Small Business Funding Alternatives

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Believe it or not, doctors are beginning to factor their receivables.

Of course, medical receivables are quite different from trucking or employment agency or most other receivables in general, with third party payors and all the procedure codes etc.

Although many experts speak of gloom and doom in the medical industry, the fact is that this industry keeps growing by leaps and bounds. Every year, the demand for medical services, medical testing (e.g. MRI Centers, Testing Centers, etc.) and medical supplies keeps getting stronger. This trend is expected to continue as the population ages.

However, even though the growth trend looks good, running a medically related business keeps getting more and more challenging. In the past, doctors and medical suppliers could expect to get large and quick reimbursements for their services. Cash flow was reasonably easy to manage. However, Medicare, Medicaid and 3^rd party insurance companies have put in place strict compensation guidelines. These guidelines can be summarized in two simple points: you can look to receive less money than before and you should be prepared to wait longer to get paid.

Let’s take a look at several options for the funding of medical receivables below.

Option 1

Cash is advanced by the funding source to a provider of healthcare services. The funding source then collects payment from third-party payors such as insurance companies and government insurers.

The funding source holds ownership position on the healthcare provider’s receivables that are advanced (i.e. factored), and a security interest on the provider’s remaining receivables. In a factoring relationship, the receivables are purchased, thereby passing ownership and the credit risk of non-payment on to the factor.

The Process

1. The healthcare provider completes the funder’s application.

2. A Letter of Intent is sent out by funder, specifying what it can do for the healthcare provider. Also included in the LOI will be a fee estimate for related audit.

3. The healthcare provider executes the Letter of Intent and returns to funder with a due diligence fee.

4. Funder then performs an audit of the healthcare provider’s third-party payors which includes:  (a) Analyzing of revenue cycle, billing and collection system; (b) Review of previous billing/collection history to build a matrix on each third-party payor; (c) Provides an on-going review of the billing procedures as long as the factoring relationship continues.

5. The healthcare provider signs a Purchase and Sales Agreement.

6. Funder funds the healthcare provider’s approved receivables upon satisfactory completion of final due diligence. 

Claims Processing

These funders know how critical claims processing is to a healthcare provider’s cash flow and, thus, business success and longevity. If claims are mishandled or incorrectly processed, your cash flow cycle can become sluggish. The efficient operation of claims processing is also vital to a receivables funding program as noted above in Option 1.

The primary goal of a billing or claims processing relationship is to ensure that the cash collection process is carried out with maximum efficiency, so the collection percentage is high and the time-to-collection is minimal. The claims processor’s primary responsibility involves taking over the billing function of a healthcare provider by acting as the liaison between the provider and the third-party payor.

Specific services include:

• Invoicing third-party payors (commercial insurance companies, HMOs, Blue Cross/Blue Shield, Medicare, and Medicaid), self-insured companies, and individuals who have no insurance or are required to co-pay a percentage of their bills.

• Managing the collection of accounts receivable including the resolution of disputes over claims with both payors and utilization review companies, handling patient and payor inquiries regarding billings, and pursuing unpaid invoices.

• Financial reporting and analysis, including the production of summary reports relating to payor mix and collection performance.

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To be wronged to the point of having to resort to filing suit, waiting throughout long, drawn-out judicial proceedings, and sometimes advancing court costs, etc. is a nerve-wracking and forgettable experience for most.

But to have the Judgment you worked so hard to have awarded   go unpaid by the judgment debtor adds insult to injury! Unfortunately, nearly 80% of all judgments are never satisfied.

Your judgment may have been awarded by the court but the follow through is completely your responsibility! Bet you didn’t know that!

But…..a judgment is a piece of paper with a dollar value attached to it, right?

So, you’re in luck – It is a negotiable paper instrument in the cash flow industry.

So, there are funders in this industry who have the resources, expertise, and determination to assist judgment holders in the process of collecting what is rightfully due them.

Oftentimes, judgment debtors will try and hide assets but these funders have the expertise to uncover any assets or sources of income, and take whatever steps are necessary to legally seize them and satisfy the judgment.

Even better, there are no upfront fees to the judgment holder and the funders do not receive payment unless they are able to recover for you!

These funders do not do an outright purchase of the judgment due to the fact that it can oftentimes be a lengthy process to pursue and collect the money owed — if at all. It is too risky an investment for even the most daring of investors.

