Cons • Company Bhad no financial statements that could be considered useful or verifiable. • High rates of return on products, in some cases in excess of 30%. • Very seasonal, majority of business is between September-November. • Some customers require terms of N60-N90.

8. Solution: Factoring • The cash flow provided by factoring current and new invoices, enabled Company B to pay suppliers within terms in order to fulfill upcoming large orders for holiday season. • By keeping current with suppliers and having excellent relationships with customers, Company Bexpects continued growth throughout this year and beyond.

9. Cash Flow Problem: Customer Concentration Company C, A start-up, was fortunate to gain a very large customer immediately but did not have the cash flow to fulfill the orders. Pros • The large customer was very strong multi-billion dollar company. • Products sold on high margin with virtually no return rights. • Owner had strong character and several years in the industry. Cons • Customer was located in Canada and sold on Net 90 terms. • Company Chad no operating history to review. • Primary customer made up over 90% of all sales.

10. Solution: Factoring • Factoring the invoices with longer payment terms created enough cash flow so Company C could stay current with all suppliers. • Company C was able to grow the business with domestic customers who paid in Net 30 and not factor those invoices to save money on fees. • By utilizing factoring, Company C was able to operate for two years showing profitability and able to get a $1M line of credit from a bank.

11. Conclusion • Alternative to banks: Factoring is a great option if you are not “bankable”. This doesn’t mean your business is bankrupt. It means the bank can’t underwrite a loan for your company at this time. • Flexibility: Factors can offer flexibility – no long term contracts, no monthly minimums, no hidden fees. • More access to cash:Factoring will allow your line of credit to grow as sales grow. Thus, you can go after larger contracts or orders without fear. • Credit Analysis: Factoring can help you evaluate the credit of prospects and ongoing customers.

12. Robyn Barrett FSW Funding robyn@fswfunding.com 602-535-5984