Ozarks Capital Funding

Invoice factoring is a great way to acquire working capital.  But before you begin the application process, you should become as educated as possible about what it entails before deciding if it’s the right financial tool for you to use.  That’s why we wrote the e-book “Accelerate Your Cash Flow With Invoice Factoring“.

This factoring e-book is packed with information about how factoring companies communicate with your customers, how fees are determined, and much more.  All for less than the price of a lunch.

Invoice factoring for medical providers is similar in concept to that of other industries such as sfaffing companies, manufacturers and distributors.  But in practicality, it is much more complicated because of the uncertainties in billing.  In fact, many factoring companies will fund most any sector but won’t touch anything to do with health care.

A factoring company devoted to medical accounts receivable factoring conducts an extensive amount of due diligence at the beginning of the relationship.   An audit is conducted that checks EOB’s (explanation of benefits) against the amount billed as well as a history of collections per third party payer.  This is because the provider rarely receives 100% of the amount billed.  Factoring companies must know in advance how much the client is expected to receive compared to the gross amount billed.  Since they are advancing up to 85% of the net collectible expected value, factors must have a good handle on what that expected amount will be.

Many medical providers balk at paying for the audit because it can be expensive (starting at $2,500 and can be as much as $15,000 depending on the size of the client).  But they must understand that if the factoring company footed the bill for every applicant, they would go broke because of those that are just “kicking the tires” or simply didn’t qualify.  They do make every effort to prequalify an applicant before it gets to that point.

Even though your company may manufacture products, distribute goods, or provider services, you will also be, in effect, a lending institution when you offer credit to your customers.  This is of course a normal practice.  In fact, to not do so would probably cost your company market share because your competitors most likely offer credit terms to their customers.

Invoice factoring allows your company to monetize the amounts due from customers by granting an advance on invoices.  BUT factoring companies are very careful to review the credit standing of your customers as well as their payment history.   Since accounts receivable factoring is based on your customer’s ability to pay in a timely manner and the receivables are the only collateral, factors must perfrom an adequate amount of due diligence.

When you are considering offering credit terms to a new customer, a similar amount of care should be given.  There are some important steps you should take before becoming the customer’s “banker”.

• Make sure to get a fully completed credit application
• Check the credit references listed
• Acquire a Dun & Bradstreet report and learn to understand the language on the report
• Set a reasonable credit limit until the new customer has shown they can pay their bills within your terms
• Don’t be shy about asking for financial statements
• Require the majority owner(s) to sign a personal guaranty

Remember, getting a new customer who does a lot of business with you is meaningless if they are extremely slow payers.  That’s the way a factoring company would look at it.  Most factoring companies expect you to refund the advance when the invoice aging goes over 90 days.

The headline of this post should cause a lot of readers to say “duh” as it seems so obvious. But surprisingly, many staff members and even owners of companies aren’t very respectful to their most value asset: their customer base.  I’m not necessarily talking about them being rude or obnoxious when they talk to them.  I’m mainly referring to not returning telephone calls or inquiries from other sources in a timely manner or even not at all.

As a business owner or team member, you need to be organized and respectful enough to return phone calls and reply to email messages from your potential customers.  To not do so is sending the following message:  “I am busy and you are way down on my list of priorities”.  To have such an attitude might result in your business not being busy at all in the near future.

When a business owner or financial executive makes the decision to factor invoices, he or she usually wants to start as soon as possible.  Like any other financing, there are steps to be taken for approval.  With accounts receivable factoring, qualification usually isn’t nearly as cumbersome as applying for a bank loan.  But it is important to have your ducks in a row when submitting the package to the factoring company.

Most invoice factoring companies expect a completed application, which consists of information about the company, it’s management, and it’s customers.  In addition, a current aging report of receivables, past two years financial statements, and corporate or LLC documents is required.  Some factors ask for more information on the front end, but for the most part, these documents are what is needed for the factoring company to make a preliminary evaluation.

In order to expedite the processing of the account, make sure the application is filled out in its entirety and that everything else on the checklist is included.  There are so many companies applying for factoring that if there are any parts of the package incomplete, it will cause the application to be kicked out and could delay the process for weeks.

As a broker, I often keep the process moving along without delays.  For example, a medical imaging company sent me what they thought was a financial statement.  Instead, it was a list of expenses with dates next to them (like a disbursement journal).  If this had been sent to the factoring company, they definitely would have rejected it and probably had hesitations about ever doing business with them.

In must invoice factoring relationships, the client’s accounts receivable is the only collateral available to the factoring company.   Since the client receives cash advances via wire transfer within 24 hours of submission of invoices, the factor must have assurance the invoices will ultimately be paid.  They also must be able to account for these payments in terms of the amount and the exact date they were paid.

Many accounts receivable factoring customers don’t understand why they couldn’t continue to receive the payments from the debtor, then forward them on to the factoring company.   The answer is simple.  Because the only collateral they have available to them is the receivables, it would be foolish to allow someone else to have complete control of that collateral.  That’s why factoring companies send letters to the debtors directing them to send payments to a lockbox that they control.

Unfortunately, there has been a lot of fraud related to factoring transactions.  some of the cases involve misdirecting of payments or even collusion between the client and the debtor.  That’s another reason why it’s so important for the factor to limit their exposure.  In the long run, these controls help all clients.

Tuesday, March 23rd was a dark day for our country. A bill was signed into law which would transition control of 1/6th of the nation’s economy to the federal government. Make no mistake – this was not about reforming health care. It was all about the further creation of a dependency class and redistributing wealth. In other words, assuming a greater amount of power for themselves while weakening our country forever.

So how did we get to this point? Were all the Democrats radical leftists who wish to transform our country to a European-style socialist nation? What about all those “blue dog” Democrats? Not all of them were out to destroy America as we know it, but enough of them proved they could be bought off with bribes and kickbacks that the bill somehow passed.

You often hear liberal Democrats say we should pass this spending bill or that for the sake of our children. What kind of example are these people setting for the youth of our country? I guess President Obama should start teaching his two young daughters at an early age that the end justifies the means and to use whatever methods possible to get what you want.

When you enter into an invoice factoring arrangement for the purposes of acquiring working capital, your staff may not have experience in how to handle accounting for factoirng.

When you get an advance on your outstanding accounts receivable, it must be accounted for. The same is true when the factoring company remits the reserve less the service fee that is charged.

Peachtree is the accounting software I have used for several years because I have found it to be reliable and on the cutting edge. To account for factoring transactions, check out this Peachtree Community thread on how to account for factoring.

When you go to the bank for a short term line of credit, chances are you’ll have to pledge some personal assets or at the minimum, offer a personal guarantee.  Such is not the case with invoice factoring.

When you enter into a factoring arrangement, the funding source needs to make sure that the receivables are unencumbered.  This means that no one else can have a lien on your accounts receivable.   Factoring companies must have a first position on your A/R because that is usually the only collateral they will have.

Many companies who would like to factor invoices as a way to acquire working capital may think that liens iimposed by the IRS from delinquent payroll taxes will impede their desires.

While the factoring company must have a clear title to the receivables because that is their only collateral, the IRS will often subordinate their interest if a deal can be worked out.  Such an arrangement, called a “subordination agreement”, would require the factoring company to send the IRS a payment from each advance.  The remainder would go to the client for them to use to pay bills, payroll, or any other purpose.

We have worked with the IRS as well as banks when there is an existing lien in place.  Call us at (800) 560-4420 with any questions.