They will take it on a “contingency” basis, though, and put their valuable time and sweat equity into recovering the money as well as advance any costs involved. So, the judgment holder can rest assured they will give it their “best shot”. Some might liken them to a modern-day “bounty” hunter!

First and foremost important fact for the weary judgment holder to remember —

Once you make the decision to allow these funders to handle the enforcement of your judgment, you basically do not have to do anything but:

• 1. Give the funding company the right to collect the judgment,
• 2. Inform the funding company of the basic facts of the case and any information on the judgment debtor available, then
• 3. Sit back and let the funding company investigate, seek out, seize and collect the judgment, plus interest and allowable costs. The funding company will advance any costs and expenses incurred in collecting on the judgment.

But….it is Extremely Important to not delay. The longer a judgment holder delays in getting the process moving, the more time the judgment debtor has to dispose of or hide assets which they do oftentimes try to do.

So, —– there is nothing for the judgment holder to lose (and lots to easily gain) by trying this option!

Some FAQs:

Can judgment holder collect interest on my unpaid judgment?

Usually, yes. Most judgments include a provision for collecting interest, usually from the day it was rendered. The actual interest rate and calculation procedure (compound or simple interest) varies from state to state.

Why not use an attorney to collect the judgment?

You can use an attorney if you are willing to pay a retainer and pay a fee of between $125 and $175 per hour, plus costs upfront, whether anything is collected or not. With our option, the judgment funder pays you a percentage of everything recovered and puts up any up-front costs. Also, this is their one and only area of work; collecting judgments is 100% of their business.

How about using a collection service?

A collection service may contact the debtor and harass him, they may even place a black mark on his credit report, but they rarely collect! With the passage of the FDCPA (Fair Debt Collection Practices Act), the debtor has the right to simply tell the third-party debt collector to stop ALL contact. A judgment funder will investigate the debtor, find his assets, and then seize them to collect the judgment.

Is there any guarantee of collecting the judgment?

No. Sometimes there are simply no assets to seize. However, the judgment funder will employ all legal means of uncovering existing assets including access to databases that enable them to garnish wages and bank accounts, and seize the assets of debtors if necessary….. because they DO NOT GET PAID if they are unable to collect the judgment!

Must the judgment holder pay for the expenses incurred in collecting on the judgment?

No.  The judgment company advances the cost of all expenses incurred in the judgment collection. In most cases, the expenses incurred in collecting on the judgment are either added to the total judgment (upon petition to, and approval by, the court), or the costs incurred are deducted from the amount recovered from the debtor before payment to you.

How long before results are seen?

It all depends on the difficulty in locating your debtor, and the difficulty in uncovering his assets. Some debtors are very smart about concealing their assets. Although the judgment company normally tries to get results in the first few weeks, recovering funds could take a few months or longer - sometimes a year or two.

What about a judgment awarded in one state against a debtor who resides in another state?

In most cases this is possible. Especially if your debtor answered your complaint or made an appearance at the trial or hearing. However, if your defendant didn’t answer or appear, the judgment is called a ‘Default Judgment’. This is considered a weak judgment. Each of us has the right to confront our accusers and to defend ourselves against any legal claims. Therefore, if the debtor is able to show the court that he was not properly served, or served in the wrong capacity, he can file a motion with the court asking it to set aside the judgment. This is the most common ‘hurdle’ that must be cleared in any judgment collection efforts, especially when done across state lines.

Is there a statute of limitations on executing on a judgment?

Yes. Your state law sets a limit on how long a judgment is valid, usually a period of 10 years from the date the judgment was rendered. Some states provide ways to renew the judgment for additional periods of time, usually another 10 years. However, in most cases, the sooner you collect on the judgment, the better.

How does all this work?

First,  an agreement is drawn up detailing the specifics of the judgment company’s purchase of the judgment. If acceptable, you then assign the judgment to the judgment company making them the judgment owner of record. Once this ‘assignment’ has been filed with the court, the judgment funder has the legal right to investigate the debtor and to proceed with the legal process of collecting on the judgment. On receipt of the signed documents, they will immediately initiate collection of the judgment.

And remember, it is to the judgment company’s advantage to move as expeditiously as possible, too, which will help you to be confident that all is being done as quickly as it can be done!

