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Talk about contrasts to the banking scenario — check out this case study of an actual deal done by one of our funders.  But, first, let me just state, I am NOT, in any respect, trying to belittle banks — all small business should strive to become ”bankable” as quickly as possible. 

What I am saying, though, is that there are stark contrasts in the banking scenarios as opposed to the cash flow industry’s and I am trying to adequately document just how we work and how we fill a niche and very significant need of many small businesses with cash flow problems.

That being said, please check out this real-life example of a factoring deal:
 

The funding source received an e-mail from an effective and efficient consultant, Alice, on August 12, 2005. Alice was referring a prospect, Henry.

Henry’s company is in the business of asbestos abatement. Henry had been referred to Alice by his banker, Amanda.

In her initial correspondence, Alice informed the funder that Henry’s contracts, mostly with governments, are bonded. Henry has several loans with Amanda’s bank, and thus Amanda has a blanket lien on everything. However, Henry is current on all his loans, and his bank is willing to release (subordinate) Henry’s receivables so that he can factor and improve his cash flow.

Henry has never heard of factoring, but with Alice’s quick educational session and with Amanda’s prompting and blessing, Henry reluctantly agreed to explore the factoring possibility.

By examining all the information and documents that Alice sent for the deal, the funder found out the following (about Henry’s company):

  • annual revenues are about $9 million.

  • is considered a construction company (progress payments, retention, bonding, etc.).

  • Henry’s loans to Amanda’s bank amount to about $500,000.

  • Henry owes the Internal Revenue Service about $56,000.

  • Henry’s contracts are generally bonded.

  • The accounts receivable and the accounts payable are mixed together in one report that requires some decoding.

A conference call with Henry and Alice was scheduled for August 17. The objectives of the conference call for the funder were:

  1. Get a feel for the prospect

  2. Establish that he has a cash need

  3. Get some relevant information and clarify certain issues

  4. Analyze his cash flow needs

  5. Propose a financing solution

  6. Get a mutual agreement on the proposed solution

During the conference call, it was mutually agreed that factoring would solve Henry’s immediate cash flow problems. After the value of the funding company’s factoring service was established, Henry’s reluctance to factor disappeared, and he asked about the next step and how to expedite the process.

There were major issues that had to be resolved, though, before any funding could occur, namely:

  • The IRS issue had to be resolved in a way that was acceptable to funding source.

  • CB had to subordinate its position to the funding source on the invoices to be funded.

  • The bonding company had to agree to factoring by the funding source.

Henry concurred. The application form was sent to him; he completed the same day and returned to funding source with all the requested documents. The funding source faxed him that same day their factoring proposal. He accepted their proposal and sent it back the next day.

On August 18, the same day the Funding Source received the signed proposal, they sent him their full factoring agreement package by overnight mail. On August 19, Henry executed the factoring agreement and sent it back. The whole process of conversion, including executing the final documents, took less than three days.

On August 19, the funding company’s due diligence was immediately begun, in addition to working on resolving the above-mentioned three major issues. At the same time, to expedite the process further, they asked Henry to start sending them any invoices he needed to factor so that they could work at the same time on the verification process.

They encountered quite a few challenges along the way before being able to fund the first invoice:

Challenge 1: The bonding company refused to cooperate.

Solution: The Factoring Company agreed to factor the invoices for the contracts that are not bonded.

Challenge 2: CB did not accept their first draft of the subordination agreement.

Solution: The Factoring Company negotiated a compromise with Amanda and Henry by which CB subordinates only the invoices related to nonbonded contracts. A subordination agreement was finally executed on September 16, 2005.

Challenge 3: Amanda of CB was on leave from her job for more than two weeks.

Solution: The only solution was to wait for her to come back.

Challenge 4: CB requested some returns from the factored invoices to reduce Henry’s debt to CB.

Solution: The Factoring Company negotiated again with Henry and Amanda to have 10 percent of every factored invoice go to CB. The Factoring Company drafted an Intercreditor Agreement that was finally executed on September 26.

Challenge 5: Resolving the IRS issue

Solution: A written settlement was signed by the IRS on September 29, 2005.

Challenge 6: Henry’s customer’s creditworthiness and concentration were issues.

Solution: Since initially The Factoring Company had to work with only one customer with average credit, The Factoring Company requested and received proof of payment of previous invoices by that customer.

Despite all the challenges, The Factoring Company managed to fund the first three invoices, totaling more than $200,000, on Sept. 20, 27 and 29, respectively.

I think, by now, it should be very clear to all the extent to which a quality funding source will go to achieve its main goal of helping small business!

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