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Oftentimes people compare factoring fees to automobile or mortgage lending rates and factoring initially appears expensive.  They tend to annualize the points charged by the factor - equating 3 points per month to an interest rate of 3% or 36% annually. This is both an incomplete and incorrect comparison.  

First, factors purchase accounts receivable at a discount. They do not lend money.  (Similar to a sale of a personal vehicle between two individuals.) 

Second, the “paper” (accounts receivable invoices) is short-term in nature and management intensive versus a bank loan, which is secured against some stable asset and usually advanced once.  Conversely, factors are continuously advancing and collecting accounts receivable, providing clients with ongoing reports, credit, due diligence, and personalized account management services.   

So, let’s look at some examples: ·       

Think of a business which typically offers a 2% discount for early payment of its invoice – say within 10 days of issue.      

If this 2% discount for payment within 10 days is annualized (similar to the thought processes mentioned above) using the thirty-six,10-day periods in a year, 72% interest has been lost.       

But — are you really losing 72% for early payment? Of course not. 

Another example: 

• You get a factoring advance that costs 3 points per month but that consistent cash flow from factoring helps you to generate more business at your 20% profit margin.

• So, would it not have cost you 17% by not factoring?

 QUESTION:        What amount of return is generated when a company has an order but no way to fill it?   

QUESTION:          How much return does a $30 to $35 overdraft fee generate? 

QUESTION:           How much money is a business owner and/or his employees earning when they are running after payments from customers? 

All this being said, a company can mitigate any factoring fees incurred by being creative.  

For instance, with ready cash, some companies have been able to negotiate a larger discount (than their factoring fees) with their suppliers by paying those suppliers faster with their ready cash – thus, more than offsetting the factoring fees!  And, I’m sure there are many more creative ways that a smart business owner can figure out so that growth and sales opportunities are not left at their door! 

I submit that when a business owner truly focuses on ALL the positive aspects and benefits which will occur as a result of factoring and maintaining a consistent cash flow, the choice of whether or not to factor will be clear.

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OK - so who, besides me - in my “blogworld” - is going to be watching the 41st Annual CMA Awards tonight?

This will, in fact, be my first one to watch!  I have come to realize in the last several years just how much I do like Country music and how much “country” is really in this girl…a lot more than I realized previously.  On a recent visit by my brother I made him laugh when I told him I had a lot more yeehaw’s in me than I realized before.  But then, I love our cajun music, zydeco, dancing, etc. etc……but I digress…on to examples.

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Other Liquid Assets Which a Business Can Leverage to Help Keep it “Cash Rich” as Opposed to “Cash Poor”……………….by Debra Maples

Okay, so far we’ve been talking about the Asset-Based Lending industry and/or it’s cousin, the Cash Flow Industry and how they can help businesses with their working capital and cash flow issues.

We have reviewed some of the most commonly leveraged assets in these industries such as a business’ invoices, a merchant’s “future” credit/debit card receipts, equipment, and purchase orders and contracts.

We have also learned about some of the “financial tools” used to leverage these assets that include:

1. Factoring of a business’ accounts receivable which converts that business’ invoices into immediate cash for daily operating expenses;

2. Advances against a merchant’s “future” credit/debit card receipts;

3. Equipment leasing which helps a business leverage it’s equipment while it is creating revenue; and

4. Purchase order and contract funding for goods and services.

But what about “other” assets a business (or individual) might have which can be leveraged for its cash flow needs?

“Others?” you ask. Yes! There are many more! Remember…any piece of paper with a dollar value attached to it can be leveraged in these industries. And we will take a brief look at some of them now.

Perhaps your business has another liquid asset of which you are unaware which you can leverage and use to further enhance your cash flow! This list is always growing too. So, if you feel you have a negotiable paper instrument with a dollar value but are not sure, don’t hesitate to check it out!

Business-Based Cash Flow Income Streams:

• Accounts Receivable

• Aerospace leases

• Bankruptcy Chapter 11 reorganization plans

• Bankruptcy receivables

• Commercial contracts

• Commercial deficiency portfolios

• Commercial leases

• Construction receivables

• Equipment leases

• Equipment timeshares (or “fractional ownership interests”)

• International receivables

• Letters of credit

• Medical receivables

• Partnership agreements

• Purchase orders

• Sports contracts

• Trade acceptance drafts

• Warehouse inventory lines

For instance, a strip mall owner who has 20 retail merchant leases for the strip mall but does not need all the cash flow each month that is generated from these leases can sell a portion of the leases. The owner can then use the proceeds from this sale for improvements to the strip mall or for whatever other purposes he may wish, thus, self-financing the improvements!

Collateral-Based Cash Flow Income Streams

• Aerospace notes

• Automobile notes

• Business notes

• Collectibles notes

• Equipment notes

• Homeowner/condominium assessments

• Marine notes

• Mobile home notes

• Private mortgage notes

• RV, Motor home and business vehicle notes

• Tax lien certificates and tax deeds

Private mortgage notes are the most easily recognizable of this group. This liquid asset (mortgage) has been leveraged when the name of the company to whom a mortgage payment is made changes from one company to another. Almost every long-term homeowner has experienced this at least once.

Consumer-Based Cash Flow Income Streams

• Cemetery pre-need contracts

• Certificates of deposit

• Consumer contracts

• Credit Card charge-offs

• Delinquent debt

• Health and country club memberships

• Inheritances

• Trust advances

• License impounds

• Retail installment agreements

• Student loans

• Timeshare and vacation club memberships

Consumer contracts such as with mini-storage facilities can also be leveraged (or a portion sold) if the storage facility owner does not need all of the cash flow from the contractual payments, similar to the strip mall owner in the above scenario.

The majority of the instruments listed under the first three categories (as noted in the above examples) are leveraged in portfolios rather than individually.

In the following categories, the instruments can be leveraged both individually and in portfolios.

Contingency-Based Cash Flow Income Streams

• Commercial judgments

• Commissions

• Consumer judgments

• Corporate charitable contributions

• Franchise fees

• License fees

• Royalty payments (including mineral rights fees)

• Sales Revenue

The Merchant Credit Card Receipt Advances would fall under the Sales Revenue category whereby the merchant is leveraging its monthly, documented credit and debit card sales.

Government-Based Cash Flow Income Streams

• Farm contracts and conservation reserve payments

• Lottery winnings

• Tax refunds

• Tax credits

We all know how Louisiana has been whooing the film industry with tax credit incentives, right? And most of these companies are not Louisiana companies either, right? So, what are they doing with “Louisiana” tax credits? They are SELLING them to Louisiana companies who can use them thereby leveraging a liquid asset!

Insurance-Based Cash Flow Income Streams

• Annuities

• Casino winnings

• Corporate retirement plans

• Funeral purchase assignments

• Prizes and awards

• Structured settlements and class action awards

• Life Insurance cashouts (sometimes called viaticals)

There are funders who will purchase a person’s whole life insurance policy at a higher rate than what that individual would get from the insurer should he or she decided to cancel and cashout the policy.

If you have any questions at all or one of these liquid assets you would like to leverage or discuss in more detail, please do not hesitate to give me a call for a free, no-obligation consultation.

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With Purchase Order funding, there is a need for additional funding “before” you get to the invoice phase. I think of Factoring as the alternative financial tool of choice ONCE you have a completed service or product for which you are to the invoicing stage and Purchase Order funding as the tool of choice to help you get TO the invoicing stage.For instance, have you seen the Citi Bank commercials on TV lately?The one where the manager goes to the operations supervisor nervous and upset because they have just received a huge order for which they will need significantly more employees and materials to deliver?  The manager is upset because he doesn’t have a clue how they will have the needed resources to fill the order! Purchase Order funding would be happy to step in here as an off-balance sheet way of filling this order as opposed to more traditional debt models.Should a business hold back its sales efforts for fear of actually getting a larger order?Absolutely not!  Unfortunately, though, many business owners are unaware of the tools in this industry to help them leverage “Other People’s Money” to help self-finance their business growth and expansion.  The Citi commercial is a prime example.Fred Schmedt of The Samuel Noble Foundation says, “The use of other people’s money, called ‘leverage,’ is a tool that agricultural producers can and should use to harvest increased profits.”  The cash flow industry says not just agricultural producers should take advantage of this time-tested concept.Purchase Order funding is short-term funding used to finance the purchase or manufacture of specific goods that have been pre-sold by you to a creditworthy end customer. The cash advanced under PO funding is used to pay for the upfront materials and labor necessary to fulfill the order from a quality customer.  Once you produce, ship, and send an invoice for the goods - the funder will have a Factoring company buyout it’s interest.  The transaction then continues as a normal A/R factoring program. 
 
Contract funding is pretty much the same as PO funding but it is for a service as opposed to goods and there are many funders who specialize in this type funding as well.

Basically, though, they each (PO and/or contract funding) allow clients to accomplish the following:

Modern-Day Factoring – How it Works

The Vendor submits a particular customer for pre-approval of the factoring of their invoices. 

 Once pre-approved: 

• The Vendor performs a service or delivers a product and has issued the invoice to its client (account debtor) which has signed off on the invoice.

•  A copy of the invoice is faxed to factoring company and the original is overnighted so that the factoring company can begin working right away.

• Upon receipt of the signed original, the factoring company will wire transfer 70 to 80% of the face amount of the invoice into the Vendor’s bank account — generally within 24 to 48 hours.  (70% for construction and 80% for most others.)

•  The factoring company will send the original invoice and an Authorization Letter to the Vendor’s customer advising them that the invoice payment should simply be redirected to the address given.

•  When payment is received by the factoring company, the Vendor is sent the remaining 20 or 30% balance less the factoring fee which is based on the amount of time the invoice takes to pay and was previously agreed upon and acknowledged by the factoring company and Vendor.

 What Modern-Day Factoring does NOT do: 

• It does NOT change the payment terms of the Vendor with its customer.  The Vendor’s Customer does not need to pay any faster and the name on the check stays the same.  The address to which the payment is mailed is all that changes.
• It does NOT change the day-to-day contact between the Vendor and its customer

• It does NOT work as a collection agent.  Even though the Vendor’s customer will be sending payment to the factoring company, the factoring company will not be calling it to collect payment.  If payment is not remitted for some reason, the factoring company will work with the Vendor to reclaim the funds.

 General Advantages: 

• No long-term contracts
• No financials required
• Flexible
• Access to prompt funding
• Fuel for the fast-growing Company 

Now let’s look at an example:

From Bibby Financial:

“Staffing Firm Employs The Right Solution

Founded in 1993, Prime Staff is a fast growing staffing consultancy that provides temporary staff for the construction, industrial, engineering and commercial sectors.

Prime Staff found that the inherent challenges experienced by the staffing industry are often exaggerated by the banks’ inflexibility to provide the higher levels of funding required by firms operating in the high value temporary market.

Prime Staff’s Managing Director, Danny McIntyre explains, “Cash flow is always a major strategic challenge for staffing companies. We pay our temporary workers weekly and also invoice our customers weekly. However, we often have to wait 30 days for payment, so cash flow problems are inevitable.

“We looked at a number of finance options before our accountants recommended receivables funding. Bibby Financial Services impressed us with their commercial awareness and understanding of our industry and we opted for a receivables funding facility. This facility releases up to 85 per cent of the value of our invoices as they are raised, giving us an ongoing supply of cash linked to our sales. They then chase up the outstanding amounts from our customers, paying us the balance of the invoice less their service fee.” 

The benefits of receivables funding within the staffing industry are profound. It has allowed Prime Staff to take on a greater number of contracts with more staff placed because it enables them to pay their temporary staff. The collection service allows the company to focus on its core skill of placing people in jobs while Bibby ensures that payment is received.

Danny adds, “Receivables funding is now incorporated into Prime Staff’s long-term business strategy. Our relationship with Bibby Financial Services has allowed us to develop plans for the future which include the launch of three new offices, and to double turnover in the next three years. Bibby Financial Services are fully supportive of our plans to expand and we are on target to meet our goals.” 

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funding option - Factoring?

What about —– A Receivables-Based Credit Line!

You already know that if you can get a line of credit at the bank, they will usually lien your businesses assets (furniture, etc.) as well as your accounts receivable.

In the cash flow industry, we offer a line of credit based solely on your accounts receivable!  If you happen to have a line of credit with your bank, too, but still need cash flow assistance, usually banks will work with us and release your receivables from their lienhold so that you can then leverage them further in the cash flow industry.

But basically — factoring is the conversion of a company’s commercial accounts receivable into immediate cash by selling those accounts at a discount. Factoring is not a loan. With factoring there is no interest to pay, nor principal to repay. No liability will appear on a company’s balance sheet due to its factoring. A Company simply sells one of its assets (accounts receivable) to obtain a more liquid asset (cash).

Since factoring is not a loan, funding is not based on the company which is factoring and its ability to repay the amount advanced. Rather, funding is based on the ability of the company’s customers (account debtor) to pay what is owed the company for the purchase of the company’s goods or services.

Factoring is, in essence, a Receivables-Based Credit Line, which needs no other collateral which is available to be drawn on when needed.   Contrary to bank lines of credit, facotring lines of credit grow as your receivables do!

 ADVANTAGES TO FACTORING:

Ø      Your Credit Line grows as your business grows

Ø      No restriction or control by the factoring company on the use of funds

Ø      No new debt is created

Ø      You are always in control of your CASH FLOW! 

In addition, factoring provides a company services other than just improved cash flow. By factoring, a company is in essence outsourcing all or a portion of its credit, collection, accounting, and monthly reporting. Factoring companies perform these services for hundreds of companies, and are experts at it. By supplying these services for their Clients, and giving their Clients the cash flow needed to grow, factoring Clients are free to do what they do best – run their business and increase sales. 

With over $60 billion of receivables being factored in the United States annually (and that figure is increasing rapidly), factoring is a quick and viable way for companies to finance their growth. 

 Fortune 500 companies such as IBM, Georgia-Pacific, and Shell Oil use this financial tool.  And now, it is available to small businesses (under $100 million/year) nationwide so that they, too, can take advantage of this proven, debt-free, and flexible method to effectively multiply working capital.

 Signs that a business could benefit from factoring include:

• LATE PAYROLL DEPOSITS
• IN BUSINESS FOR 3 YEARS OR LESS
• EXPERIENCING HEAVY GROWTH
• ALWAYS CHASING CUSTOMERS FOR PAYMENTS
• HEAVY SEASONAL SALES
• POOR RECORD OF INSURANCE PAYMENTS
• TAX PROBLEMS
• CONSISTENT HIGH BACK-LOG OF ORDERS
• LOSS OF SIGNIFICANT CUSTOMER

 WHAT ARE THE OVERALL ADVANTAGES TO  FACTORING? 

With factoring, you can have cash on demand to fund business growth internally, meet seasonal demands, and accommodate new and larger clients who may demand longer terms. 

IMMEDIATE ADVANTAGES:

• FAST & EASY!  Once a client has been set up, moeny can be wire-transferred to their bank account within 24-48 hours!
• NO FINANCIAL STATEMENTS needed in most instances.
• NO LONG-TERM CONTRACTS are required and you choose and pick which invoices to sell.
• Once an invoice is purchased, the factor assumes full responsibility for its collection (unless another option is chosen by you.).
• NO ADDITIONAL “DEBT” IS BEING ACQUIRED - AN ASSET IS BEING SOLD! 
• IMPROVES CASH FLOW to help grow your business which, in turn, makes your business more attractive to conventional financing - it helps establish your business!

DAILY ADVANTAGES: 

•  Custom-tailored program to fit your needs.
• Get cash for operating expenses - when needed - and when you can’t get it anywhere else!ØInterested in your Customers’ credit history - not yours
• Continuous source of Operating Cash
• Provides Credit Services (Screening & Monitoring, Early Detection of Customer Service Problems)
• Get instant credit reports on prospective customers and continuous monitoring of the credit status of all present customers
• Provides detailed Management Reports
• Faster Payments!
• No debt creation - no monthly payments or balloon
• No personal guarantees
• No geographical limitations
• Reduces internal administration so you can focus on growing your business - greater operating efficiency
• Reduces bad debt
• Avoids repayment of debt at inopportune time
• Avoids giving up equity or control, as in “traditional financing”
• Able to meet increasing sales demands
• Off-balance sheet financing
• Protects and improves credit rating
• Professional collections
• Greater Operating efficiency
• “Time Value of Money”
• Able to take advantage of volume, trade and other spur-of-the moment discounts by having cash available   

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As well as being a niche industry, the funding companies in the cash flow industry could be referred to as “boutique funders”…Another difference between them and the banks.

With traditional sources you usually get a “Commercial” or “Business Banking Department” for business or commercial banking. In the cash flow industry, the funders are much more specialized than this.

For instance, with factoring, for example, there are funders that specialize in construction as opposed to medical receivables factoring. Two seperate industries, right, with their own particular differences in terminology, daily activities, transactions and ebb and flow of work? So, the cash flow industry has funders who are experts in each of the industries they are involved with. This industry does not operate under the philosophy that one size fits all, as we all know that, in fact, one size definitely does NOT fit all.

From my experience, I have seen banks attempting factoring but, generally, shying away from it because they realize that their one commercial or business banking scenario does not work well for this specialized type of funding.   They do realize however, that there is a need for the funding offered in the cash flow industry and Wells Fargo Bank has, in fact, recently purchased one of our larger factoring companies!  I have also seen banks branching out and opening a whole new section just to specialize in factoring of accounts receivable. 

 And, I say “larger” because not only do we have funders who specialize in particular industries (i.e. construction, medical, transportation, etc.), they break it down even further sometime into small, medium or larger transactions.  For instance, with factoring there are usually small ($50 on up to $100,000/per month), medium ($100,000 to $1M per month) and larger ($1M and above/per month) factoring companies.  Different from the banking industry, huh?

Don’t get me wrong, it is always a business’ objective to use banks BUT there are definitely times when the cash flow industry fills a need and quite often gives businesses the life’s blood they need to survive.

I use the analogy that the cash flow industry is sort of like the convenience stores, you can pull in and get what you need right away, without hassle and you may pay a little more for it.  But, you have what you need when you need it. 

We may all want to shop at the large discount stores like Wal-Mart, Target etc. to get the best value for our dollar but oftentimes the crowd or other things just make it easier and more advantageous for us to use the convenience store.  We have to make the decision of which best suits our needs at that time. 

Same thing with the cash flow industry and bank.

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So they can go fishing and catch an 844 pound shark!

No, seriously, they sell them for 3 reasons:

• 1. Access to their cash!
  • Sometimes there is a serious need (i.e. pay off credit cards, medical bills, or for a divorce settlement or retirement). 
  • Other times, there is simply a desire to .. purchase a dream home, take a vacation, buy a new car, start a business or put money into someone else’s venture.
  • And, then, in other instances people just want access to their cash for peace of mind. They don’t want to worry about liquidity issues, collection worries, or the finances of the person who owes them the debt.
• 2. Yield/Interest
  • People also sell because they know that with cash in hand today, they can start earning interest or yield. They will oftentimes even sell their income stream for less than face value so that they can begin earning a yield.
• 3. Inflation
  • Lastly, people realize that over time, the payments they receive today will drop in real value.

So, on the other hand, Why do people BUY income streams?

Buying future payments is a very profitable form of investing.

When investors buy future income streams, they do not pay face value and this equates to a high yield on their investment. Also, a nice perk with this type of investment is that they (usually) know in advance EXACTLY what that yield will be (provided the payments come in on time or are not contingency-based).  If they are contingency-based, as in the Cubs example below, this would be factored into the offer by the investor.

Buying income streams is very attractive to investors because it gives them the opportunity to invest their money profitably and relatively securely.

Check out the story on the sale of the Boston Cubs and the income stream their owner is selling.  Here’s a short excerpt:

“Whether Wrigley Field will be sold with the Cubs or separately is unknown. The neighborhood park with its ivy-covered walls is as much part of Cubs tradition as any player in the team’s history.

Donald Levin, the owner of the successful Chicago Wolves minor league hockey team, ticked off the questions surrounding the ballpark.

‘Do you own the field? Do you have to be out in case they renovate? Where are you going to play? What happens to all the income?’ said Levin, who is expected to make a bid for the Cubs. ‘These are more important evaluation questions than the contracts.’

Howard, the Oregon business professor, said an owner typically wants to control the venue where their team plays.

‘If you are paying that kind of money you want to be able to claim and control all income streams it will throw off,’ he said.” (Emphasis added.)

Perhaps the Cubs owner is tired of all the hassles that goes with running a major league club and, as noted above, would prefer to take a vacation and relax.  Sure, he will make a lot of money on the sale, but I imagine it will be far less than what he could make from the various income streams, tax credits and other benefits he would receive as the owner.

Suffice it to say, there will always be income streams available for purchase and investors will always be ready and willing to purchase them and hopefully I have been able to fill in some of the picture as to why that is so.

Until next post….Be Safe.. Debra

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